Simon Johnson, member of the CASE Advisory Council, suggests that emerging markets should create their own alternative to the International Monetary Fund.  He argues that rather than doing the impossible and reforming its structure, and eliminating its negative stigma, a wiser alternative is to create a new institution. 

The rise of an “Emerging Market Fund,” whose membership would exclude the U.S. and Western Europe, may be the “best way forward,” states Johnson.  He believes that the new institution would overcome several of the IMF debilitating flaws by granting greater power to weaker states to control their own safety net institution.  The EMF would decrease the hesitance of emerging markets to utilize IMF loans, limit the level of controversial conditionalities of loans imposed by the Western membership of the IMF, and reduce the motives for emerging markets to hold vast and destabilizing hard currency reserves, concludes Johnson in CASE E-brief 10/2009, “Replacing the International Monetary Fund."

Replacing the International Monetary Fund
By Simon Johnson

The International Monetary Fund (IMF) recently held its annual meeting in Istanbul on October 6th and 7th.  On the surface, the world’s largest gathering of finance ministers and central bank governors should have been a moment of celebration for the IMF – the organization rediscovered its role as lender of last resort to countries in crisis during 2008-09, received an extra $500 billion from member countries to triple its lending capacity, and in recent weeks has been positioned to manage the much-hyped “peer review” of countries’ monetary, fiscal, and financial policies.

But just beneath the surface, the problems mount. The IMF’s ability to fight and prevent crises has hit a brick wall, because of long-standing resentments regarding the extent to which the U.S. and Western Europe dominate the organization.

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Simon Johnson was the chief economist of the International Monetary Fund from March 2007 to August 2008.  He is now a Professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is also a member of the CASE Advisory Council.

A shorter version of this brief appeared in the October 8th edition of BusinessWeek and can be accessed at http://www.businessweek.com/magazine/content/09_42/b4151072120155.htm.