Monday, March 8, 2010

Who's Afraid of the IMF?

. Monday, March 8, 2010

Emmanuel notices that multilateral lenders-of-last-resort are popping up in Europe and Asia, and wonders: why not scrap the IMF? A European lender could tailor its policies to European needs, by surveilling compliance with the Maastricht criteria, for example. Emmanuel also notes that European countries rarely have balance of payments problems, which is the ostensible purpose of the IMF. The Vreelander sees the move from international to regional multilateral institutions as just another sign of the times:

The European Monetary Fund is less of a big deal. In the 1950s, 60s, and 70s, European countries borrowed from the IMF and had to accept the conditions attached. With the United States as the largest shareholder of the IMF, this gave our country some influence over policy in Europe. But Europe turned away from the IMF a long time ago. With Greece flirting with the idea of turning to the IMF for a loan, Germany and France are moving to make the divorce more final; Europe will deal with European monetary affairs.

But this European monetary move adds impetus to other regional organizations, like the Chiang Mai Initiative for Asia, and the Banco del Sur for South America. Global governance going forward will be increasingly based along regional lines. The United States will no longer have as much influence - neither directly, nor through its influence at the IMF.

So, the United States needs a new leadership style. We should continue to invest regionally, promoting our relations with neighbors, Canada and Mexico. And we should look to lead the world by engaging multilaterally. The days of effective US unilateralism are over. Cooperation with friends is the key moving forward.

I agree with the general sentiments expressed by both, but I think we can go a little deeper as well. There is a lot of research supporting the claim that the U.S. influences the size and type of IMF lending. E.g., this paper by Oatley and Yackee argue that countries allied with the U.S. get larger IMF loans, this paper by Randall Stone argues that U.S. allies can (sometimes) leverage that relationship to receive fewer conditions on their loans. If the goal is to decrease the influence of the U.S. and increase the influence of local/regional governments, then these patterns of increasing regionalization make sense.

But there is also another dynamic (other than the fact that the ASEAN+3 and eurozone are not the whole world) at play that suggests that the IMF will be around for quite awhile: it can provide needed political cover for leaders to enact unpopular reforms. This is especially true if the IMF is controlled by the U.S. Let's think about the Greece situation in this way: if Greece installs an austerity program in exchange for loans from Germany, then voters who dislike the plans in Greece and Germany know exactly where to aim their disapproval: incumbents. But if Greece is required to install an austerity program in exchange for an IMF loan -- even if the IMF loan is funded by Germany -- then domestic political leaders can argue that they had no choice in the matter: the Big Bad IMF made them do it. In this case, as it often is, opacity is a good thing for leaders enacting unpopular reforms, and including the IMF can muddy the water.

(Note: Vreeland has a paper on this topic, which he forgot to cite in his post. Blogging is all about self-promotion, James! Don't make me do your laundry for you.)

Now, it appears that Germany wants to make the domestic political costs for needing debt bailouts very high. In other words, Germany doesn't want to provide any political cover for Greece, for fear that if there are no consequences for being profligate then they'll just go back to profligacy. If this is true, then the political cover dimension of the IMF is a very strong reason to want to move policy away from that organization, since the "political cover" aspect of the IMF is essentially encouraging moral hazard. But there are potentially very high costs for German leaders as well: I doubt that German voters appreciate having to bail out foreign governments during an economic downturn. If leaders in Germany are punished for spending German funds to keep Greece (and Portugal, and Spain, and Ireland) afloat, then I think we'll see those nations scrambling to re-strengthen the IMF. The unpopularity of the IMF can actually work in the Fund's favor, in this case.

The takeaway? The U.S. may not able to act be able to act unilaterally as much anymore, but that does not guarantee that global governance must become more fractured. There may be political incentives to keep international organizations international, rather than regionalizing or localizing them.


Who's Afraid of the IMF?




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