In this featured commentary, SIIA Council Member Ho Seng Chee discusses how the IMF has become redundant as a financial crisis fireman and must remake itself if it is to be relevant again.
This commentary was originally featured in the TODAY (Singapore) newspaper on Friday 14 October 2011.
In the latest twist to the European crisis on Tuesday, the Slovak government voted down proposed enhancements to the European Financial Stability Facility (EFSF). Slovakia's rejection of the EFSF enhancements sent stock markets downwards. For one of the smaller governments of the euro zone - and indeed the world - to wield such influence over the global economic system seems a trifle absurd.
Serious times call for serious measures. What the world needs now is true leadership, of which we have seen very little lately. The International Monetary Fund (IMF) in particular has been conspicuously absent from the driver's seat in this crisis.
Most recently, the institution's annual meeting in Washington two weeks ago brought together policymakers from its entire membership. It was a perfect opportunity to send a strong signal and to act decisively. Yet, that meeting delivered absolutely no concrete steps to deal with the problems in Europe.
The IMF's inability thus far to rally European and other governments to act is leading many to question its relevance. That is because fighting crises is supposed to be the IMF's lifeblood. In a recent interview with CNBC, I commented that: "(People say) the IMF saved Europe. I see it the other way, it's kind of like Europe saved the IMF. If (the IMF) didn't have the European crisis, it wouldn't have a job." I added that, from the crisis perspective, it was difficult to see a meaningful role for the IMF in today's Asia.
Shortly after CNBC ran the stories, a former IMF colleague emailed me to take exception with the idea that the European crisis had become the IMF's existential raison d'etre. His point, of course, was that there was much more to the IMF than just the bailing out of crisis countries.
While that may be true, do Asians care? Does the IMF still matter to this region?
Regardless of how broad or varied the IMF's operations may be, the institution is always defined by the last financial crisis it fought. The reference point for Asians in that respect remains the crisis of the late 1990s. It has been more than a decade since but most Asians continue to associate the IMF with the harsh reforms it imposed in return for financial assistance. It is especially smarting for many of us that some of these conditions have been subsequently acknowledged as mistakes.
That painful experience has led Asian countries to build their own buffers against financial stress. These include strong reserve positions totalling over US$3 trillion (S$3.83 trillion) combined or more than half of global foreign reserves. Enhanced regional collaboration mechanisms have also been put in place to facilitate financial crisis resolution.
Under the Chiang Mai Initiative multilateral currency swap arrangement, US$120 billion is available for drawdown by participating Asian countries. Meanwhile, structural reforms begun during the Asian crisis have led to improved corporate governance, stronger banks and more robust capital markets in many Asian countries.
These self-help developments have, to a very large extent, made the IMF redundant as a financial crisis fireman for Asia. This is not to say that Asia will not be affected should the situation worsen in Europe (or the US, for that matter). Europe accounts for about 27 per cent of global gross domestic product and takes in over 15 per cent of direct exports from Asia. If it were to go down, Asia will surely suffer too.
What Asians cannot see is how, even in that eventuality, the IMF would be relevant to us. The way events are unfolding in Europe is serving only to accentuate this perception of the IMF's inconsequence.
Continuing scepticism over the IMF's governance structure is also reinforcing feelings of indifference towards the institution. The IMF's governance framework must reflect today's international economic order if it is to be credible in the eyes of the global community.
Developed countries like to laud as a milestone achievement the G20-driven initiative to shift 6 per cent of the IMF's voting shares to Asian and other emerging economies. But that shift will end with Asia having just 16.1 per cent of the IMF's votes, while accounting for upwards of 30 per cent of the world economy.
Similarly, when Mr Dominique Strauss-Kahn resigned earlier this year, Europe's insistence that one of its own must succeed him spoke volumes about the traditional powers' commitment to IMF governance reform. The subsequent behaviour of European countries - and also of the United States - in hastily shepherding Ms Christine Lagarde to the top job laid bare their true intentions on sharing real authority in global economic policymaking. Faced with such obduracy, many Asians have opted for benign apathy.
And therein lies a potential loss for the international economy. For all that I have said above, I still believe that our global economy needs a universal body like the IMF to lead in the resolution of global economic problems. But for it to be effective in the international landscape of today and the future, the IMF must remake itself to be relevant again to everyone.