It Is Broke, but This Is Not How You Fix It

Aging institutions, national and international, are prone to inertia and resist change even when their original purposes and circumstances are no longer extant. The powers that dominate their functioning use them as convenient vehicles for their other goals, not germane to the institutions. If a change becomes ineluctable, all possible diversionary subterfuges are adopted to weaken the institution’s structure and role by setting up auxiliary bodies which often usurp its functions – at least the important part of them. Nowhere is this institutional morphology displayed more starkly than in the shaping of the International Monetary Fund (IMF) during the last three decades.

Under the Bretton Woods system of fixed exchange rates, the IMF’s remit extended to all member countries – industrialised and developing regardless of their economic power. Whenever any country’s exchange rate was found to be unsustainable, thereby adversely impacting on its balance of payments, the Fund advised a change in its macroeconomic policies including the exchange rate, often with the provision of its resources to relieve financing problems in the short run. The Fund’s approach to the macroeconomic policies of member countries had one most important dimension: it concerned itself more with the policies of the industrialised countries as their policies affected not only their own economies but also other economies, directly and indirectly, and therefore had repercussions on the working of the international monetary system’s soundness and stability. Since the industrialised countries, except the United States, also resorted to financing facilities from the Fund, it had a certain leverage in influencing their policies. The US being a reserve currency country was, of course, beyond the pale of the Fund’s direct influence, though it could not ignore the Fund’s advice as it felt the ripple effects of the policies of the other industrialised countries on its official gold hodlings. This scenario was radically transformed in 1971 when the US snapped the dollar’s link with gold, thus heralding a regime of floating exchange rates. Under this system, there was no need for industrial countries to borrow from the Fund, and if any occasion arose for such an exigency, they could rely on each other under various arrangements. Thus the Fund became a lender of last resort to only the non-industrialised countries.