Arvind Subramanian: Is the IMF failing?

The IMF has failed to be open about the euro-zone crisis and has shown an inability to increase its resources quickly enough. Unless its leadership corrects itself, the search for alternatives will continue

Eccentric in tone and cryptic in content, the resignation letter of a senior International Monetary Fund (IMF) official released last week was nevertheless important for what it implied: the IMF is failing in two key respects. It has not provided independent intellectual leadership, most evidently on the euro-zone crisis. And it is unprepared to provide stability for the next big global crisis. With Spain and, possibly, Europe inching back toward the abyss, that crisis looms. The possibility of the IMF being MIA is cause to ring the alarm bells.

On the euro zone, the IMF has toed the official European/German line on the crisis, possibly to the disservice of Europe and the world. It has not been a source of new ideas or critical thinking on key issues such as: the workability of the current strategy for Greece, the responsibilities of creditor countries, including the need for symmetric adjustment in a currency union, and the alternatives to austerity in the short run. It is not that the official line is necessarily wrong but that the IMF has failed to challenge orthodoxy, forfeiting its role as a valuable referee in the policy debates. If things turn bad, the IMF will have to bear responsibility for its complicity in the less-than-optimal policy choices made in Europe.

 

In response, the IMF invokes the familiar defence that it does indeed voice its opinions and concerns — but privately. The IMF cannot go public and precipitate the very crisis that it is enjoined to prevent. Moreover, the IMF, especially as the junior partner in the troika, has to work with governments, so that while it can influence and challenge policy choices before they are made it must fall in line once they are made.

This defence is increasingly untenable for two reasons. Not just governments behind closed doors, but the world and markets need to have the benefit of the IMF's thinking and advice. That is one of the valuable global public goods that the IMF provides. And the world is sophisticated enough to understand that the IMF, even where it may differ from governments intellectually, can nevertheless support them institutionally and financially.

Second, sharing its thinking publicly is an important internal check on the institution. What the resignation letter hints at, and something which outsiders can never prove and insiders will never admit to, is that internal decisions are made in an atmosphere that encourages caution rather than openness and made by a few who do not have a monopoly on competence and good ideas.

The second major failing of the IMF is the failure to over-size itself financially and quickly. True, the IMF has increased its resources recently (by about $450 billion) but the magnitudes will be insufficient if Spain and Italy were to plunge into crisis. Europe may be rich but it cannot avoid relying on external resources in an emergency. The reasons could be economic, because the balance sheet of the euro zone as a whole is fragile and raising internal resources at a time of prolonged and slow growth will be difficult; political, because Germany may be unwilling to shoulder all responsibility. Or the euro zone could collapse, unleashing chaos — minimising which will require all the resources the world can muster.

To be fair, the IMF’s managing director has been trying to raise resources from its members — but without the sense of urgency and scale that is warranted by the circumstances. In some part this is because the major shareholders, the US and Europe, fear a loss of influence from a bigger IMF. It is also because the new creditors, especially China, are reluctant to acquiesce to greater contributions by them if there are not commensurate changes in governance that would give them more say. The fault of the current leadership, if any, is again the failure to articulate the intellectual case for keeping the IMF relevant as a crisis-stabiliser in the new world where rich countries are potential supplicants for emergency resources.

The writing is on the wall for the IMF. The BRICs have set up a new bank for effecting resource transfers, and East Asian monetary arrangements are being strengthened. There is no mistaking the motivations. Frustrated with the difficulty in reforming the IMF, emerging market countries, especially China, are gradually contemplating alternatives to it. These new initiatives are not necessarily superior or even usefully complementary to a multilateral IMF. But they are the consequences of a weak and unresponsive IMF — too closely tied to an increasingly irrelevant Euro-Atlantic, rather than a truly international, monetary fund.

If the current IMF leadership does not take corrective action, a few years hence the world might well be asking why the IMF was asleep as advisor and financier even as the European driver was taking the car over the cliff.

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The writer is senior fellow at the Peterson Institute for International Economics and at the Centre for Global Development. He is a former IMF Assistant Director. A version of this op-ed appeared in the Financial Times on July 26