IMF: International Ministry of Finance

The emerging markets crisis is a godsend for Christine Lagarde. Now she can make the case for an even more powerful IMF.

There’s no organisation that can reap profit from a crisis like the International Monetary Fund (IMF).

Whenever a country finds itself in economic hardship, IMF managing director Christine Lagarde seductively waves her chequebook.

A loan shark for countries, as a Newsweek article from 2011 implied.

To be fair, the IMF doesn’t lend countries money at outrageous interest which is the hallmark of a loan shark. It doesn’t tighten the financial noose around a country’s neck.

But in return for its money it demands a strong say in how the country is run. And since it’s a lender of last resort, it knows the borrower has no choice but to comply.

Just ask Greece how many strings are attached to borrowing IMF funds.

Now an emerging markets (EM) crisis is brewing. This may not be good news for the global economy but it’s good news for the IMF.

The IMF gets to play the Good Samaritan once more, which is just good PR. The IMF stays relevant and may even grow its resources.

The IMF already does much more than it was ever intended to do. An EM crisis could send even more money and influence its way.

Expanding job description

“An international organisation established in 1945 which aims to promote international trade and monetary cooperation and the stabilisation of exchange rates.”

That’s how the Oxford Dictionary defines the IMF. Based on the last few years that seems a little narrow.

Sure it’s a promotor of international trade by speaking out against US President Donald Trump waging trade wars against the rest of the world…

But it’s also developed a currency, called Special Drawing Rights (SDR), and developing a cryptocurrency (IMF Coin) for governments to use…

And in its spare time it’s saving countries from collapse, like Greece during the eurozone crisis.

The Oxford Dictionary’s definition accurately describes the IMF from the period of its inception up to the 1970s.

It was originally tasked with maintaining the Bretton Woods exchange rate system in which currencies were pegged to the dollar.

If countries couldn’t pay for their trade deficits, the IMF was there to lend a helping hand. As such it used to be more in the background.

But then oil price shocks threw the world into economic turmoil in the 70s and the organisation took centre stage.

The IMF came to be seen as “the world’s master economic trouble-shooter,” as Iranian economist Jahangir Amuzegar put it.

The IMF thrives in times of crisis and disappears from the limelight again when times are good. At least that was the case up until recently.

Under the leadership of Christine Lagarde the organisation has taken on a much more prominent role in global politics and finance.

The IMF is constantly making headlines these days, in its role as countries’ lender of last resort and with its economic impact assessments.

Yesterday Lagarde backed up the UK government and Bank of England on Brexit.

Speaking in London, she warned the UK that leaving the EU without a deal would be “a significantly worse outcome” that would come with “substantial costs” for the UK economy.

The IMF has muscled its way into the centre of global governance and gone way beyond its job description to stay relevant.

That’s why the looming EM crisis is a godsend for the IMF, especially with the global economy generally faring better.

It’s the perfect occasion for Lagarde to make the case for an even more powerful IMF.

More money, more power

If money is an accurate yardstick to reflect power, then the IMF’s influence has grown considerably over the past decade.

Before the global financial crisis the funds at the organisation’s disposal to help out struggling countries totalled $300 billion.

One European sovereign debt crisis later and its budget has increased to $1 trillion.

And if it were up to Lagarde, the fund’s working capital grows larger still. She’ll point to the EM crisis and the likelihood that a number of countries will ask for help soon.

“This autumn [Lagarde] is launching a discreet lobbying campaign to persuade the fund’s major creditors to expand its resources,” writes Gillian Tett in the Financial Times.

“And as this battle gets under way, the crisis in Argentina might unexpectedly help her pitch – even (or especially) with the administration of Donald Trump.”

The IMF’s growing influence is something to be watched.

Developing countries see the IMF as a biased institution dominated by a cabal of Western developed countries.

Emerging market countries also complain they’re underrepresented with power skewed towards Western nations.

Their criticism is justified. For it’s no coincidence that every managing director in its history has been a Western European.

The IMF is part of the America-Europe axis that’s long dominated the global economy. They’ve decided among themselves that the IMF should be European-led while every World Bank president should hold the US nationality.

More power for the IMF means more power for a select group of countries that can bully any country outside its clique that refuses to toe the line.

An EM crisis could put a lot more money into the IMF’s coffers. It could very well cement its place in the global order.

Since it’s already deviated so far from its original purpose, the way this is going the IMF might one day be rebranded the “International Ministry of Finance”.

The growing power of supranational institutions like the IMF raises an important question to a United Kingdom that is leaving the EU.

In this day and age, with so many global organisations taking centre stage, how sovereign can any individual country still expect to be?

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