A central theme of this book has been to raise questions about the adequacy of the IMF as the world’s de facto ILLR. The historical narrative of this project highlights that, almost since its inception, the Fund has been afflicted with two chronic institutional flaws. The Fund has consistently found itself playing catch-up to the winds of change in global finance rather than anticipating these changes and adapting in order to better function as a global financial crisis manager. The story of the IMF’s evolution as the de facto ILLR has been one of reaction rather than preemption. Of course, it is a bit unfair to criticize the Fund for not being able to predict the future. The problem is not so much the institution’s lack of foresight, but rather its relative lack of flexibility. As I discussed early in this book, the Fund was not designed by its makers to function as an ILLR. Its lack of independence and inability to create liquidity are part of the institution’s DNA.
The process of playing catch-up began in the 1960s with the creation of the General Arrangements to Borrow (GAB). Although this increased the Fund’s access to lendable resources, it also exacerbated the problem of unresponsiveness through its cumbersome borrowing procedures. As debt crises rocked the developing world decades later, the Fund’s unresponsiveness became especially acute as it implemented its concerted lending strategy. In addition, it was once again short on resources, seeking quota increases from member countries in 1980, 1983, and 1990. When demand for Fund credit outpaced its lending capacity, the Fund was forced to seek special supplementary loans from surplus economies. In the aftermath of the Mexican peso crisis of 1994-1995, the IMF introduced the Emergency Financing Mechanism (EFM). This was designed to provide speedier loan approval. After the Asian financial crisis of the late 1990s, the Fund attempted to address the problems of resource insufficiency and unresponsiveness by creating two new mechanisms. The first was the Contingent Credit Line (CCL), which was designed to serve as "precautionary resources in the event of contagion from a crisis” and once again increasing quotas. The second was the Supplemental Reserve
Facility (SRF), which was designed to provide "extra quick-disbursing resources to countries facing a crisis of confidence in financial markets.”19 In the years since the 2008 global financial crisis, the IMF has once again sought to address its two chronic weaknesses. To minimize the problem of resource insufficiency, the Fund initially increased its lendable resource base by securing a number of large (temporary) bilateral commitments from some ofits major shareholders. In 2010, the IMF agreed on quota reform that would permanently increase the institution’s resources to roughly $660 billion—a deal that waited until late 2015 for US congressional approval. Besides increasing its aggregate resource base, the Fund changed the rules that limit how much individual countries can borrow in times of crisis. It did this by doubling both annual and cumulative access limits for member countries from 100 and 300 percent to 200 and 600 percent, respectively.20 Without question, these adjustments are big improvements. They better position the IMF to address financial crises. Yet, despite these efforts, the fact remains that the IMF is still ill equipped to address a systemic global financial crisis on the order of 2008. As one scholar has explained, even with its increased lending capacity, "The IMF can hardly exert any systemic role in today’s global financial system.”21 The Fund has also taken steps to mitigate the problem of unresponsiveness. In particular, it introduced three new facilities designed to provide speedier financing to member states facing balance ofpayments crises: the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Rapid Credit Facility (RCF). The FCL is designed to provide countries with "strong fundamentals” with access to "large and up-front access to IMF resources with no ongoing conditions,” while the purpose of the RCF is to provide "low access, rapid, and concessional financial assistance to [low-income countries].”22 The PLL is quite similar to the FCL; however, it meets the needs of countries precluded from drawing on the FCL because of disqualifying economic vulnerabilities. At the time of this writing, three countries (Colombia, Mexico, and Poland) have used the FCL, while two countries (Macedonia and Morocco) have used the PLL. No member has yet to tap the RCF. Even the basic Stand-By Arrangement was overhauled after 2008 in order to make the workhorse facility more effective for members who may not qualify for an FCL outside the IMF’s quota-based resources in the event of a financial crisis. However, in practice the CCL proved to be very unpopular and, during the relatively calm 2000s, it was deemed unnecessary and allowed to "expire” as a facility in November 2008.
- 19. Boughton 2000, p. 277.
- 20. IMF 2009.
- 21. Lombardi 2012.
- 22. IMF 2012b; IMF 2012c.
arrangement "by providing increased flexibility to front-load access” intended to improve its "crisis prevention and crisis resolution” performance. Of course, the effectiveness of these reforms remains to be seen. As one recent paper on the subject put it, "The recent strengthening of IMF resources and redesigning of instruments, while a move in the right direction, met the demand of only a few countries, and its effectiveness as a protective safety belt remains largely untested.” As has been the case with nearly all of its previous reforms, these changes may in fact be too little, too late.
By contrast, the United States has the ability to compensate for the Fund’s institutional flaws through the provision of liquidity via the Fed or Treasury. Yet, as the evidence presented here has shown, US rescues are highly discretionary and selective. Typically, only countries where the United States has sizable financial interests find themselves on the receiving end of a US bailout. This paints an unflattering picture of global financial governance when it comes to equity and fairness. This is especially the case when paired with existing empirical research that has shown IMF lending tends to favor countries with close political and economic ties to the United States (and other advanced economies). The picture that emerges is an overtly two-tiered ILLR system. Countries of financial import to the United States are far more likely to receive swift or supplemental US bailouts as well as preferential treatment under an IMF arrangement. Countries where US interests are not so prominent, conversely, are left with less-responsive and less-robust ILLR mechanisms.
In light of the Fund’s chronic flaws as an ILLR, the remaining risks facing the global financial system, and the global economy’s tepid recovery, policymakers should consider the value of a permanent central bank swap regime. Such a system would be a revival of the system discussed in chapter 3 that existed from 1962 until 1998. Among six major central banks, such a system has already re-emerged. As noted above, in 2013, the Fed, Bank of Canada, Bank of England, Bank ofJapan, ECB, and the Swiss National Bank made permanent their network of unlimited reciprocal central bank swap lines. However, this leaves out all emerging market economies that, arguably, are most vulnerable to financial shocks. This is especially true as the world’s major central banks unwind years of unconventional monetary policy. One option is a reciprocal swap regime that includes all members of the newly empowered Group of 20 (G-20). A G- 20 swap network, with the Fed at the center, would provide markets with confidence that the world’s largest economies have access to a large volume of liquidity, which can be released at a moment’s notice. Moreover, it could have the added benefit of helping to correct global imbalances by giving emerging market economies an added sense of security against financial crises, reducing their incentive to build up large stocks of foreign exchange reserves for self-defense.
Such a network today would work much like it did in the 1960s when the intended design was to create a system where short-term shocks could be addressed directly via central bank cooperation, while the IMF would work to correct longer-term imbalances. Of course, the likelihood of such a plan hinges on the political will of the countries involved, especially the United States. If recent history is any indication, the prospects do not look good. South Korea discovered this when it suggested just such a system in the spring of2010, as it assumed the presidency ofthe G-20. The proposal gained no traction and was essentially dead on arrival. In the meantime, emerging market economies have been busy signing both multilateral and bilateral swap agreements with each other as a means of insulating their economies from financial tumult. On the multilateral front, the Chiang Mai Initiative (CMI) beefed up its East Asian crisis-management capabilities in 2012, including a doubling of its lending capacity to $240 billion. In 2014, the BRICS economies—Brazil, Russia, India, China, and South Africa—created the Contingent Reserve Arrangement (CRA): a $100 billion swap network designed to provide dollars to participating countries in times of crisis. On the bilateral side, India and South Korea have both actively sought bilateral swap deals with willing partners since 2008. Indeed, in 2013, the Indian government commissioned a "task force” to investigate the benefits of signing more such agreements. Then there is China. Since 2008, the People’s Bank of China has negotiated more than 30 swap deals with partner central banks. Although the primary function of these agreements is to promote trade settlement in China’s currency, they can also function as emergency credit lines. For example, in in 2014 and 2015, Argentina tapped its swap line with Beijing to a tune of $2.3 billion to replenish its dwindling foreign exchange reserves. This is all part of an interesting trend that appears to be driven by financial insecurity. Because the IMF remains an imperfect ILLR and the United States is unwilling to provide ex ante assurances that it will come to the aid of emerging market economies when times get tough, vulnerable economies are looking to each other for help.
-  Boughton 2001, p. 44.
-  Bird and Rajan 2002, p. 6. The basic idea of the CCL was that a country could approachthe Fund before a crisis to negotiate conditions in return for the promise of financing from
-  IMF 2009b, p. 3.
-  Fernandez-Arias and Levy-Yeyati 2010, p. 2.
-  As one South Korean official explained to the Financial Times, "Bilateral swaps arevery effective, but they are negotiated individually at the moment. They are prisoners to circumstances” (Oliver 2010). In 2014, India’s Finance Secretary similarly suggested that theIMF should study whether a G-20 swap network would address the threats facing emergingmarket economies (Sikarwar 2014).
-  Oliver 2010.
-  Grimes 2011. See also Adam and Sharp 2012.
-  The Hindu 2013.
-  Liao and McDowell 2015.
-  Devereux 2015.