Outside editorial: Back in business

Posted: Monday, November 03, 2008

Remember the International Monetary Fund? Not so many months ago, it was an institution in search of a mission. Once the global lender of last resort, the IMF had less than $15 billion in credit outstanding at the end of 2007.

Global capital mobility and the accumulation of huge foreign currency reserves in emerging-market countries seemed to make balance-of-payments crises obsolete. Emerging-market finance ministers felt liberated; never again would they have to go hat in hand to the fund, whose loans usually came with demands for financial reform attached.

Then came this fall's global financial collapse. As credit froze in the United States and Europe, cash-hungry investors began yanking money out of emerging markets. Reserves dwindled, currencies fell - and suddenly the IMF had customers again.

Alarmingly, a number of the countries in need of assistance are strategically situated new democracies. At the top of the list is Pakistan, which initially sought credit from China but has more recently approached the IMF. Several Eastern and Central European nations and former Soviet republics are also in trouble.

The IMF has agreed to lend Ukraine $16.5 billion; Hungary is in line to get $15.7 billion, plus an additional $9.4 billion from the European Union and the World Bank. According to a newly published estimate by Deutsche Bank, South Africa, Poland, Romania, all three Baltic states and Turkey could be next. Turkey alone could need $90 billion, Deutsche Bank calculates.

The problem is that the IMF had only about $250 billion in available resources before its commitments to Ukraine and Hungary. This may not be enough to cover all the looming crises; it certainly won't be enough in the unlikely but no longer unimaginable event that a large emerging market, such as Brazil, runs into trouble.

Does it make sense for the United States, as well as Japan and Europe, to shore up the IMF at a time when the industrial democracies are themselves in crisis? The answer is yes. Financial stability is a global public good. As a multilateral institution, the fund is uniquely positioned to provide such stability on a relatively nonpolitical basis. This is in contrast to what might happen if countries had to seek bilateral loans from such sources as the Gulf Arab states, Russia or China.

Given their own troubles, of course, Moscow and Beijing might well refuse to provide credit, but they might also be tempted to lend in selected strategic cases, attaching political strings. No doubt Hungarian and Ukrainian leaders were glad to have the IMF as an alternative to Russian influence despite the fund's tough economic conditions.

This week, the fund announced a new program that will enable countries that have pursued sound policies in recent years to borrow for up to three months - renewable twice per year - without the usual conditions.

This is a step in the right direction. Though the amounts lent under the program will not be large (even a giant such as Brazil would be eligible for only $22.5 billion), the promise of fund infusions could bolster confidence. But the fund's new plan underscores its need for greater resources. Perhaps the United States and other industrial democracies could try to channel Arab state, Russian and Chinese bailout money through the IMF in return for giving those countries more voting power at the fund, assuming they are interested in such a deal.

The Nov. 15 global economic summit might be a good venue to explore this and other concepts. But the West's strategic objective must remain the same: to help emerging markets salvage both their prosperity and their hard-won status as sovereign democracies.

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