Thursday, May 26, 2011

The Politics of IMF Leadership

. Thursday, May 26, 2011

Daniel Davies titles a recent post on the selection process of the new IMF chief "Taking the politics out of politics, and the international relations out of international institutions". Davies is correctly pushing back the notion that the IMF exists for technocratic perfection, specifically the argument (by Martin Wolf among most other popular writers) that the IMF chief needs to be an economist.

This is real "too important to be left to generals" territory. A "merit-based" selection process for the IMF top job is effectively assuming that all the issues the IMF faces are technical (not political), and that the problem is to find someone with sufficient technical economic skills to pick the right solution from a mass of confusing alternatives.

In fact, in general the IMF tends to face situations in which there are only about three or four real options, one of which is usually both massively obviously the best idea, and politically very difficult for some powerful constituency or other. That's why it's a political job. And the allocation between the USA and Europe was agreed at the original Bretton Woods conference as part of a very dicey compromise between the only two blocks which can print unlimited hard currency. It's an international institution, and one of the biggest problems in designing such an institution is to persuade the major powers that it is worth their while working through the institutional framework rather than through bilateral diplomacy. That's why the UNSC has permanent members, for example, and it's why France and Germany tend to get first dibs on important Commission posts.

I am no fan at all of the IMF (or of the way in which history is being rewritten to cast them as opponents of pointless austerity). But it does at least kindasorta work as an international institution, which is why I'm in favour of not fixing it.

Davies is right that the IMF is more about politics than about economics. That's the whole point of having an established international institution rather than a series of ad hoc transfers as needed: sometimes the ad hoc transfer won't come for political reasons, and that can lead to disasters like the 1930s. There are a number of political dimensions related to the IMF. One is the austerity politics in the debtor nation. The IMF is routinely portrayed (including by Davies here) as some kind of bogeyman, externally imposing its imperial will (or the imperial will of the US) onto smaller, less powerful countries. This is only some of the story. James Vreeland has done a lot of the best research on the IMF, and here's the abstract of a new working paper by him:

Many argue that governments use IMF programs to push unpopular policies past domestic political opposition. Many others have argued that the IMF is merely a tool of US foreign policy, providing loans without enforcing policy conditions. This paper addresses the inconsistencies between these two views, presenting large-n evidence supporting both. The domestic politics story, however, depends on international politics. The IMF can only be used to push through unpopular policies when the institution is not being used to reward friends of the US.

In other words, the IMF is a useful bogeyman for domestic leaders that want (or need) to pursue unpopular reforms, but do not have the domestic political constituency to do so. To the extent that some of these reforms are necessary (as they certainly are in Greece today), we may not want a kinder, gentler IMF. Better for the IMF to remain the scapegoat, thus giving domestic reformers some political room to move. Blame the institution, but pass the reform. Some of Vreeland's other work supports this idea.

There's another political aspect of the IMF that is less discussed. Dr. Oatley wrote a post last year about the politics of bailouts in creditor nations. Basically, the story runs like so: it is often politically unpopular for one country to give aid to other countries in times of need. Think about the typical German voter, who wonders why her tax dollars should be spent to reward the Greeks for their profligacy? A direct funding mechanism (like EFSF?) may not be politically sustainable in democracies. But an indirect funding mechanism (like the IMF) may be more politically successful, by making the bailout one step removed from budget politics in creditor countries.

We're seeing both elements at play in this crisis. Austerity is unpopular in debtor countries like Greece but is inevitable in some form, so if politicians can shift some of the blame onto the IMF it may help them get necessary reforms through. At the same time, voters in Germany and France don't like being expected to pick up the tab of the Europeriphery indefinitely, and have set 2013 as the expiration date for bailout funds. But the IMF doesn't have such a limit. It can extend funds when and where they are necessary. And funding the IMF is not as politically salient as funding other countries directly.

Because the IMF is facing domestic political pressures in creditor and debtor nations, as well as international political pressures from its constituent governments (particularly the US, but the role of EMs are growing too), its next leader should be someone that can navigate the political space and doesn't mind be blamed for everything that goes bad in debtor countries. The next leader should not be someone chosen for their technical economic nous, much less for their country of origin, but for their political sensibility.

I have no idea of Christine Lagarde is that person. I know very little about her. What I do know is that she's a bureaucrat, not an academic, and so presumably has a good sense of the European political situation. That's a start.


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The Politics of IMF Leadership




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