This Is A Good Idea. Please Do It.

TOKYO (Reuters) - Emerging economies, notably those in Asia, are under-represented in the IMF and their quotas should be increased to reflect their growing role in the global economy, Japan's finance minister said on Saturday.

"It is important to recognize that the current distribution of IMF quotas represents another form of unsustainable global imbalance," Finance Minister Sadakazu Tanigaki told the International Monetary Fund at its fall meeting.

"Many emerging market economies, including those in Asia, are markedly under-represented in terms of their current economic strength and relative positions in the global economy."

I'm not terribly optimistic of the possibility of making the IMF a "good" organization in the near term, simply because the finance ministries of the west are not run by people who are serious about development. However, this proposal by the Japanese is an important step towards making the IMF a much "less bad" organization in terms of development and social justice.

Basically, the IMF's voting is decided by allotted quotas. The US is unsurprisingly the largest voting bloc, with 17% of the total. Since it takes 85% of the votes to make any serious change, the US can currently veto any proposal to change the IMF's mission. But it's a narrow margin - revaluing some of the Asian economies might knock 3% off the US's totals, removing the only effective veto power from the IMF.

Now, to my knowledge (I welcome corrections) the US hasn't single-handedly scuttled any major reform initiatives in the IMF - like I said, the west generally isn't serious about development. But allowing developing countries a deserved larger voice in one of the most important international institutions is a good move in it's own right.

On a similar note, Mark Weisbrot (one of my favourite economists) argues that the IMF is increasingly irrelevant. The culprit? Argentina:

Just a few years ago, the IMF was the most powerful financial institution in the world. When financial and economic crises swept across East Asia in 1997, it was the IMF that laid down the painful conditions that governments had to meet in order to access more than $120 billion in foreign funds....

Those days are over. After their nightmarish experience with the fund in 1997-1998, Asian countries began to pile up huge international foreign exchange reserves - partly so they would never have to go begging to the IMF again. But the final blow to the fund came from the country that Anne Krueger, first deputy managing director of the fund, reportedly calls "the A-word": Argentina.

Argentina suffered through a terrible four-year depression, beginning in 1998. A country that had recently ranked among the highest for living standards in Latin America soon had the majority of the country falling below the poverty line. Many Argentines blamed the IMF, which had played a major role in designing the policies that led to the collapse, and seemed to prescribe just the wrong medicine during the crisis: high interest rates, budget tightening and maintaining the Argentine peso's unsustainable link to the U.S. dollar.

In December 2001, the government defaulted on $100 billion of debt, the largest sovereign debt default in history. The currency and the banking system collapsed, and the country sank further into depression - but only for about three more months. Then, to most people's surprise, the economy began to recover.

The recovery began and continued without any help from the IMF. On the contrary: In 2002, the fund and other official creditors (including the World Bank), actually took a net $4.1 billion - more than 4 percent of gross domestic product - out of Argentina. But the government was able to chart more of its own economic course, rejecting IMF demands for higher interest rates, increased budget austerity and utility price increases. Argentina also took a hard line with foreign creditors holding defaulted debt, despite repeated threats from the fund. When push came to shove in September 2003, Argentina did the unthinkable: a temporary default to the IMF itself, until the fund backed down.

The result was a rapid and robust recovery, with a remarkable 8.8 percent growth in gross domestic product for 2003 and 9 percent for 2004. With a projected 7.3 percent gross domestic product gain for 2005, Argentina is still the fastest growing economy in Latin America.

I recently finished reading Sorrows of Empire by Chalmers Johnson. In it, he argues that US policy makers are largely ignorant of how badly the IMF has affected US relations in Asia, as a result of the remarkably destructive IMF response. Now, the nations of southeast Asia have taken some pretty strong measures to see that they don't find themselves in a similar position. No wonder - I mean, the 1997 Crisis removed Suharto from power. It's not like the Malaysian or Singaporean government wants to risk a similar situation again.

It also points to the growing fondness for China and ASEAN (an all-asian trade group that, unlike APEC, excludes the US) among Asian economies - unlike the US and the IMF, ASEAN hasn't demanded it's members make painful cuts to food and fuel subsidies.

Far from securing the liberal trading regime that it was designed for, the IMF may very well have been crucial in undermining it.