As the contest for the top job at the International Monetary Fund heats up in the wake of Dominique Strauss-Kahn’s embarrassing arrest, I’m considering nominating a new candidate: Myself. Am I qualified? Well, I haven’t managed a finance ministry or a central bank, and I barely recall taking calculus in high school. But I’ve got a few things working in my favor. I’m not French, and I don’t see why one of the global economy’s most important institutions should be a French fiefdom. Nor do I have a criminal record, and I pledge to studiously avoid one (at least while serving in office). Most of all, I have seen the IMF in action around the world, and I have a few ideas about how the place should be run. The IMF could be playing a more constructive role in the global economy than it is right now.
The first problem with the IMF is that it doesn’t represent the world economy as it stands today. The IMF was founded during a much different era, when the U.S. and a small handful of European nations controlled the world economy and dominated its output. Everyone else was Communist and cut off in their own economic bloc, impoverished and not able to participate in the world economy, or living in a colony of one of the European powers (or some combination of the above). Today, the structure of the world economy is more balanced, and becoming more so by the day. China is now the world’s 2nd-largest economy. India, Brazil, South Korea and Mexico are all in the top 15 (while it’s the European countries that are suffering through a debt crisis). But the IMF is still effectively an arm of the American and European political establishment. Yes, reforms launched last November are restructuring the IMF to give countries like China, India and Brazil more say. But those steps don’t go far enough. They won’t really change the overall dominance of the West in the IMF. If the IMF is to continue to play an important role in the world economy, and especially if it envisions an even larger role for itself, the institution will have to build trust with the new, emerging powers of the global economy. And that means a more representative and diversified management structure.
Even more, the IMF has to become more open not just to the reality of the new world economy, but to the ideas and influences that created that reality. The economic ideology of the IMF also dates from a very different era, when the notion of democratic capitalism and free trade dominated the thinking of the world’s economists. But the history of the past sixty years tells us that such classical economic methods don’t always achieve results in certain circumstances, and more pragmatic, creative approaches to economic problems, especially poverty reduction, might be necessary. Now don’t get me wrong. I’m all in favor of free trade and free markets. All I’m saying there is that we should show some flexibility in special cases to bring about specific outcomes.
The development story in Asia tells us why. Yes, Asia’s rapid-growth economies have succeeded through trade and foreign investment – in other words, due to the free markets and globalization favored by the IMF and other Western powers. But at the same time, Asia’s Tigers were not free traders. In some cases (Japan, Korea, Taiwan, China), they protected nascent industries from foreign competition and/or offered special financial support to allow them to grow. True, trade protection is a very dangerous policy (just ask the Indians pre-market reform, or the Japanese today). But we can’t deny that protection on a specific and limited basis actually worked to build industries and promote development in Asia. Yet I don’t expect the IMF to go around the developing world promoting industrial policy or state protection and support of industry. Asian nations also often controlled capital flows, but that, too, would probably not enter the policy dictionary of the IMF. The situation is similar in regard to crisis management. During the Asian financial crisis, Malaysia broke from IMF-mandated policies and imposed capital controls to try to stem the meltdown – and contrary to the roars of protest from most mainstream economists, that step actually worked. But would the IMF actively advocate capital controls in the face financial stress? Highly unlikely. Now I’m not saying such policies should be liberally implemented around the world. I still believe the standard classical way is usually best. But we can’t ignore policies used with great positive impact in recent decades either.
So instead what the IMF tends to do is dish out roughly similar advice to all countries, no matter what their circumstances. Just take a look at the IMF website. You’ll see posted there IMF reports outlining the fund’s agenda for economies all over the world. And what you’ll discover is a general uniformity of advice. In a review of the economy of the small, poor African state of Lesotho, for example, the IMF recommended prudent fiscal policy and reforms to improve the investment climate. For France, the IMF suggested prudent fiscal policy and reforms to enhance competitiveness. Russia was told to have a prudent fiscal policy and reforms to improve the investment climate. Yes, I’m oversimplifying here to make a point. But at the same time, we can’t deny that the IMF tends to use the same tools out of the same toolbox for all economic repairs.
Greater flexibility on policy matters would probably also make the IMF more welcome and less feared around the world. More than a decade after their experience in the 1997 Asian financial meltdown, Koreans still refer to that period as the “IMF crisis.” That’s not fair – the IMF didn’t cause the crisis, and actually did quite a bit to alleviate it. But people tend to associate the pain of economic crises with IMF policies. There is good reason for that. IMF crisis management techniques tend to deepen the pain felt by the general population. Just ask the Greeks today. There is often little way around such trauma. Getting rid of deficits and debt is always excruciating. But the IMF seems to forget that the best way to close deficits and make debt more sustainable is through economic growth, not by imposing policies to further undermine that growth. In other words, we should find a better balance between the need for austerity, reform and restructuring and the need to restore growth (and thus tax revenues).
Such an approach would probably allow the IMF to play a more active role in preventing crises, not just solving them. Why is it that we usually only hear about the IMF when some country is on the brink of financial collapse? The fact is that countries don’t want to turn to the IMF for help since its funds come with heavy, very painful strings attached. Conditionality is necessary, of course. But if the IMF was more sympathetic, more pragmatic and less ideological in its policy approach, governments might be more willing to invite in the IMF at an earlier stage, helping to prevent meltdowns before they happen. That would be good for the financially strapped countries and the entire world economy.
And there is no reason why the IMF shouldn’t be playing a greater role in stabilizing the world economy by working to make it healthier and less vulnerable to shocks and crises. But the IMF will never be able to play that role until it changes – its outlook, its management and its policy menu. Without that, the IMF will be stuck with its reputation as a bully – imposing the policies of the strong onto the weak. That’s what happened during the Asian financial crisis, when the IMF forced Korea, Indonesia and Thailand to swallow reforms that were effectively drawn up at the U.S. Treasury Department on matters that had nothing to do with the financial crisis – such as ending state support for industry, changing labor laws or lowering trade barriers. Today, the IMF is standing with Germany in shoving austerity measures down the throats of the Greeks, Irish and Portuguese.
Until the IMF can be perceived as a more impartial “honest broker” in economic matters, until it opens up to fresh thinking and new influences, its role in the world economy will be constrained and its credibility will remain in question. Whoever ends up winning the top job at the IMF will have to address these problems, for the good of the fund, and more importantly, for the good of the world economy.