May 20, 2011
The Guardian Unlimited, May 19, 2011
Now that Dominique Strauss-Kahn has resigned from his position as Managing Director of the International Monetary Fund (IMF), it is worth taking an objective look at his legacy there. Until his arrest last week on charges of attempted rape and sexual assault, he was widely praised as having changed the IMF, increased its influence, and moved it away from the policies that – according to the Fund’s critics — had caused so many problems for developing countries in the past. How much of this is true?
Strauss-Kahn took the helm of the IMF in November of 2007, when the IMF’s influence was at a low point. Total outstanding loans at that time were just $10 billion, down from $91 billion only four years earlier. By the time he left this week, that number had bounced back to $84 billion, with agreed upon loans three times larger. The IMF’s total capital had quadrupled, from about $250 billion to an unprecedented $1 trillion. Clearly the IMF had resources that it had never had before, mostly as a result of the financial crisis and world recession of 2008-2009.
However the details of these changes are important. First, the collapse of the IMF’s influence in the decade prior to 2007 was one of the most important changes in the international financial system since the breakdown of the Bretton Woods system of fixed exchange rates in 1971. Prior to the 2000’s, the IMF headed up a powerful creditors’ cartel which was able to tell many developing country governments what their most important economic policies would be, under the threat of being denied credit not only from the Fund but also from other, then-larger lenders such as the World Bank, regional lenders, and sometimes even the private sector. This made the Fund not only the most important avenue of influence of the U.S. government in low-and-middle income countries – from Rwanda to Russia – but also the most important promoter of neoliberal economic “reforms” that transformed the world economy from the mid-1970s onward. These reforms coincided with a sharp slowdown of economic growth in the vast majority of low-and-middle-income countries for more than twenty years, with consequently reduced progress on social indicators such as life expectancy, and infant and child mortality.
The IMF’s big comeback during the world recession did not bring the middle-income countries that had run away from it back to its orbit. Most of the middle-income countries of Asia, Russia, and Latin America stayed away, mostly by piling up sufficient reserves so that they did not have to borrow from the Fund, even during the crisis. As a result, even a low-income country like Bolivia, for example, was able to re-nationalize its hydrocarbons industry, increase social spending and public investment, and lower its retirement age from 65 to 58 – things that it could never do while it was continuously living under IMF agreements for twenty years prior. Most of the IMF’s new influence and lending would land in Europe, which accounts for about 57 percent of its current outstanding loans.
As for changes in IMF policy, these have been relatively small. A review of 41 IMF agreements made during the world financial crisis and recession found that 31 of them contained “pro-cyclical” policies: that is, fiscal or monetary policies that would be expected to further slow the economy, or both. And in Europe, where the IMF has most of its lending, the policies attached to the loan agreements for Greece, Ireland, and Portugal are decidedly pro-cyclical and making it extremely difficult for these economies to get out of recession. The IMF’s influence on Spain, which does not yet have a loan agreement, is similar. And in Latvia, the IMF presided over an Argentine-style recession that set a world historical record for the worst two-year loss of output (about 25 percent) – a complete disaster.
To be fair, some changes at the Fund during Strauss-Kahn’s tenure were significant. For the first time ever, during the world recession of 2009, the IMF made available some $283 billion worth of reserves for all member countries, with no policy conditions attached. The Fund also made some limited credit available without conditions, although only to a few countries. The biggest changes were in the research department, where there was tolerance for more open debate. For example, there were IMF papers that endorsed the use of capital controls by developing countries under some circumstances, and questioning whether central banks were unnecessarily slowing growth with inflation targets [PDF] that may be too low.
But as can be seen from what is happening in the peripheral eurozone countries, the IMF is still playing its traditional role of applying the medieval economic medicine of “bleeding the patient.” To be fair to both Strauss-Kahn and the Fund, neither the Managing Director nor anyone else at the IMF is ultimately in charge of policy, especially with respect to countries that are important to the people who really run the institution. The IMF is run by its Governors and Executive Directors, of whom the overwhelmingly dominant authorities are the U.S. Treasury Department (which includes heavy representation from Goldman Sachs) and, secondarily, the European powers (except in Europe, where Treasury defers to the Europeans). Until decision-making at the IMF undergoes a dramatic change, we can expect only very small changes in IMF policy. This can be seen most clearly in the current case of Greece: Strauss-Kahn was aware that the fiscal tightening ordered by the European authorities and the IMF was preventing Greece from getting out of recession; but while he pushed for “softer” conditions, he was unable to change the lending conditions from punishment to actual help. That’s ultimately because the European authorities (European Commission and European Central Bank), not the IMF, are calling the shots – although Strauss-Kahn had plenty of resistance within the Fund itself, too.
The voting shares of the IMF have changed only marginally, despite all the reforms of the last five years. The share of “emerging market and developing countries” – with the vast majority of the world’s population — has gone from 39.4 to 44.7 percent, while the G-7 countries have 41.2 percent, including 16.5 percent for the U.S. (down from 17.4 percent pre-reform).
But the voting and governance structure is not currently the main obstacle to changing IMF policy. At this point, the developing countries – and we should add in the victimized countries of the eurozone – are not using their potential influence within the Fund. Their representatives are mainly going along with the decisions of the G-7. If any sizeable bloc or blocs of these countries were to band together for change within the Fund, there could be some real reforms at the IMF.
This can be seen from the last decade of struggle within the World Trade Organization, where developing countries have often not accepted the G-7 consensus, and have successfully blocked the negotiation and implementation of rules that would hurt them – despite the fact that the WTO rules have been, from the outset, stacked against developing countries. It is true that the WTO operates by consensus rather than a quota-based voting structure, but that is not the key difference between it and the IMF. The key difference is in the role of developing countries and their representatives.
There is talk now of replacing Strauss-Kahn with an open, merit-based process of selection, breaking with the 67-year tradition of reserving the position for a European (most often French). At the moment this change does not appear likely to happen. It would be a step forward, but it would be only a symbolic change, and the odds are good that the next Managing Director – of whatever nationality – will be to the right of Strauss-Kahn. Real change at the IMF is in the hands of the governments of most of the world – if they dare to organize it.