Christine
Lagarde has been busy this June. The French Foreign
Minister and European Union candidate for the top job
at the International Monetary Fund has been visiting
the capitals of ''important'' emerging countries - Brazil,
India, China, Russia - to drum up support for her candidacy.
For their part, governments in these and other developing
countries, after an initial show of being united in
irritation at the blatant attempts by Europe to keep
control over this slot, have been too wary of each other
to agree on a common candidate, at least thus far. The
only declared candidate from a developing country, Agustin
Caarstens from Mexico, has not yet received explicit
support from any other country.
In any case, because voting rights at the IMF have barely
changed despite the shifts in the global economy over
the past six decades, the developing countries on their
own would simply not have enough votes to put in a candidate
of their choice. Things might be different if they can
persuade the United States to back a common candidate
of their own, but that is unlikely, especially if the
candidate in question does not have a record that makes
him or her more than acceptable to the Obama administration.
So it seems that the IMF will once again be headed by
someone from Europe. This has been the convention based
on an unwritten ''gentlemen's agreement'' at the Bretton
Woods conference in 1944, when the US and the European
powers agreed to share the top jobs at the IMF and the
World Bank among themselves, with the World Bank's chief
always coming from the US. This convention emerged and
was entrenched over a period when it was also quite
clear that these two broad groupings were in dominant
control of the global economy.
That is much less clear today, and certainly the course
of the medium term future of the world economy is unlikely
to be scripted only by these two players. Before the
emergency exit of Dominique Strauss-Kahn had rendered
the choice of the next head of the IMF an urgent matter,
it was common to hear voices even from the developed
countries suggesting that the next person to be in charge
could and should be someone from the developing world.
Of course it would be nice to see some diversity in
these powerful positions: not just of region, but gender
and so on. There are those that point out that this
has only symbolic value, as the content of both IMF
policies and management style need not change according
to the origin, gender or background of the head. After
all, the experience at the World Trade Organisation
shows that regional background of the head need not
change very much: thus Supachai from Thailand as Secretary
General made little appreciable difference to the functioning
of the organisation.
But even symbols matter. And in any case, the fierce
and almost immediate insistence on the part of the Europeans
that the IMF chief must come from their own region suggests
that there may be more to it than pure symbolism.
In fact, the reason for this is not just because of
the perceived desire of European governments to retain
some semblance of control over global institutions.
It is also because the major immediate work of the IMF
is mainly in Europe, with several European economies
currently involved in rescue packages with the IMF,
and others unhappily waiting in the queue. Greece and
Ireland are already receiving IMF packages that are
seen as lifelines to continued (if flickering) acceptance
by the financial markets for their government bond issues;
Portugal has just signed an agreement; Poland, Latvia
and Hungary have been getting IMF support for a while
now; and there is no surety that other ''peripheral''
European economies will not have to join in.
The argument in Europe is that since European countries
are likely to be involved in bailout packages in the
immediate future, it is especially important to have
a European head the Fund. This is an extraordinary (but
typical) display of double standards, because this was
precisely the argument earlier used (including by Europeans)
against having a person from the developing world head
the institution. It was felt that debtor countries could
not and should not provide the leadership of the IMF
because of possible conflicts of interest. Obviously,
such logic no longer applies when the boot is on the
other foot.
But in fact, the Europeans pushing for a quick choice
of one of their own to head the IMF may actually be
shooting themselves in the foot, not just geopolitically
but even as far as their own economic recovery is concerned.
The way that the recent IMF bailouts have been organised,
in co-operation with the European Union, has actually
intensified the economic recession in these countries
and prolonged the process without providing a clear
path to resolution.
This is because, despite much explicit protestation
to the contrary, the IMF even under Strauss-Kahn did
not change its basic approach and orientation. It continued
to push procyclical policies on countries experiencing
balance of payments difficulties when they approached
it for funds, even as it was applauding the US government
for undertaking countercyclical policies in 2009. Draconian
austerity packages have been imposed on countries that
are already struggling with asset deflation and collapses
in private economic activity. Unsurprisingly, this has
been associated with worsening conditions - not just
for the poor, for wage workers, for the unemployed and
for citizens facing cuts in social services - but also
for the macroeconomy. The reductions in public spending
have come at a time when private spending is already
on the decline, and so the negative multiplier effects
have actually fed into each other and created a downward
spiral.
This obviously makes public debt even more difficult
to manage, because as GDP falls, the public debt to
GDP ratio rises! As that ratio increases, financial
agents further batter the country's government in bond
markets, and so the whole crazy negative process continues.
Many developing countries that have been forced to take
this medicine know this process only too well. They
also know that some amount of debt restructuring (which
involves a write-down of the value of the external debt)
is not just desirable but inevitable, and requires only
a small amount of sharing of the severe economic pain
that the citizens are forced to undergo. But at least
many of these countries have been able to come out of
this crisis eventually by devaluing their currency -
an option which the troubled countries in the eurozone
have so far rejected.
In fact, with all this experience of continually getting
it wrong in so many countries over so many decades,
you would have thought that the IMF would have learned
something from its own mistakes. By now it should surely
know that countercyclical policies involving more public
expenditure are more effective than fiscal austerity
in pulling countries out of recession. It should also
have been the first to recognise that the current debt
situation of many ''peripheral'' European economies
is simply unsustainable. So, instead of falling in line
with and even accentuating the European Union's insistence
that the entire burden of adjustment must be borne by
the deficit countries, it should have pushed for a debt
restructuring that forced banks to take a haircut as
a step towards a more sustainable trajectory.
What is even more bizarre is that the IMF is now advocating
fiscal austerity for everyone, not just the countries
in deficit facing problems with bond markets! In addition
to forcing Ireland, Greece and Portugal to embark on
painful and counterproductive austerity measures, it
is advocating fiscal restraint in the US and even in
Germany. It has recently lauded the austerity measures
in the United Kingdom, which look certain to prolong
the recession in that country and to keep unemployment
high, and which even the OECD recently criticized as
being excessive.
Why would the IMF persist in pushing such blatantly
counterproductive strategies? The only constituency
that they clearly favour is finance, in these cases
the European (mostly German, French, British and Dutch)
banks that have lent heavily to the economies in distress.
So it is hard not to see that class interests - and
the interests of the financial class in particular -
have determined this set of policies, rather than national
interests per se.
This means a change of guard at the IMF would help only
if it involved a significant change in its approach
to economic policies. Someone like Christine Lagarde
is likely to pursue even more enthusiastically these
same self-defeating and economically damaging measures.
But then so are several of the possible candidates from
developing countries. Indeed, probably the only reason
that they are even considered to be ''credible'' candidates
is because international finance trusts them to deliver
much of the same.
All this is unlikely to change unless there is a broader
political consensus around the world in favour of a
real transformation in economic policies, away from
privileging finance towards controlling it and being
more concerned with the welfare of citizens and society
in general. If the recent protests across Europe are
any indication, such political change may well be on
its way in Europe.
Note: This article was originally
published in The Frontline, Volume 28 Issue 13: June
18-July 01, 2011.
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