reddytoread

It is well known that developing countries have been claiming a larger role in the World Bank and the IMF and that this has been resisted by the developed countries.  The US has objected to dilution of its shareholding even though it could mean smaller financial obligations on its part and in the latest round of debates about appointments to head the IMF and the World Bank the presumption that their leaders would be drawn respectively from Europe and from the United States has been for the first time frontally and fiercely challenged.   That such demands cannot forever be resisted has come to be increasingly recognized even in developed countries, and has been underlined by the creation of the Asian Infrastructure Bank and the ‘BRICS Bank’, which has demonstrated that China and other claimants to a larger role may increasingly bypass the received structure entirely.

This places IMF Managing Director Christine Lagarde in a difficult position as the organization is already perceived as having been permissive in lending to Greece as compared with other countries, perhaps because of the influence of European countries in the organisation.  This complaint may in part reflect the zeal of the newly converted to fiscal propriety, but it also reflects genuine concerns about equitable treatment and economic justification.  The IMF has now been exposed to a default (going into arrears, technically) by Greece: the first ever default by a ‘developed’ country and the largest in the IMF’s history.     Although Greece has requested an extension of time to pay its recently due bill, it seems unlikely in this context that the organization will give Greece very much breathing room.

There is, however, a much deeper issue.   The IMF is supposed to be treated as a super senior creditor which is to be repaid first in the event of payments difficulties.  This treatment helps the IMF to charge lower interest rates than otherwise and to reassure the governments that have contributed its capital.  However, it is only a practically relevant concept to the extent that the IMF is one lender among many.  The role of the IMF has become in part to provide a perceived seal of approval and thus ‘crowd in’ other lenders.  It is not typically economically attractive for a country to default to the IMF in part because it may lose future borrowing opportunities not only from the IMF but from many other potential lenders, who may freeze it out of the debt market for at least some time.   Moreover, such a response by other lenders is ‘incentive compatible’ to the extent that IMF arrears must be cleared before any other lender can be repaid.  Of course, the fact that Greece’s creditors are predominantly now other governments and the ECB as a result of an implicit bailout of private investors means that the calculations that they will make will not be narrowly financial (even if they will consider economic implications such as the impact on the wider stability of the Eurozone).

This institutional arrangement might be thought of as having when it ‘worked’ given rise to a repeated game in which social norms (implicit agreement among creditors to lend only when the IMF approves), signalling (the informational inferences attached, for good or for ill, to the IMF seal of good housekeeping) and legalities (IMF super seniority) all played a role in enforcing an equilibrium.   Greece’s recent missed payment, as some have delicately referred to it, suggests not only that its relations with its creditors but the workings of the international financial system are rather far off an ‘equilibrium path’.   That is in part the consequence of the seemingly political IMF decision to go along with demands by Germany and other Eurozone creditor countries that Greece should have a fiscal contraction without the elements of exchange rate adjustment — which in the Eurozone context would have to be supported by a still more expansionary monetary policy — or debt relief which have made IMF programs arguably successful in restoring financial balance in a number of cases, even though they may have led to otherwise socially undesirable results. There are of course arguments that standard IMF policies have been at times counterproductive even in these respects and even in the short term , for example by failing to note the microeconomic effects, e.g. on the banking system, of macroeconomic policies such as raised interest rates.  The effect of the standard medicine on growth and development in the long run is still more controversial, and this is a crucial issue for attaining the creditors’ own goal of debt sustainability. The IMF has itself expressed concern about the effect of contraction resulting from austerity on debt sustainability in Greece. However, it has been silent on the need for changes in the flawed architecture of the Eurozone that has underpinned the crisis, and on the possible positive contribution of a more expansionary posture in Eurozone surplus countries.

It is right that political considerations should enter decisions which affect people but the hypocrisy of claiming to prioritize technical considerations while selectively capitulating to political ones has been laid bare.  In analyzing society it is always sensible to focus on rules, policies and politics rather than on individuals, but even from these perspectives it seems clear that the case for the next head of the IMF to be another European will be hard to make.