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Is the IMF Worth Reforming?
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?
Published in General
I think the question should be “Should the United States fund the IMF?”, to which I would answer “No!” As a non-government entity, it’s function and possible reform, and all of its other internal governance issues, can only be influenced by funding. If other countries still believe it has value, let them fund it.
Claire, good article and thanks for following the subject. I read the highlights from this yesterday.
My initial take was that the IMF is not known for its humility or introspection. For the IMF to release such a scathing report indicates that the reality is even worse.
Is the IMF worth saving? Personally, I don’t think so because its absence would take away a backstop that may motivate some fiscal responsibility. If it does remain a house cleaning starting at the top is a must.
The IMF, the World Bank, the UN, the EU etc. have all undergone such extraordinary mission-creep since their founding that even if one were to accept the simplistic and Soviet-inspired Harry Dexter White narratives of the origins of WWII that lead to their creation, they no longer serve those purposes. (To be fair, the role of the UN General Assembly as a tar pit to prevent regional bodies while the real work is done in the deliberately easily-vetoed Security Council arguably continues. The World Bank has definitely been distorted out of all recognition.)
Tough question. The IMF was to provide reserves to avoid competitive devaluation or import restrictions when countries ran up against non financeable current account deficits as happened in the inter war period. It was created when almost all economists were Keynesians. Perhaps the one thing Keynesians left of value is the accounting framework the IMF uses for its BOP financial programs. It’s cool and had it been applied sensibly it could have made positive contributions, but the IMF was always agnostic as between cutting spending or raising taxes, so the programs adopted in exchange for reserves raised taxes and did more harm than good. But that was under the Bretton Woods system which ended even before Nixon cut the link to gold and moved us toward flexible rates. It had immediately become a dollar standard even if we didn’t really understand that fact until years latter. The IMF became a technical organization, not a lender of last resort. We were the lender of last resort. That doesn’t mean it is irrelevant. It would be irrelevant along with central banks if we returned to a true gold standard or free banking but neither is likely. A technical organization to collect, and when necessary produce data, and help organize international lending forums when countries face current account crises is useful. It might be easier and more effective to start from scratch. Non accountable, overfunded, overpaid organizations built on false economic notions riddled with powerful interests are hard to reform.
Of course we need an IMF. Aristocrats are no longer allowed to own serfs, and without peasants to perform their labor and make them wealthy, some other mechanism is needed. The IMF is it. And by laundering the money through public debt instruments, the IMF makes it seem virtuous.
I suspect this is underestimating the difficulty of starting something like that from scratch. (And while we’re starting from scratch, in comes the ADB … )
Whenever somebody says “easier to start from scratch” when it comes to computer software, or a new financial management and accounting system for our university, that’s a sign that they have no idea what features they need to build back in, and that we will be dealing with the resulting mayhem for years to come after the new system goes live.
There are a couple orders of magnitude more professional economists now than when the IMF was founded. Perhaps some of them could collect data. And the Club de Paris doesn’t seem to need much to do what it does.
Maybe, but reform is nearly impossible. We’re not talking about a lender of last resort, just technical support which can be done on an ad hoc basis and gradually acquire a permanent staff.
Burn it down. It has no accountability. Unless there is a very real threat that malfeasance and bad decisions will be punished with a perp walk into prison or a bullet to the brainstem, there is no possibility of reform. They are like any other bureaucrats in that they suffer no punishment or even reputational harm if they F up. They just get other bureaucratic jobs. They will fail upwards in a manner typical of all bureaucrats.
Yes, it’s hard to start from scratch. But they need to, and with all new people too. You can’t just change the name and reassign the same cavalcade of losers. Keeping the same system with some “new and improved reforms!” is just [redacted].
I say this without any real knowledge of what the IMF is or does. But I know what a longstanding unaccountable bureaucracy is and does. Graft, corruption, incompetence, waste, fraud and abuse.
[Editors’ Note: Vulgarity].
Defund it. If the USA quits funding its share of it, it will wither and die. Along with it will go all the support that Hillary Clinton/Democrats/GOPe draw from the richest of the wealthy class.
It’s not the software we toss or the financial framework, it’s the giant bureaucratic international patronage for economists infrastructure that includes ministries of finance, the private and public lending banks, central banks as well as the IMF staff and all the cliques, symbiotic relationships and corruption that always accumulate that would be decoupled, stripped away from this obsolete framework. The same technical people will be needing work and software isn’t a clique that must be broken up. Organizations not subject to market forces through time have to be broken up and started fresh even if they are still relevant. The IMF as conceived isn’t.
Exactly.
And many of the new entities’ hires would likely be ex-IMF.
That doesn’t matter. They aren’t bad people, they just accumulate different interests, form cliques etc. are subject to different pressures over time. The technical people we need gather organize data and run software. Few economists, which in the Keynesian form are the problem, are needed.
Claire,
I think we should define our terms a little more. Proper governance can exist only if there are two things to support it. First, transparency must be available. There will be little to govern if you can’t get the data. Second, oversight must be independent and legitimate. The independent part is obvious. If the institution is overseeing itself there is no oversight. However, the legitimate part is more complicated. The oversight people must be given the authority from and responsibility to those who’s interests are directly affected. As an example, the stockholders of a company electing its board of directors.
The report on the IMF appears to be moving in the direction of transparency, a good thing. What appears to be of concern is whether the oversight is legitimate. To cut to the chase, has the IMF been actively over-subsidizing the EU and thus is in direct conflict with the interests of those who contribute to IMF who are not part of EU? Obviously, the USA is in that category.
Making the IMF “more democratic” is an odd phrase to use as a solution. The solution is making the oversight of the IMF “more legitimate” to ensure that the interests of those providing the funds are not abused.
Regards,
Jim
True, but my cynicism tells me that it would be the very people who should be left behind that would be the first on board.
Great research and reporting – thank you!
The lack of accountability and transparency seems to fit into a general pattern. Coincidentally, the years in question do happen to fall under the hidden years of diplomacy, the years HRC was Sec’y of State, events of which the State Dept., DOJ, FBI and White House still very much want to keep hidden.
With HRC’s 30,000 deleted emails, few publicized accomplishments as Sec’y of State and no stated agenda for the presidency, I will, to quote the funny song on Commentary, “hope for the best, expect the worst”, vote against Clinton.
Some idle thoughts.
This standard complaint wrongly combines two entirely separate factors. Banks–international or not–and any other business enterprise are undemocratic–they have to be. Decisions have to be made in real time based on real-time and woefully incomplete information, and that requires a pretty autocratic administration, for all the touchy-feely claptrap of a modern major-HReral. They remain, though, accountable–to their owners and to the markets in which they operate.
The IMF is, indeed, entirely too unaccountable.
Yeah, and? We’re still the ones whose money is being committed. Of course we should call the tune–just as any lender must–concerning the uses to which our money is put. Don’t like our terms? Don’t borrow from us.
To the extent “we” have done poor analyses regarding our lending or the terms of our lending, that’s on us, not on the principle that we should be the ones setting the requirements for our money’s use.
Leaving aside the wholly self-serving nature of Camdessus’ comments, he’s described the World Bank’s mission. There’s no need for duplication, especially when it’s duplication in the use of OPM.
And this bit of…nonsense…again from Ms Berlinski’s quote of Camdessus:
I wonder whether he has consulted with the taxpaying citizens of Germany whether they think their international prosperity has been “not detriment-ified” by their money flowing to Greece through the IMF? The good citizens of France? The good citizens of the US? How is Brazil’s or Argentina’s international prosperity fostered by the IMF’s use of their money?
To finally get to the core of the OP, though, no, the IMF is not worth reforming; it should not exist. At best, it’s long outlived its usefulness. With the plethora of international “banking” facilities–the IMF, the BIS, the World Bank Group(!), all the allegedly regional facilities–the African Development Bank, Asian Development Bank, Caribbean Development Bank, and on and on–the system as a whole needs to be heavily culled and rationalized.
And the purpose of the newly rational system revisited and re-agreed before any funding of the new system is done. I, for one, though, object to being the source of OPM.
Eric Hines
The “and,” in this case, is a serious criticism. One thing that comes through clearly in the evaluation is that European economies were held to different (and wholly insufficient) standards of scrutiny. I don’t know whether this would have been true had the IMF been staffed by agile Indian and Kenyan economists; in fact, they might have been victim to precisely the same prejudices: Europeans until that point had a reputation for competence, and not just among Europeans. But there’s certainly a case — no matter the institution — for staffing it with people who are apt to be critical and unaffected by groupthink. This doesn’t necessarily mean, “people from countries whose economists would love to discover you’re not all that,” but that’s certainly one way you could create that kind of adversarial scrutiny. There are other ways — setting up dedicated adversarial teams within forecasting bodies, etc.
The US and Europe are no longer enjoy an overwhelmingly disproportionate share of the global economy, so obviously — assuming we think it is still useful — the IMF shouldn’t primarily be lending American and European money.
Your case against it is quite strong and I share the instinct, but I’m made hesitant by the thought that what will follow in its wake isn’t the healthy strengthening of national and regional development banks but the colossus of the Asian Development Bank. I don’t know that this will improve the world.
http://www.telegraph.co.uk/business/2016/07/28/imf-admits-disastrous-love-affair-with-euro-apologises-for-the-i/
An excellent analysis and why the EU and the Euro will fail. Still think your idea that the EU is democratic is absurd. The EU is all about creating institutions like the IMF.
Neither will a competition with the ADB to see who can lend the most the fastest, or otherwise to maintain influence (however defined), do much to improve the world. “Our” response to the IMF question and to the proliferation of international funds transfer (I hesitate to say lending) facilities and whether to continue the underlying concepts (and if so, how to improve these things) must be driven by what needs to be done in that regard, not by responses to this or that competition.
Eric Hines
Is there a way to make organizational control, the say in decision making, directly proportional to financial contribution? I think that’s what references to “democratic” processes are getting at. Those whose citizens are making the largest contribution are, rightly, entitled to set most of the agenda. “Skin in the game,” to coin a phrase.
I once had a girlfriend who was a World Banker. We hung out with many IMF people. A more arrogant group can simply not be found in America. Both organizations employ affirmative action to discriminate against Americans and both organizations are not subject to American legal protections against racial and sexual discrimination and harassment. (Obviously – see DSK!) I found their arrogance and legal immunity very offensive and am unable to weigh in on the main subject of this post, so best with indignation am I.
I just simply want this pack of elitist do-gooders removed from my country. DC does not need any economic stimulus. Move them both to Rio or Port au Prince!