Comment: The IMF's challenge

COMMENT BY CENTRALBANKNEWS

Rajan suggested that advanced emerging markets need to be convinced that they "still have much to gain by listening to the Fund", in order to "draw them back". This, of course, will be no easy task. "As emerging markets grow and gain economic power, they do not seem as interested in multilateral dialogue, or in combining forces to mould multilateral institutions in ways they think appropriate. Growth and increasing self-confidence are leading to disengagement", Rajan admitted.

But a changing global economic environment could once again underline the need for a multilateral provider of insurance and emergency assistance to these countries. "The underlying imbalances driving the reserve build-up may reverse in the future" and many of the emerging market vulnerabilities "that are being papered over by massive reserve holdings" could re-emerge.

Rajan suggested that there should be a greater role for the pooling and even lending of reserve between emerging markets, rather than the historical reliance on IMF loans. This could lead to the establishment of a "new insurance facility" that would offer far more automatic access in times of trouble in return for more ex ante conditionality.

Exactly how feasible such solutions are is yet to be determined. The devil will no doubt be in the details as such a macro framework will have to keep all parties satisfied on a political level and somehow mitigate the risk of moral hazard. But, for the time being, Rajan's frank and accurate assessment of where the Fund's main challenge lies is commendable.