World economies vow to act to bolster IMF’s role

Sunday, 10 October 2010 21:32 -     - {{hitsCtrl.values.hits}}

WASHINGTON (Reuters) - World finance leaders called on the IMF on Saturday to play a bigger role in supervising the global economy, keeping a close watch on currencies and rich countries’ policies to prevent another financial crisis.

  • Nations vow action to bolster IMF’s oversight role
  • China wins support to focus on developed economies
  • Enhanced IMF role seen as way to level FX playing field

The International Monetary Fund’s 187 member countries called for “evenhanded surveillance” and said uncovering vulnerabilities in advanced economies was a priority, potentially a major shift for the Fund, which has traditionally tread softly on giving advice to its biggest shareholders.

An uneven pattern of world growth has led to divergent national policy responses that have fueled global tensions as the U.S. dollar slides and emerging market currencies soar. Sharp currency shifts have heightened the calls for rebalancing trade and fed worries that emerging markets could be at risk of asset bubbles.

The United States, which has been pressing China aggressively to let its yuan rise faster, had urged nations to give the IMF more clout to referee currency disputes.

“Further action is urgently needed to reinforce the institution’s role and effectiveness as a global body for macro-financial surveillance and policy collaboration,” the IMF’s steering committee said in a closing communique.

The United States and China both appeared to get their points across in the final communique.

Washington wanted the IMF to speak with greater “candor” in advising countries on policy, and that term appears in the statement. Beijing had stressed the need for an “evenhanded” approach, and that word is included twice.

IMF members stopped short of formally endorsing in the communique an IMF proposal that would have established a multilateral surveillance program, an idea that drew mixed reviews from member countries.

They called on the Fund to make in-depth studies of how to better manage capital flows but postponed more concrete decisions until next year.

Eswar Prasad, a former IMF official who is now a senior fellow at the Washington-based Brookings Institution, said the IMF’s enhanced surveillance idea sounded awfully familiar.

“The IMF is trying to reinvent the wheel yet again,” he said, adding that the proposals were “fancy new names for old surveillance mechanisms” and did not give the IMF any stronger authority to turn their policy advice into action.

“The major economies are each encouraging the IMF to push harder on other countries but showing no willingness to yield to the IMF any such leverage over their own policies,” he said.

While the U.S. push was part of its focus on the value of the yuan, China wanted to ensure the Fund also focused intently on policies in the rich world, and member countries agreed.

“Stronger and even-handed surveillance to uncover vulnerabilities in large advanced economies is a priority,” the communique said. “Surveillance should also be better focused on financial stability issues and their macroeconomic linkages, and more attentive to cross-border spillovers.”

Currencies have become a hot-button issue as countries seek to solidify a shaky economic recovery, particularly in advanced economies.

Liquidity-boosting efforts by the U.S. Federal Reserve have driven down interest rates and led to a weaker dollar, while rigid foreign exchange policies in other countries, notably China, have left emerging markets bearing the brunt of currency adjustment as investors pile into higher-yielding assets.

Dominique Strauss-Kahn, the IMF’s managing director, said he would personally attend the Fund’s regular economic consultations with the largest systemic players, including the United States, the euro zone, China and Japan.

The IMF already conducts annual economic reviews of most of its member countries and reports on a range of issues including exchange rate moves and monetary and fiscal policy.

The Fund has a mixed track record when it comes to identifying the seeds of crisis and getting countries to change their policies before it is too late.

Some critics argue that the IMF cannot be a respected voice in the global economy until all of its members feel their views are heard on world policy decisions.

“As long as the Fund is seen as an organization in which all decisions are taken by a relatively small number of rich countries, and then announced in the name of the international community, mistrust in the Fund will persist in many regions of the world,” Russian Finance Minister Alexei Kudrin said.

The IMF is well aware that its leadership is heavily skewed toward the United States and Europe, and it must give dynamic emerging markets greater power, but no consensus was reached on Saturday on how to do that.

The IMF’s Strauss-Kahn said he expected an agreement within weeks, which would be in time to meet a self-imposed deadline of deciding by next month’s G20 summit in Seoul.

U.S. Treasury Secretary Timothy Geithner said IMF reform and foreign exchange rate policies were directly linked, and if emerging markets want greater say they must release their grip on tightly managed currencies.

Strauss-Kahn put it slightly differently, saying only that with greater representation comes greater responsibility.

“You cannot be at the center and be a freerider,” he said.