By John Jacobs, program officer for the Halifax Initiative. A coalition of development, environment, faith-based, human rights and labour groups, and the Canadian presence for public interest work and education on the IFIs.
Originally published in the Chronicle Herald
The candidates being considered for International Monetary Fund’s new boss do not inspire much hope for an institution in need of credibility. Much of the media’s focus has been on the nationality of the candidates rather than on which capabilities are needed to address the IMF’s major challenges: shifting to a more flexible policy orientation and adapting to a changed global economy.
According to a recent report by the IMF’s Independent Evaluation Office, the Fund’s effectiveness has been hindered by a “high degree of groupthink, intellectual capture and inadequate intellectual approaches.” The groupthink was founded on the belief that “market discipline and self-regulation [are] sufficient to stave off serious problems in financial institutions.”
Put another way, the IMF believed that the global financial markets should be left to their own devices to chart the contours of economic globalization. As a result, mere months before the financial crisis, the “IMF’s banner message was one of continued optimism and … pointed to a positive near-term outlook and fundamentally sound financial market conditions.” The Fund continued to endorse “light-touch regulation and supervision policies” — policies that we now know contributed to the crisis.
In retrospect, the IMF report notes, countries that did not accept IMF recommendations were less vulnerable to the financial crisis.
The Fund is also suffering from a credibility gap in low- and middle-income countries, where most IMF lending takes place. The Fund’s groupthink led to the imposition of policy frameworks that gave investors and international finance free rein. Accepting this one-size-fits-all approach denies countries the policy means of promoting domestic economic development.
As a result, countries are increasingly choosing to go it alone or seek other sources of support rather than submit to IMF policy prescriptions that undermine their capacity to protect themselves from an ever more volatile global economy.
The global economy is changing, but the IMF has not kept pace. The Fund was formed to facilitate the emergence of market economies in Europe while promoting U.S. economic interests, and it has evolved into an institution that promotes these objectives globally. This bias continues to prevail at both the policy and staff levels.
According to the report, “many staff members believed that there were limits as to how critical they could be regarding the policies of the largest IMF shareholders —[stating] that, ‘you cannot speak truth to authorities’ since … ‘you’re owned by these governments’.” This contrasts sharply with the IMF’s ongoing imposition of policies on developing countries through its loan conditions.
Emerging economies are changing the face of the global economy and demanding that international institutions reflect this new reality in terms of governance and policy approaches. The new IMF managing director will have to foster an institution that is able to respond to, ratherthan impose upon, developing countries and emerging economies.
There were some welcome signs under Dominique Strauss-Kahn’s management of a rethinking of IMF orthodoxy. For example, the Fund now sees a role for capital controls, it is questioning the virtues of very low inflation targets, and there is more openness to regulation of the financial system and the taxation of excess banking profits. There is also more of an acceptance of arguments that there needs to be a social framework around globalization.
Strauss-Kahn’s tenure has resulted in a more flexible IMF. Carrying on with the shift away from adherence to the Washington Consensus, and its policy focus on free markets, will be one of the biggest challenges facing the new director.
There have been numerous calls for reform at the Fund. Most recently, the G20’s IMF Reform Working Group reiterated its demands for an open, merit-based and transparent process for selecting the new IMF boss. Such a process is crucial, given the organizational challenges facing the new managing director and the changing global economy.
The emergence of better candidates is hindered by the U.S. and Europe’s dominance of the selection process and the candidates on offer do not inspire confidence. Both are linked to factors that led to the financial crisis: France’s Christine Lagarde has been nurtured by the American finance industry and Mexico’s Agustin Carsten is closely tied to the IMF’s deregulation agenda.
What the world needed was a process that signalled the IMF is making progress in becoming an organization that contributes to more even-handed and broad-based development on a global scale. What the world got was another indication that the Fund continues to be an institution that prioritizes the interests of wealthy countries.