By Xavier Cirera
In his entry on 18 May, John Humphrey clearly framed the implications of the current financial crisis for development and development studies into two sets of issues: i) what elements of the crisis will not return to where they were previously; and ii) what elements we would not like to return to the way they were beforehand. The crisis forces us to think about what went wrong. But at the same time, the crisis has opened up the space to discuss and reform previous policies, perhaps unrelated to the crisis, but that were, in our judgement, inadequate.
A clear example of this dual implication of the crisis for development is the current proposal to reform the IMF. The Fund is at the centre of the G-20’s proposed solution for the crisis. More money is being injected into the Fund in order to allow the IMF to help countries in crisis. Reform has been proposed, giving more power to emerging markets. The main idea, empowering the IMF to do business as usual.
But one question remains, do we want the IMF to do business as usual? More importantly, do we want the IMF? A year ago it was not clear what the role of the IMF was anymore. Not only that, countries such as Argentina or Venezuela were buying their ‘freedom’ out of the Fund by repaying in advance existing loans. Critiques have mounted over the years about the narrow-minded approach of the Fund to crisis and development in general. For example, could this massive counter-cyclical fiscal policy started by Britain and the US be tolerated by the IMF outside the OECD? Moreover, what is considered reckless domestic policy that justifies tight fiscal deficits? The Fund has very often ignored countries binding constraints to growth by focusing exclusively on an extremely tight fiscal policy. And more importantly, in the new G-20 proposal the Fund has no capacity to supervise the financial system; this task will be performed by the Financial Stability Board.
So why then reform the IMF? Why not provide the World Bank with financial capacity to rescue countries in case of crisis? Conditionality, then, would be linked to more general growth and poverty reduction policies rather than a narrow focus on fiscal policy. This seems to me a more coherent and effective approach to crisis support.