Friday, January 02, 2009

IMF’s new economic stimulus

It is not often that good news comes from the International Monetary Fund (IMF), especially for emerging economies of the world. In its 64 years of existence as a creation of the post-war system of fixed exchange rates, IMF has paid scant attention to redefining global financial systems. Its economic conditionalities have often been seen from the prism of trying to tie the developing nations to the apron strings of rich, developed countries.

But a paradigm shift is afoot in IMF’s new economic ideology. According to IMF Managing Director, Dominique Strauss-Khan, the Fund will focus, in the period ahead, on helping member states respond to financial and economic crises towards reforming the global financial landscape. This is good news.

Strauss-Khan, during the Fund’s recent Executive Board meeting, said that its Financial Committee and the G-20 leaders have “emphasized the central role of the Fund as a crisis responder and a developer of ideas.” The G-20 was created a decade ago after the emerging markets crises. Strauss-Khan was referring to the broad guidelines reached after its recent summit on how to assist emerging economies such as Nigeria respond to threatening financial crisis and stimulate economic growth.

Though, meeting these challenges will prove hard, especially in countries operating tight budgets. According to the IMF boss, such stimulus packages are expected to see member states, in particular poor states, through turbulent times.

The fund’s Executive Board, in this new thinking, has been mandated to examine other elements of lending instruments that are less stringent and suffocating for the citizens of borrowing nations.
We welcome this new thinking by the former Bretton Woods Institution.

This is a radical departure from its earlier position in which it merely assisted member states on how to overcome their balance of payments through what it calls Policy Support Instrument (PSI). The current thinking is reform-based and a realisation that, at last, IMF and the West are beginning to come to terms with the multiple problems that stifle development efforts in emerging economies.

This is, indeed, a step in the right direction. The recent global financial meltdown has brought home the telling lesson that the world will be a better place with global economic co-operation between the G-7 group of rich countries, which has, until now, held the stage, and the G-20 that includes most of the key parts of the rich and emerging world.

We want to see these synergies begin to bear fruits in the coming year. This is one sure way that Third World countries can renew their confidence in the IMF. At the moment, the painful austerity measures which often follow every IMF loan to developing nations make many emerging nations wary of any stimulus package designed by its operators.

With good governance and realistic economic policies, developing nations will be less dependent on IMF–induced economic measures. Misapplication and misappropriation of funds by Third World governments often create loopholes which IMF and the World Bank exploit to prescribe measures that create more problems than they can clean up. All told, the IMF economic plans appear encouraging.