Concerns over political influence at IMF

Posted on July 28, 2016

The headquarters of the European Central Bank (ECB) is pictured in Frankfurt am Main, western Germany, on January 21, 2016. / AFP / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)©AFP

With the sad exception of Greece, the eurozone financial crisis has fallen down the list of problems that European leaders have to confront, with migration and Brexit rising to the top. The International Monetary Fund, which played a leading role in trying to resolve the crisis, has had to turn its attention to more familiar issues of balance of payments problems in emerging market commodity producers.

Yet the report yesterday by the IMF’s watchdog, the Independent Evaluation Office, on the IMF’s role in the crisis deserves attention. The study does not find conclusive evidence of political interference in the fund’s processes. It does, however, provide ammunition for the view that Europe’s outsized influence over the governance of the IMF must continue to decline if the institution is to retain credibility.

    Several of the conclusions of the report have been accepted already by IMF management, headed by Christine Lagarde, and its executive board, which represents its shareholder countries. Taking their lead from European officials, the IMF failed to grasp that balance of payments problems could occur within a currency union. It also ignored the lesson it had supposedly drawn from earlier crises: that a prompt and orderly writedown of private and public debt is often necessary to restore confidence.

    It participated, too, in a “troika” of lenders, the others being the EU and the European Central Bank, which meant that its hands were frequently tied.

    As Ms Lagarde says in her response to the IEO report, its authors did not find clear evidence that IMF staff or management were unduly influenced by political pressure. But such pressure is rarely written in the record, particularly when, as the report disturbingly makes clear, key decisions seem to have taken place outside normal policy channels with no proper evidence about how they were reached.

    Political influence often operates instead in intellectual and institutional capture, in an organisation dominated by one way of thinking. Whether or not direct political interference by shareholder countries exists, the fund must strive to minimise its potential.

    As the crisis spread across the eurozone, for example, there was a clear conflict of interest in Dominique Strauss-Kahn being head of the IMF. The former finance minister’s ambition to stand for the French presidency was well known, arousing suspicions that political considerations, particularly with regard to writing off debt to European creditors, were affecting the fund’s judgment. The IMF made a marked change of direction on that issue after Mr Strauss-Kahn was replaced by Ms Lagarde, who deferred much more to the views of IMF staff economists.

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    The fund has undoubtedly learnt lessons from the eurozone crisis, including the effect of fiscal contractions in an economy operating below potential. But it is disturbing that European governments maintain outsize voting power, even after recent reforms. The EU has also yet to demonstrate that it has abandoned the traditional stitch-up by which it in effect appoints the head of the IMF.

    Even though most of the rescues in which it participated were qualified successes — Ireland, Portugal, Cyprus — there is no doubt the eurozone crisis and particularly Greece showed up institutional weaknesses within the IMF. These may be corrected piecemeal but there remains a serious question about whether an institution that retains a lopsided influence from one part of the world can ever be seen as dispassionate and even-handed.

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