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Thu 14 Oct 2010 01:00 PM

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Can IMF teach emerging market lessons to rich world?

Emerging market finance leaders dispense advice to the world's richest nations

Can IMF teach emerging market lessons to rich world?
Egypt’s Youssef Boutros Ghali chaired the IMF’s steering committee.
Can IMF teach emerging market lessons to rich world?
The meetings in Washington showcased the growing influence of emerging markets.

Emerging market finance leaders came to the centre of Western power earlier this month and dispensed advice to the world's richest nations.

Three years into a financial crisis spawned in the US, advanced nations are realising that China, Brazil and other fast-growing economies have something to teach the rich world about surviving financial turmoil.

The International Monetary Fund could provide the right classroom, provided its old-guard leadership of Europe and the US can finally put ego aside and agree to give dynamic emerging markets their proper place.

“There has been a distinct resistance among many (Western) policymakers to apply ‘emerging markets lessons’ to some of the challenges their countries are facing,” said former IMF official Mohamed El Erian, the co-chief investment officer at PIMCO, the world’s largest bond fund.

“The IMF is uniquely placed to be the trusted adviser.”

A common thread running through the weekend IMF meetings in Washington was that countries were pursuing national policies in a fruitless effort to solve global problems. It is still not clear any nation is ready to act for the global good.

The gatherings provided little in the way of new pronouncements or ideas to speed up the world’s recovery or fix long-standing imbalances between cash-rich exporters and indebted consumer countries.

Finance officials did agree to give the Fund heightened powers to oversee their economies, but that has been tried before without much success.

While concrete action was lacking, the meetings showcased the growing influence of emerging markets, who are on the verge of winning a greater share of IMF power.

The IMF’s steering committee was chaired by Egyptian Finance Minister Youssef Boutros Ghali, and hints of a developing world perspective were visible in the committee’s closing statement.

The communiqué, representing the consensus of all 187 IMF member states, said the Fund needs to be more even-handed in examining economies to ensure advanced nations don’t evade scrutiny.

In another testament to the growing importance of emerging markets, investors flocked to Washington to gain insight from — and access to — policymakers from Asia, Africa and Latin America, where generous returns have drawn an uncomfortably heavy flow of investment money from the rich world.

“The most striking feature of these meetings was on the private side, where record attendance reflected a frenzy of interest in emerging market stocks and bonds,” said Kenneth Rogoff, a Harvard University professor and former IMF chief economist. “Nothing policymakers were saying about potential risks seemed to make any dent in the mood.”

Emerging market power will likely be on display next month, as well, when Group of 20 leaders meet in South Korea. One aim for this meeting, the first G20 summit to be held in a developing country, is to ink an agreement on redistributing IMF voting and executive board power to better reflect emerging nations’ growing share of the global economy.

No such deal has been reached, however, and the US and Europe remain far from agreement on who exactly should give ground so that newcomers can gain more clout.

This is part of the reason why the IMF has a reputation for speaking loudly but carrying no stick to force countries to listen to its advice.

Advanced economies control the IMF’s purse strings and the internal power and don’t want to listen to policy lectures. Emerging markets that turned to the IMF for financial help during the Asian and Latin American crises in the 1990s have bad memories and don’t want to be subjugated again.

IMF officials know that in order to be respected, the internal power must reflect the real-world pecking order, and Europe and the US will have to cede
some control.

“There is no doubt that a bigger say of emerging market economies in the IMF is absolutely necessary to give the Fund the legitimacy to do (its) job,” Brazilian central bank president Henrique Meirelles said.

US Treasury Secretary Timothy Geithner said if countries expect greater IMF representation, they must be willing to take the IMF’s advice, a thinly veiled reference to China’s plodding progress in allowing its yuan currency to rise.

The advice ought to go both ways, PIMCO’s El Erian said.

Rich countries have pulled every policy lever yet still cannot generate growth fast enough to drag down high unemployment, a predicament that El Erian dubbed “active inertia”.

Policymakers have not had much success because they are “reacting with the familiar rather than the effective” and would be well served listening to ideas from countries that have been through financial crises and recovered, he said.

Many of the so-called “Class of 1998” countries that endured financial crises learned the dangers of overborrowing and overleverage, and have since built up huge cash reserves as a form of self-insurance against future trouble.

US businesses and consumers are doing the same thing now, much to the frustration of US president Barack Obama and US Federal Reserve chairman Ben Bernanke, who have poured trillions of dollars into the economy to try to kickstart growth.

“Witness the unusual amount of cash that US companies are hoarding on their balance sheets, and note the extent to which US households are... selling equities to go into cash and bonds,” El Erian said.

The IMF is the logical place for exchanging ideas.

The rich world may finally be ready to listen.