John Rapley

Whoever would have thought that the great bugbear of Third World governments, the IMF (International Monetary Fund) would one day find itself fighting for relevance? Wasn't the IMF a titan whose will could scarcely be resisted by poor countries?

Resist - or ignore - it they are. Eager to sever ties with an institution that is unpopular with domestic constituencies, many countries have done like Jamaica and cleared their debts to the IMF. The further development of global bond markets has made it possible for them to raise debt capital privately. And, like Jamaica, a great many countries have guarded against the future risk of currency flight by accumulating large foreign reserves. Quite simply, Third World governments need the IMF less than they did even a decade ago.

As for the developed countries, none has had a serious need for the IMF in a long time. But it is not that long ago that the IMF seemed to be a linchpin of the world economy. And it seems to be hoping that it might yet become so.

Creation of the IMF

The IMF was created when the Great Depression still cast a long shadow over Western minds. Anxious to create a world in which governments facing balance-of-payments difficulties did not try to balance their books by cutting imports - widely seen as the cause of the Depression - Western governments created the Fund. All member countries would deposit some money into its accounts. They could then draw upon those reserves to cover short-term deficits. If deficits stretched out, they could then accumulate a little debt.

This guarantee of liquidity gave countries confidence to keep trading. The world economy then entered a prolonged boom period. When it ended, in the 1970s and 1980s, the IMF found itself thrust back into the global limelight. And the light was not flattering to it.

Faced with a global recession, Third World countries that had borrowed heavily to fund their development could no longer pay their bills. The IMF rode to the rescue. But since governments needed to borrow far more than their deposits entitled them to, the IMF began attaching conditions to their loans. Governments had to cut their budgets and boost their export revenues. Thereby was born the era of structural adjustment.

Memories of the resultant hardships still linger in developing countries. Eager to ensure they'd never need to run back to the IMF, Third World governments began accumulating their foreign reserves. Meanwhile, the free market took over the job of the multilaterals. Private bond rating agencies, whose reports could raise or cut a government's interest expenses overnight, became the new arbiters of global finance.

Risk

In a recent report, the IMF argued that this new strategy is not without risk. The massive pile-up of foreign reserves in U.S. accounts - since most international trade and debt settlement is done in U.S. dollars - appears to have created an excess of liquidity in the U.S. economy. All this money has found its way onto U.S. bond, property and stock markets, apparently inflating one bubble after another. Sooner or later, warns the IMF, the global house of cards may come crashing down.

When it does, will the world's governments rush back into the arms of the IMF? The Fund is doing what it can to retain their affections. At its recent annual meeting in Singapore, the Fund agreed to boost the voting rights of a few Third World countries, apparently eager to maintain some relevance for itself.

Of course, the predicted global crisis may not occur. But it is true that we are now in uncharted waters, and that could make for an interesting journey.

John Rapley is a senior lecturer in the Department of Government, UWI, Mona.