IMF angles for a central role in world economics

WASHINGTON - The future of the International Monetary Fund has been taking shape this week with proposals that will put the crisis lender at the heart of world economic policy-making and give emerging powers more say on how it is run.

As global financial leaders gather ahead of IMF and World Bank meetings this weekend, reform of the 61-year-old IMF tops the agenda.

The fund presented proposals from its own six-month-old strategic review that aim to give it a larger watchdog role in the world economy.

Its 184 member Governments will debate the reforms today and tomorrow.

Changes under consideration include closer monitoring of currency rates and exchange policies of the emerging economic powers of Asia and elsewhere - efforts that before covered only industrial countries.

They also aim to broaden the IMF's role from conducting one-on-one reviews of member economies to bringing together the world's leading economic powers - industrial and emerging - for multilateral talks.

IMF managing director Rodrigo Rato said the moves were critical to co-ordinating economic policies and preventing an unruly unwinding of huge global imbalances in trade and investment flows that could spark world recession.

"Co-ordinated action would be politically easier and economically more effective than governments in systemically important countries acting alone," Rato said.

"These consultations will enable the fund and members to propose actions to address vulnerabilities that affect individual members and the global financial system."

Critically, he said, these discussions needed to extend well beyond the limited scope of the existing Group of Seven club of rich and powerful economies - consisting of the United States, Japan, Germany, Britain, France, Italy and Canada.

That elite group was set to meet overnight, before the IMF gathering begins late today.

"The days when G7 finance ministers could sit in a hotel room and make decisions about exchange rates are gone," Rato said, referring to the 1985 Plaza Accord among G7 nations to weaken the US dollar.

World finance chiefs attended an IMF-led conference yesterday to discuss how to resolve these global imbalances, in the lender's first crack at pulling all parties into commitments.

The IMF and many private experts say the US dollar needs to weaken once again to help cut the enormous US current account gap, especially against a rigidly controlled Chinese yuan.

China has faced intense pressure from US politicians to let its currency rise faster against the greenback to stem its soaring trade surplus with the US, pressure that has only intensified with President Hu Jintao meeting US President George W. Bush this week.

With so much political heat building among countries over trade and currency rates, and with the threat of protectionism on the rise, experts say the IMF is one of the few institutions that can act as a global umpire.

While welcoming a more central role, Rato backed away from the idea of the IMF as a strict referee - saying its trusted links with government would be a key advantage now.

"What is distinctive about the fund's role in international discussions is that we do not just stand on the sideline and point or make calls," he said. "We are engaged in discussions with the players."

IMF critics say the lender has fallen out of step with modern economic realities, as demand for its lending has dropped sharply amid rapid globalisation of private capital flows and a desire among some members to pay the fund back.

The US has been pressing the IMF to increase its surveillance of currencies, especially China's yuan.

But Rato said addressing economic imbalances should focus on more than exchange rates.

"Exchange rate policy should go hand in hand with supporting policies such as fiscal adjustment in the US and structural reforms that boost consumption in China," he said.

Another criticism of the IMF is levelled at its voting structure, which detractors warn will jeopardise its legitimacy unless it changes to reflect emerging powers.

- REUTERS