Emerging market countries from Chile to China have been arguing for some time that the International Monetary Fund – the nerve center of the international financial system – needs to become more “democratic.” They want more policy influence the next time the Fund decides to bail out a fellow emerging-market country like Argentina, Brazil, Indonesia, and Turkey. (Unfortunately, benign as current market conditions may seem, there will surely be a next time for some countries.) In the meantime, as a new “Washington Consensus” of best-practice economic policies inevitably emerges, developing countries want to feel that they helped design it, for better or worse.
I couldn’t agree more. The IMF’s perceived “democratic deficit” is a serious challenge to the Fund’s political legitimacy and to its ability to effectively stabilize crisis situations. But let’s recognize that real democracy is only going to come when middle-income developing countries are prepared to back up their lofty rhetoric with hard cash.
Right now is precisely the time to do so, given that the United States has become, without rival, the world’s most reckless borrower. The US is draining a whopping 75% of the world’s surplus savings. Today, even formerly bankrupt governments from Korea to Russia to Mexico are awash in dollars. Why not put some of those dollars to good use?
These countries need to understand that calls to cut rich-country voting shares at the IMF, unless they are backed up by real money, are naïve, if not downright hypocritical. At the end of the day, as long as the IMF is in the lending business, it needs to keep its creditors happy. Otherwise, they will pull up stakes, and the Fund (and its sister organization, the World Bank) will have a debt crisis of its own. Right now, the US, Europe, and Japan put up the lion’s share of the capital, so they have disproportionate power.