The silent revolution inside IMF

The International Monetary Fund, at long last, has begun to open up. Gone are the days when it acted as a handmaiden of Western, mainly US, economic orthodoxy. It is even throwing a gauntlet down to the mighty US Federal Reserve, questioning the effects its constant monetary boosting has had on the rest of the world.

Given that the IMF is the key arbiter on many key issues of global finance and economics, and hence also over global fairness and equity, the change should be greatly welcomed. Over the past decade, the reform debate had centered mainly on giving emerging market economies more voting power, by commensurably reducing the voting shares of the "rich" world.

Given the global economic dynamics, the adjustment was of course long overdue. One clear indication is that the IMF's senior-level staff members have become much less American and less European. But now, the first substantive consequence of these shifts are beginning to emerge.

The frontline of this fight is the IMF's Research Department, where old school guys (yes, mostly guys) and rich country governments battle the new thinkers. Take, for example, the third quantitative easing (QE3) the Fed announced in late 2012. From the American perspective, the big boost in money supply is intended to stimulate economic growth - and therefore job creation - at home.

The extent to which these measures actually achieve that goal continues to be the subject of much controversy even in the US. What is not controversial is that these measures can have a negative impact on emerging market economies. And policymakers there will generally agree that it is important to have a growth-oriented US economy.

But there is growing concern as to whether US authorities are not increasingly poking in the dark with their policy measures. QE3 has mainly boosted the stock market, not the real economy - and even the stock market effect is wearing off.

Either way, emerging market economies are no longer willing to acquiesce. Brazil has stepped forward to lead the defense. That has upset many US policymakers. Perhaps not surprisingly, that has also generated a lot of negative press about Brazil in the US media.

Enter the now more open-minded IMF, as Boston University professor Kevin P. Gallagher has documented, it has issued a whole range of reports that cast a critical eye on the spillover effects that quantitative easing in the US has had on emerging market economies.

The IMF found, for example, that lower interest rates in the US were associated with a higher probability of a drastic increase in capital flow into emerging market economies. And it declared that such increase in capital flows can cause currency appreciation and asset bubbles, which in turn can make exports more expensive and destabilize the emerging market economies' domestic financial systems.

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