Canada’s IMF role significant, even in the face of international organization’s decline

Changes in international finance — the rise of the European Union and an unstable U.S. economy are posing challenges for the IMF.

By John Cooper

Out of the disastrous Great Depression and the economic challenge of World War II, the International Monetary Fund (IMF) was created to generate a framework for economic cooperation, growth and stability. Its basic goal on its creation in 1945 was to avoid the kind of economic policies that led to the Depression.

Over the years, it has been credited with helping small countries grow and stabilizing the world economy. Conversely, it has also been criticized as an entity where the economic ‘haves’ kept the ‘have nots’ in economic thrall. Overall, it has provided a stage for Canada to lead by example on fiscal policy initiatives.

And for analysts, it may also be the victim of its own success — the shifting environment of international finance has called into question whether the IMF is now redundant, or simply in need of a makeover; last fall, IMF head Dominique Strauss-Kahn called for the organization to “downsize or die” in the face of changing world markets.

Conceived at the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire in July 1944, where 45 nations came together to set a course for globe-spanning economic cooperation, the IMF officially came into being in December 1945. It works closely with organizations like the World Bank (founded the same year) to reduce poverty by raising living standards and promoting sustainable development.

Sixty-three years later after its inception, the IMF boasts 185 member countries — almost every nation in the world; its Washington headquarters is the site of think-tank sessions that move capital like chess pieces on a board, and its 2,600 staff from 143 countries oversees quotas of $352 billion, outstanding loans of $17 billion and an overall fund of $157 billion. It also stockpiles 103.4 million ounces of gold valued at $9.2 billion; bottom-line total holdings amount to $95.2 billion. 

Today, the IMF operates from a nondescript limestone building a short walk from the White House, in an atmosphere that analysts consider to be one of the world’s most disciplined bureaucracies.

Discipline is necessary when looking after balanced growth in international trade, encouraging stability and making resources available to member countries. In its efforts to promote international monetary cooperation, the IMF assists in establishing a multilateral system of payments and works to resolve crises when they occur, and seeks to alleviate poverty through technical assistance, loans and surveillance (the review of member nations’ economies). Members contribute to what is essentially a large, multinational credit union, where countries can go if they need financial assistance. The “hard currency” used by the IMF — such as euros, yen, or dollars — is necessary for many international transactions. All member countries contribute to the quota system; Canada’s quota is currently US $300 million — by comparison, the U.S. contributes $2.75 billion, the U.K. $1.3 billion, and China $550 million.

Members can tap into a fund if they are having problems making loan payments, and can use the IMF’s resources by drawing on other members’ currencies with an equivalent amount of their own currency. A member repays its own currency from the IMF with other members’ currencies over a specified period of time, with interest; in this way, a member country receives credit from other members. The IMF is overseen by a board of governors representing all members, who meet yearly; an international monetary and finance committee of 24 governors meets twice a year and daily operations are overseen by a 24-member executive board.

Canada’s role

Each year, the IMF conducts detailed appraisals of each member country’s economy, outlining for its authorities whether its policies are conducive to external and domestic stability and advising on policy adjustments — the aim is for a transparent review of a country’s fiscal strengths.

The IMF report for Canada, released in late February, highlighted “the flexibility of the Canadian economy in adjusting to adverse shocks and notes that our strong fiscal situation puts Canada in an enviable position to take on the economic challenges ahead,” said a release by the federal finance ministry.

“Canada prides itself as a bridge-building force within the (IMF) membership, and one that presents innovative ideas to evolving challenges that the Fund has faced over its history,” says David Gamble, acting director, public affairs and operations division, Finance Canada. “Most recently, Canada has played a leading role in supporting reforms to the IMF’s governance structure and the way it conducts economic surveillance of member economies, with the goal of safeguarding the effectiveness, legitimacy and credibility of the Fund over the long-term.”

So has it been successful? Analysts say Canada’s role-through-influence has been overwhelmingly more significant than its financial contribution.

Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, who spent four years representing Canada at the IMF in the 1980s, considers the IMF a “tremendous organization ... and tremendous international organizations are hard to shut down if they become irrelevant. Canada has always made a significant contribution to the IMF in terms of human capital. People sometimes have the sense that Canada’s international influence is slipping, but it’s not something that I’ve encountered.”

But changes in international finance — the rise of the European Union, the emerging power of the BRIC countries (Brazil, Russia, India and China) and the dip in the U.S. economy — mean that roles may change.

“The role of the IMF as a stabilizing influence has been very important in the past,” says Joseph D’Cruz, professor of strategic management at the Rotman School of Management, University of Toronto. “Today it’s less important because there is among the developing countries a negative reaction — they believe that the measures they’ve been forced into taking [in borrowing money in the past] have been somewhat draconian. As the BRIC countries are becoming more significant on the global scene, the role of the IMF is being questioned.”

Hodgson says IMF is at the point of having to reinvent itself as business declines and plans are in place to downsize by 300 to 400 staff. Still, it boasts a solid track record — countries from Turkey and the Philippines to Georgia and Botswana have all been cited as IMF success stories.

“Many countries followed the IMF’s advice and adopted flexible monetary policies,” says Hodgson. “It has always had critics but frankly it’s important to have a lightning rod outside a country instead of having an internal debate where people blame each other within a country. It’s kind of a victim of its own success; it grew, but stopped lending money in a big way. The issue going forward is ‘can the IMF reinvent itself again and give weight to growing markets and can it redistribute control so that it’s not just a G-7 club?’ ”

According to D’Cruz, Canada has contributed in two ways. “The main influence on the IMF is from the example Canada sets. We have balanced budgets — we’re one of the leaders in that area — and that gives rise to a second example, and that is moral suasion. Because Canada is so well run fiscally it is able to use influence (and) that is larger than its financial role. Canada is the voice of moderation and in some ways it is a counterbalance to the United States, which has a more aggressive role, a role that is sometimes resented by other countries.”

While critics have largely called the IMF’s structural adjustment programs — the preset targets established as a basis for loans — unfair, saying they restrict slow social stability and lead to increased poverty, Hodgson counters that “you’ll always have critics — those on the left say the repayment schemes are too tough and right-wing critics think the fund has intervened and messed up capital markets.”

Hodgson adds that Canada has a track record for sending the best-qualified economists to the IMF. “Everyone involved usually has a graduate degree in macroeconomics, they’re very well qualified and there’s a great commitment from individuals. There’s much debate about the future, and the real issue is ‘has the world changed so much that we don’t need this security blanket anymore?’ But we shouldn’t throw out the baby with the bathwater.”

John Cooper is a Whitby, Ont.-based freelance writer.

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