Visiting Scholar Adam Lerrick

"There is life after the IMF and it is a very good life."

Members of the International Monetary Fund will meet in Washington this weekend and, almost certainly, once again go home without facing up to the facts of a new financial universe: Developing economies no longer orbit around the IMF and, in any case, the Fund doesn't command the resources necessary to control surging capital markets.

Two years ago, then new IMF Managing Director Rodrigo de Rato tried to stake out a new strategy for the Fund in the globalized 21st century. While countless committees theorized on what that strategy should be, an unwelcome answer arrived from the Fund's best customers. One after another, developing nations--Brazil, Argentina, Uruguay, Indonesia, the Philippines--paid off their loans early. Finance ministers across the globe, who'd trained at Harvard and the University of Chicago, had figured out that it was better to give up the Fund's subsidies than to cede control over their own economic destinies.

The institution's proud lending portfolio that had totaled $100 billion in 2003 has since collapsed. It now stands at $13 billion. Turkey could push that even lower as it dips into a full treasury to pay off a $9 billion balance. The IMF's lending accounts are shrinking and its income stream drying up.

Desk managers at the Fund once micromanaged 50 different economies. But those days are now gone. Centrifugal forces are at work and the changes are structural not cyclical. Emerging economies are opting to self-insure with massive international reserves rather than submit to IMF tutelage. Neighbors are uniting in regional monetary funds. In Asia, the Chiang Mai Initiative commits 13 central banks to pool resources should any single nation falter. Their $3 trillion combined credit is 10 times IMF capability. In Latin America, Venezuela's oil money stands behind friends in need. A new Banco del Sur will cement the region's bonding. Nations moving up the economic ladder--China, Brazil, India and Russia--offer new funding for other developing countries without the policy demands made by the IMF.

There was a windfall for the IMF in the decade of bailouts that began with Mexico in 1995. As its loan portfolio tripled and net income ballooned tenfold to $1.2 billion in 2004, there was money enough to pay for another big glass headquarters and a 50% increase in staff to 2,700; to more than double administrative costs to almost $1 billion; and even to poach on the World Bank's territory of development aid.

Now the Fund is bleeding $200 million to $300 million a year. But there is no talk of retrenchment. Instead, the Fund seeks to become the arbiter of global exchange rates and the arbitrator of economic disputes between nations--grandiose positions that are not needed, wanted nor enforceable in the world economy. And the IMF seeks a new wellspring of funding to support the expansive lifestyle to which it has become accustomed.

A Committee of Eminent Persons was assembled to find the money. Central bankers, among them Alan Greenspan of the U.S. and Jean-Claude Trichet of Europe, joined private-sector leaders Andrew Crockett of JP Morgan and Mohamed El-Erian of Harvard Management. But this assembled brainpower was warned off of the real questions that need to be answered: What is the right role, the right size and the right cost of the IMF?

Instead, the Eminent Persons were shunted off to the IMF's basement where 103 million ounces in ingots had been left behind from the days of the gold standard. Each ounce, deposited by member countries at $35, is now worth $650, creating a constant temptation for Funders. Selling this resource rather than leaving it in the basement would yield a gain of $60 billion and an investment income of $3 billion a year. The Committee emerged with a proposal to use 13 million ounces, or an eighth of the gold stockpile, to establish an IMF endowment, an independent income stream for the Fund in perpetuity.

But this isn't really the IMF's gold. The bullion belongs to the U.S., Germany, Brazil, Ghana and other nations. More than one-quarter of it belongs to developing countries. If the IMF is allowed to open the door to this vault, fears of new missions and unrestrained spending will be confirmed. The gold and the gain it can bring should be returned to national treasuries. India's poor could do more with the $1.5 billion that is rightfully theirs than the IMF.

Is insolvency at the IMF proof of its ability to prevent financial crises, as the Fund claims? Perhaps. But an unsustainable business model should not be propped up with disguised transfers from taxpayers. Today the IMF only borrows from rich nations when developing governments need funding. IMF officials are now proposing to borrow from industrialized nations at below-market interest rates and then to reinvest those funds in the market at high yields and keep the profits. But is income of the old magnitude still required?

The Fund was created to safeguard the stability of the international financial system. Where should it now focus to fulfill its original mandate?

Not on crisis intervention. The $30 billion bailouts that once sufficed to stem capital flight in large emerging economies would today be wiped out in a matter of hours. Markets can now assimilate risk, provide liquidity, adjust exchange rates and, where all else fails, restructure debt.

Not on policing emerging economies. National leaders are just as skilled and know their countries infinitely better.

And not on aid to the poorest countries. Development is the province of the World Bank.

For markets, surprise is the enemy of stability. This leaves the Fund's undervalued data-gathering expertise the resource on which it should reconstitute its business. Improving the quality of information and speeding its flow, setting disclosure standards for governments and financial systems and disseminating results will do much to forestall crises before they appear and soften their impact when they do. A staff of 500 instead of 3,000 and a budget of $400 million instead of $1 billion would be easily sustained by the investment income on the Fund's $10 billion of existing reserves. The IMF role would no longer be imperial, but it would remain crucial for the global public good.

Adam Lerrick is a visiting scholar at AEI.