Horst Koehler's departure as IMF managing director to campaign for the German presidency provides an occasion for reflection, both about the fund and the state of economics.
On the eve of Koehler's arrival as managing director, the world had experienced a period of financial turbulence not seen since the 1930s. Confidence in the IMF was at an all-time low. It had badly mismanaged the East Asian crisis, the Russian crisis, and the Brazilian crisis. A cloud hung over his predecessor, and Koehler's own election was clouded in controversy.
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Surely, in choosing its leader, an international public institution should look for the most qualified person, and the choice should be made in as open and transparent a manner as possible. Principles of democratic accountability, about which the IMF spoke forcefully in the developing world, demanded this. Yet in the end, an agreement between America and Europe dictated that the IMF's leader should be a European.
The Europeans then agreed that Germany had not had its fair turn at the leadership of a major international organization, and so the choice was a simple one: a German acceptable to America would get the job. Experience in developing countries, where virtually all of the crises with which the IMF has had to deal occur, was not even thought to be a prerequisite!
In three years, much has changed -- but much remains the same. It appears that the selection of the next IMF managing director will be no more open than the last.
If confidence in the IMF is slightly higher than it was at its all-time low, its performance has been mixed. The rhetoric has certainly improved. The fund now openly talks about the need to focus on poverty, and it candidly acknowledges that it had imposed too much conditionality when providing financing to poor countries.
With the successive failures of IMF bailouts, the fund has been looking for alternative strategies for handling crises. It has yet to find one. But at least it now recognizes that capital market liberalization -- long the centerpiece of its agenda -- did not bring developing countries faster growth, only more instability.
These are big changes, and they should be lauded. But on the fundamental questions of economic management, the record is far less positive. It is almost unanimously recognized that Argentina was badly handled, with recovery beginning only after the authorities abandoned the IMF's strictures. Lending resumed when the authorities made it clear that Argentina would rather default than let the IMF continue to dictate policies that had contributed to disaster in the first place.
In Brazil, the IMF is given credit for averting another disaster, but at what price? The economy has virtually stagnated, making it impossible for President Lula to advance the social goals on which he had run for office. The IMF's economic framework still does not provide for countercyclical fiscal policies, because the IMF remains ambivalent about the standard Keynesian prescription of stimulating an economy in a downturn.
In Brazil and elsewhere, the IMF's distorted accounting frameworks -- what it does and does not count as expenditures -- continue to impede the investments required to modernize public-sector enterprises and to put a major roadblock in the way of land reform.
For example, when the government borrows to buy land, it is treated as debt, but the offsetting transaction when it sells the land through a mortgage effectively goes unrecognized.
While the president of Germany is not supposed to intervene in the day-to-day management of the country, his voice will no doubt be influential. It is here that Germany should pause and look at the record. Clearly, Germany faces many difficulties; most economists agree that reunification was mishandled and the burden on the German economy correspondingly excessive. European enlargement, creating large numbers of lower-wage workers at Germany's borders, will pose new challenges.
Economists differ on how best to meet these challenges. But the IMF's track record on diagnosing problems and prescribing solutions is not enviable. Its conservative philosophy has consistently failed to produce economic growth, and the benefits of what growth has occurred have disproportionately gone to the wealthy.?
Latin America, where the fund's doctrines have been taken most seriously, has suffered far slower growth as a result. Indeed, growth in the 1990s was little more than half the rate recorded in the pre-reform decades of the 1960s and 1970s. Meanwhile, East Asia, where governments eschewed these doctrines and were active in promoting growth, has seen incomes soar and poverty plummet -- despite the crisis of 1997.
In Europe, the record of "conservative" economic prescriptions is little better. The contractionary fiscal and monetary policies imposed by the Stability Pact and a European Central Bank fixated on inflation have taken a heavy toll. The strong euro has made matters worse. Europe needs structural reforms, but such reforms alone will not end the continent's malaise, and some measures -- those that weaken employment protection or the social safety net -- may come at a high price, especially for people at the bottom.
Sweden has shown that there is another model of a market economy. While it has trimmed its welfare state, it has not abandoned it, and Swedish economic performance equals or exceeds that in most of the rest of Europe.
Germany will be sadly disappointed if it thinks that by veering in the direction of economic conservatism, it will rise out of its current doldrums.
Joseph Stiglitz is professor of economics at Columbia University and a member of the Commission on the Social Dimensions of Globalization. He received the Nobel Prize in Economics in 2001.
Copyright: Project Syndicate
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