The litany of complaints against the International Monetary Fund is long: it has failed to prevent financial crises; it has imposed austerity programmes on poor countries; it is the plaything of the US Treasury.
Above all, in a globalised world, it has yet to find a useful role for itself. The criticisms hurt all the more for being true. Set up more than 60 years ago as an institution that would smooth out balance-of-payments problems between countries operating fixed exchange rate systems, the IMF has mooched around for decades trying to work out what it should be doing now that most countries, in the West at least, have floating exchange rates. To adapt the words of Dean Acheson about Britain: "The IMF has lost an empire, but has not yet found a role."
Rodrigo de Rato, the IMF's managing director, wants to change all that.
After years of dithering by management, de Rato thinks he has a blueprint for the future; one that takes the IMF back to its roots. It is not a development agency, he says; it should not be a Mark 2 World Bank. This is smart thinking and it has the broad support of policy makers. When de Rato announced at the IMF'S meeting in April that he wanted it to concentrate on multilateral surveillance in order to help sort out global economic imbalances, the news broke on the 60th anniversary of the death of Maynard Keynes, one of the IMF's founding fathers. According to Mervyn King, the governor of the Bank of England, the IMF is going back to Keynes' original vision - and a good thing too.
But the scale of the challenge facing de Rato is considerable and was demonstrated when he outlined his plans to a small gathering at the Treasury in London in July. One participant told de Rato in no uncertain terms that the accumulation of vast reserves by central banks in Asia was a "colossal vote of no confidence in the IMF". There was a sense in Asia that its intervention during the crisis of 1997-98 was deeply unfair: "A Western-dominated institution put them through the wringer and they have built up reserves so that the IMF can never wield the same sort of influence again."
The critique encapsulates the problem. The global imbalances are the result, primarily, of the US spending too much and Asia saving too much.
They pose a real threat to global stability, because the US cannot go on living beyond its means for ever. There is a nice way and a nasty way to approach the problem: the nasty way would involve a flight out of the dollar, a world recession and the return of protectionism. The nice way, the way favoured by de Rato, is multilateral surveillance, a process whereby the IMF would get all the key people around the table and tell them what is going wrong and what each country needs to do in order to fix things.
Member countries, it is hoped, would be more prepared to alter their policy stance collectively than if they thought they were being asked to take unilateral action.
This, though, presupposes that the IMF's judgment is trusted. It has considerable expertise when it comes to macroeconomic analysis; its half-yearly World Economic Outlook gives a clear and frank exposition of the state of play. But it would wield far more influence, especially in Asia, if it represented the global economy as it is today rather than as it was at the end of the Second World War. It is absurd that Belgium has greater voting power at the IMF than Brazil or India, and de Rato knows it.
The solution is obvious: developing countries have to be given greater voting power so that their voice is better heard. Yet this is a zero-sum game: more power for China, India and Brazil means less power for somebody else, especially the smaller European countries. At the moment, de Rato is going for a cautious, two-stage strategy, in which the lack of power for the bigger developing countries is sorted out first and the demands of smaller developing countries are put off to another time.
Changing the way the IMF is run is a necessary but not sufficient condition for the new institution de Rato wants to create. He is aware that the financial markets play a crucial role in the new global age; the question is how to manage them. Keynes' IMF had fixed exchange rates and capital controls. The IMF of de Rato will have to rely on transparency, persuasion and luck to unravel the global imbalances. Especially luck.
- Larry Elliott is economics editor of the Guardian.