Financial Daily from THE HINDU group of publications
Thursday, May 04, 2006
RBI & Other Central Banks
Money & Banking - Insight
Must be nipped in the bud
B. S. Raghavan
The proposal to turn the IMF into a virtual Fiscal and Monetary Security Council will give it a more pervasive character, adding, significantly and disturbingly, to its considerable clout. It is a mystery how this event, with such portent for intrusion into the domestic policies of member-countries, has passed unnoticed without anyone sounding the tocsin, says B. S. RAGHAVAN. The country representatives on the IMF's Executive Board should act decisively to put a stop to efforts that will make the IMF a super-government.
In what Britain's Chancellor of the Exchequer, and current Chairman of the International Monetary and Financial Committee, Mr Gordon Brown, has called "a major shift," the IMF is being vested with expanded powers turning it into a virtual Fiscal and Monetary Security Council.
The proposal, quietly placed at the meeting of the Fund's policy committee on April 22, and coming up for approval and adoption at the IMF meeting in Singapore in September, will give to the framework of surveillance and conditionalities of the Fund a more pervasive character, adding significantly, and disturbingly, to its already considerable clout.
It is a mystery how this event, with such portent for intrusion into the domestic policies of member-countries, has passed off unnoticed without anyone sounding the tocsin.
The IMF, no doubt, has the power, under Article IV of the Articles of Agreement, to "exercise firm surveillance over the exchange rate policies of members," and oversee the compliance of each member with its obligations under the Article, to "collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates."
By virtue of this mandate, it undertakes "a comprehensive analysis of the general economic situation and the economic policy strategy of the member" and determines "the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment."
It must be remembered, however, that since its inception 60 years ago, the Fund has been performing this task through limited country-specific bilateral consultations, usually once a year, with the governments concerned, forwarding its conclusions and recommendations to the policy-makers in the respective countries as also to its Executive Board.
It would have amounted to a transgression of the Fund's charter, were it to embark upon any continued or sustained multilateral consultations, as part of the process of surveillance. The IMF generally plugs into bodies such as the G-7, the Group of 24, the Organisation for Economic Cooperation and Development, and the World Bank to obtain inputs for its annual reports on world economic trends. It has never been known to convene global meets to formulate and enforce policies on the fiscal and monetary front.
In its new avatar, the Fund will be entitled to take up (as the Managing Director, Mr Rodrigo de Rato, put it), "issues comprehensively and collectively with systemically important members and, where relevant, with entities formed by groups of members, such as the European Union and the Gulf Cooperation Council... . (as) an important vehicle for analysis and consensus building... (in order) to address spillovers and linkages that affect individual members and the global financial system."
In short, it wants to acquire the authority to summon member-countries of its choice or as a whole for laying down policies which may be either generally applicable or specifically tailored for different governments.
How come this sudden discovery of the need for putting sharper teeth into the mandate of the IMF? As is the case when such initiatives are launched, this move also is persuasively packaged by adducing all kinds of reasons: Vaulting energy prices, global trade imbalances, tightening financial conditions, existence of economic linkages between countries and international economic and market developments, what have you. Mr de Rato also built his case for the IMF wielding the baton on the arguments of curbing the tendency of individual governments to take economic actions that could hurt neighbouring countries and regions, (such as an abrupt move to close a trade deficit) and ensuring that global economy does not slip into a recession.
It is not as if all these are new features of the world economic landscape. They are merely meant to mask the real reason which is simple: The mounting desperation with which the US eyes China's intransigence in not agreeing to "greater exchange rate flexibility" or, in plain words, the appreciation of the yuan vis-à-vis the dollar to a level that would let the US (with a trade deficit of $202 billion at the last count with China) off the hook.
The US has not been having its way with China either diplomatically, or by involving it in G-7 confabulations. In fact, observers round the globe are agreed that deliberations of the G-7 are marked by ritualistic posturing and its homilies command neither weight nor respect. As a commentator put it, it is well past its "Best before... " date! It was no surprise, therefore, when its expostulation to China to "promote flexible currency" was promptly rebuffed.
This has provoked some members of the US Congress to introduce legislation in which China has been dubbed "a currency manipulator" and liable to punitive measures, including refusal of loans through international financial institutions, such as the Asian Development Bank, and imposition of 27.5 per cent tariffs on Chinese goods. The Chinese caravan has nonchalantly moved on.
The final hope was that the US President would be able to get the Chinese President, Mr Hu Jintao, when the latter visited Washington recently, to agree to the insistent pleas of the US. Mr Hu knew better than to commit himself. The Chinese side has stuck to its guns with impressive constancy from which other countries subjected to similar pressures can learn a lesson or two.
The Governor of the People's Bank of China turned the tables on the US by demanding that rather than monitoring the yuan, global financial institutions should watch the US dollar. The rise of yuan "probably... could be a little bit faster but it is not the way of Chinese reformers to do things".
They believed, he said, in being slow and steady to balance competing interests and make sure the financial sector was strong enough to withstand any change. "Each country is entitled to choose an exchange rate system consistent with its own economic development... Right now, the speed of moving forward is OK... It's good for China. We don't worry too much what other people say". Enough to make the US hit the roof with rage.
Suppose, the IMF's surveillance powers are enlarged to put recalcitrant nations in the dock before their accusers in a Security Council-like fashion convened under the authority newly given to it; suppose, the US, using its bludgeon (as it did in the case of Iraq, and is trying to do in the case of Iran), gets a resolution passed condemning them; hey, presto! The deed is done, global imbalances caused by the strong yuan (as if nothing else matters) are resolved and the accused marched in handcuffs to the cell in the basement.
It is hard to tell whether it is such type of fantasying by the US to which Mr de Rato, also has wittingly or unwittingly become a party in making his proposal. As The Economist has warned: "For multilateral surveillance to have any credibility, there must be no suggestion that the Fund is doing the bidding of the US treasury, or that of any other country, for that matter."
Unfortunately, the move has come about, coincidentally or otherwise, at a time when a particular country is keen to force another, which has been thumbing its nose at it, to submit to its will.
The country representatives on the IMF's Executive Board, at its meeting in Singapore in September, should act decisively to put a stop to efforts that will make the IMF a super-Government, the worse for being a handmaiden of the US, micro-managing the domestic fiscal and monetary policies of member-nations and, thereby, making mince-meat of what little is left of their sovereignty and autonomy.
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