International Monetary Fund 2.0

If international institutions held a global popularity contest, there's little doubt the International Monetary Fund would finish last. Over the past 30 years, the Washington-based agency has aroused fear and loathing throughout much of Africa, Asia and Latin America because of the tough conditions it imposed on governments as the price for its financial assistance. When its role dwindled to near-irrelevance earlier this decade as the world economy expanded strongly, few tears were shed. Taking over as managing director in 2007, Frenchman Dominique Strauss-Kahn warned its directors that, "what might be at stake today is the very existence of the IMF."

Yet suddenly the IMF is the center of attention again, and this time in a new and unaccustomed role: as the hero of the hour, the institution seen as best able to rescue the collapsing world economy. A principal outcome of the April 2 meeting of G-20 leaders in London was an agreement to triple the IMF's resources to $750 billion, and to allow it to issue a further $250 billion on its own. Part of that money is supposed to go to countries suddenly in financial straits, and part is designed to serve as a more general liquidity boost to the contracting world economy. (See pictures of stores that have closed down.)

But the extra money is just part of the story. Along with the new resources come, at least in theory, important changes in the way the IMF functions. In the future, European countries will no longer have an automatic right to pick its managing director, as they do at present. And through a reform of its arcane shareholding or "quota" system, the domination of policy by the U.S. and other developed economies will give way to a more balanced system of governance, under which developing countries such as Brazil, China and Russia will have a greater say. The IMF's focus is supposed to shift, too: the G-20 wants it to play a more active role as global economic cop, monitoring policy among the major advanced economies as well as the poorer ones, and blowing a whistle when it sees dangerous behavior. In theory, the IMF should reflect both the changing global economic order and the crisis-induced shift towards greater financial regulation.

It remains to be seen whether all these intentions become reality. But it's a sign of the times that one of the signatories of the G-20 communiqué was Argentina's President Cristina Fernandez de Kirchner. Her husband Nestor Kirchner, whom she succeeded as President, has long been one of the IMF's most vocal critics; he blamed it for causing a national economic "catastrophe" and spurned its help when he started rebuilding Argentina's shattered economy in 2003. It probably helped that shortly before the G-20 announcement, the IMF gave the world a peek at its new, softer and more generous self, by agreeing to give Mexico a credit line of up to $40 billion. Mexico isn't in the same sort of crisis that has driven it to the IMF several times in the past 30 years, but it wanted backup financing agreed just in case. Tellingly, the IMF extended the credit line through a new facility that doesn't impose the same sort of rigid conditions that gave the organization such a bad name in the past. That prompted Stephen Timms, financial secretary to Britain's Treasury, to crow: "We have gone beyond the era of stigma." India's Prime Minister Manmohan Singh said he viewed Mexico as a precedent, and concurred with Timms. "We are very happy that the [loan] conditions are being relaxed," he said.

Change is long overdue. "Who can possibly justify the fact that Belgium has a substantially larger quota than India, Brazil or Mexico?" asks Ariel Buira, of the Mexican Council for International Affairs. The IMF's legions of critics even include other international agencies. Malcolm Knight, a former general manager of the Bank for International Settlements — a sort of club for central bankers — recently blasted the IMF in an article that described its performance as "less than evenhanded or effective," and accused it of being asleep at the wheel in the months before the current economic turmoil. "The IMF was uncharacteristically disengaged from the debate on growing economic and financial vulnerabilities during the run-up to the present crisis," Knight argued, adding: "It offered little concrete policy advice to countries on how to manage once the crisis broke."

The big question is whether the IMF is up to the job being thrust upon it. The huge boost to its reserves exists on paper, but it's not yet clear where all that money will come from. Japan has pledged $100 billion. Gordon Brown, the British Prime Minister who hosted the G-20 summit, said the European Union would put up $100 billion and that China would provide $40 billion. But Chinese officials wouldn't confirm that amount — and even if the money is forthcoming, it still leaves $260 billion unaccounted for. At a time when governments are financially overstretched, that's no small sum. Moreover, the thorny issues involved in reforming the IMF's governance structure have been kicked back to the organization; the G-20 simply said they should be sorted out by January 2011, but gave no guidance about how.

For all these unanswered questions, the vote of confidence given to the IMF partly reflects its performance over the past few months under Strauss-Kahn, a former French finance minister who made an unsuccessful bid for the French presidency before being appointed to the job. Since the U.S. investment bank Lehman Brothers collapsed in September 2008, the IMF has lifted its game and put together rescue packages totaling more than $50 billion for Hungary, Iceland, Latvia, Ukraine and other financially overstretched countries.

Unlike some of his more diplomatic predecessors, Strauss-Kahn hasn't shied away from publicly advocating policy changes — and even criticizing some of his taskmasters. When he made an impassioned plea in January 2008, at the Davos World Economic Forum, for countries to spend their way out of this crisis, it so surprised his audience, who were more used to traditional IMF calls for austerity, that Larry Summers, now a top U.S. economic official, described it as a "historic moment." More recently, Strauss-Kahn has put public pressure on European governments to increase the size of their economic-stimulus packages, and has criticized the U.S. for not tackling more forthrightly the toxic assets still on the balance sheets of many banks.

Even in its revamped form, the IMF will be less of a significant player on the world stage than its founders intended at the Bretton Woods conference in 1944. Back then, the resources allocated to the IMF amounted to more than half of the world's current account payments. Today, its resources amount to about 3%, according to Buira. Still, if the G-20 intentions are put into practice and the IMF does take on a more active — and more accepted — role as a stabilizing force in the world economy, it will be much closer to the original vision of its role as outlined in the 1940s by John Maynard Keynes, who helped to found it. The IMF "is not a Red Cross philanthropic relief scheme, by which the rich countries come to the rescue of the poor," Keynes declared. Rather, it should be a "highly necessary mechanism, which is at least as useful to the creditor as to the debtor." Rediscovering that sense of equal exchange will be key to the IMF's rebirth.

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