The IMF should not be more democratic

Tyler Cowen

This is “IMF week,” when diplomats, board members, economists, and many others related to the IMF International Monetary Fund they meet to discuss business. On top of that, there has been controversy surrounding the former role of the fund’s top official, Kristalina Georgieva, in monitoring the World Bank’s Doing Business Index. Therefore, questions are again arising about the mission of the Fund, its reliability and whether it should always be run by a European, as is customary.

Is it necessary to reform the IMF in some way? Shouldn’t the Fund be run by “the best person”, regardless of their country of origin? Should it be somehow more democratic?

My answer, in a nutshell, is “actually, no.” It would be better if we realized that the IMF is inherently a dull institution and, indeed, somewhat nepotistic, and it should be.

The IMF was created by the Bretton Woods agreement, formed by the United States and the United Kingdom, and was designed to impose a Western financial and monetary order and, in fact, Anglo-Saxon hegemon in the world. These days, the original Group of Five nations – the US, Germany, the UK, France, and Japan – wield dominating influence through their voting quotas. China has much more power than it used to, but it cannot yet prevail over the consensus of the G5.

The Fund is used by the G5 nations and their allies to put their reputable capital behind the international monetary order. Obviously, sponsoring countries will only subscribe to a system that they largely approve of and benefit from.

If the IMF did not exist, insolvent nations would still be periodically bailed out by rich countries, if only because G5 politicians do not want to jeopardize the stability of the world financial order. But problems would arise as, each time, the rescues would have to be organized anew. What country would contribute how much? Who would abandon the nations each time and when? Who or what would enforce the payment? All these questions are regularized and institutionalized through the existence of the IMF.

The nepotistic element is that the G5 nations use the IMF and its credit lines to protect the solvency of their own banks and financial systems. In contrast, an IMF serving “the citizens of the world,” whatever that means, would be an IMF without much backing from the largest and most important financial players. It would be more like UNICEF, which does not have enough capital, than an institution that can move world markets or help preserve them.

It also won’t work for China to have too much influence over the IMF, as China does not aim to build a global order of relatively free trade and capital movements. The Chinese know this and have been creating their own loan and investment projects, such as the giant Belt and Road initiative and the Asian Infrastructure Investment Bank.

So it should come as no surprise that the Europeans nominate an IMF managing director and that the US, in essence, elects the president of the World Bank, by mutual agreement for a long time. Establishment figures are installed to ensure that the IMF and World Bank continue to support the prevailing international economic order. These are not institutions for radicals or dissidents.

If the leadership and governance of the IMF board were elected by vote of the 190 member countries, the G5 nations would put far less of their reputational capital behind the institution. The IMF is an international public good, but those public goods are only produced when it is in someone’s selfish interest to do so.

Critics on the left, such as economist Joseph Stiglitz, argue that the IMF has imposed too much austerity on debtor countries and has insisted on too many interest rate hikes at the wrong times. Those criticisms might contain some truth, but there are not many viable alternatives. The IMF does try to enforce the payment of debts and the orderly resolution of claims, and that limits the kind of advice, and also the pressure, that it can provide. If the institution were somehow to become a mechanism for the jubilee of debts, the end result would be a decrease in private capital flows to the poorest nations. Why make loans if no one will work to make sure the money is paid back? The IMF would also lose credibility and that would limit its ability to fight global financial crises.

Successful international economic orders have generally been based on a considerable degree of hegemony, be it the British-led gold standard in the 19th century or the more recent post-WWII American rule. Once you realize that, many of the current questions surrounding the IMF answer themselves quite automatically. The real problem is not how to improve the IMF, but how we are going to deal with it while the current hegemonies continue to lose their hold.