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The IMF’s independent auditing body has just published an absolutely lacerating report on the IMF’s role in the Eurozone crisis. Among the highlights:
- The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped create the perception that the IMF treated Europe differently. Conducting this evaluation proved challenging. Some documents on sensitive issues were prepared outside the regular, established channels; the IEO faced a lack of clarity in its terms of reference on what it could or could not evaluate; and there was no clear protocol on the modality of interactions between the IEO and IMF staff. The IMF did not complete internal reviews involving euro area programs on time, as mandated, which led to missed opportunities to draw timely lessons.
- In general, the IMF shared the widely-held “Europe is different” mindset that encouraged the view that large imbalances in national current accounts were little cause for concern and that sudden stops could not happen within the euro area.
- The IMF-supported programs in Greece and Portugal incorporated overly optimistic growth projections. More realistic projections would have made clear the likely impact of fiscal consolidation on growth and debt dynamics, and allowed the authorities to prepare accordingly or persuaded European partners to consider additional—and more concessional—financing while preserving the IMF’s credibility as an independent, technocratic institution. Lessons from past crises were not always applied, for example when the IMF underestimated the likely negative response of private creditors to a high-risk program.
- [E]ven though the possibility of engaging with a euro area country in a program relationship became real in early 2009 (when IMF staff raised the issue informally with the Irish authorities), no Executive Board meeting ever took place to discuss, let alone articulate, how the IMF could engage with a euro area country in a program relationship. (The first informal Board meeting during the euro area crisis was held on March 26, 2010, but only to discuss developments in Greece.) IMF management had earlier established small, ad hoc staff task forces to explore various contingencies, but the work of these groups was so secret that few within the institution knew of their existence, let alone the content of their deliberations.
- Before the launch of the euro in January 1999, the IMF’s public statements tended to emphasize the advantages of the common currency more than the concerns about it that were being expressed in the broader literature. Individual staff members did express such concerns. Interviews with former and current senior staff members suggest that, after a heated internal debate, the view supportive of what was perceived to be Europe’s political project ultimately prevailed in guiding the Fund’s public position.
- The IMF staff was often quick to praise national authorities for reforms without assessing the actual implementation or impact of the reforms. Reforms announced or implemented were generally cast in a positive light, albeit with a caveat that more were needed.
- Apparently seeing little risk that a smaller country in the periphery could become a source of vulnerability to the rest of the monetary union, euro area surveillance did not analyze sufficiently how policies pursued in one country might affect other members of the monetary union. Staff resources were shifted away from countries that would later face crises.
- The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value.
- “[A] high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches”… compounded in the case of the euro area by a “Europe is different” mindset that encouraged the view that surveillance was largely the responsibility of euro area institutions and authorities, that large national current account imbalances were little cause for concern, and sudden stops could not happen within a currency union that issues a reserve currency.
This is an important account, because the IMF bears substantial responsibility for the collapse of confidence in traditional political parties in Europe, as well as the prevailing sense that the European Union is undemocratic and unaccountable. But as I’ve argued elsewhere, the lack of accountability and democracy in the EU is grossly overstated. The lack of democratic accountability in the IMF is not.
The standard complaint is that not only is the IMF undemocratic and unaccountable, it is privileged and Eurocentric.
… despite two major pushes for reform in the last five years, IMF governance remains undemocratic and unaccountable with Europe still be substantially over-represented.”
The distribution of votes is skewed to the WWII victors, the US and “old Europe” and no government willingly gives up its votes.
The main problem around nationality is that the European governments keep breaking their promises to have a merit-based process. They care only about the nationality of the candidate. This is why European governments backed Lagarde even before she formally launched her campaign and before nominations were in. In terms of reforms, European governments have been clinging on to their outdated privileges for years.
This is one of the rare cases where the criticism is warranted. Europe did itself great harm by “clinging on to their outdated privileges” and assuming a unique degree of European competence. It deprived itself of analytic rigor and objectivity, and it is paying for it bitterly.
A danger of the widespread impulse to punish the elites for their incompetence is that voters can only punish people for whom they can vote — so perfectly serviceable elected officials or mainstream political parties will be set upon with pitchforks, whereas the guilty parties and institutions will emerge unscathed, unreformed, and poised to keep screwing everything up. No one even knows to whom the IMF and the World Bank, for example, are supposed to be accountable. They’re subject to none of the normal constraints on democratic governance in the form of an independent judiciary or a legislature. When these bodies performed a narrow range of technocratic functions, this wasn’t such an big deal, but they now perform a huge range of tasks that affect everyone, even those only dimly aware of the existence of these bodies, but certain they want someone’s head to roll for the way things have shaken out.
Ngaire Woods has written a good article about how the IMF and World Bank could be reformed to make them more transparent and accountable. The larger question, though, is whether we still need the IMF at all. It was founded to restore economic stability and growth in the aftermath of the Second World War. The express point of creating them was to forestall the kind of crisis that had led to the Second World War — to build a framework for economic cooperation that would avoid the vicious circle of competitive devaluations that contributed to the Great Depression and led to the collapse of faith in liberal democracy.
The world has changed significantly since then. Massive private capital flows now dominate the global economy on a scale unimaginable at Bretton Woods. But above all, rather than forestalling the kind of crisis that led to the Second World War, the IMF itself played a key role in reprising exactly the same kind of crisis.
In 1997, the IMF Managing Director Michel Camdessus asked this question at the Economic Club of New York, and answered — unsurprisingly — in the rousing affirmative:
I raise the question only because in my view, the answer is very clear. Yes, the world does need the IMF, and more so today than ever before. It is true that global economic opportunities are increasing, but many countries are not yet able to take advantage of them. Moreover, for countries that do tap private capital markets, the risks have increased. As we have seen on countless occasions, the market rewards what it sees as sound economic policy and punishes—sometimes resoundingly—what it perceives as policy weakness. Hence, the upside potential for good economic performers is substantial, but the latitude for policy mistakes remains, and the cost of mistakes can be much greater. This is why, with a remarkable unanimity, our 181 member countries are increasingly looking to the Fund to help enhance the stability of the global economic and financial system and increase the prospects for high-quality growth in ways that individual countries are not as well equipped to do. This is why more than ever they expect us:
• one, to encourage countries to pursue the sound economic and financial policies required to attract private capital and thereby expand opportunities for investment, trade, and growth worldwide; we do this through our policy advice, our technical assistance, and, when appropriate, our financial support.
• two, through this emphasis on appropriate policies, to reduce the risk of a sudden reversal of capital flows and their potentially destabilizing spillover effects;
• three, when crises do occur—as undoubtedly they will—to ensure that they are dealt with in ways that are not detrimental to international prosperity; and
• four, to provide a forum in which members can discuss and learn from each other’s policy successes and failures, assess developments in the global economy and, to the extent possible, diffuse emerging problems before they become major crises.
I agree that it would be useful to have an institution that did all of those things. But the IMF failed on all counts when it was most needed.
Can the IMF be reformed to be make it serve the purpose for which it was designed? Can it be made more accountable? Should it exist at all?