September 15, 2016
Challenge, Volume 59, 2016, Issue 4, July 25, 2016
This is an Accepted Manuscript of an article published by Taylor & Francis in Challenge on July 25, 2016, available online: http://www.tandfonline.com/doi/full/10.1080/05775132.2016.1202029
Over the last decade and a half, an epoch-making change took place in international economic relations. This change was so big that it was probably the most important development in the international financial system since the breakdown of the Bretton Woods system of fixed exchange rates in 1973. But hardly anyone noticed it.
What happened is that the International Monetary Fund (IMF) lost most of its influence in developing countries—in particular the middle-income countries. This has turned out to be important for a number of reasons. It is most likely part of the explanation of why most developing countries have done better in the twenty-first century than they did during the pro longed economic growth failure during the last two decades of the twentieth century. The IMF often spearheaded big neoliberal policy reforms that coincided with the slowdown: tighter (and sometimes pro-cyclical) monetary and fiscal policies; the abandonment of development strategies and industrial policies; various forms of deregulation; and an often indiscriminate opening of international trade and capital flows.
While these reforms may have been helpful in some circumstances, as a package—and often applied as a one-size-fits-all package—they often brought awful results. In the past five years we have seen, for example, how disastrous it has been for Europe to get its basic macroeconomic policies wrong. But these are high-income countries—even Spain, Greece, and Portugal are relatively well off compared to most developing countries. What has really made the eurozone a unique story is that for the first time in decades, it is these high-income countries, rather than low- and middle-income countries, that have suffered from taking the prescribed medicine. But much of the rest of the world, unfortunately, had gotten this kind of treatment for decades; and for developing countries, the effects of bad policies are generally more harmful, and for a number of reasons the recovery time is usually longer.
Until quite recently, the IMF was Washington’s most important avenue of influence over economic policy in developing countries. This was due to two institutional arrangements: first, the Fund was placed in the position of “gatekeeper” for funds flowing to developing countries. Borrowing countries that did not meet the IMF’s conditions would not get money from the World Bank, regional lenders such as the Inter-American Development Bank, rich-country governments such as those belonging to the Paris Club of creditors, and sometimes even the private sector. This still holds true for many poor developing countries.
I witnessed the breakdown of this creditors’ cartel when I went to Bolivia in February 2006, just a month after the country’s first indigenous president, Evo Morales, took office. I met with the new economic ministers and asked them whether Bolivia was going to renew its current Stand-By Arrangement with the IMF. At the time, Bolivia had been under IMF agreements for twenty consecutive years, with the exception of a nine-month period. They had undertaken much of what the IMF had demanded of them, including the privatization of the country’s vital hydrocarbons sector. Yet Bolivia’s income per capita was still less than it had been twenty-eight years earlier. One of the ministers replied that the IMF had been there and offered them a renewal, but the government had said no. Bolivia was still a low-income country, and the IMF asked if they were interested in borrowing through the Poverty Reduction and Growth Facility. The government, they told me, said, “No, thanks.” They told the IMF that they did not need any loans.
I was glad to hear this, but then asked about other loans and even grants, for example from the European Union. They said that the IMF had informed them that other sources of funding would no longer be conditional on any IMF agreement. This was a new world for Bolivia—and part of a historic change that would give new freedom to many developing countries. It turned out to be a game changer for Bolivia, as the government soon renationalized its hydrocarbons sector, and its revenue from hydrocarbons multiplied sevenfold over the next eight years, from $731 million to nearly $5 billion. This was the foundation for Bolivia’s achievement—for the first time in decades—of vastly improved economic growth and stability under Morales’s presidency.
The second institutional arrangement that had made the IMF an instrument of U.S. power was that the U.S. Treasury Department, which represents the U.S. government at the IMF, not only was given a direct veto over major decisions, but also was the predominant decision-making power at the Fund with regard to developing countries. Although Europe could theoretically muster enough allies to outvote the United States at the Fund, this almost never happened during more than seventy years of the Fund’s operations. In fact, the IMF’s executive board rarely voted at all. This came to light in U.S. congressional hearings in 1998: a U.S. representative from Vermont named Bernie Sanders asked Karen Lissakers, then U.S. executive director at the Fund, how often the executive board actually voted. Her answer: of the last 2,000 funding decisions, there had been just 12 formal votes.1
We will return to the governance of the IMF below. This is just to offer a glimpse of how the Fund’s role in the world has been set by institutional inertia, gentlemen’s agreements, and the tight solidarity of a handful of rich countries, led by Washington. The United States established its hegemonic role in the Fund from the institution’s beginning, as the only standing industrial power after World War II. As Europe and Japan caught up with the United States economically, they never formally demanded a commensurate say in the Fund. To do so might open the way for developing countries—the ones most affected by IMF policy—to also demand a voice.2 The IMF’s special role as gatekeeper is an informal arrangement—there is nothing in the World Bank’s rules, for example, that says it must deny a loan to a government that does not meet IMF requirements. It is an agreement among the wealthy-country governments in order to form a powerful creditors’ cartel—one that can enforce debt collection as well as impose conditions that U.S. or European governments desire. It has no more legitimacy than another gentlemen’s agreement that has determined since the institutions’ founding that the head of the IMF should be a European and the head of the World Bank should be an American.3
But the IMF’s enormous loss of influence over the past decade has meant a serious reduction of U.S. power in the world, and especially of American influence over the economic policy of middle-income countries. For this reason, even those who did not understand the economic implications of these changes should have noticed the political implications, as the world moves toward a more multipolar system of international relations. They did not, however.
Understanding these developments is important to understanding how the world has been transformed over the past decade, and where it may be headed.
THE IMF BECOMES NOTICED IN A TURN-OF-CENTURY CRISIS
The Asian financial crisis, which began in 1997, was the first big blow to the IMF’s credibility and power. It was the IMF’s intervention in that crisis, and the affected countries’ response, that set the stage for many of the changes that would take place in the 2000s—including some imbalances that still plague the global economy today. For example, the big trade imbalance between developing Asia and the United States over the past two decades4 has been to a large extent the result of these countries’ decisions to export their way out of the crisis—as they had little other choice—and also a means to build up large foreign exchange reserves, so that they would never again have to return to the IMF and its creditors’ cartel for funding.
The Asian crisis caused some of the relevant experts to reconsider the idea that opening up to international capital flows would automatically benefit developing economies, an idea that had taken root in policy circles despite the lack of empirical studies to back it up. These events led to a series of proposals for reform of what came to be known as “the international financial architecture.” Some of these proposals were quite ambitious, although they were also sound and sensible. They included an international currency; a world central bank; an international bankruptcy court; an international regulatory body for the world financial system; and proposals for sweeping reform of the IMF.
I remember thinking that much of this was pie in the sky, and indeed, more than seventeen years later, there has been very little in the way of reform at the international level. But it was not cynicism or pessimism that led me to this conclusion; on the contrary, I was quite optimistic that change would come, and it has. In the debate that took place during those years about how this would happen, I argued that—while reform of IMF policy was something worth fighting for—the bigger changes in the foreseeable future would come not from within the IMF but from the IMF and its creditors’ cartel’s losing its influence over developing countries. That is what has happened.
The Asian crisis originated in a huge and relatively sudden reversal of international private capital flows in developing Asia. In 1996 there was a private net inflow of $93 billion to Thailand, Indonesia, South Korea, the Philippines, and Malaysia; the next year it was a private net outflow of $12.1 billion.5 This was a change of about 11 percent of these countries’ GDP. It is easy to see how this would, and did, cause a crisis: the domestic currency falls, and people want to move their money elsewhere. The foreign exchange reserves of the banking system fall, and then there are more panicked withdrawals. This downward spiral continues as firms go bankrupt. The companies that had borrowed in foreign currency, a practice that had increased substantially with the prior decade’s liberalization, were particularly vulnerable. Financial instability increased, and the real economy weakened.
It would have been relatively easy to stop and reverse the process, if the IMF had chosen to do so. The IMF is often thought of as a lender of last resort, but the Asian crisis made it plain to the world that this was not the case. The Fund could have supplied the foreign exchange reserves necessary to stop the panicked capital flight before it brought about a serious crisis and recession. But it chose not to do so.
The crisis was initiated with the devaluation of the Thai baht in July 1997, when the currency was allowed to float after being previously pegged to the U.S. dollar. At this time it was still possible to avoid most of the damage that the region would suffer. There was even an effort to establish a $100 billion “Asian Monetary Fund” to stabilize the situation, proposed by Japan in September and supported by China, Taiwan, Singapore, Hong Kong, and other countries. Although to the casual observer it might seem that it was none of Washington’s business if these Asian countries chose to help their neighbors out of a financial jam, the proposal was nipped in the bud by the U.S. Treasury Department. Larry Summers, then deputy secretary of the Treasury in the Clinton administration, was dispatched to the region to inform the locals that any “bailout” agreement had to go through the IMF.6
There was a reason for these dictates: like the European Central Bank (ECB) and its allies in today’s eurozone, the U.S. Treasury and the IMF saw the crisis as an opportunity to win some very unpopular reforms that they wanted. Former U.S. trade representative Mickey Kantor expressed this idea bluntly when he said—according to the Times of London—that “the troubles of the tiger economies offered a golden opportunity for the West to reassert its commercial interests. When countries seek help from the IMF, Europe and America should use the IMF as a battering ram to gain advantage.”7
This they did, demanding such changes as South Korea’s removal of remaining restrictions on international capital flows and controls on foreign exchange. This was despite the bitter irony that it was the liberalization of capital flows that had caused the crisis in the first place. In a display of terrifically bad timing, just as the Asian crisis was getting under way, the IMF actually proposed changing its charter so as to take responsibility for getting countries to liberalize international capital flows.8
Indonesia during the crisis had perhaps a record number of conditions attached to its “bailout”—about 140, including reducing tariffs and removing some restrictions on foreign investment.
The IMF’s failure in Indonesia was so blatant that even its own Internal Evaluation Office would later acknowledge that “in Indonesia … the depth of the collapse makes it difficult to argue that things would have been worse without the IMF.”9 But it was also clear that the Fund had inflicted unnecessary harm on the entire region, not to mention the contagion that spread to other countries.
The Fund’s reputation, authority, and legitimacy were damaged, and thenceforth challenged as never before, as a result of its policy failures in the Asian economic crisis. For the first time, the Fund received criticism from prominent economists, which stung. Joseph Stiglitz, the chief economist of the World Bank (who would subsequently receive a Nobel Prize in Economics), told the Wall Street Journal: “These are crises in confidence…. You don’t want to push these countries into severe recession. One ought to focus … on things that caused the crisis, not on things that make it more difficult to deal with.”10 The U.S. Treasury Department was not amused by his public criticism of the IMF; according to the Financial Times, there were rumors “for weeks” before Stiglitz’s resignation—denied by the Treasury department—that Treasury secretary Larry Summers had insisted on his removal.11 Economist Jeffrey Sachs, then at Harvard, was even more caustic than Stiglitz, calling the IMF “the Typhoid Mary of emerging markets, spreading recessions in country after country.”12
The Asian economies eventually recovered, and the IMF made sure that the governments of the countries that were “bailed out” made good on many of the loans that the private sector had borrowed from foreign banks.13 In that sense, at least, it was “mission accomplished” for the Fund and the U.S. Treasury Department.
THE ARGENTINE CRISIS: A GOVERNMENT SAYS NO, AND WINS
The Argentine government collapsed in the face of widespread rioting and looting in December 2001, bringing about the end of an economic experiment—in which the IMF had been heavily involved—that had been widely regarded as a proud example of successful reform just a few years earlier. Four presidents would take office over the next two weeks, and the government would default on about $100 billion of its public debt—the biggest sovereign debt default in history.
Throughout Argentina’s 1998–2002 depression, the Fund recommended dealing with the series of external shocks from the global economy—over which Argentina had no control—by tightening the government’s fiscal and monetary policies. As in the case of eurozone over the past few years, however, this just worsened the recession and the crisis.
The Fund kept pouring in more money, as private investors became increasingly reluctant to loan into an impending disaster. In January 2001 they arranged a $40 billion loan package—14 percent of Argentina’s GDP—in a futile effort to maintain investor confidence, and foreign exchange reserves, within Argentina’s fixed exchange rate regime, which by then was obviously doomed.14
By 2002 Argentina needed real help, perhaps more than at any time in its modern history. The banking system had collapsed, bank accounts were frozen, and the country was facing an angry middle class that had been promised that their peso deposits would always be matched by dollars at a one-to-one rate. The economy was at rock bottom, with first-quarter GDP down at a 16.3 percent annual rate. Official unemployment would peak at 21.5 percent, with underemployment at an additional 19 percent. The majority would fall below the poverty line in a country that until recently had enjoyed among the highest living standards in Latin America.15
Yet the IMF was in no hurry to help. As it turned out, negotiations would drag on for the entire year of 2002, concluding only after the Argentine economy was already recovering. The IMF still saw “failures in fiscal policy” as the “root cause” of the crisis—although this was entirely without foundation—and was determined to attack the problem at its roots.
The Fund was also playing its traditional role as head of a creditors’ cartel, trying to win certain concessions from the debtor. Some of these concessions were idiosyncratic to the Fund and not necessarily of importance to the creditors, while others reflected the direct interests of the private creditors, with the Fund seeking to use its status as gatekeeper to increase the creditors’ bargaining power.
On May 25, 2003, Néstor Kirchner, a Peronist former governor of the sparsely populated province of Santa Cruz, was sworn in as president of Argentina. He had campaigned against “neoliberalism,” and he immediately pledged not to “return to paying the debt at the cost of the hunger and exclusion of Argentines, generating more poverty and social conflict.”16
The government would offer about twenty-five cents on the dollar to the private holders of defaulted debt and was in no mood to pay much more. Foreign creditors, especially from Europe and Japan, lobbied their governments to get the IMF to press for more. The Fund began to invoke a little-known internal policy, which provides that the IMF should not “lend into arrears”—that is, lend to a government that has fallen behind on its debt payments unless “the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors.”17
The IMF wanted the usual fiscal austerity, even more than before: it wanted the government to commit to a primary budget surplus (i.e., the surplus if interest payments are not included) of 4.5 percent of GDP for 2004, and even larger surpluses over the next two years. This was good for creditors but made the government and its various constituencies wary about choking off the country’s hard-won, and presumably fragile, economic recovery.
The Fund also wanted to slow the growth of the money supply. This appeared even to conservative central bank and finance ministry officials in Argentina as being another case of dangerous overkill. Like a general still fighting the last war, the IMF saw hyperinflation as a real danger, and that was a major reason for its support of the fixed exchange rate all the way to the abyss at the end of 2001.
To see how far off the mark the IMF economists’ projections were, in January 2003 they forecast that Argentina would grow by 2.5 percent for the year, with inflation of 35 percent.18 The actual results were in a different universe altogether: 8.8 percent growth and only 3.7 percent inflation.19
Much of this persistent pessimism was probably wishful thinking on the part of various experts who wanted to see Argentina pay a long-term price for defaulting on its debt. Editorials in the business press were quite bitter, all the way up to the settlement between Argentina and the creditors holding defaulted debt in 2005. But the IMF’s errors on monetary policy were more part of a systematic bias endemic to the institution and were repeats from previous crises in the late 1990s in Asia, Russia, and Brazil. In both Russia and Brazil, Fund economists had exaggerated the dangers of hyperinflation that could supposedly result from the collapse of fixed exchange rate systems. Fortunately in Argentina, the monetary targets that the government had agreed to for 2003 were soon abandoned, and that probably helped the country’s recovery.
But there was one crucial, dramatic showdown between the Argentine government and the IMF in September 2003 that was perhaps a historic moment in the history of not only Argentina but also the Fund and the region. The IMF was pushing hard for concessions on a number of issues, including the debt. The government refused to give in, but without a new loan from the Fund, Argentina would not be able to make payments due that month to the Fund itself. Now, this was much more serious than defaulting to private creditors. By international custom, the IMF was a special creditor, and nobody but “failed states” like Afghanistan or Sudan had defaulted to them. In such a case, essential credit in the private sector, such as letters of credit from banks that are necessary to carry on normal trade, can be cut off. Nobody knew if the IMF would use this “nuclear option” against Argentina; Brazil had indicated that it would help its neighbor in such an event. My own view at the time was that it would be too politically costly for the Fund to inflict this kind of punishment on a country that was not a “pariah” or “failed state,” but it was a tense moment. The government of Néstor Kirchner was gutsy, and held firm; it technically went into default when the payment came due on September 9. Within a week, the IMF backed down and agreed to lend Argentina enough money to maintain its debt payments to the Fund.20 Another crisis had passed, and the IMF’s power as the leader of a creditors’ cartel had taken another blow.21
The Argentine case is important because it starkly illustrates the most common misconceptions about the IMF, as well as some others about the global economy. Clearly the Fund did not act as a lender of last resort, as detailed above. To the contrary, it drained billions of dollars out of Argentina after the country’s financial system collapsed. But it did try to use its considerable muscle as head of a creditors’ cartel to win a better deal for the private creditors. As the Fund is widely viewed as a champion of “free markets,” it is also worth noting that such intervention on behalf of creditors is the opposite of a market solution. The common description of the IMF as an institution that promotes “free market” policies is therefore also inaccurate.
A NEW IMF? THE FUND SINCE THE GREAT RECESSION: CHANGING SLOWLY, MOSTLY IN THEORY
As noted above, the collapse of the IMF’s influence in most middle-income countries was a historic change, one of the most important changes in the international financial system in more than six decades. When Dominique Strauss-Kahn became managing director of the IMF in November 2007, the IMF’s influence was at a low point. Total outstanding loans at that time were just $17 billion, down from $110 billion only four years earlier.22 But by the time he resigned in May 2011, that number had bounced back to $125 billion,23 with agreed-upon loans at least twice that much.24 The IMF’s resources available for lending tripled from a pre-crisis $250 billion to an unprecedented $750 billon by October 200925 and would increase more in the ensuing years.26
Despite being vastly bigger than ever before, however, the Fund did not recover the influence that it had lost in middle-income countries. And since the IMF had been the most important avenue of influence for Washington on economic policy in developing countries, U.S. influence had not rebounded either. By 2012, most of the IMF’s lending—even as measured just by outstanding loans—was in Europe. And it had commitments to the eurozone that were several times bigger than the approximately $90 billion in outstanding loans. So this was where the overwhelming majority of IMF lending was now concentrated. The middle-income countries of Asia, Latin America, and also Russia, which had broken away from the IMF after the Asian crisis, never came back. Now the IMF had a new role, in the implementation of austerity policies in high-income countries in the eurozone, as well as some middle-income countries in Eastern Europe and the former Soviet Union.
But the Fund’s lending in the eurozone, which has overwhelmingly become its largest commitment, was different: here it was the junior partner in the troika, with the European Commission and the ECB (as well as the Eurogroup of finance ministers). In matters of European economic policy, the United States would defer to the European authorities and their directors and governors within the IMF. This is much different from the IMF’s traditional role either as an institution with its own decision-making or in its historical role with the U.S. Treasury Department mainly calling the shots, as in the case of its decisions regarding developing countries. Nonetheless, the Fund has something of its own identity and policy direction as an institution, and it is worth examining how much it has changed in its ideas and practices since the Great Recession.
The IMF’s Independent Evaluation Office (IEO) took it to task for its errors and omissions in the run-up to the Great Recession, in a critical report published in 2011. Looking at the IMF’s performance in the years 2004–7, the report noted that the IMF “fell short” in its “most important purpose” of “warning member countries about risks to the global economy and the buildup of vulnerabilities in their own economies,” and that this failure was due to such factors as “a high degree of groupthink; intellectual capture,” and “an institutional culture that discourages contrarian views, … while political constraints may have also had some impact.”27
While the report was hardly loved in IMF circles, in reality it was probably too generous. The IMF produces the World Economic Outlook every six months, as well as the Global Financial Stability Report and the Fiscal Monitor, as part of its duty of surveillance of the world economy. It missed the two biggest asset bubbles in the history of the world: the U.S. stock market bubble (which burst in 2000–2002) and the U.S. housing bubble (which began to collapse in late 2006). Both of these bubbles caused recessions when they exploded, with the bursting of the U.S. housing bubble directly causing the Great Recession. These bubbles were not only easy to recognize in hindsight; they were quite plain and obvious for years before they burst. Dean Baker took the time to explain the basic arithmetic underlying both of them, well in advance of their collapse.28 As Baker demonstrated, the prices of stocks in the United States (not just technology companies or the NASDAQ, but the broad indices) in the late 1990s were not compatible with any plausible growth projections for the economy.29 Similarly, during the housing bubble he pointed out that U.S. house prices grew 50 percent more than inflation from 1997 to 2006, after just keeping pace with inflation for the prior half-century.30 By looking at rents, demographics, and the various “this time is different” explanations for the run-up in home prices, he was able to show very clearly that there was no believable explanation other than that of a bubble.
It is no excuse to say, as defenders of the Fund will do, that most other economists and investment fund managers also missed these bubbles. Most of these actors had conflicting interests. For example, money managers are often rewarded or punished for their performance relative to their peers. A mutual fund manager who saw the stock market bubble in 1999 is faced with a dilemma: if, on the one hand, he pulls out of the stock market, and—before its bursting—it provides double-digit returns for another year to those who stay in, he may very well be punished. On the other hand, if he stays in, the bubble bursts, and his fund loses 20 percent along with everyone else, that could be much less threatening to his job or career. There were also financial giants like Goldman Sachs who clearly understood the housing bubble before it burst and were able to profit from “The Big Short.”31,32
The IMF, by contrast, was spending hundreds of millions of dollars annually on research and was entrusted with monitoring the global economy, not maximizing the return on a university endowment or a hedge fund. Members of the Fund’s research department should have been able to check obvious sources and detect the magnitude of an asset bubble in real estate of more than $8 trillion. The IMF produced recommendations for improvement in its 2011 Triennial Surveillance Review.33 There has been some improvement in the IMF’s multilateral surveillance and risk assessment in the past few years, but it remains to be seen whether the Fund will do better in the run-up to the next global financial crisis. Overall, it has not done very well in its recommended policies since the Great Recession began.
A look at forty-one countries34 that had IMF agreements as of October 2009 found that thirty-one of them had been subjected to procyclical macroeconomic policies—either fiscal or monetary policies (or, in fifteen cases, both)—that would be expected to worsen an economic downturn in the borrowing countries. In some cases, the IMF relaxed its targets and recommendations as the world economy and these particular countries’ economies worsened. Sometimes (as in the cases of Hungary, Latvia, the Republic of Congo, and Haiti) the policy changes appeared to be the result of social unrest or other pressures on the borrowing government. But the original errors, made after the U.S. economy had begun its Great Recession and the world recession was well under way, were often very costly; they were also somewhat inexcusable. No matter how one looks at it, IMF program lending during the Great Recession had harmful conditions attached for the majority of borrowing countries. This was not yet a “new IMF.”
As late as April 2014, when the Fund approved a two-year, $17 billion Stand-By Arrangement with Ukraine,35 it was déjà-vu all over again. After two years of almost no economic growth, the IMF was projecting a 5 percent decline in GDP for 2014. Yet the Fund insisted on austerity amounting to about 3 percent of GDP over the next two years—the equivalent for Ukraine of cutting out the annual $500 billion base budget of the Pentagon in the United States. Ukraine at this time was facing a number of downside risks that made austerity particularly inappropriate. The country’s exports were about 50 percent of GDP, with about half to the European Union and Russia, two economies that were still weak at that moment. Investment in Ukraine was also weak (about half its pre–Great Recession peak) and the uncertainty surrounding the possibility of further civil conflict weighed upon investors. Under IMF austerity, Ukraine’s economy shrank by 6.8 percent in 2014 and an enormous 9.9 percent in 2015.
To be fair, there were a couple of positive developments in IMF policy during this time. In 2009, the IMF made available some $283 billion worth of Special Drawing Rights to member countries without conditions. (SDRs are IMF reserve assets that can be exchanged for hard currency.) It is difficult to say if this had much impact in countering the global recession. Most of the funds were allocated to the high-income countries, which had no need for them. About $20 billion was allocated to low-income countries, but many of these did not believe they could afford to take on new debt. The Fund also made some limited credit available without conditions, but it only went to a few countries that happened to have right-wing governments allied with the United States: Poland, Colombia, and Mexico.
The biggest changes were in the Fund’s research department, where there seemed to be more tolerance for open debate on some important policy issues. For example, there has been new IMF research that acknowledged that developing countries could benefit from capital controls in some situations.36 Other research questioned whether central banks were targeting too low of an inflation rate, which could unnecessarily reduce growth and employment.37 The IMF’s then research director, Olivier Blanchard, also produced a short piece in the IMF’s October 2012 “World Economic Outlook” that caused a bit of a stir. It showed that IMF economists had significantly underestimated the fiscal multipliers in making their growth forecasts for countries during the world recession. In other words, the losses in output and employment were significantly worse than expected because of the error in measuring the impact of government spending and taxation on growth. Blanchard and Daniel Leigh followed up with a longer paper that confirmed this result.38 It would be welcome news if this and other good research at the Fund had some impact on policy, but if it did, it is not that noticeable. Blanchard himself has made any number of statements to the press against stimulus policies or against even beginning to reverse austerity as various times. In October 2012, in spite of his research and with Europe still in the second phase of its “double-dip” recession, he told the German press that “now is not the time for fiscal stimulus.” He had made similar statements regarding the United States: in October 2010, with unemployment stuck at 9.5 percent and amid talk of the need for more fiscal stimulus, Blanchard weighed in against any new stimulus measures.39 A year later, when asked about his 2010 paper that advocated central banks’ targeting inflation as high as 4 percent, he walked back from this, too, saying that such a policy was meant “for normal times” and not for the weak economies that the high-income countries currently faced.40 But this conclusion makes no sense, since a higher inflation target is much more urgently needed, and the risks associated with it much smaller in the environment of weak demand and low inflation that prevailed at the time.
In other words, the glimpses of light in IMF research did not seem to illuminate even high-level policy statements, much less actual policies. And these policies appear to be pretty well entrenched in the high-income countries as well. An examination of sixty-seven Article IV consultations—the reports produced by required regular meetings between the IMF and member governments—for the EU governments during the four years 2008–11 revealed a consistent and disturbing pattern. Fiscal tightening, pension cuts, reductions in health-care spending, increasing labor supply, and reducing the size of the state constituted the vast majority of the Fund’s recommendations.41
To be fair to the IMF under Strauss-Kahn (2007–11) and his successor, Christine Lagarde, neither the managing director nor the Fund’s top economists are ultimately in charge of policy. This is especially true when we are talking about policies for countries that are important to the people who actually run the institution. The IMF’s governors and executive directors have the ultimate authority over decision making. In practice, this means that the U.S. Treasury Department has the overwhelmingly dominant voice, with some input from other rich countries— although Washington generally defers to the European governments on policy in Europe, such as that concerning the eurozone. In general, there are rarely substantive differences between the policy makers of these two huge economies.
So there would probably need to be a big shift in the structure of power at the IMF before there would be major changes in policy. This is true regardless of who is managing director. When Dominique Strauss-Kahn was at the helm, he seemed to be aware that the austerity in Greece was counterproductive not only for Greece but also for the eurozone. However, there was not much that he could do about it, despite the fact that he had a strong personal stake in the outcome: prior to the scandal that toppled him in 2011, he was planning to run for president of France and certainly did not want to risk having the IMF involved in a major economic failure while he was running the organization. Similarly, the IMF recently retreated from its demands to the European authorities for significant debt relief for Greece and signed on to a loan program that did not meet its own debt-sustainability criteria—although it will be revisited later this year. The agreement’s primary budget-surplus target of 3.5 percent of GDP by 2018 seems likely to keep Greece mired in recession.
The vast majority of the world has little or no say at all in the Fund, and there has been a movement to change that for more than two decades. The most recent reforms to voting shares, which were proposed in 2010 and just recently made effective after five years of delay by the U.S. Congress, left the U.S. share at 16.73 percent. This is enough to maintain a U.S. veto over some important decisions, including changes to the IMF charter. More importantly, for all other decisions the rich countries (as measured by the Organization for Economic Cooperation and Development), who generally vote together with the United States, still have 63 percent of voting shares.
Nonetheless, at this point the voting and governance structure is not the main obstacle to changing IMF policy. At present, the developing countries are not using their potential influence within the Fund. Their representatives are mainly concurring with the decisions of the G-7. If any sizable bloc or blocs of these countries were to band together for change within the Fund, there could be some significant changes in policy even with the current lopsided voting shares.
The World Trade Organization (WTO) provides a compelling counterexample that shows what developing countries can do when they act together within a multilateral organization. For more than a decade and a half, they have formed blocs and opposed Washington and its allies on a number of issues—ranging from policies on patent monopolies for pharmaceuticals to policy space for development and food security. These efforts have succeeded in preventing and changing numerous initiatives from the rich countries that would have harmed developing countries, despite the fact that the WTO’s founding rules have been very much rigged against their interests. The WTO formally has a consensus process, unlike the weighted voting-share system of the IMF that gives Washington and its allies a majority of the votes. But that is not the only thing that has made the difference between who has a voice in these two organizations; the main difference is the often active role taken by developing countries and their representatives in the WTO, versus the mostly passive role that they have at the IMF. Institutional inertia can be a powerful force, and it can persist for decades.
Of course, it is entirely possible that Washington and its allies would scuttle the IMF and also the World Bank entirely if they could no longer control these institutions in the manner to which they have been accustomed. That remains to be seen. In the meantime, the Fund will continue to lose influence as more and more countries become free to avoid its policy choices and recommendations. There is progress in history, if not so much in IMF policies.
“Review of the Operations of the International Monetary Fund, Before the Subcommittee on General Oversight and Investigations, Committee on Banking and Financial Services,” April 21, 1998 (statement of Karin Lissakers, U.S. Executive Director, International Monetary Fund), http://commdocs.house.gov/committees/bank/hba48110.000/hba48110_0f.htm.
This role of historical inertia in maintaining control over the Fund is similar to that of the Permanent Members of the UN Security Council, each with veto power: the United States, Russia, France, the UK (the main Allied victors of World War II), plus China. As with the IMF, other rich countries would rather be excluded from this power than to open the way to more developing country representation.
Martin A. Weiss, “International Monetary Fund: Selecting a Managing Director,” Congressional Research Service, Library of Congress, R41828, May 20, 2011.
U.S. Census Bureau, “Foreign Trade, U.S. Trade in Goods by Country,” www.census.gov/foreign-trade/balance/.
Steven Radelet and Jeffrey Sachs, “The Onset of the East Asian Financial Crisis,” in Currency Crises, ed. Paul Krugman, 105–53(Chicago: University of Chicago Press, 2000).
Edward A. Gargan, “Asian Nations Affirm I.M.F. As Primary Provider of Aid,” New York Times, November 19, 1997, http://www.nytimes.com/1997/11/20/business/asian-nations-affirm-imf-as-primary-provider-of-aid.html.
“Fund Managers in a Surrey State,” The Times (London), December 5, 1997, p. 31.
“It is time to add a new chapter to the Bretton Woods agreement,” wrote the IMF’s Interim Committee in 1997. “Private capital flows have become much more important to the international monetary system, and an increasingly open and liberal system has proved to be highly beneficial to the world economy.” From the IMF’s “Statement of the Interim Committee on the Liberalization of Capital Movements Under an Amendment of the Articles,” Report of the Managing Director to the Interim Committee on Strengthening the Architecture of the International Monetary System, October 1, 1998, http://www.imf.org/external/np/omd/100198.htm#attach.
“The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil,” Evaluation Report, Independent Evaluation Office, 2003, p. 38.
Bob Davis and David Wessel, “World Bank, IMF at Odds over Asian Austerity,” Wall Street Journal, January 8, 1998, p. A5. Accessed December 14, 2014, http://www.nytimes.com/2010/12/15/business/global/15chinawind.html.
Nancy Dunne, “Knives Out in Washington for a Free Spirit. Joseph Stiglitz: He May Have Criticized the Institutional Consensus on Too Many Points,” Financial Times, November 25, 1999 (London ed., p. 2).
Jeffrey Sachs, “With Friends Like IMF …,” Cleveland Plain Dealer, June 6, 1998, p. 8.
Jeffrey Sachs, “The IMF and the Asian Flu,” American Prospect, March/April 1998, p. 16. See also, “The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil,” Evaluation Report, Independent Evaluation Office, 2003, pp. 17, 107.
IMF, “IMF Approves Augmentation of Argentina’s Stand-By Credit to US$14 Billion and Completes Second Review,” press release 01/3, January 12, 2001, http://www.imf.org/external/np/sec/pr/2001/pr0103.htm.
“Encuesta Permanente de Hogares, Incidencia de la Pobreza y de la Indigencia, Resultados del segundo semestre 2011” [“Permanent Household Survey, Incidence of Poverty and Indigence, Results from the Second Half of 2011”]. National Institute of Statistics and Censuses, Republic of Argentina, Buenos Aires, April 25, 2012.
Larry Rohter, “Argentina’s Chief Is Sworn In and Comes Out Fighting,” New York Times, May 26, 2003, http://www.nytimes.com/2003/05/26/argentina-s-chief-is-sworn-in-and-comes-out-fighting.html.
IMF, “IMF Policy on Lending into Arrears to Private Creditors,” June 14, 1999, www.imf.org/external/pubs/ft/privcred/.
IMF, “Argentina: Memorandum of Economic Policies of the Government of Argentina for a Transitional Program in 2003,” January 16, 2003, http://www.imf.org/external/np/loi/2003/arg/01/index.htm.
Ministerio de Economía y Producción, Republica Argentina. It is worth noting that IMF projections have generally been noticeably overoptimistic on growth. See Dean Baker and David Rosnick, “Too Sunny in Latin America? The IMF’s Overly Optimistic Growth Projections and Their Consequences,” Center for Economic and Policy Research, September 16, 2003, /documents/publications/econ_growth_2003_09.pdf.
Tony Smith, “Argentina Defaults on $3 Billion I.M.F. Debt,” New York Times, September 10, 2003, http://www.nytimes.com/2003/09/10/business/argentina-defaults-on-3-billion-imf-debt.html.
Tony Smith, “Argentina Reaches Deal on 3-Year Aid Package,” New York Times, September 11, 2003, http://www.nytimes.com/2003/09/11/business/ argentina-reaches-deal-on-3-year-aid-package.html.
IMF, ” Total Fund Credit and Loans Outstanding,” and “SDR/USD Exchange Rate,” International Financial Statistics Database, n.d. Retrieved February 19, 2015, from https://stats.ukdataservice.ac.uk/index.aspx?r=662533&DataSetCode=IFS#.
IMF, “IMF Lending Arrangements as of April 30, 2011,” 2011. Retrieved February 19, 2015, from http://www.imf.org/external/np/fin/tad/extarr11.aspx?memberKey1=ZZZZ&date1key=2011-04-30.
IMF, “IMF Standing Borrowing Arrangements,” 2014. Retrieved February 19, 2015, from http://www.imf.org/external/np/exr/facts/gabnab.htm.
IMF, “IMF’s Financial Resources and Liquidity Position, 2009—May 2011,” n.d. Retrieved February 19, 2015, from http://www.imf.org/external/np/tre/liq-uid/2011/0511.htm.
Independent Evaluation Office, “IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07,” Evaluation Report, 2011, pp. vii, 1, http://www.ieo-imf.org/ieo/pages/CompletedEvaluation107.aspx.
See, e.g., Baker’s 2002 paper, “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” Center for Economic and Policy Research, August 2002. Retrieved February 12, 2015, from https://www.cepr.net/index.php/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/.
Dean Baker, Plunder and Blunder: The Rise and Fall of the Bubble Economy (Sausalito, CA: Poli Point Press, 2009), 58.
Dean Baker, “Recession Looms for the U.S. Economy in 2007,” Center for Economic and Policy Research, November 2006, https://www.cepr.net/index.php/publications/reports/recession-looms-for-the-us-economy-in-2007.
See Charles H. Ferguson, Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America (New York: Random House, 2012). Michael Lewis, The Big Short: Inside the Doomsday Machine (New York: W. W. Norton, 2010).
Michael Lewis, The Big Short: Inside the Doomsday Machine (New York: W. W. Norton, 2010).
IMF, “2011 Triennial Surveillance Review,” October 2011, https://www.imf.org/external/np/spr/triennial/.
Weisbrot et al., “IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries,” Center for Economic and Policy Research, October 2009, https://www.cepr.net/index.php/publications/reports/imf-supported-macroeconomic-policies-and-the-world-recession/.
IMF, “IMF Country Report: Ukraine: Request for a Stand-by Arrangement—Staff Report; Supplement; Staff Statement; Press Release; and Statement by the Executive Director for Ukraine,” USA, 2014, https://www.imf.org/external/pubs/cat/longres.aspx?sk=41516.0.
José Antonio Cordero and Juan Antonio Montecino, “Capital Controls and Monetary Policy in Developing Countries,” Center for Economic and Policy Research, April 2010, /documents/publications/capital-controls-2010-04.pdf.
Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, “Rethinking Macroeconomic Policy,” International Monetary Fund Staff Position Note 10/03, February 12, 2010, https://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf.
Olivier Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers,” International Monetary Fund, Working Paper 13/1, January 2013, https://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf.
“IMF’s Blanchard Says No Need for More U.S. Stimulus,” Reuters, October 8, 2010, http://www.reuters.com/article/2010/10/08/us-imf-blanchard-idUSTRE6974AZ20101008.
“Blanchard Says Global Economy Faces ‘Enormous Risks,‘” Bloomberg TV, http://www.washingtonpost.com/business/blanchard-says-global-economy-faces-enormous-risks/2011/09/23/gIQAUCcyqKvideo.html.
See Mark Weisbrot and Helene Jorgensen: “Macroeconomic Policy Advice and the Article IV Consultations: A European Case Study.” January 2013, Center for Economic and Policy Research, https://cepr.net/publications/reports/macroeconomic-policy-advice-and-the-article-iv-consultations.