By Mohamed A. El-Erian
FORTUNE -- The IMF is not one, but rather, two institutions: a highly respected analytical outfit anchored by superb technocrats and delivering world class insights; and an inconsistent operator that frequently falls hostage to pressure from its political masters in advanced economies and thus fails to deliver on its promises.
Never has the contrast been as strong as it is today. And never have the consequences been as material.
Formed in 1944 under very different global circumstances, the IMF has brilliantly navigated the ebbs and flows of the global economy. In doing so, it has retained its reputation as the most powerful, competent, and relevant of all international institutions.
On paper, the IMF serves the global economy in four main ways: It provides unbiased analysis that covers not just national developments, but also, and importantly, their cross-border effects; it is a forum for global policy discussions and coordination; it is a financial first responder, providing emergency loans to countries shut out of markets and often on the verge of collapse; and it supports its member countries' implementation of sound policies and establishment of sound processes and practices.
This is quite an impressive list already. Yet it does not give justice to the full scope and impact of a well-functioning IMF. You see, a credible IMF translates into an institution that is able to significantly leverage everything it does.
IMF loans can unlock funding from other sources. Its analysis feeds into economic summits, potentially influencing the agenda and the narrative. Its technical assistance can unleash the underutilized potential of domestic economies. And, in its role as a conductor of policies around the world, it can be the best source of checks and balances, including in enforcing international standards.
At times over its history, the IMF has indeed excelled. It showed itself to be much more than the world's intellectual leader, emergency provider of financing, and trusted advisor to governments. It also played the role of the world's institutional north star.
Yet today's IMF falls quite short of its potential and, even more consequently, of what the global economy needs in order to grow and prosper. The institution's credibility is lacking. Its convening power has weakened. Its financial resources have lagged the growth and volatility of private capital.
The IMF also has considerable representation and legitimacy deficits. Its governance is a reflection of the distant past and, certainly, not of today's global economy. As such, the institution's policy coordination role is seen as asymmetric by most, and ineffectual by many. And the Fund no longer plays the catalytic role that is so important for good global economic outcomes.
The fault does not lie in the institution's analysis. Its work, spearheaded by the "World Economic Outlook," is regarded as first class.
I can attest to this as both an economist and market participant. We eagerly await the Fund's analysis, data, and insights -- all of which inform and influence how we think about the global economy and global markets.
The problem with today's IMF is that it is easily manipulated by western countries in general, and Europe in particular. And the detrimental consequences have been clear for all to see.
Repeatedly over the last three years, the IMF has been pressured to participate in programs for struggling European economies that are inadequately designed, poorly monitored, and insufficiently financed.
Unsurprisingly, outcomes have consistently fallen short of what was promised to citizens. Understandably, many have started to see the IMF not as part of the solution but, rather, as part of the problem.
This sad phenomenon was highlighted recently by the debacles in Cyprus.
To the stunned amazement of virtually everyone I know, the IMF signed on to an initial agreement that was so poorly designed that it immediately attracted widespread international and national condemnation. As a result, the agreement was essentially disowned by all those that, just hours earlier, had signed on and participated in a triumphant announcement.
In the follow-up, the IMF again undermined its credibility. It agreed to a revised program that showed insufficient understanding and analysis of the complexities of the country's problems; and one that, even today, is yet to be fully financed.
In both cases, and in other similar circumstances elsewhere in Europe (including Greece), I suspect that the IMF felt it had no choice but to succumb to pressure by European politicians. But in doing so, it is has risked more than its credibility and standing. It has also undermined its ability to influence the flow of private capital that is so critical to growth and employment, and whose sudden reversal can destabilize countries and impose social hardships.
To be more effective, the IMF needs to do much more to press its political masters to revamp the institution's governance and practices. The current modest proposals to tweak voting power and representation are insufficient and already stalling. They should be enhanced with more meaningful reforms. Moreover, the selection process for the institution's leader, which de facto reserves the position for a European (and has done so since the Fund's inception), should be dramatically changed to avoid nationality trumping merit.
Some feel that, while long warranted, such reforms stand no practical chance of implementation. They argue that Europeans will resist an erosion in their historical entitlements, even if these are now blatantly outdated.
They have a point. Yet the answer is not to allow the Fund's enormous talent and its huge potential to erode further. Rather, their insight speaks to the importance of an honest and broad-based debate. And the anchor for this best comes from the IMF itself.
Now is the time for Fund's management and staff to tell the world what is needed for the institution to perform a role that is critically required, and sorely missing in today's highly inter-dependent global economy. With this as a blueprint, one can imagine a more informed and constructive global debate and real progress. Lacking that, the global economy will resemble an uncoordinated orchestra that, despite many bright spots, delivers confusing and, at times, painful renditions.
Gold is usually a safe haven for investors during times of economic turmoil. Not this time around. And Wall Street expects it to get worse.
FORTUNE – As gold plunges to new two-year lows, a paradox has emerged: The decline reflects better news in the U.S. economy, but it also suggests bad news in other parts of the world as bullion loses its luster as a safe-haven investment.
After rising for 11 MORENin-Hai Tseng, Writer - Apr 16, 2013 5:00 AM ET
Cyprus is more than the sad story of a small economy which allowed its banks to grow irresponsibly. It is also points to shifts in the determinants of European stability.
By Mohamed A. El-Erian
FORTUNE -- Many are hoping that, after dominating the headlines for almost two weeks now, the tiny island of Cyprus will soon return to virtual obscurity in the global financial media. For this to happen, the latest MOREMar 27, 2013 1:38 PM ET
Despite an eleventh-hour deal, the fallout from the Cypriot crisis is far from over.
By Cyrus Sanati
FORTUNE -- The banking crisis in Cyprus is far from resolved and will almost certainly morph into a far more serious sovereign debt crisis in the near future, threatening investors around the globe. The revised bailout agreement hatched over the weekend will still leave the island nation's banking-centric economy in ruin, thus limiting the government's ability MOREMar 26, 2013 9:27 AM ET
When a bailout is worse than the illness.
FORTUNE -- You can thank Cyprus and Europe's leaders for making our $700 billion bank bailout look good.
The plan to impose a tax on bank deposits to help pay for the bailout of Cypriot banks was "absurd," says Philip Dybvig, one of the world's leading economic experts on banks and financial crisis. Back in 1983, Dybvig co-authored, along with University of Chicago economist MOREStephen Gandel, senior editor - Mar 19, 2013 4:17 PM ET
The Cyprus bailout illustrates why short-term tactical compromises are no substitute for proper, albeit much more difficult, strategic decision-making.
By Mohamed El-Erian
FORTUNE -- The botched bailout of Cyprus sheds light on more than just the difficulties Europeans face in collectively designing a complicated country rescue package. It also serves as a reminder of the mismatch between Europe's multiple objectives and its more limited tools. And it illustrates why short-term tactical MOREMar 19, 2013 9:56 AM ET
European leaders have strong incentives to try and smooth over this 'crisis' by signaling that Cyprus is a unique and extreme case.
By Matthew Hedrick, Hedgeye
FORTUNE -- The market's reaction to Cyprus's bailout is overdone, and these 'crisis' conditions will be short-lived.
A quick update on the latest development is that parliament has delayed until Tuesday a scheduled vote on the proposed bailout, namely on the levying of a one-time tax MOREMar 18, 2013 1:43 PM ET
Wall Street is heavily invested in bank debt across the European Union. If banks begin falling as a result of the Cyprus 'bailout,' investors in the U.S. will feel the loss.
By Cyrus Sanati
FORTUNE -- The terms of the Cypriot "bailout" announced late Friday are simply atrocious and should be revised to protect small depositors to avoid potentially crippling bank runs from popping up across Europe. Forcing bank losses on MOREMar 18, 2013 11:07 AM ET
All eyes this weekend will be on one large economy in Europe, Italy, and one small one, Cyprus. Elections there could send the markets back into a frenzied state of uncertainty over the euro's future.
By Cyrus Sanati
FORTUNE -- The outcome of two elections this coming weekend could push Europe back to the edge of economic calamity. Sovereign bond investors in London and on the continent will be watching voter MOREFeb 22, 2013 5:00 AM ET
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