The Misguided, Self-Defeating War On the IMF

The Misguided, Self-Defeating War On the IMF
Managing Director of the International Monetary Fund (IMF) Christine Lagarde arrives in front of the painting 'November 9, 1989' by Hans Peter Zimmer for a meeting in the German federal Chancellery on May 13, 2014 in Berlin, Germany.
Photograph by Adam Berry-Pool/Getty Images

You have to feel a little sorry for the International Monetary Fund and its managing director, Christine Lagarde. Invited to give the commencement address at Smith College, an elite women’s college in Massachusetts, Lagarde canceled her appearance last week in the face of student protests calling the fund imperialist. Meanwhile, legislation to enable IMF voting reform is being held up by Senate Republicans concerned that under the proposed changes, the fund wouldn’t be imperialist enough—and would bolster the influence of countries such as China and Russia at the expense of the U.S.

Both sets of critiques are misplaced and unfair, to the institution and to Lagarde personally. Yet while the charges of imperialism levied by the Smith College students tend to receive the most attention, the Senate Republicans pose a far bigger threat to the IMF’s viability.

The criticisms of IMF policy made by Smith’s students deserve examination. “The IMF has been a primary culprit in the failed developmental policies implanted in some of the world’s poorest countries,” read a Smith college petition. “This has led directly to the strengthening of imperialist and patriarchal systems that oppress and abuse women worldwide.”

After 10 years of strong economic growth, low inflation, and declining debt across the developing world, this line of argument is a lot less persuasive than it used to be. But even in the comparatively grim 1980s and 1990s, there was little evidence that IMF programs had a particularly adverse impact on poor people.  Analysis by development economist Bill Easterly in 2000 could find no overall impact of IMF and World Bank adjustment lending on economic growth, though he did point to suggestive evidence that the lending smoothed the consumption of the poor—marginally increasing it in years when output contracted, marginally reducing it when output expanded. A later paper by Easterly found no causal impact of adjustment lending on policy change in recipient countries. So much for the neoimperialist imposition of a neoliberal agenda through the agency of multilateral institutions.

More recently, the IMF has been making pronouncements that might get a cheer at an Occupy Wall Street rally. Lagarde has suggested, “Across too many societies, the gap between the haves and have-nots is getting wider and strains are getting fiercer.” The IMF has come out swinging on the harm caused by inequality: “Lower net inequality is robustly correlated with faster and more durable growth,” while “redistribution appears generally benign in terms of its impact on growth.” Here’s a recent IMF working paper on stimulus packages: “Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output.” Lagarde has repeatedly suggested Europe needed to boost stimulus spending, while U.S. budget cuts were too big, too fast.

And here’s the managing director on climate change: “clearly one of the great challenges of our time, one of the great tests of our generation.” The IMF’s position on climate policy is that “[f]iscal instruments (emissions taxes, trading systems with allowance auctions, fuel taxes, charges for scarce road space and water resources, etc.) can and should play a central role in promoting greener growth.”

The IMF reform that Lagarde is championing would make the fund’s board more representative of global power. It would not only allow the organization to provide greater sums to countries in financial crisis, which should help smooth the consumption of the poor, but it would increase the voting power of developing countries on the IMF board. If “being less imperialist” entails being more representative of the distribution of world economic power and better at representing the 99 percent of the world’s population, the reform would do precisely that.

Despite the howls of campus leftists, the politicians on the right seem to have more reason to worry about the direction the IMF is taking. Republican Senators, including Rand Paul of Kentucky and Ted Cruz of Texas, have led the charge to block Lagarde’s proposed reforms. Less worried by the fund’s patriarchy abroad, Paul’s 2010 Senate campaign literature suggested he thinks the IMF is undermining American power: “Today, America is often subservient to foreign bodies such as the International Monetary Fund (IMF).” And the Heritage Foundation, a conservative think tank, has long been concerned that the organization is too keen on bailouts, deficit spending, and climate change mitigation.

But the right is being short-sighted at best regarding IMF reforms.  It is true that the U.S. share of voting power in the organization would drop from 16.7 percent to 16.5 percent under the proposal. But the changes would also bolster the fund’s capacity to respond to financial and economic crises.  Not least, the reforms might allow the Ukraine to borrow $6 billion from the IMF over the next three years in addition to the $17 billion package the organization put together in the past few weeks.  That dwarfs the $1 billion in loan guarantees the U.S. Senate was able to agree to in the past few weeks—and suggests how powerful a tool the fund can be in support of U.S. economic and political interests overseas. (That is, if IMF support during the last few years for European allies from Greece to Ireland wasn’t enough evidence already.)

The protesting Smith students show how distant the academy can drift from the real world. But at least they’re only students, not lawmakers. The campaign by Senate Republicans to delay modest and sensible IMF reform, meanwhile, displays anything but enlightened self-interest. So perhaps the message for both sides is the same: Do grow up.

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