A New Fundamentalism

When anti-globalization protesters say the International Monetary Fund (IMF) needs to be reformed, nobody takes much notice. But when the highly respected governor of the Bank of England speaks out, he makes quite a splash.

Mervyn King has been gearing up for several years for the important speech on the IMF he delivered in India yesterday, and the location he chose to urge fundamental reforms was most appropriate, because one of his criticisms is that the IMF as at present constituted is far too US and Euro-centric.

One of Mr. King’s proposals is that the voting (i.e. power) structure of the fund needs to be altered to take account of modern realities.

Another central theme is that the very role and powers of the IMF need to be redefined. "Its lending activities have waned, and its role in the international monetary system is obscure," he said.

The IMF was one of the most important of the Bretton Woods institutions set up by Keynes and others in order to ensure the post-1945 world did not suffer the kinds of economic catastrophes it experienced during the interwar years. International cooperation in economic policy was to be the central aim of the new world economic order.

Under the Bretton Woods system of fixed exchange rates, the IMF’s role in monitoring countries’ balance of payments, and the need for periodic currency adjustments, were clear. The fund also bailed out advanced industrial countries in financing difficulties. The UK was the last big industrialized country to require such assistance (in 1976).

In the new world of floating exchange rates, the advanced countries had less need for IMF finance. On the other hand, the fund found a new role as lender of last resort to developing nations during the upheavals that followed the oil shocks of the 1970s.

But here we are, with sensational "imbalances" in the world economy, many analysts forecasting dire things if and when the dollar collapses, and an IMF that does plenty of analysis but has precious little clout.

Mr. King would like to see the IMF beefed up and transformed into an executive organisation that is taken seriously when it pronounces about the need for exchange rate adjustments and the dangers of imbalances or "balance sheet issues".

His plea should be taken seriously. But will it be? On the very day that his New Delhi speech was reported, the Financial Times carried an interesting article by Harold James, professor of history and international affairs at Princeton, and the author of a celebrated history of the IMF.

James reminded us that "before September 11 2001, it was widely assumed that globalization bred peace and stability". But he added: "Over the past five years there has been increased nervousness about this concept in many parts of the world."

For James it is not the state of the world economy, "which has proved amazingly robust", but the framework of global governance that is the problem reformers should be concentrating on. He thinks western policymakers should be more concerned about the relationship between their values and Islamic tradition and place less emphasis on the assumption that technical development and a well run world economy will "solve, as it were by a kind of magic, the problem of values".

Well, these two aims are not mutually exclusive. It was always shortsighted to assume globalization bred peace and stability - there were similar assumptions during the late 19th and early 20th century phases of globalization. And we all know where those assumptions led - to two world wars and the perceived need for the Bretton Woods institutions.

The world economy may have proved robust in recent years, but many analysts fear this is a robustness on the edge of the precipice. Mr. King is to be encouraged in his advocacy of a more efficacious IMF. But the chances of securing any support from the Bush-Cheney administration must be close to zero.