Economics

Searching for a role: What next for the world’s central bank?

Christine Lagarde: saying little and saying it at length.
(Global Economic Outlook)

On the screen … a hairy man was saying to a bald man: ‘But the effects of these attacks on the dollar will not of course immediately be apparent… But you must understand that this is in the first place not a matter for the International Monetary Fund,’ said the hairy man with contempt.

‘Sweetheart, turn that down, will you?’

Kingsley Amis, The Green Man (Jonathan Cape, 1969)

On 22 September 2011, at a press conference in Washington, Christine Lagarde, managing director of the International Monetary Fund, was asked: ‘[D]o you not think the euro-zone is fundamentally flawed as an institution to be running a currency?’ Came the answer that one would expect from a former French finance minister: ‘It is not only about finance. It is also about a political, collective destiny amongst countries that have spent centuries fighting with each other, and which are determined to stay together.’

As I noted at the time, this is the stock response of the Euro-functionary when anyone casts doubt on any aspect of the European Union: they always mention the wars.

George Osborne, Britain’s chancellor, backed Ms Lagarde for the job when it came vacant in 2011. In sharp contrast to the European Commission, where the UK’s lack of weight was highlighted by David Cameron’s doomed attempt to stop Jean-Claude Juncker becoming president, the British voice matters at the IMF.

Not only is the fund the brainchild of one of the most famous Englishmen of the twentieth century – John Maynard Keynes – but Britain retains a 4.51 per cent shareholding, the same size as that of France, and Gordon Brown chaired the committee of IMF finance ministers from 1999 to 2007, a key role in the organisation.

Yet despite this clout, not one of the fund’s 11 managing directors has been British. Fully five have been French. There have been two Swedes, one Belgian, one Dutchman, one German and one Spaniard.

Ms Lagarde has just completed her last annual meeting as managing director. It was held in the Peruvian capital Lima (every three years it leaves Washington and goes on the road). She steps down next summer and the search is on for a successor.

Traditionally, the job goes to a European, just as the presidency of its sister institution across 19th Street, the World Bank, goes to an American. For the uninitiated, these are the institutions set up at the Bretton Woods conference in New Hampshire in 1944, not to be confused with the Dumbarton Oaks summit of the same year, which established the United Nations (arboreal place names were clearly in vogue).

The fund is really a bank – the world’s central bank – and the bank is really a fund, bankrolling development projects round the world. The IMF’s core function is to lend money to countries suffering balance of payments difficulties. More of that in a moment.

Progressive/leftist criticism of the IMF tends to boil down to two main beefs. One, the European monopoly on the top job must end, with a candidate from the Third World/developing world/emerging markets (fill in this week’s euphemism for poor countries) appointed instead. Two, the fund is staffed by buttoned-down, pointy-headed enforcers of the ‘Washington Consensus’, the pre-crisis orthodoxy prescribing free markets, free trade, labour market ‘flexibility’, privatisation and public spending cuts.

In fact, these two criticisms are intertwined: taken together, they suggest the IMF’s failings can be traced to the cloying embrace between a succession of European grandees and the aforementioned stage army of true believers in the fund’s nostrums. A managing director from a developing country, preferably one that has borne the brunt of the IMF’s prescriptions, would change all that, re-orientating the organisation away from the conventional (non-)wisdom and towards a progressive programme geared to sustainable growth and development. Critically, such a person would finally realise the aspiration of Lord Keynes that creditor countries should share fully in the burden of getting chronic debtors back on their feet.

As someone who has attended 18 IMF meetings, I have to say this all strikes me as about 50 per cent wrong-headed. The fund’s full-time staff does not consist of serried ranks of financial hit-men in Brooks Brothers suits; rather it employs people who are on the whole very bright and, indeed, fairly approachable, certainly when compared with their equivalents in national central banks.

The managing directors, by contrast, have appeared to obey the law, set out by the journalist and critic Michael Vestey, that governs changes in the top ranks of the BBC: whoever takes over will be worse. Here, the fund’s detractors have a point, although whether appointing a Third World MD will improve matters is debatable. The Catholic Church has recently tried something similar, and I think it is fair to say that the jury is still out on Pope Francis.

My first managing director was Horst Köhler, who held the post from May 2000 until March 2004, at which point he resigned what is one of the biggest roles on the world stage in order to assume the position of President of Germany, a titular job that could safely be entrusted to a presentable sixth-former.

Next up was Rodrigo Rato of Spain. He, too, resigned early, in the summer of 2007, after what was generally thought to have been an undistinguished tenure, citing ‘my family circumstances and responsibilities, particularly with regard to the education of my children’.

You couldn’t fault his timing. By quitting in June 2007, he was clear of the blast area when the credit crunch of August that year gave the world financial system a coronary from which it is still trying to recover.

Enter Dominique Strauss-Kahn, the former French finance minister. He proved a better showman than Rato (which is not saying much) but struggled to get to grips with the crisis. He resigned in May 2011 after being arrested in New York on a rape charge that was later dismissed.

(For what it is worth, I never really believed DSK was a rapist. Given he planned to stand against the then president of France, Nicolas Sarkozy, at the next election, I assumed it was a case of cherchez les spooks. That said, he was obviously a man of reckless habits, to say the least, and the French people would have been barmy to have elected him to any senior position.)

His offence in office, as Matthew Lynn pointed out in the Daily Telegraph on 9 October, was ‘making the original mistake of allowing the Fund to be hijacked by the EU to rescue the euro’.

Ms Lagarde, his successor, continued DSK’s (mis)use of the fund to bail out developed European nations that are (allegedly) part of a confederal bloc that ought properly to be stumping up the cash itself.

Will Vestey’s Law be suspended when Ms Lagarde’s successor emerges? That depends on whether one believes the unimpressive performance of the last four managing directors is entirely down to their personal failings (and to the above-mentioned Europeans-only recruitment policy) or whether it reflects a deeper malaise within the fund as a whole.

There is, to put it mildly, some reason to take the latter view. The IMF’s central role until 1973 was to preside over the Bretton Woods system of fixed currency rates, a sort of large-scale version of the European Exchange Rate Mechanism (ERM). Currencies were fixed to the dollar which, in turn, was fixed to gold. Devaluations were possible (as with Britain in 1967) but discouraged. The fund made money available to those countries with balance of payments difficulties in return for their agreeing to ‘structural adjustment’ programmes that curbed domestic consumption and put the public finances back in order.

Post-1973, this fixed exchange rate role was lost but that of an international lender of last resort continued, from the 1976 British loan right through to the bailouts for countries caught up in the Far Eastern ‘meltdown’ of the late 1990s.

By the Köhler/Rato years, however, even this role was dwindling as deep and liquid global capital markets could be tapped by troubled countries, obviating the need for loans from the fund. This created a genuine crisis for the IMF, whose main source of revenue had been the interest earned on its lending to cash-strapped governments.

The mid noughties saw Rato and his colleagues bag a new mission for the fund, that of monitoring the ‘imbalances’ in the world economy and sounding the alarm when ‘spill-over’ effects from actions by one country or region threatened to cause grief for everyone else. So successful was the IMF to prove in this new supervisory role that it failed entirely to spot the credit crunch and the subsequent Great Recession.

That said, one might have thought that the crisis would have given the fund a new lease of life. After all, if the uneventful prosperity of the 1990s and early 2000s had threatened the IMF with irrelevance, surely the worst economic storm since the 1930s would bring it centre-stage once more?

It never quite happened, partly because the crisis moved so rapidly that there was little time to engage an international organisation charged with representing the interests of all 188 member countries. True, the crash brought down the curtain on the key role of the Group of Seven leading nations. But the G7 was replaced not by the fund but by the Group of 20 – the G7 plus the new giants, such as India, Brazil and China.

The IMF’s one signature policy during the crisis was the one for which it has been heavily criticised – the bailing out of troubled euro-zone members. As Matthew Lynn pointed out, ‘Its four biggest borrowers are, in order, Portugal, Ukraine, Greece and Ireland – three of them developed EU countries.’

And so to Lima. Ms Lagarde’s speech of 9 October involved saying not very much and saying it at length. She informed her audience that we inhabit a changing global landscape, one of ‘uncertainty, transition, and balancing acts’. Who’d have guessed it? She called for a new trade deal, for more inclusion, less inequality and more transparency. Words and phrases such as ‘sustainable’, ‘gender’, ‘multilateralism’, ‘capacity building’ and ‘new agility’ were scattered throughout, like raisins in a cake.

Sad to say, the fund is not alone in searching for a role and, too often, ending up promulgating a sort of unfocused do-goodery. The World Trade Organisation (WTO), set up 20 years ago, has so far failed to preside over the sort of global free trade deal that had been expected from it, and not for want of trying.

A Nairobi summit at the end of this year was to have been the scene for its eventual triumph, but that is now looking unlikely, so instead the talk is of ‘delivering on development’. The WTO is not, of course, a development institution – that is the job of the World Bank, an outfit that used to build dams, schools and hospitals and now seems more interested in talking about climate change and trying to control communicable diseases, the latter of which you may have thought the proper task of the World Health Organisation … and so on.

The ‘original’ in all of this was the Organisation for Economic Co-operation and Development (OECD). Set up in 1948 to administer America’s Marshall Plan of aid to war-shattered Europe, the OECD was pretty much out of work by the early 1960s. Rather than congratulate itself on a job well done and go home, the OECD has collected a range of new tasks since then, some of which we never imagined needed doing: ‘measuring well-being’, holding forth on healthcare costs, recommending action against money laundering and corruption and, of course, publishing the PISA rankings of national school systems.

And all this from the agreeable surroundings of its HQ, the Château de la Muette in Paris.

It is time for the IMF and its fellow international agencies to take some of the medicine the fund has been dishing out for years. Structural adjustment is long overdue.

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