Don’t we need to somehow reform the IMF? Shouldn’t the fund be led by “the best person,” regardless of national origin? Should it somehow be more democratic?
My answer, in a nutshell, is “not really.” We would do better to realize that the IMF intrinsically is a stodgy and indeed somewhat cronyist institution, and it has to be so.
The IMF was created by the Bretton Woods agreement, fashioned by the U.S. and the U.K., and it was designed to impose a Western and indeed Anglo hegemonic financial and currency order on the world. These days, the original Group of Five nations (the U.S., Germany, the U.K., France and Japan) exercise dominant influence through their voting quotas. China has much more sway than it used to, but it still can’t override a G-5 consensus.
The IMF is used by the G-5 nations and their allies to put their reputational capital behind the international monetary order. Obviously, the backing countries are only going to underwrite a system that they largely approve of and benefit from.
If the IMF didn’t exist, failed nations still periodically would be bailed out by rich ones, if only because the G-5 politicians wouldn’t wish to endanger the stability of the global financial order. But problems would arise as the bailouts would have to be organized anew each time. Which nation would put in how much? Who would pull the plug on failing nations and when? Who or what would enforce repayment? All those questions are regularized and institutionalized through the existence of the IMF.
The cronyist element is that the G-5 nations use the IMF and its lending facilities to protect the creditworthiness of their own banks and financial systems. In contrast, an IMF serving “the citizens of the world,” whatever that might mean, would be an IMF without much support from the biggest and most important financial players. It would be more like the undercapitalized Unicef than an institution that can move world markets or help preserve them.
Nor will it work for China to have too much influence over the IMF, as China isn’t aiming to build up a global order of relatively free trade and free capital movements. The Chinese know this, and they have been creating their own lending projects and investments, such as the giant Belt and Road Initiative and the Asian Infrastructure Investment Bank.
It thus should come as no surprise that the Europeans nominate a managing director for the IMF and the U.S. in essence chooses the president of the World Bank, by longstanding mutual agreement. Establishment figures are installed to ensure that the IMF and World Bank continue to support the prevailing international economic order. These aren’t institutions for radicals or dissidents.
If the directorship and board governance of the IMF were picked by a vote from all 190 member countries, the leading G-5 nations would put much less of their reputational capital behind the institution. The IMF is an international public good, but such public goods only get produced when it is in somebody’s selfish interest to do so.
Critics from the left, such as economist Joseph Stiglitz, have argued the IMF has imposed too much austerity on debtor nations and insisted on too many interest rate increases at the wrong times. Those criticisms might hold some truth, but there aren’t many feasible alternatives. The IMF does try to enforce debt repayment and the orderly resolution of claims, and that limits the kind of advice, and also the arm-twisting, that it can provide. If the institution somehow became a mechanism for debt jubilee, the end result would be a diminution of private capital flows to poorer nations. Why lend if no one will work to see that you are paid back? The IMF would lose credibility as well, and that would limit its ability to fight global financial crises.
Successful international economic orders typically have been based on a fair degree of hegemony, whether it was the British-led gold standard of the 19th century, or the more recent post-World War II American dominance. Once you realize that, a lot of the current questions about the IMF answer themselves rather automatically. The real issue isn’t how to improve the IMF, but how we are going to cope as current hegemonies continue to lose their sway.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Big Business: A Love Letter to an American Anti-Hero.”
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