When there’s 30 billion Euros at stake, a forthright document that says that mistakes were made in lending the money in the first place attracts instant attention. The International Monetary Fund’s recently released Ex Post Evaluation of its 2010 lending to Greece is such a document. The press discussion surrounding the release of this report focuses on the IMF’s relationship with its partners in the so-called “troika” of the IMF, the European Commission and the European Central Bank. The IMF contributed 1/3 of the money to the Greek bailout and worked with the other two members on designing loan programs and overseeing their implementation. However, as the Fund’s report details, the troika was never a happy family. The three parties squabbled over the pace of reforms and on the appropriate division of labor between the members, making crisis diplomacy even more difficult. These tensions came to the fore in November of last year, as Jean-Claude Juncker and Christine Lagarde publicly disagreed on the pace of necessary debt relief for Greece.
The ‘blame game’ for who lost Europe is an important issue. The troika continues to lend to Portugal, Ireland, and Cyprus, and the costs of austerity are very real. Unemployment in Greece is at 27% and the pressure remains on the Samaras government to continue to implement economic reforms. However, focusing solely on the unhappy marriage between the IMF and the Europeans blinds us to the urgent need for deep reforms of IMF conditionality to make its lending more effective. The Fund’s Ex Post Evaluation reminds us that austerity is a political issue as well as an economic one. The IMF needs to better manage the tension between a desire to help member countries with a need to make sure that countries that receive IMF loans keep their commitments to reform.
The rationale for IMF conditionality is based on the idea that economic reforms are politically costly. The reforms that Greece is implementing have increased taxes, cut spending, and reduced wages. Few elected governments and even fewer unelected ones want to implement such policies because they produce certain political resistance. Those who benefit from government programs will lobby to have benefits restored, and the contraction of government spending also slows economic growth. Installments of an IMF loan are spaced out to coincide with a check-up on the state of the economy, and if countries fail to carry out their pledges, they can lose access to further installments of the loan. In this manner, conditionality serves as a means to prod governments to do things that they might not otherwise do.
Because austerity measures might cause the politicians that adopt them to be removed from office, the success of economic reforms is less about designing an optimal policy and more about finding a politically feasible one. The Fund’s term of art for this is “borrower ownership,” which refers to the idea that country leaders have to be committed to a loan program in order for it to succeed. The nature of the lending to Greece, which was well in excess of its borrowing privileges in the Fund, required the IMF staff to demonstrate to the Executive Board that Greece has the capacity to deliver on its promises. Not surprisingly, in the Ex Post Evaluation, IMF staffers admitted that they overestimated the degree of borrower ownership in Greece as well as the capacity of the Greek government to implement reforms. Unfortunately, these problems did not go away over time. The March 2012 loan agreement further reiterated a belief that the authorities “owned” the loan program. Soon after, the country entered a political crisis, as two elections were needed to create a viable government, and the political polarization worsened the economic slump and made further progress on implementing reforms difficult.
It can be said that borrower ownership is something that the IMF does not understand very well. It can also be said that pressure from the European countries drove the Fund to lend despite serious misgivings. Regardless of the source of the problem, the IMF cannot address devise effective programs by neglecting the political foundations of economic adjustment. Two types of reforms are essential for the IMF moving forward. The very language of borrower ownership needs more substance. The degree of ownership can change over time, and it cannot be demonstrated by words, since leaders can have incentives to lie in order to get the loan. What is needed is the development of measurable indicators of ownership. For an organization that helped create standardized data used by businesses and governments the world over, this is not an impossible task. The bigger challenge is one of orientation. The IMF is largely staffed by economists, which means that devising and communicating politically feasible policies can be a challenge. Managing Director Lagarde recognized this soon after taking office when she suggested that the Fund needs new thinking and outside expertise on how social and political trends affect macroeconomic stability. Whether this call for new thinking will translate into changes in staff recruitment is an open question.
The IMF faces unparalleled challenges in Europe as well as in the Middle East. In both regions, the Fund faces political pressures from major powers to overlook potential implementation risks in order to achieve broader aims. The ideal strategy for the Fund to assert greater autonomy and resist these pressures lies in institutional reform. Taking the politics of reform as seriously as the economics will produce more effective lending programs and help the IMF in the long term.