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.