What a difference the crisis has made for the International Monetary Fund. It was just a few months ago that this important but unloved institution, a landmark of post-war global economic arrangements, seemed destined to irrelevance.
The IMF has long been a whipping boy for both left and right -- the former because of the Fund's emphasis on fiscal rectitude and economic orthodoxy, and the latter because of its role in bailing out indebted nations.
Developing nations grudgingly took its advice, while advanced nations, not needing the money, ignored it. In a world where private capital flows dwarf the resources at its disposal, the IMF had come to seem an anachronism.
And, when some of the IMF's largest debtors (Brazil and Argentina) began to prepay their debts a few years ago with no new borrowers in sight, it looked like the final nail in the coffin had been struck.
The IMF seemed condemned to run out of income, in addition to losing its raison d'être. It shrank its budgets and began to downsize, and, while it was handed some new responsibilities in the meantime -- surveillance over "currency manipulation," in particular -- its deliberations proved largely irrelevant.
But the crisis has invigorated the IMF. Under its capable managing director, Dominique Strauss-Kahn, the Fund has been one of the few official agencies ahead of -- instead of behind -- the curve.
It moved quickly to establish a fast-disbursing emergency line of credit for countries with "reasonable" policies. It ardently championed global fiscal stimulus on the order of 2 per cent of world GNP -- a position that is all the more remarkable in view of its traditional conservatism on all fiscal matters.
And, in the run-up to the G-20 summit in London, it thoroughly overhauled its lending policies, de-emphasising traditional conditionality and making it easier for countries to qualify for loans.
Even more significantly, the IMF has emerged from the London meeting with substantially greater resources, as well as new responsibilities. The G-20 promised to triple the Fund's lending capacity (from $250 billion to $750 billion), issue $250 billion of new Special Drawing Rights (a reserve asset made up of a basket of major currencies), and permit the Fund to borrow in capital markets (which it has never done) if necessary.
The IMF was also designated as one of two lead agencies -- along with an expanded Financial Stability Forum (now renamed the Financial Stability Board) -- charged with providing early warning of macroeconomic and financial risks and issuing the requisite policy recommendations.
Another piece of good news is that the Europeans have now given up their claim on naming the IMF's managing director (as have the Americans their corresponding claim on the World Bank presidency).
These senior officials are henceforth to be selected "through an open, transparent, and merit-based selection process." This will provide for better governance (although Strauss-Kahn's leadership has been exemplary), and will enhance both institutions' legitimacy in the eyes of developing nations.
So the IMF now finds itself at the centre of the economic universe once again. How will it choose to deploy its newfound power?
The greatest risk is that it will once again over-reach and over-play its hand. That is what happened in the second half of the 1990s, as the IMF began to preach capital-account liberalisation, applied over-stringent fiscal remedies during the Asian financial crisis, and single-handedly tried to reshape Asian economies.
The institution has since acknowledged its errors in all these areas. But it remains to be seen if the lessons have been fully internalised, and whether we will have a kinder, gentler IMF in lieu of a rigid, doctrinaire one.
One encouraging fact is that developing countries will almost certainly get a larger say in how the Fund is run. This will ensure that poorer nations' views receive a more sympathetic hearing in the future.
But simply giving developing nations greater voting power will make little difference if the IMF's organisational culture is not changed as well.
The Fund is staffed by a large number of smart economists, who lack much connection to (and appreciation for) the institutional realities of the countries on which they work.
Their professional expertise is validated by the quality of their advanced degrees, rather than by their achievements in practical policymaking. This breeds arrogance and a sense of smug superiority over their counterparts -- policymakers who must balance multiple, complicated agendas.
Countering this will require proactive efforts by the IMF's top leadership in recruitment, staffing and promotion.
One option would be to increase substantially the number of mid-career recruits with actual practical experience in developing countries. This would make the IMF staff more cognizant of the value of local knowledge relative to theoretical expertise.
Another strategy would be to relocate some of the staff, including those in functional departments, to "regional offices" in the field. This move would likely face considerable resistance from staff who have gotten used to the perks of Washington, DC.
But there is no better way to appreciate the role of context than to live in it. The World Bank, which engaged in a similar decentralisation a while back, has become better at serving its clients as a result (without facing difficulties in recruiting top talent).
This is an important moment for the IMF. The international community is putting great store in the Fund's judgment and performance. The Fund will require internal reforms to earn that trust fully.
The author, Professor of Political Economy at Harvard University's John F Kennedy School of Government, is the first recipient of the Social Science Research Council's Albert O Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.
Copyright: Project Syndicate, 2009. www.project-syndicate.org