Imperial decay at the IMF

With the consequences of multiple policy failures staring it in the face, the IMF is fumbling with new prescriptions. The spring meetings pointed to the loss of moorings.

C.P. CHANDRASEKHAR

ON the surface it appeared to be business as usual at the routine spring meetings of the International Monetary Fund (IMF) and the World Bank held in April in Washington D.C.

Ministerial statements, rudderless discussions and lacklustre communiques brought to a close another set of expensive conclaves that provide the Bretton Woods institutions, especially the IMF, the mandate to continue doing more of the same.

This year, however, there was evidence of disquiet beneath the surface calm. The source of that disquiet was not the 10,000-odd demonstrators who congregated in Washington calling for the liquidation of the institutions whose global ravage they felt was enough. These demonstrators, in any case, were kept in control by what seemed to be an anti-guerilla operation inspired by the Seattle experience. The disquiet stemmed from the perception, expressed by mainstream critics in and around the spring meetings , that despite its imperial rhetoric and public display of power in the economically weaker locations of the world, the IMF had lost its moorings and was decaying at the core.

The sense of that decay, though perceived by many people for quite some time now, turned more pervasive in the wake of the utter failure of the IMF and its policies, initially in Russia and more recently in South-East Asia. That failure was two-fold. Fir st, when confronted by crisis, the IMF responded with its time-worn package, delivered at all destinations irrespective of nature and circumstances. It demanded a greater role for markets and a smaller role for the state, in return for finance to tide ov er a crisis which markets had created in the first place.

In Russia this policy served all the principal financiers of the IMF well. It helped terminate and bury a system that had for long provided an alternative, however imperfect, to developed capitalism. Not surprisingly, the response to the economic chaos t hat followed the imposition of markets was a willingness to throw good money after bad free-market policies, till such time as the till was virtually empty. After that, the IMF has had more of the same policies but little money to offer. Stanley Fischer, the IMF's acting managing director, epitomises in terms of style and viewpoint what the U.S. administration thinks an organisation man at the IMF should be.

Speaking in Moscow early in April he declared that after ten years of experience in over 25 transition economies, the evidence is clear that the basic economic reform and growth strategy recommended by mainstream economists works. He brushed aside the ev idence of economic devastation in Russia by saying that despite the many disappointments and setbacks in Russian economic reform, what has so far been achieved in Russia should not be underestimated. This ideologically blinkered perspective has proved un acceptable even to mainstream economists like Jeffrey Sachs, who had made it their mission to ensure the erstwhile Soviet Union's successful transition to capitalism, and are hard put to explain their collective failure.

In East Asia, which had been a dynamic pole of the world economy and an important participant in world trade, the story proved different.

Initially an IMF package of more open trade and financial markets on the one hand, and a sharp curtailment of government expenditure on the other, threatened to transform slow growth and an economic recession into a depression. Faced with that prospect, the IMF turned tail and accepted rising deficits as a means to ensure the recovery, which foreign capital inflows were expected to, but did not, deliver. This was in the realm of practice. In theory, the IMF continued to attribute the crisis to the conse quences of cronyism and non-transparency in the financial markets, ignoring the role that the financial liberalisation had played in creating the conditions that led up to the crisis.

Here again, one of the IMF's most vociferous critics turned out to be an economist from the Bretton Woods stable. Joseph Stiglitz, till recently the chief economist at the World Bank, has for long believed that one area where markets are prone to fail is in the realm of finance. The East Asian experience, according to him, illustrates not just this home truth but much more. In particular it establishes the complete bankruptcy of the policy package that the IMF (and we must mention the Bank, too), has an d continues to push through in crisis-afflicted developing economies. Doing the rounds prior to the spring meetings was an article that Stiglitz had penned for the occasion in The New Republic.

Stiglitz, while soft on his own erstwhile employer, articulated a viewpoint which would make even a liberal see red. The IMF, he states based on his experience during the crisis, worked in tandem with the U.S. Treasury Department. The latter had earlier sown the seeds of crisis by pressuring these countries to liberalise their financial markets, which resulted in hot money flows that triggered a speculative boom in the real estate markets. When that boom went bust, capital withdrew and currencies collap sed.

However, though the source of the problem was private and not public profligacy, the IMF imposed fiscal austerity as the solution, worsening the crisis. All these are arguments that have been advanced time and again, even if not necessarily from within t he mainstream. What is revealing is that Stiglitz holds that when he chose to use his position to change what was obviously bad policy, officials and economists at the IMF blamed the board of directors, influenced by the Treasury, as being the cause for inertia, while elements in the board argued that the economists were in control. To quote Stiglitz, it was maddening, not just because the IMF's inertia was so hard to stop but because, with everything going on behind closed doors, it was impossible to k now who was the obstacle to change.

That indictment is more than damaging. It comes in a context where one of the principal contributions of the spring meetings was consensus over a view that the IMF has been espousing for some time now. This is that greater transparency in policy-making i s the key to improving the functioning of national economies as well as the international financial system.

Unfortunately for the Fund, the spring meetings began in the midst of turmoil in U.S. and world stock markets, which had generated fears of a real economic slowdown. This turmoil was led by a collapse of the Nasdaq index from the speculative highs it had reached in recent months, indicating that even in the most free and transparent U.S. economy, financial markets do not work.

The lack of transparency in the IMF's functioning does not stop with the kind of experiences focussed on by Stiglitz. It took its crudest form in the recent muddle over the appointment of a successor to Michel Camdessus who chose to step down as managing director of the IMF before his third term was through. If allowed to make the decision, the U.S. would have liked to fill the gap with Stanley Fischer, the first deputy managing director of the IMF. But in the democratic and transparent world of neo-col onial domination, all games are fair. For fear of war, all spoils won are equally divided. In the convention that guides that division, the U.S. gets the right to nominate its own citizen at the head of the World Bank and the United Nations Development P rogramme (UNDP). Europe gets to keep the formal headship of the IMF.

However Europe, unlike the U.S., is no single country. While united against the U.S. and celebrating monetary union, deep divisions simmer under a yet to be fully formed European identity. These tensions, and the fact that France with Jacques DeLarosiere and then with Michel Camdessus had occupied the European seat at the IMF for 22 years, convinced Germany and its Chancellor, Gerard Shroeder, that Germany being Europe's natural leader it was time the seat was occupied by a German. France, initially hop eful of retaining the chair, gave in to the German claim. Italy, with a couple of eligible candidates in hand, also made a bid, but withdrew in deference to European unity.

All this would have made the task easier if Germany's first choice, chronologically speaking, Caio Koch-Weser, was not considered by many as being a poor choice. But with unity vis-a-vis the U.S. being of paramount importance, the Europeans gave i n to Shroeder's zeal for installing Koch-Weser in Washington at any cost. It was left to the U.S. to test the delicate diplomatic balance and threaten a veto of the German nominee. It was in the face of that threat that Shroeder had to offer another cand idate in the form of Horst Kohler, who finally won the race, though he has been widely described as a lame duck for the job. In the words of The Financial Times: "His relationship with the irascible Larry Summers, the U.S. Treasury Secretary, star ts off on the cool side of lukewarm, and Mr. Kohler evokes little more enthusiasm in Paris, Rome and London."

But the Kohler appointment did not happen before Japan had staked a claim for the top job at the Fund for its own Eisuke Sakakibara, an internationally acclaimed economist-diplomat renowned for an ability to influence foreign exchange markets. He was fav oured by many. Besides violating the convention that a European acceptable to the U.S. must occupy the Chair at the IMF, Sakakibara's candidature must have been anathema given his strident criticism of the way the IMF handled the South-East Asian crisis. In the event, power prevailed over reason, and Sakakibara too withdrew in favour of Kohler.

This episode in the IMF's history does not just starkly reveal who dominates this multilateral forum, but also brings to the fore the utter lack of transparency in deciding on the person who should play the role of free market messiah for the next five y ears. Informed journalistic reports make clear that secretive diplomatic efforts and transatlantic phone calls were the means by which the slot was finally filled without any further public display of discord.

No sane, thinking person can believe that an organisation which headhunts its chief in this fashion displays even a modicum of transparency. Which is what makes the IMF's effort to use the excuse of transparency to force market economics down the throats of a reticent, crisis-ridden Third World appalling, to say the least. But there is little reason to be appalled. All it takes is to understand that the transparency slogan is just one more confidence trick on the part of a visibly incompetent, but still domineering, international elite to straddle the globe with impunity. This hollow grandeur only reinforces the perception that the IMF is in a state of imperial decay.