Power to the Middle Guys; Future Shocks: Emerging markets resent taking orders from the IMF. So let them invest their own reserves in better global governance, says the fund's former top economist.(International Monetary Fund)

Byline: Kenneth Rogoff (Rogoff, the IMF's former chief economist, is professor of economics and Thomas D. Cabot Professor of Public Policy at Harvard University.)

There has been a lot of rhetoric the last few years about how governance of the international financial system ought to be made more "democratic." Recent victims of emerging-market debt crises like Brazil, Turkey and Argentina are particularly peeved. They want more say over the conditions attached to vast bailout packages from the International Monetary Fund, the U.N.-family organization charged with helping to maintain global financial stability. To some extent the critics have a point. Whereas the Fund is not quite a "one dollar, one vote" organization, its governance structure certainly gives creditor nations a lot more say than borrowers. This perceived "democratic deficit" has increasingly become a serious challenge to the Fund's political legitimacy and its ability to effectively stabilize crisis situations.

Unfortunately, those who believe that the problem can be solved simply by reducing the rich countries' voting shares are either naive or hypocritical. In reality, global financial governance is a game where you have to put up money to have meaningful influence. Like it or not, right now the United States, Europe and Japan are the world's largest economies, and they put up the lion's share of the IMF's hard-currency backing. No superficial recalibration of voting power in the Fund is going to change the real balance of power. Any financial institution that doesn't worry about keeping its creditors happy isn't going to be sustainable. A purely redistributive Porto Alegre (home of the World Social Forum, where small and middle powers dominate) IMF is just not a viable alternative.

Perhaps, though, there is a better way. What if middle-income emerging-market countries assumed real power by putting up a much larger share of the capital needed to Fund each other's bailouts? Crazy, you say? Not really--not since 12 years ago, when the United States set off on a new borrowing rampage that has now reached a clip of $600 billion per year. Courtesy of the United States' shopping spree, emerging-market central banks are awash in dollars, which they have been soaking up in part to keep their currencies from rising too much. China alone, with above $400 billion in reserves, has more than enough to recapitalize the $150 billion IMF twice over. Even Latin America, whose dollar reserves are dwarfed by Asia's and Russia's, could easily buy out Europe's shares in the Fund.

Now it may sound odd to have the middle-income countries actually pay for their own bailout insurance, but it isn't. In its original vision the Fund was more of a cooperative than a charity. Once upon a time, back in the 1960s, the IMF was bailing out rich countries like Britain, but that era is over. These days it doesn't have the money to bail out a United States or a Japan. Instead, it is middle-income countries like Brazil, Turkey, Russia and China that care the most about Fund bailout policies. So why not have them backstop each other ? ...