Sunday, February 06, 2005


G8 agenda item - creating order in the international economy?

The governor of the Bank of England is calling for a rethink of the International Monetary Fund. At the G7 meetings in London last week he found some support for the idea from the chairman of the US Federal Reserve and the governor of the central bank of China.

A former chief economist of the IMF published in January some thoughts about reform. It seems the plan is to reflect the realities of the global economy in the past 60 years, and invite emerging markets to buy a bigger say in governance of the global economy.

There has been a lot of rhetoric the last few years about how governance of the international financial system ought to be made more "democratic." Recent victims of emerging market debt crises like Brazil, Turkey, Argentina and others, are particularly peeved. They want more say over the conditions attached to vast bailout packages from the International Monetary Fund, the UN family organization charged with helping to maintain global financial stability. To some extent, the critics have a point. . . This perceived "democratic deficit" has increasingly become a serious challenge to the Fund's political legitimacy and its ability to effectively stabilize crisis situations.

What if middle income emerging market countries assumed real power by putting up a much larger share of the capital needed to fund each others' bailouts? . . .China alone, with over $500 billion in reserves, has more than enough to recapitalize the $150 billion dollar International Monetary Fund three times over. Even Latin America, whose dollar reserves are dwarfed by Asia's and Russia's, could easily buy out Europe's shares in the Fund.

These days, the Fund doesn't have the money to bail out a United States or a Japan. Instead, it is middle income countries like Brazil, Turkey, Russia and China that care the most about Fund bailout policies.

International bankers think reform is necessary. Shouldn't the agenda of the G8 reflect the concern of these experts?

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