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.
Note: This article was originally published in The
Frontline, Volume 28 Issue 13: June 18-July 01, 2011.
July
5, 2011.
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