by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Financial Times
July 25, 2012
© Financial Times
Eccentric in tone and cryptic in content, the resignation letter of a senior International Monetary Fund (IMF) official released last week was, nevertheless, important for what it implied: The IMF is failing in two key respects. It has not provided independent intellectual leadership, most evidently on the euro area crisis. And it is unprepared to provide stability for the next big global crisis. With Spain and possibly Europe inching back towards the abyss, that crisis looms. The possibility of the IMF being missing in action is cause to sound the alarm bells.
On the euro area, the IMF has towed the official European/German line on the crisis, possibly to the disservice of Europe and the world. It has not been a source of new ideas or critical thinking on key issues such as: the workability of the strategy for Greece; the responsibilities of creditor countries, including the need for symmetric adjustment in a currency union; and the alternatives to austerity in the short run. It is not that the official line is wrong, but that the IMF has failed to challenge orthodoxy, forfeiting its role as a valuable referee in the policy debates. If things turn bad, the IMF will have to bear responsibility for its complicity in the less than optimal policy choices made in Europe.
In response, the Fund invokes the familiar defense that it does indeed voice its opinions and concerns, but privately. The IMF cannot go public and precipitate the very crisis that it is enjoined to prevent. Moreover, especially as the junior partner in the troika, it has to work with governments. So while it can influence and challenge policy choices before they are made, it must fall in line once they are made.
This defense is increasingly untenable for two reasons. First, not only governments (behind closed doors) but also the world and its markets need to have the benefit of the IMF's thinking and advice. That is one of the valuable global public benefits that the Fund provides. And the world is sophisticated enough to understand that the IMF, even where it may differ from governments intellectually, can support them institutionally and financially.
Second, sharing its thinking publicly is an important internal check on the institution. What the resignation letter hints at, and something that outsiders can never prove and insiders will never admit to, is that internal decisions are made in an atmosphere that encourages caution rather than openness, and by a few who do not have a monopoly on competence and good ideas.
Another shortcoming of the IMF is the failure to extend itself financially and quickly. True, it has increased its resources (by at least $430 billion) but the magnitudes would be insufficient if Spain and Italy were to plunge into crisis. Europe may be rich but it cannot avoid relying on external resources in an emergency.
The reasons could be economic, because the balance sheet of the euro area as a whole is fragile and raising internal resources at a time of prolonged and slow growth will be difficult. They could be political, because Germany may be unwilling to shoulder all responsibility. Or, the euro area might collapse, unleashing chaos, which will need all the resources the world can muster.
To be fair, Christine Lagarde, managing director of the IMF, has been trying to raise resources from its members but without the sense of urgency warranted by the circumstances or the boldness to take on the major powers. The fault of this leadership, if any, is again the failure to articulate the intellectual case for keeping the Fund relevant as a crisis-stabilizer in the new world where rich countries are potential supplicants for emergency resources.
Frustrated with the difficulty in reforming the IMF, emerging market countries, especially China, are gradually contemplating alternatives. The BRIC (Brazil, Russia, India, and China) nations have set up a bank for effecting resource transfers and East Asian monetary arrangements are being strengthened. These new initiatives are not necessarily superior or even complementary to a multilateral IMF. But they are the consequences of a weak and unresponsive IMF, an increasingly irrelevant Euro-Atlantic, rather than a truly international monetary organization.
If the IMF leadership does not take corrective action, the world might well be asking why the Fund was asleep as adviser and financier even as the European driver was taking the car over the cliff.
Book: A Strategy for IMF Reform February 2006
Op-ed: The G-20 Is Failing April 12, 2012
Working Paper 11-16: Asia and Global Financial Governance October 2011
Working Paper 11-5: Integrating Reform of Financial Regulation with Reform of the International Monetary System February 2011
Policy Brief 10-29: Strengthening IMF Surveillance: A Comprehensive Proposal December 2010
Working Paper 10-14: Reform of the Global Financial Architecture October 2010
Speech: Crisis and Beyond—The Next Phase of IMF Reform June 29, 2010
Congressional Testimony: The Role of the International Monetary Fund and Federal Reserve in the Stabilization of Europe May 20, 2010
Op-ed: How the Fund Can Help Save the World Economy March 5, 2009
Article: Economists Seek IMF Reform January 26, 2009
Policy Brief 07-1: The IMF Quota Formula: Linchpin of Fund Reform February 2007
Paper: What Next for Argentina? February 2004