At a Washington briefing IMF Director for External Affairs Thomas Douglas announced that in the next few days the fund’s board will approve Ann Krueger as first deputy executive director. She is scheduled to officially begin work in her new post in the early fall and will be the first woman to hold such a high post at the fund. Dr. Krueger is a professor at Stanford University and a member of the American Academy of Arts and Sciences. Earlier she served as vice president and chief economist with the World Bank and is now president of the American Economics Association. According to the Bloomberg Agency, “Most likely Ann Krueger will continue the harsher position toward countries that have repeatedly used IMF loans like, for example, Turkey.” In its opinion, “The IMF should insist that countries utilize their own resources, especially at the expense of selling state property, decreasing the scope of corruption, and devaluating the national currency.” Prof. Krueger does not support the US administration’s criticism of the fund’s policies that it serves the interests of private investors and fosters weak state policies. She has criticized the IMF and World Bank for their policy of reducing the debt burden of the poorest countries. In her opinion, it would be useful to target funds at such spheres as education and health. She favors floating exchange rates and opposes fixed ones like, for example that of the US dollar, reports Interfax-Ukraine.
Stanley Fischer’s looming departure as the IMF’s first deputy managing director marks the end of an era. Indeed, all those who led that institution during the global crises of 1997-1998 (Fischer, Managing Director Michel Camdessus, director of research Michael Mussa, as well as the two men who directed events behind the scenes from the US Treasury, Robert Rubin and Larry Summers) are all gone or going.
Failures in Indonesia, Thailand, and Korea in 1997 were followed by failures in Russia and Brazil the next year: in those cases, attempts to maintain exchange rates at overvalued levels left taxpayers in those countries billions of dollars poorer. Preserving exchange rates, however, provided vital time for people with money to get out at more favorable terms. Only devaluation restored growth to these countries.
With each failure, the IMF’s credibility decreased. Still, it thrashed about for solutions, each little more successful than before. Sometimes the solution entailed precautionary lending, as in Brazil; another time it was a “bail-in” strategy that was eventually abandoned, as in Romania.
The last straws were this year’s crises in Turkey and Argentina. Turkey’s panic came on the heels of Fischer saying that everything seemed on track. Argentina, long an IMF poster child, was lauded for bringing down inflation and stabilizing its exchange rate. In this fog of praise, the IMF ignored the fact that Argentina’s growth rate had stagnated and that double-digit unemployment persisted for half-a-decade. Without growth, it would become increasingly difficult for Argentina to repay its huge loans.
As a result of these failures, a global consensus has emerged that the global financial crisis was mismanaged and that reforms are needed in the global economic architecture. What is lacking now is consensus about what should be done.
The IMF seems to have learned much from its mistakes — at least rhetorically. It now recognizes that the capital market liberalization which it pushed around the world incited huge instabilities and was a central factor in the global financial crisis. It also recognizes that the way it restructured Indonesia’s banks led to a run on them, that it pursued excessively contractionary policies in East Asia, and that these policies deepened the downturns.
But the IMF has yet to ask itself why these mistakes occurred. It has yet to translate its new rhetoric into policy. The next IMF team should reflect on the following questions and lessons:
— Economics is not ideology but the practical employment of evidence and theory. What evidence, for example, suggested that liberalizing capital markets in poor countries would deliver faster growth? Before forcing changes on the international economic system, overwhelming evidence should support it. What evidence suggested that high interest rates, in economies burdened by short term debt, would help stabilize exchange rates? Before imposing policies with devastating consequences, strong evidence should show that the policies will work. Saying that interest rates will eventually come down is not enough. After all, you cannot “unbankrupt” a firm ruined by punishing interest rates.
— Greater intellectual coherence is needed. Why shout that government should not intervene in markets, claiming that markets are efficient, yet intervene in currency markets?
— Economic reforms may entail pain, but the pain the poor must bear should not be minimized. Why were billions of dollars available to bail out banks, but a few million dollars for food and fuel subsidies for Indonesia’s poor could not be spared? How was it that a few oligarchs could bleed Russia of billions of dollars through state-give aways of assets under privatization schemes encouraged by the IMF, but there was not enough money to pay misery pensions to the aged?
The IMF, like it or not, is a public institution — despite its corporate speak. In the IMF world, member countries are referred to as shareholders. But IMF policies affect lives and economies in ways no corporation could ever do. As a public institution, it should be guided by democratic principles. When the World Bank sought private discussions with the IMF on the policy implications of East Asia’s crisis, it was largely spurned. When I sought public discussion — even after the crisis had settled — it was resisted. Even debate about reforming the global financial architecture was stilted: only finance ministers and central bankers, it seems, are allowed a seat at the IMF table.
In behaving this way, the IMF rode roughshod over basic economic and ethical principles. There are always trade-offs between policies. Some are more advantageous to some groups; others represent greater risks. Decisions about which policy to choose is a matter best left to a country’s political processes; they should not be usurped by international bureaucrats, no matter how competent. For economists to misrepresent their policy decisions as mere technical matters violates basic ethical and professional precepts.
The irony of the IMF’s position over the past eight years is that, while the Clinton Administration advanced Third Way principles at home through an active government role in promoting growth, in the international arena America’s Treasury (directly and through the IMF) advanced views that reflected, with only slight variations, traditional market fundamentalism and trickle down economics, ideas which America itself had rejected.
Here, the new Bush administration shows greater intellectual coherence. The Republicans criticized huge international bail-outs as “corporate welfare” before they took office, and in Turkey they basically stuck to their principles, though not enough to stop an IMF bail- out. Whether the Bush team will continue with this line when American and not German banks are at risk is another matter.
The Bush administration and the new team at the IMF (when it arrives) have an opportunity to move away from the failed strategies for development, transition, and crises of the past. The challenge is to craft policies based on economic science, not ideology, in an open and democratic manner, paying particular attention to the consequences for the poor. Unfortunately, from what we have seen of domestic US policy of late, we cannot be sanguine.
