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To make the IMF relevant will take more than a new leader

In appearing to veto Gordon Brown’s chances of becoming the next head of the International Monetary Fund, David Cameron says the organisation needs someone who “understands the dangers of excessive debt, excessive deficit”. But if that is all the new person understands, then he or she will make little difference to an institution badly in need of real reform.

For years the IMF has been caught wrongfooted during almost every major global economic event. Before the great recession of 2008 it was an international institution on life support: ignored by most developing countries; derided for its failure to predict most crises and then for its counterproductive responses; even called to book by its own auditors for poor management of its own funds.

The IMF encouraged financial liberalisation that pushed many countries to crisis, and became famous for congratulating bubble economies on healthy and sound financial management (Thailand in 1997; Argentina in 1999; most recently Ireland and Iceland in 2008) — often just months before their spectacular financial crashes. Its policy prescriptions were widely perceived to be rigid and unimaginative, applying a uniform approach to very different economies.

In this sorry situation the global financial and economic crisis came as real manna from heaven for the organisation. It was back in the forefront as G20 largesse in early 2009 once again gave it relevance, providing it with large resources in order to expand its lending to developing countries hit by the crisis. So how has the IMF dealt with this recovery in its fortunes? Has it, as it claims, become more flexible in its approach to economic distress?

So far the signs are not that good. According to the IMF’s own financial statistics, over 2009 and 2010 it handed out credit of only $93-billion from total available resources of $595-billion — less than 16% of the money it could have lent — even though many developing countries were in dire need.

Even these loans were accompanied by the usual rigid conditions that have made economic contraction much worse in recipient countries, destroyed wages and employment opportunities, and meant reduced living standards for ordinary people. The claim that recent IMF programmes have prevented cuts in social spending has also been independently shown to be false.

‘New attitude’
This is hardly a stellar performance for an organisation charged with ensuring that developing countries did not suffer unduly from the collapse of revenue from private sources. The IMF says it has a new attitude towards capital controls — the restrictions that governments can place on the free movement of currency across borders. For several decades, the IMF actively promoted the reduction of all such controls, even when it was obvious that international financiers were creating volatile capital flows that played havoc in developing-world economies.

So when the IMF recently published papers noting that capital controls could usefully be employed in certain conditions, this was widely welcomed. The IMF had finally admitted that capital flows can be destabilising. The progressive economists Kevin Gallagher and José Antonio Ocampo noted recently on the Guardian‘s website that this amounted to “yet another big step forward for the IMF — though there is still a long way to go”.

Of course, where the IMF is concerned we have learned to be grateful for small mercies. But the capital-control papers provide at best a lukewarm form of support, and they insist that conditions must be fulfilled before the country concerned should think about employing them. The IMF also notes that such controls are always distorting, and so should be used only temporarily. And it focuses entirely on controls of capital inflows — such as having different tax rates for some kinds of foreign investment, or higher reserve requirements or lock-in periods for minimum stay in the country. It does not even talk about controlling outflows, which are still presumably beyond the pale and should not even be considered.

Yes, this is an advance from its previous rigidly anti-control position. But which countries can apply such controls on capital inflows? Those that are getting large inflows of capital, of course: precisely the countries that do not need to consult the IMF at all, because they are favoured by private capital and so have no balance-of-payments constraint.

So this policy advice is being provided to those countries that do not need to listen. In fact, it is clear that they have not been listening, because many of them (Chile, Brazil, Thailand etc) went ahead and instituted such controls on inflows well before the IMF decided it could be acceptable. Once again the IMF is behind the policy curve, struggling to remain relevant by belatedly justifying policies that have already been put in place.

The countries that do need to go to the IMF are the ones with balance-of-payments difficulties. You might think that the IMF would equally accept their need for capital outflow controls to stave off further crisis. But in these cases the IMF insists they maintain open capital accounts, and even indulge in further financial liberalisation, so as to ensure “investor confidence”. So where the IMF actually has policy teeth, it uses them to bite the recipient countries without any evidence of “rethinking” its discredited positions.

Even so, the IMF could still be genuinely useful to developing countries that are being battered by high food and fuel prices. Last weekend’s meeting of G20 finance ministers did note the need to regulate financial activity in commodity futures markets, but so far the IMF has been silent on this. It could also provide direct assistance, by using its compensatory financing facility to provide resources without conditions. But this has not even been suggested by the organisation, despite calls from economists such as Kunibert Raffer.

So far, then, there is little to celebrate in terms of real change at the IMF. Will change of leadership at the helm make much difference? It’s hard to say, but if the next IMF chief does not recognise the crucial role of state spending in maintaining incomes and employment, things can only get worse. –

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Jayati Ghosh
Jayati Ghosh
Jayati Ghosh is one of the world's leading economists. She is professor of economics at Jawaharlal Nehru university, New Delhi, and the executive secretary of International Development Economics Associates (Ideas). She is a regular columnist for several Indian journals and newspapers, a member of the National Knowledge Commission advising the prime minister of India, and is closely involved with a range of progressive organisations and social movements. She is co-recipient of the International Labour Organisation's 2010 Decent Work Research prize

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