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Missing the Point

May 26, 2011

Dominique Strauss-Kahn in house-move shock! French woman enters IMF race.

All this is besides the point. What matters is what the IMF does, not where its former Managing Director is awaiting trial or the nationality or gender of his replacement. The Fund lends money to countries in financial trouble in return for liberalisation, budget cuts, higher interest rates and privatisation. These traits are imprinted on the IMF like a tattoo.

Despite Strauss-Kahn’s professed reformism the cuts proposed in the Greek bail-out follow a familiar pattern, and one which was  revisited during the global economic crisis from 2008 onwards. IMF conditionalities imposed on Pakistan included government spending cuts and a hike in interest rates. Latvia’s government was obliged to lower spending and wages. A $16 billion programme in Hungary carried the condition that government spending would be slashed and pensions lowered. El Salvador and Serbia each faced fiscal austerity as a result of their standby IMF programmes. Ukraine was urged to eliminate its fiscal deficit.

In Belarus, according to the deputy managing director of the IMF in 2009: “Key structural reforms, including price and wage liberalization, should follow the realignment of the currency. Broader measures to support private sector development – including reductions in the size of government, deregulation, and privatization – are also needed to underpin better medium-term growth, and should be undertaken as fast as market conditions allow”.

It was like the 1980s all over again, except without the bouffant hairdos. Again, the cuts were given theoretical justification by a tool known as financial programming, the main model used by the IMF during the 1980s and 1990s. The model prescribed the restriction of domestic credit in the belief that this would address balance of payments problems. Fiscal policy was considered less useful, even in economies where balance of payments problems were not due to excessive lending.

Financial programming has its roots in another 80s throwback: monetarism, the Thatcherite doctrine which said that manipulating the money supply was key to dampening inflation. The Thatcherites soon ditched monetarism when they discovered that they couldn’t find a measure of money that effectively controlled prices. The IMF clings to its old mantra.

The way the contemporary IMF behaves is the opposite of what its architects proposed, which was the restriction of capital flows so that governments could spend how their electorate wanted. John Maynard Keynes, who was involved in setting up the global financial institutions immediately after the second world war, argued for a system whereby governments taxed and controlled the movement of capital across borders. And until the 1970s this is what happened in many countries, including the United States. Keynes also wanted a co-ordinated international banking system and even tabled the idea of a global currency.

Keynes proposed this system because he knew that otherwise capitalists could  hold a country to ransom by threatening to pull funds from a country that didn’t do what suited them – that is, limit public spending and keep interest rates high. If capital flows were free, Keynes foresaw, governments couldn’t stimulate demand by investing in public works or lowering borrowing costs to help ailing industries. Unfortunately opposition from Wall Street meant that Keynes’s full vision didn’t materialise, and we ended up with today’s IMF, in which fiscal conservatism and a belief in the free movement of capital are deeply embedded.

Granted, recent IMF studies permit the use of capital controls under certain conditions – partly in acknowledgement of the Fund’s failures during the 1997 Asian crisis, when it argued vociferously for the dismantling of capital controls. But it’s too little, too late. Stuffing the financial genie back into its bottle would require a wholesale redesign of the international economic order, including greater democracy and cooperation between the international institutions, better representation of developing countries, and the taxation of international capital flows. Even the kind of economics practiced by the Fund would have to change. A more growth-orientated way of thinking would recognise amongst other things that fiscal austerity and tight monetary policy can slow economic growth, making debt repayments more difficult, not less.

It remains a travesty that the rich nations dish out the top jobs at the IMF and World Bank to their own people, but it’d take a lot more than a lone Mexican or Turk to alter the DNA of the Fund. Personalities can influence institutions, but the evidence of the last few decades shows that whoever’s in charge, the IMF remains remarkably resilient to change.

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