Today, I mark my one hundred and fiftieth Red Notes column. As I started writing…
Changing Guard at the IMF? Jayati Ghosh
Christine Lagarde has been busy this June. The French Foreign Minister and European Union candidate for the top job at the International Monetary Fund has been visiting the capitals of ”important” emerging countries – Brazil, India, China, Russia – to drum up support for her candidacy. For their part, governments in these and other developing countries, after an initial show of being united in irritation at the blatant attempts by Europe to keep control over this slot, have been too wary of each other to agree on a common candidate, at least thus far. The only declared candidate from a developing country, Agustin Caarstens from Mexico, has not yet received explicit support from any other country.
In any case, because voting rights at the IMF have barely changed despite the shifts in the global economy over the past six decades, the developing countries on their own would simply not have enough votes to put in a candidate of their choice. Things might be different if they can persuade the United States to back a common candidate of their own, but that is unlikely, especially if the candidate in question does not have a record that makes him or her more than acceptable to the Obama administration.
So it seems that the IMF will once again be headed by someone from Europe. This has been the convention based on an unwritten ”gentlemen’s agreement” at the Bretton Woods conference in 1944, when the US and the European powers agreed to share the top jobs at the IMF and the World Bank among themselves, with the World Bank’s chief always coming from the US. This convention emerged and was entrenched over a period when it was also quite clear that these two broad groupings were in dominant control of the global economy.
That is much less clear today, and certainly the course of the medium term future of the world economy is unlikely to be scripted only by these two players. Before the emergency exit of Dominique Strauss-Kahn had rendered the choice of the next head of the IMF an urgent matter, it was common to hear voices even from the developed countries suggesting that the next person to be in charge could and should be someone from the developing world.
Of course it would be nice to see some diversity in these powerful positions: not just of region, but gender and so on. There are those that point out that this has only symbolic value, as the content of both IMF policies and management style need not change according to the origin, gender or background of the head. After all, the experience at the World Trade Organisation shows that regional background of the head need not change very much: thus Supachai from Thailand as Secretary General made little appreciable difference to the functioning of the organisation.
But even symbols matter. And in any case, the fierce and almost immediate insistence on the part of the Europeans that the IMF chief must come from their own region suggests that there may be more to it than pure symbolism.
In fact, the reason for this is not just because of the perceived desire of European governments to retain some semblance of control over global institutions. It is also because the major immediate work of the IMF is mainly in Europe, with several European economies currently involved in rescue packages with the IMF, and others unhappily waiting in the queue. Greece and Ireland are already receiving IMF packages that are seen as lifelines to continued (if flickering) acceptance by the financial markets for their government bond issues; Portugal has just signed an agreement; Poland, Latvia and Hungary have been getting IMF support for a while now; and there is no surety that other ”peripheral” European economies will not have to join in.
The argument in Europe is that since European countries are likely to be involved in bailout packages in the immediate future, it is especially important to have a European head the Fund. This is an extraordinary (but typical) display of double standards, because this was precisely the argument earlier used (including by Europeans) against having a person from the developing world head the institution. It was felt that debtor countries could not and should not provide the leadership of the IMF because of possible conflicts of interest. Obviously, such logic no longer applies when the boot is on the other foot.
But in fact, the Europeans pushing for a quick choice of one of their own to head the IMF may actually be shooting themselves in the foot, not just geopolitically but even as far as their own economic recovery is concerned. The way that the recent IMF bailouts have been organised, in co-operation with the European Union, has actually intensified the economic recession in these countries and prolonged the process without providing a clear path to resolution.
This is because, despite much explicit protestation to the contrary, the IMF even under Strauss-Kahn did not change its basic approach and orientation. It continued to push procyclical policies on countries experiencing balance of payments difficulties when they approached it for funds, even as it was applauding the US government for undertaking countercyclical policies in 2009. Draconian austerity packages have been imposed on countries that are already struggling with asset deflation and collapses in private economic activity. Unsurprisingly, this has been associated with worsening conditions – not just for the poor, for wage workers, for the unemployed and for citizens facing cuts in social services – but also for the macroeconomy. The reductions in public spending have come at a time when private spending is already on the decline, and so the negative multiplier effects have actually fed into each other and created a downward spiral.
This obviously makes public debt even more difficult to manage, because as GDP falls, the public debt to GDP ratio rises! As that ratio increases, financial agents further batter the country’s government in bond markets, and so the whole crazy negative process continues. Many developing countries that have been forced to take this medicine know this process only too well. They also know that some amount of debt restructuring (which involves a write-down of the value of the external debt) is not just desirable but inevitable, and requires only a small amount of sharing of the severe economic pain that the citizens are forced to undergo. But at least many of these countries have been able to come out of this crisis eventually by devaluing their currency – an option which the troubled countries in the eurozone have so far rejected.
In fact, with all this experience of continually getting it wrong in so many countries over so many decades, you would have thought that the IMF would have learned something from its own mistakes. By now it should surely know that countercyclical policies involving more public expenditure are more effective than fiscal austerity in pulling countries out of recession. It should also have been the first to recognise that the current debt situation of many ”peripheral” European economies is simply unsustainable. So, instead of falling in line with and even accentuating the European Union’s insistence that the entire burden of adjustment must be borne by the deficit countries, it should have pushed for a debt restructuring that forced banks to take a haircut as a step towards a more sustainable trajectory.
What is even more bizarre is that the IMF is now advocating fiscal austerity for everyone, not just the countries in deficit facing problems with bond markets! In addition to forcing Ireland, Greece and Portugal to embark on painful and counterproductive austerity measures, it is advocating fiscal restraint in the US and even in Germany. It has recently lauded the austerity measures in the United Kingdom, which look certain to prolong the recession in that country and to keep unemployment high, and which even the OECD recently criticized as being excessive.
Why would the IMF persist in pushing such blatantly counterproductive strategies? The only constituency that they clearly favour is finance, in these cases the European (mostly German, French, British and Dutch) banks that have lent heavily to the economies in distress. So it is hard not to see that class interests – and the interests of the financial class in particular – have determined this set of policies, rather than national interests per se.
This means a change of guard at the IMF would help only if it involved a significant change in its approach to economic policies. Someone like Christine Lagarde is likely to pursue even more enthusiastically these same self-defeating and economically damaging measures. But then so are several of the possible candidates from developing countries. Indeed, probably the only reason that they are even considered to be ”credible” candidates is because international finance trusts them to deliver much of the same.
All this is unlikely to change unless there is a broader political consensus around the world in favour of a real transformation in economic policies, away from privileging finance towards controlling it and being more concerned with the welfare of citizens and society in general. If the recent protests across Europe are any indication, such political change may well be on its way in Europe.
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