WATERLOO, ONT. -- The credit crisis will spark a long-awaited overhaul of the International Monetary Fund by forcing nations such as the United States and Britain to acknowledge they lack moral authority to guide the world economy unchallenged, former prime minister Paul Martin predicts.
Richer countries, especially those in Europe, have jealously guarded their controlling stake in the Washington-based IMF, even as emerging markets such as China and India have become bigger players in the global economy.
One argument for refusing to align management of international financial institutions with a world in which China has usurped Britain and France in economic might is that the sophisticated policy makers of the developed countries are best placed to keep the global financial system out of trouble.
But the credit crisis, rooted in the collapse of the loosely regulated market for U.S. subprime mortgages, robs the leading developed economies of that argument, said Mr. Martin, who made a rare public appearance at a conference on the IMF's future hosted by the Centre for International Governance Innovation in Waterloo, Ont., on Saturday.
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U.S. and European banks gobbled up complex securities linked to subprime home loans, paying little heed to the fact that the borrowers were at high risk to miss their payments. By the middle of last year, foreclosures were at record levels, causing the market for subprime loans to collapse and making all those complex securities virtually worthless.
The IMF estimates that fallout from the credit crisis could approach $1-trillion (U.S.), causing many observers to draw parallels with the Asian financial crisis a decade ago, a calamity that the United States and other developed nations blamed on poor decisions by governments in Thailand and elsewhere.
In the latest crisis, U.S. and European policy makers were oblivious to the strains that U.S. subprime lending put on the financial system until it was too late. U.S. Treasury Secretary Henry Paulson and others are now scrambling to restore confidence in markets and forestall some of the world's biggest economies from sliding into recession.
"The rich countries cannot claim any longer that they have a moral hold on virtue here," Mr. Martin, who is using his status as a former leader of a developed country to lobby for institutional reform, said in an interview. "If the subprime crisis hasn't opened people's eyes, then nothing will."
Many observers see a role for the 184-member-nation IMF in sorting out the current crisis and avoiding a repeat, perhaps as an "apex" regulator overseeing work of smaller regional bodies or gathering information from national banking regulators to identify threats to the financial system. But some say that for that to happen the IMF must return to relevancy.
The conference's 40 participants agreed the IMF is at a crucial point in its history, and has only a few years to regain the confidence of developing countries before those nations establish competing institutions or opt to go it alone.
The IMF's role as a lender of last resort has diminished because countries such as Argentina and Russia have paid off their debts. That leaves the fund's staff with little leverage to convince governments to follow their policy advice.
Exacerbating the fund's struggle for legitimacy is the old world order's refusal to relinquish any material control to the emerging economic powers. A two-year debate on reallocating shares in the IMF ended in the spring with a formula that still left China with fewer votes than Saudi Arabia and Denmark. Belgium and the Netherlands retained more clout than India and Brazil.
The United States is the fund's largest shareholder, controlling about 17 per cent of the shares, or quota, which gives the world's largest economy an effective veto over all IMF decisions.
Fan He, a professor at the Chinese Academy of Social Sciences, told the conference that his country's government is tiring of IMF advice that does little more than echo U.S. complaints about how the Communist regime runs the world's fastest-growing major economy. "If the fund doesn't deliver, it will be marginalized, it will disappear," he said. His government has compiled international reserves of almost $2-trillion, at least in part to help survive another Asian crisis without having to worry about loans from Western powers. "We have the confidence to live without the fund."
That, too, was the view of representatives from Latin America, Central Asia and the Middle East. Conference organizers sought to limit the perspectives of the United States, Europe and Canada, arguing that those governments have little trouble influencing discussions on the subject.
"The debate has been about what the Group of Seven [industrialized nations] is prepared to give up," said Ngaire Woods, director of the Global Economic Governance Program at Oxford University. "Instead, it should be about what the monetary co-operation would have to look like in order to engage the rest of the world."
No confident answers emerged to that question.
John Murray, deputy governor at the Bank of Canada, suggested the IMF might surrender some of its authority to regional groups that would offer "peer review" of economic prescriptions devised by the PhDs in Washington. Others, including Randal Quarles, a former U.S. Treasury official, said the IMF's standing would improve if it offered policy advice other than that based on orthodoxy or fad.
Developing countries didn't escape criticism, including from some of their own. The governor of the Central Bank of Barbados, Marion Williams, said emerging market countries did little to block the changes in IMF governance that most at the conference ridiculed as inadequate. "How did this result happen? It is probably because the countries that had leverage did not use it," she said.
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