Embroiled in IMF debate

In: Uncategorized

29 May 2011

After writing two brief articles calling for the abolition of the International Monetary Fund (IMF) I have found myself embroiled in a global debate on the subject. I am due to appear on the Russia Today television channel and CBC radio’s The Current. It all started when I wrote a comment on the subject for Fund Strategy (see 23 May) followed by a blog post on Fundweb, its sister website (for text see below).

My Russia Today performance, which has already been recorded, was a disaster for technical reasons. A storm over London disrupted the satellite link so for a while I could not be heard by other participants in the debate. The other panelists were Peter Chowla of the Bretton Woods Project and Jeffrey Frankel of Harvard. Chowla complained about the unfairness of the convention of appointing a European to head the IMF before implying there should be an extension of the organisation’s powers. For example, he wanted it to impose discipline on developed countries rather than just the poorer world. Frankel insisted that the IMF had played a role in promoting economic growth over the past 60 years without justifying his comments. The programme should be broadcast tomorrow and appear on YouTube on Thursday.

My CBC appearance is scheduled for 7.30am Eastern Summer Time / 12.30pm British Summer Time. It should also be available afterwards on the internet and to download as a podcast. The other guests are John Manley, a former Canadian minister of foreign affairs and the president of the Canadian Council of Chief Executives and Ousmene Mandeng, a former deputy division chief at the IMF.

Meanwhile, Chris Bickerton, an assistant professor at the University of Amsterdam, has written a good piece on the IMF for Le Monde Diplomatique. It argues it would be much better to have a political debate about the nature of the crisis rather than about the merits of the CVs of different candidates.

Finally, this is the text of my Fundweb blog post from 25 May:

Rather than engaging in the bizarre debate about who should lead the International Monetary Fund (IMF), the organisation should be abolished. Not only does it do more harm than good in the world economy but it is also profoundly anti-democratic. Here are five reasons why it should go:

*It is discriminatory. The IMF has functioned more like a medieval court than a modern organisation. Owing to a long-standing agreement with America the organisation has been headed by a European, while the World Bank, its sister institution, is headed by an American. Candidates have never been chosen by merit.

Even the current discussion of choosing an emerging economy candidate is about doing an alternative stitch-up. The candidate will be chosen in a backroom deal between a few top politicians rather than going through a transparent or democratic process. The way the IMF is set up gives America a veto on any action of which it disapproves. Important decisions require an 85% supermajority and America holds 16.7% of the votes.

The quota system, by which member states receive votes according to the amount of money they contribute to the fund, is also undemocratic. It is in effect giving rich countries more votes than poor ones.

The organisation has also discriminated in the way it has treated developed and developing economies. For example, it gave the developed world considerable leeway to pursue fiscal stimulus in the period following the 2008 collapse of Lehman Brothers. In contrast, during the 1997-8 Asian financial crisis it insisted on immediate austerity. If anything, the poorer countries should be given more leeway than the rich ones.

* It is unsure of its role. The organisation was conceived in 1944 as a way of helping to manage a system of fixed exchange rates between currencies. Since the system collapsed in the early 1970s, with the move to floating exchange rates, it has tried to adapt to a fundamentally different environment.

Until the 2008 crisis the focus was largely, although not exclusively, on dealing with the developing world. More recently it has concentrated on the eurozone. Yet there has been little public debate about its exact role.

* It prefers stability over growth. The overwhelming emphasis of the IMF is on promoting short-term stability rather than long-term growth. In late 2008, for example, it was part of the drive to restore stability to the global financial system. However, this was done by evading the fundamental weakness of the global economy.

In the subsequent two years there has been little attempt to address weak economic growth in the west or international economic imbalances. As a result the crisis is likely to re-emerge in a new and more virulent form in the future.

Indeed much recent financial history can be understood in those terms. One crisis has been suppressed at the expense of creating the conditions for the next one. For example, loose monetary policy in America in the aftermath of the 2000 stockmarket falls helped create the conditions for the 2008 crisis. Since then the western nations have expanded credit as a way of tacking a crisis triggered by excess credit.

* The IMF bails out errant financial institutions. The overwhelming emphasis of IMF bailout programmes is on rescuing troubled institutions rather than helping national economies return to growth. In that sense it can be seen as a kind of institutional welfare programme. This is in contrast to the way the western media often presents bail-outs as almost altruistic operations for the benefit of poorer countries.

* It helps absolve politicians of their responsibility. One reason politicians often opt for IMF bail-outs in times of trouble is that it provides them with a way of evading responsibility for their actions. They can claim that they are being forced to impose austerity by an external institution rather as a result of their own policies. The abolition of the IMF would make their culpability more transparent.