IMF reform

Is Washington-based organization doctor or patient?

G-20 finance ministers and governors of central banks have been exploring ways of salvaging the global economy in the meeting in Busan. The participants will be smart enough to put the IMF reform issue on the front burner in their communique to be published today. The global financial turmoil has raised the question whether the IMF is a good doctor or a bad doctor or a patient itself.

IMF has been under critical review for its position on the three points--double standard, cross-border capital movement and emphasis of money economy over the real economy.

Its double standard in policy recommendation raised eyebrow. In the Asian financial crisis in 1997, it provided bailout funds to Korea, Thailand and Indonesia. Its conditionality was too brutal. It asked the Asian member countries to cut budgets, hike interest rates by double-digits, depreciate currency by nearly 100 percent, eliminate all capital controls and dismiss workers. Korea could manage to get out of the crisis in two years, but the cost of recovery was too heavy. In hindsight, the recovery could have been possible without incurring enormous social costs once the IMF prescriptions were tailor-made for the Asian situation. The number of the self-employed in Korea is high by international standard. Many of them are those who lost jobs following the IMF bailout in 1998.

Now the EU is in trouble. Specifically, It decided to provide bailout funds to Greece. The question is why the IMF is not doling out the same prescriptions to Greece. Is the leniency is the result of influence of the IMF board members, many of whom are Europeans? Have IMF concluded that its prescriptions should be different for each member country?

For the first time since its inception, IMF changed its mind on free cross-border capital movements. In its recent policy paper, it backed control on hedge funds and speculative hot money. Korea and many developing countries have long called for controlling hot money. Only after the Wall Street was locked in trouble, IMF changed its mind although it is still not official.

Finally, IMF should not be a blind advocate of money capitalism. Its policy should be directed toward helping member countries expand manufacturing base. Illusion of money economy, namely trading of financial contracts, is well documented in the latest Wall Street episode. Supporting the real economy is the responsibility of its brother organization World Bank. IMF and World Bank need to synchronize policies on the real economy.

The Washington-based multilateral organization has been an evangelist of the free market capitalism. It has played a crucial role in spreading capitalism and providing policy advice to all of its member countries.

It may take time for G-20 to reach consensus on reforming IMF. Hopefully, the plan will come out before the Seoul meeting in November. Retooling IMF is essential to protect capitalism. It is time of crisis for capitalism. IMF needs soul-searching to defend capitalism in time of the global economy trouble.