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A Perfectly Crazy Idea for the IMF

Rather than count on the IMF to fulfill its mandate of protecting them from liquidity crises, emerging economies self-insure by accumulating large stockpiles of international reserves – resources that could be used to fund domestic needs. If member countries won't go to the Fund, the Fund should go to its member countries.

GENEVA – In the movie Dangerous Minds, the actress Michelle Pfeiffer plays a former US Marine who becomes a teacher in an inner-city high school. In a difficult environment, where academic achievement is far from the top of the rebellious teens’ list of priorities, Pfeiffer’s character comes up with an unorthodox – and effective – new approach: each student will start the year with an “A” grade, which is theirs to lose. At a time when many emerging-market economies are as discouraged as Pfeiffer’s students, perhaps the International Monetary Fund should take a page out of her playbook.

Emerging economies inhabit a risky world characterized by volatile capital flows. But, rather than rely on the IMF to fulfill its mandate of protecting them from liquidity crises, they self-insure by accumulating large stockpiles of international reserves. Emerging and developing economies now lend nearly $7.5 trillion to the US Treasury – resources that could be used to fund badly needed infrastructure projects.

What is curious about this approach is that the IMF’s record in handling financial crises, though far from perfect, is generally quite good. So why the reluctance to count on the Fund?

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