The recently concluded meeting of the IMF-World Bank in Singapore has been special in more ways than one. It was the first such meeting held in the region after the Asian crisis. A decision was taken at the meet to increase the voting shares of four countries — China, South Korea, Turkey and Mexico — with the promise that a more radical restructuring was on the anvil. The International Monetary Fund is badly in need of reform. It is no longer the powerful lender it was at the time of the Asian crisis, when it imposed stringent conditions on hapless borrowers in return for bailing them out. That bitter experience led to many countries in the region building up mountains of foreign exchange reserves, so that they would not need to turn to the IMF in times of crisis. As a result, emerging Asia now has foreign exchange reserves of almost $2 trillion. Further, the global economic boom of the last three years has led to a marked improvement in the financials of emerging economies, a fact reflected in their higher credit ratings. Many developing economies now run substantial current account surpluses and even those that have deficits have found it very easy to finance them, thanks to vast amounts of capital flowing into emerging markets. Many countries have started pre-paying their loans to the IMF and to the World Bank. This is not a scenario in which the IMF’s function as a lender of last resort is much in demand.

The vulnerabilities now appear to be in the United States of America, with its huge deficits and debt-fuelled consumption spree. There is not much the IMF can do about that except to warn about the need to tackle these imbalances. That is not to say that the role of the IMF is over. As a matter of fact, given the huge global imbalances, the spread of derivatives and hedge funds and the big increase in financial leverage, it can be argued that the need for an international watchdog and lender of last resort is greater than ever. But for the IMF to effectively perform that function, it needs to earn the trust of all its members, rather than function as a tool for US and European interests. It needs to realize that the centre of gravity of the world economy is shifting to the developing world. So the piecemeal reform through which the voting powers of a few countries are increased in a token fashion is not enough. Indeed, India’s voting share has actually come down marginally as a result of the change. If the IMF wishes to stay relevant, it will have to adapt to changing reality.