An IMF Report Card

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There were two reasons this was so important: first, destabilizing short-term capital flows — "hot money" transactions — were at the root of much of the instability that has afflicted so many developing countries, during the past quarter century. The IMF, rather than helping to stabilize the global economy, was actually contributing to global instability. The reversal of its position, if actually translated into well-thought-out policies, may contribute to a more stable global economy. Secondly, it was an admission that free, unfettered markets, by themselves, may not always be a good thing. There are limits to markets. Of course, to most people, this had long been obvious, but this was a new position for the IMF and could bode a change in the way it does business.

And so even critics looking at this record are compelled to conclude: There have been major changes in six short years. But in many areas, there has been greater change in rhetoric than in reality. While the improvements in the debt-forgiveness programs are to be lauded, countries like Moldova must still spend up to three-quarters of their scarce public revenues servicing foreign debt. In advocating a statutory framework for debt restructuring, the IMF was right, but until the U.S. backs this reform, it won't happen. Global governance remains highly undemocratic. And the IMF's own democratic insensitivities have been revealed in several ways. For instance, in its approach to sovereign debt restructuring, it wanted to retain a pivotal role; yet its role as a major creditor would compromise the impartiality of the proceedings. By the same token, while the U.S. has recognized the role of secret bank accounts in financing terrorism, secret bank accounts are also important in money laundering, tax evasion and other forms of corruption. There needs to be a much stronger and broader attack on bank secrecy.

There needs to be a much stronger attack on bank secrecy

Some of the central failings of global financial markets have not even begun to be addressed. We should recognize and address the huge instabilities that mark the global economy. The growing recognition of the potentially destabilizing role of short-term capital flows is clearly a step in the right direction, but there are other fundamental problems. Wall Street prides itself on its ability to use derivatives to slice and dice risk, shifting risk to those more willing to bear it. Yet when developing countries borrow, they are left to bear the brunt of both exchange- and interest-rate volatility, at great cost. If its currency falls against the dollar, a developing country's debt may become unbearable. Why aren't those risks allocated equitably?

The global reserve system is both a major source of inequity and instability. It's no accident that much of the world's reserves are held in dollars. Prudence requires developing countries in East Asia and Latin America to hold substantial reserves in hard currencies, and most choose dollars and U.S. government bonds. The result: America lives well beyond its means — importing over $500 billion more than it exports every year — while developing countries that run much smaller deficits are chastised and severely punished by the markets. The system guarantees that developing countries are lending to the U.S. at low interest rates; but many are also borrowing from the U.S. to finance government spending and investment, paying substantially higher rates. The result is a net transfer from the poor countries of the world to the richest.

We should applaud the attempts at reform, but we should not be complacent. In an arena where change typically occurs at glacial speeds, the change is observable. The global community can be proud. Yet those who expected a major reform in the global financial architecture have been sorely disappointed. Any fundamental reforms would have to address issues of global governance, and there are strong vested interests in keeping the status quo — rearranging the chairs around the table, but not changing the table or those who have a seat at it. Thus many of the reforms have only just begun. Fundamental weaknesses in the global financial system — and in its governance — have yet to be addressed. The glass is still more than half empty.