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Since its founding in Bretton Woods in 1945, the International Monetary Fund (IMF) has acquired a somewhat shady reputation for its obstinate and doctrinal approach to economic and financial crisis management.
The alleged inept performance of the Fund has elicited derision from prominent economists the world over, so much so that its acronym has been re-labelled “Its Mostly Fiscal”. To most people, the very mention of the name “IMF” conjures up an image of economic subjugation, social hardship and relentless financial austerity.
Its dreaded structural adjustment programmes (SAP) first introduced in the 1980s have been blamed for the economic carnage that menaced many developing nations especially in Africa, where doses of economic medicine were prescribed advocating the premature removal of controls on capital flows, and then imposing harsh and inappropriate measures on the countries that were forced by capital outflows to borrow from it. These economic policy conditionalities were highly controversial, leading many to question the efficacy of the “tough love” policies of the Fund.
The former French President Francois Mitterand admitted that the debt repayments demanded by the IMF since the 1980s have been a major mechanism for the transfer of wealth from the South to the North. It is estimated that during that period debt repayments drained about US$ 160 billion each year from “developing” countries. This was about 2.5 times the total development aid that these countries received. Long criticized for its lack of accountability and transparency, the Fund has also faced serious questions about its relevance and theological devotion to outdated and discredited economic policies.
The prominent American economist Jeffrey Sachs believes that the IMF has a poor record in nursing fiscally-challenged countries back to financial health and may have helped detonate the Indonesian crisis in 1997. Likewise, the Nobel Prize-winning economist Joseph E. Stiglitz notes in his book, Making Globalization Work that “advanced industrial countries, through international organizations like the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank, were not only not doing all that they could to help these [developing] countries but were sometimes making their life more difficult. IMF programs had clearly worsened the East Asian crisis, and the “shock therapy” they had pushed in the former Soviet Union and its satellites played an important role in the failure of the transition.”
However, all these misgivings were based on the Fund’s performance before the global economic crisis of 2007. Since then a major shift has occurred in the global economic landscape, with the emergence of the IMF as a leading player in the response to what has become known as the “Great Recession. Consequently, many commentators have hailed the rejuvenated IMF as a “phoenix rising” against the backdrop of the collapse of the financial system which led to an economic contraction that spread outside the original group of crisis countries including Iceland and Greece. For all intents and purposes, the Great Recession of 2007/2008 will always be remembered as the debilitating crisis which led to the unprecedented downgrade of Greece to emerging market status by S&P Dow Jones Indices, Morgan Stanley Capital Index (MSCI) and Russell Indexes.
It is fair to say that during the global financial crisis of 2007/2008, the role played by the Fund was outstanding. Fortunately, the Frenchman Dominique Strauss-Kahn was in the right place at the right time when he assumed the stewardship of the IMF in November 2007 and gave it a new lease on life just as its influence on the world stage was waning. Arguably, he provided a human face to the organization and embarked on a number of transformational reforms. One of these reforms concerned the credit basis of the fund which was structurally extended to reflect the increasing importance of emerging market economies.
Crucially, the reforms produced a combined shift of 9 percent of quota shares to dynamic emerging market and developing countries. In fact, when Mr. Strauss-Kahn took over the reins, the outstanding credit at the fund was US$ 10 billion as opposed to US$ 91 billion fours years earlier. Upon leaving office, the figure was at US$ 84 billion. Owing to prudent economic management, the total capital of the fund had quadrupled to US$ 250 billion. Particularly significant was Mr. Strauss-Kahn’s controversial call for fiscal stimulus in early 2008. One shudders to think where we might be if it had not been heard.
Despite the good results achieved on the watch of Mr. Strauss-Kahn, a lot more needs to be done especially as it relates to the selection of the best possible candidate for the job of managing director from a worldwide pool. Since its inception, the IMF has been under the helm of a (Western) European whereas the World Bank has been headed by an American. We are all hoping that further reforms undertaken by the new managing director will address this outmoded approach to governance of a leading international financial institution.
Regarded as an augury of good things to come, his successor Christine Lagarde, another French national, has continued his legacy, registering two significant achievements in her first 15 months as managing director, first when she sounded the alarm in 2012 that European banks needed to be recapitalized to meet the challenge of the region’s debt crisis and second when she succeeded in mobilizing nearly US$500 billion of new resources to ensure that the global lender could respond to future emergencies.
Nevertheless, there is still the widespread misconception that the IMF “army” simply matches into a country and imposes its will on the government and the people. The fact is the IMF doesn’t just impose its remedy on a nation unless it is invited to help restore economic and fiscal health. Countries generally turn to the Fund for financing when they have run into balance of payments problems and require counsel for economic stabilization and the pursuit of a growth agenda. These difficulties may have come about due to external shocks, for instance a rise in the price of energy or economic policy choices that have led to economic imbalances and vulnerabilities in the economy.
Despite the economic challenges Saint Lucia faces, we can consider ourselves blessed that we haven’t gone cap in hand to the IMF. Unfortunately, the same cannot be said about some of our sister islands including Grenada and Antigua. That notwithstanding, the Fund has made a case to the Saint Lucia Government advising a reduction in the wage bill and the amount spent on transfers and subsidies in the region. A statement released by the IMF in 2014 recommended “ambitious, credible medium term fiscal consolidation to put public debt on a sustainable path and create the fiscal space for counter cyclical policies”.
The new IMF under the sterling and forward-thinking leadership of both Christine Lagarde and her predecessor Dominique Strauss-Kahn has been given a bit more orientation, although it still has a long way to go in adopting an even-handed approach in the way it deals with developing economies and emerging markets. Since the Great Recession of 2007/2008, there has been every indication that the Fund has begun to restructure and shift its own tasks to reflect a fundamentally-changed environment.
For comments, write to [email protected] – Clement Wulf-Soulage is a management economist, published author and former university lecturer.