CAMBRIDGE: Bad news is all the IMF has been getting in the last year. First came a divisive fight over naming a new Managing Director: Germany pushed a little known and unqualified bureaucrat and failed to have him accepted. In the end, Chancellor Schroder was given a fig leaf to hide his embarrassment in the form of the present managing director, Horst Kohler, whose main qualification for the job is being German, unlike his two predecessors De Larosiere and Camdessus, who were distinguished French inspecteusr de finances, i.e. they belonged to the cream of cream in the bureaucratic elite of France. The next slap came from criticism by American Republicans of the IMF’s strategy as nothing but unending bailouts. That criticism was enshrined in the Meltzer Report, which now hangs even more ominously over the IMF because the Republicans now rule in Washington.
America’s Congress has never had much sympathy for the IMF. Democrats question tough-minded programs; Republicans criticize bailouts; nobody has anything constructive to offer. But criticism of the IMF not only comes from the American right. A few shots across the bow came from inside the community, from just across the street at the World Bank. The most notable barrage here was the affaire Stiglitz, when the World Bank’s chief economist accused the IMF of malpractice, gaining applause from bad economists and failed policy makers worldwide.
The latest hits have just happened. First came the resignation of IMF chief economist Michael Mussa, a formidable University of Chicago-educated economist renowned for good judgment. He predicted most of the crises that came along but that did not raise his popularity with the IMF’s board. Mussa was also remarkable for a flamboyant presentation of his views, which was hard for some IMF folk to tolerate in so stuffy environment.
The final hit is comes in the form of the resignation of the IMF’s first deputy managing director, Stanley Fischer, who was in charge of assuring continuity and good sense as well as staff morale. These two departures come on top of a steady exodus of talent to Wall Street in recent years.
So the IMF is at a cross roads, it is weak in leadership, weak on economics knowledge at its top, weak in the support it gets from its member countries. The IMF has become a household word, but one with unfavorable connotations. Ask any undergraduate about the IMF and the answer, however vague, is invariably negative. Ask any leftist activist, and the IMF competes with greedy multinationals as the lowest form of life.
Part of this negative assessment is inevitable: by the time a country comes to the IMF it is on its way to the economic emergency room. Radical surgery usually follows. The fact that recovery does come is noted less than the time spent in hospital. IMF policies are criticized more than the awful policies that incited a country to collapse in the first place. Turkey today is a case in point, or Russia, or Asia in 1997-98.
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What can the IMF do? Little by itself, of course, because it is governed by its member countries and that means the US, Europe (which does not speak with one voice), and Japan (which has no voice).
The most important issue now is the Fischer succession. The right person should not necessarily be an American as that would unduly limit the choice and risks bringing an appointment more distinguished by ideology than competence. Doling out top international jobs by nationality is a terrible practice and choosing Fischer’s replacement presents a wonderful opportunity to make a break with this routine. The successful appointee should be, above all, an effective administrator and a top economist experienced in policymaking.
But the IMF must also reinvent itself to become far more focused; it may not be able to change its image but it can become more effective. There are two ways to do this:
- resist the temptation of mission creep: the IMF is widening its focus to poverty issues, corruption issues, environment issues, governance issues. All these are important, all these are remotely affected by IMF policies, none of them can get around the central truth that a country which has hit the ropes needs to practice austerity. The IMF is well advised to stay away from the details and not stretch its little political capital to so broad a range of issues with an inevitable failure in satisfying the whole range of partners in an ever-wider dialogue;
- increase transparency. The IMF staff must begin to report, publicly and for everyone to see, the shortcomings in countries' balance sheets and currency strategies because these are invariably the causes of collapse. Over and over again, Turkey being the latest example, the IMF is mute for too long. The IMF board must learn that muzzling the IMF staff contributes to crisis by postponing a reckoning.
The IMF is an important part of the international financial architecture, but it is in great need of repair. It needs a strong and respected leadership in the top ranks and it needs a refocusing of its mission and a shift from emergency operations to preventive medicine. Because the IMF is at a crossroads, now is the time for serious reforms, not a quick fix.
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CAMBRIDGE: Bad news is all the IMF has been getting in the last year. First came a divisive fight over naming a new Managing Director: Germany pushed a little known and unqualified bureaucrat and failed to have him accepted. In the end, Chancellor Schroder was given a fig leaf to hide his embarrassment in the form of the present managing director, Horst Kohler, whose main qualification for the job is being German, unlike his two predecessors De Larosiere and Camdessus, who were distinguished French inspecteusr de finances, i.e. they belonged to the cream of cream in the bureaucratic elite of France. The next slap came from criticism by American Republicans of the IMF’s strategy as nothing but unending bailouts. That criticism was enshrined in the Meltzer Report, which now hangs even more ominously over the IMF because the Republicans now rule in Washington.
America’s Congress has never had much sympathy for the IMF. Democrats question tough-minded programs; Republicans criticize bailouts; nobody has anything constructive to offer. But criticism of the IMF not only comes from the American right. A few shots across the bow came from inside the community, from just across the street at the World Bank. The most notable barrage here was the affaire Stiglitz, when the World Bank’s chief economist accused the IMF of malpractice, gaining applause from bad economists and failed policy makers worldwide.
The latest hits have just happened. First came the resignation of IMF chief economist Michael Mussa, a formidable University of Chicago-educated economist renowned for good judgment. He predicted most of the crises that came along but that did not raise his popularity with the IMF’s board. Mussa was also remarkable for a flamboyant presentation of his views, which was hard for some IMF folk to tolerate in so stuffy environment.
The final hit is comes in the form of the resignation of the IMF’s first deputy managing director, Stanley Fischer, who was in charge of assuring continuity and good sense as well as staff morale. These two departures come on top of a steady exodus of talent to Wall Street in recent years.
So the IMF is at a cross roads, it is weak in leadership, weak on economics knowledge at its top, weak in the support it gets from its member countries. The IMF has become a household word, but one with unfavorable connotations. Ask any undergraduate about the IMF and the answer, however vague, is invariably negative. Ask any leftist activist, and the IMF competes with greedy multinationals as the lowest form of life.
Part of this negative assessment is inevitable: by the time a country comes to the IMF it is on its way to the economic emergency room. Radical surgery usually follows. The fact that recovery does come is noted less than the time spent in hospital. IMF policies are criticized more than the awful policies that incited a country to collapse in the first place. Turkey today is a case in point, or Russia, or Asia in 1997-98.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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What can the IMF do? Little by itself, of course, because it is governed by its member countries and that means the US, Europe (which does not speak with one voice), and Japan (which has no voice).
The most important issue now is the Fischer succession. The right person should not necessarily be an American as that would unduly limit the choice and risks bringing an appointment more distinguished by ideology than competence. Doling out top international jobs by nationality is a terrible practice and choosing Fischer’s replacement presents a wonderful opportunity to make a break with this routine. The successful appointee should be, above all, an effective administrator and a top economist experienced in policymaking.
But the IMF must also reinvent itself to become far more focused; it may not be able to change its image but it can become more effective. There are two ways to do this:
- resist the temptation of mission creep: the IMF is widening its focus to poverty issues, corruption issues, environment issues, governance issues. All these are important, all these are remotely affected by IMF policies, none of them can get around the central truth that a country which has hit the ropes needs to practice austerity. The IMF is well advised to stay away from the details and not stretch its little political capital to so broad a range of issues with an inevitable failure in satisfying the whole range of partners in an ever-wider dialogue;
- increase transparency. The IMF staff must begin to report, publicly and for everyone to see, the shortcomings in countries' balance sheets and currency strategies because these are invariably the causes of collapse. Over and over again, Turkey being the latest example, the IMF is mute for too long. The IMF board must learn that muzzling the IMF staff contributes to crisis by postponing a reckoning.
The IMF is an important part of the international financial architecture, but it is in great need of repair. It needs a strong and respected leadership in the top ranks and it needs a refocusing of its mission and a shift from emergency operations to preventive medicine. Because the IMF is at a crossroads, now is the time for serious reforms, not a quick fix.