IMF turns over a new leaf

DAEJON, SOUTH KOREA—The crippling financial crisis in Asia more than a decade ago was said to have turned from bad to worse because the governments in the region were forced to adopt the wrong foreign policies.

These policies were mostly pushed by the International Monetary Fund. As a result, the IMF took a beating from those it only meant to help.

Since then, the IMF has been making amends with Asian countries like the Philippines.

Aware of the bad image it incurred at the height of the crisis in the late 1990s, the IMF now says it wants to mend its relationship with Asia.

Its managing director, Dominique Strauss-Kahn, tells Asian journalists in a press conference here that the IMF is acknowledging its faults and is taking a new approach toward dealing with countries in this part of the globe.

He says policies pushed by the IMF during the crisis last decade were indeed severe for many economies, and that the institution could have instead recommended measures that could have been less painful.

“For many reasons, some fair and some unfair, Asians were upset by the way the Fund worked 12 years ago. We [IMF] want to renew our relation with Asia,” Strauss-Kahn says.

Dominated by the West

Moreover, Strauss-Kahn says the IMF wants to finally address the long-standing perception that the institution, mostly managed of people from the United States and Europe, has not provided developing countries a sufficient voice in its decision-making.

“We want Asian countries to feel at home with the IMF, and for all of us to move beyond the memories of the Asian crisis,” he says.

The Asian financial crisis wiped out the economic gains of the Philippines and neighboring countries in the preceding years. This led the IMF to impose measures that were described to be too severe for some economies to bear. Asian countries implemented the measures in exchange for financial support.

The measures included budget tightening, which were criticized for having reduced resources for social services, and financial liberalization, which resulted in the inflow of large sums that went to speculative activities that, in turn, dragged down Asian currencies.

Strauss-Kahn says one of the things the IMF intends to do to repair its relation with Asia is to increase the region’s quota shares, which determines voting rights, in the institution.

By January 2011, he says, the IMF will shift 5 percent of the quota shares from Western countries to developing countries, mostly in Asia.

Currently, the United States has 17 percent quota shares, while the entire G20 economies have 71 percent.

Quota shares are supposedly determined largely by economic size. Strauss-Kahn agrees that in the current setup, European economies are over-represented in the IMF and Asian countries are under-represented. But he notes that Asia has recently been growing faster than the global average.

“Asia is now the driver of the global economy, and it is just proper for it to have more role in [the operation of a] global institution like the IMF,” Strauss-Kahn says.

Apart from increasing quota shares, and therefore voting rights, of Asian countries, the IMF likewise wants more Asians to form part of the IMF’s staff and top management, Strauss-Kahn says.

“We want to have more room for people from the Philippines and neighboring countries,” Strauss-Kahn says in response to this reporter’s question on the implications of the IMF’s new policy for the Philippines and other countries in the region.

Moreover, he says, the IMF wants developing countries like the Philippines to play a more active role in the institution by voicing its views on the way the institution is run and on its decisions.

But as expected, developing countries are not too enthusiastic about the IMF’s new policy. Some countries believe the IMF can offer much more than what it is currently offering.

Developing countries that are part of BRIC—Brazil, Russia, India, and China—as well as the Philippines believe that the 5-percent shift of IMF quota shares from industrialized to developing economies is not enough.

For the IMF to be fair, more quota shares must be shifted from industrialized countries in the West, the developing countries say.

Robust Asia

In an earlier press briefing, Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. has said that most economies in Asia, including the Philippines, have proved to be robust over the past few years. This was further highlighted by their performance at the height of the global economic crisis last year.

Asia’s growth in recent years was mainly driven by China and India. In the case of the Philippines, it managed to grow by 1.1 percent in 2009. At around the same time, most economies in the West contracted.

BRIC economies are more vocal about the increase in quota shares of developing economies, stressing that the move has been long overdue.

The Philippines currently accounts for about 0.6- to 0.7-percent share in the total voting rights of the IMF.

“We [the Philippines] want a shift of more than 5 percent. A shift of 7 percent is preferable. Nonetheless, if 5 percent is one that is going to be implemented, that will already be a good start,” Tetangco says.

New disposition

Meanwhile, some policymakers are surprised by the new disposition of the IMF.

“It feels like some fresh wind blowing from Washington, DC,” says BSP Deputy Governor Diwa Guinigundo, referring to the place where the IMF is based. “It is a welcome change considering that the Fund was considered to be a big part of the problem rather than of the solution during the Asian financial crisis.”

In an e-mail to the Inquirer, Guinigundo also says that the IMF is becoming humble, something he describes as a welcome development.

“It looks like it is fast learning important lessons in humility and flexibility. Humility because the Fund cannot pretend to know it all. Flexibility because its doctrine and framework are sorely deficient to cover what its member countries affected by the crisis really needed,” the deputy governor says.

Guinigundo says the BSP finds the IMF’s gesture acceptable.

“The Fund’s mea culpa is accepted. Now we can perhaps approach the negotiating table as partners. They can learn from us as much as we can learn from them,” Guinigundo says.

However, the deputy governor stresses that giving more voting rights to Asian countries should not be seen as an act of philanthropy by the IMF. He says the countries deserve to have more say in the IMF given its achievements in terms of taming inflation, boosting economic growth, and beefing up their foreign exchange reserves.

Moving forward

In the meantime, Strauss-Kahn says the IMF will change its approach in terms of recommending policies to member-countries in need of financial assistance from the IMF.

He says that, learning from past mistakes, the IMF now intends to be more careful in its policy recommendations, making sure these are streamlined.

Caroline Atkinson of the IMF’s external relations explains that a streamlined policy recommendation is one that is focused only on the main problem of a member-country and one that veers away from a whole set of reforms that covers, say, budget spending, that will hurt the poor.

She says the IMF has understood that reforms to be implemented by a government should not aggravate the plight of the poor.

“At the end of the day, reforms should be owned by the people, Atkinson says.

Strauss-Kahn says the IMF is hoping that Asia will respond positively to its call by accepting the institution’s offer of more friendly ties.

“We have learned from the crisis in Asia; we underestimated the consequences of [our policy recommendations]. But past is past, and we need to work together to move forward,” Strauss-Kahn says. –Michelle Remo, Philippine Daily Inquirer