G20: Why support the IMF?

The G20 countries have come to agreement
on a number of important steps to foster a recovery from the recession.
However, since we always knew that they would come to "agreement", the
substance of the deal is not entirely clear at this point.

There are two areas where the nature of the agreement seems clearest: clamping down on tax havens and increased funding for the IMF.

The
clampdown on tax havens is a restoration of an agenda that had been
gaining momentum in the 1990s but was then derailed by the Bush
administration. While outwardly committed to preventing tax fraud, the
Bush administration worked to undermine any substantive measures
intended to accomplish this goal.

The G20 seem to be in agreement
that tax havens must be closed, with the first step being the public
identification of the rogue states. This naming will be followed by
sanctions if these states continue to support tax evasion.

A
crackdown on tax havens may be viewed as unambiguously positive, but
the promise of increased support for the IMF is less encouraging. The
G20 committed to tripling the resources available to the IMF to $750bn.
It is not clear that giving additional power to the IMF is a step
forward. The IMF failed to warn of the growing dangers posed by the
housing bubble in the United States
and the shaky credit system that supported it. It's not obvious why
this failure should rewarded by giving the institution even more
responsibility.

Furthermore, the IMF continues to dish out its
aid with important conditions, most notably demanding fiscal austerity.
While most of the governments that turn to the IMF probably should be
taking steps to get their budgets in order, the timing is questionable.
Rather than demanding immediate reductions in deficits, it would be
better to see commitments to phased reductions. Tax increases and
spending cuts are not what the world economy needs right now.

The
renewed support for the IMF also threatens one of the most promising
trends in international finance in recent years: the growth of
alternative multinational funding mechanisms in the developing world.

The
most explicit alternative to the IMF is the Bank of the South that has
been established with the support of most of the countries in Latin
America. However, there is also an East Asian bailout fund (which
coordinates with the IMF) and also China's own efforts to act as an
IMF-like source of funds.

It would be desirable to see a variety
of institutions applying different approaches to multi-national
lending. This sort of competition would allow for a real world test.
Unfortunately, the G20 agreement seems to reaffirm the leading role of
the IMF and to at least imply a position of official hostility to
innovation.

The agreements in other areas are more ambiguous.
The countries are ostensibly committing $1tn to supporting recovery,
but we have no idea what this $1tn entails. It is not called
"stimulus", so it is clearly not intended to mean a new commitment of
tax cuts and/or new spending.

It is also not clear what the new
regulatory regime is supposed to look like. The United States
supposedly agreed to regulate hedge and equity funds, but it is not
clear how serious this regulation will be.

The G20 also committed
themselves to "free trade". This is just gobbledygook. No one in the
G20 is actually committed to free trade. There are all forms of trade
barriers that they ignore or are even in the process of extending
(patents and copyrights being the most obvious). The commitment to free
trade is just there so they can feel that they are not repeating the
mistakes of the 1930s.

Perhaps the biggest disappointment is the
failure to talk about the core imbalances that led to this crisis. The
dollar will have to fall to get the US trade deficit down to a
sustainable level. No one seems to want to discuss this yet. Perhaps we
need an even worse downturn before our leaders are prepared to get
serious on this issue.