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IMF may be starting to fall apart

Section: Daily Dispatches

IMF Fails to Make Progress on Reforms

By Chris Giles and Eoin Callan
Financial Times, London
Sunday, October 21, 2007

WASHINGTON -- Rodrigo Rato bowed out as managing director of the International Monetary Fund at the weekend with effusive plaudits from world financial leaders in public but sharp criticism of his role and the Fund's relevance from the same people when talking outside official news conferences.

The emerging consensus among rich and poor countries alike was that the reform process of the IMF had moved backward. Worse, they added that acrimony over the Fund's role in assessing the economic policies of its members, their effects on other countries threatened to create just the disorder in the global economy it is intended to prevent.

"We didn't make any progress this weekend," said an irritated David Dodge, the Canadian central bank governor, adding that it was a "pretty big disappointment" and that IMF stakeholders had not "settled even the principles let alone the details" of institutional reform.

The communique from the International Monetary and Financial Committee, the IMF's governing body, put a brave face on the lack of progress in making the Fund more legitimate around the world by increasing the voice given to emerging and developing countries. It said that the new formula for voting shares at the IMF would be most strongly linked to a country's economic weight in the world, but it would also reflect the living standards in different countries and the minimum number of votes given to every IMF member would at least double.

Mr Rato presented this as an achievement, but many other delegations privately agreed with Mr Dodge. Emerging economies are aggrieved that one of the aims of the Fund's medium-term strategy was to increase the legitimacy of the organisation, but the two big decisions of recent months -- who would be the new managing director and who would chair the IMFC -- were stitched up by European countries behind closed doors.

Senior officials in group of seven countries told the Financial Times that the reform process would have to start again under Dominique Strauss-Kahn, the new IMF managing director who takes office at the start of November.

The IMFC announced it welcomed progress in strengthening surveillance of countries' economic policies and spillovers from one country to another. "The committee looks forward to review the progress and experiences in these areas," the communique stated. But the IMF's new surveillance policies -- in particular trying to be an umpire in determining when one country's exchange rate regime is having a detrimental effect on other economies -- are also causing acrimony.

China, the country most likely to fall foul of the new procedures, voted against the new surveillance rules and since the rest of the global community, through the IMF, cannot force a country such as China to change its policy, the new rules have only served to heighten tensions.

Morris Goldstein of the Peterson Institute for International Economics, said that there was a serious risk of widespread conflict between emerging and advanced economies in the years to come. "What you are seeing with China and the US is just the tip of the iceberg," he said.

Mr Dodge said: "This is precisely the time we need the fund's ability and skills to deal with global imbalances," adding that the breakdown in reform efforts had decreased the "chance of coming to a common view across the fund's membership" on currency policy.

"The longer the imbalances go on, the greater risk that we will end with a rather messy dénouement," he said.

The IMFC put a brave face on the dissent that was within its ranks. Rather than concede that problems exist, it repeated the message from Fund officials over the past week that the global economy was still growing strongly, although it will be slowed by the credit squeeze.

The finance ministers and central bank governors who sit on the IMFC agreed that all relevant national and international bodies should study possible improvements for risk management in complex financial products, the accounting of off-balance sheet vehicles in banks, the work of credit ratings agencies, and the regulation of liquidity in financial entities.

Jean Claude Trichet, the head of the European Central Bank, said: "Certain areas of the regulatory framework may need to be reviewed, such as the treatment of liquidity risk and securitisation framework, in particular the treatment of liquidity exposures to special purpose vehicles and the assessment of risk transfer, given their significance in the recent financial turbulence."

Unlike the G7 rich countries, they did not quite call for China to let its currency appreciate, although the IMFC repeated its call for "greater exchange rate flexibility in a number of surplus countries."

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