The IMF’s Independent Evaluation Office (IEO) recently released its assessment of the IMF’s handling of the euro crisis. It was a damming report.
The IMF has been heavily criticised for its response to the euro crisis, particularly its involvement in Greece. As Stephen Grenville has noted, you could fill a library with the commentary on the Fund’s failings. These include: ignoring the signs of an impending crisis; failing to understand the dynamics of a currency union; relying on excessively ambitious projections in the design of programs; not applying the IMF’s requirements for exceptional access to resources; and having a pro-Europe bias in lending decisions.
Among some of the most disturbing revelations in the IEO report are shortcomings in internal IMF governance. One media report concluded it was ‘unclear who is ultimately in charge of this extremely powerful organisation’. Was IMF management calling the shots, or was management a puppet to the European Central Bank (ECB) and European Commission (EC)? One thing is clear: the IMF’s executive board wasn’t in charge.
In describing its governance arrangements, the IMF states that the board of governors (consisting of finance ministers or central bank governors) is the highest decision making body, but most of its powers are delegated to the executive board who conducts the day-to-day business of the IMF and is responsible for all lending decisions. Yet notwithstanding that the IMF was dealing with a major financial crisis with global consequences, the IEO concluded that ‘the executive board played only a perfunctory role in key decisions related to the IMF’s engagement in the euro area crisis’. Important details were not provided to the board, and it was not consulted on some key policy issues.
One criticism was that the IMF had a pro-Europe bias, a consequence of a European managing director and over 25 per cent of the executive board coming from Europe. Supporting this claim was the way the IMF ignored its own requirements for exceptional access to its resources in order to make additional loans to Greece. The IEO also points out that European directors were provided with information not available to other directors. It also appears that decisions on the use of IMF resources were effectively being taken by the ECB and EU.
It is disturbing that the IEO had difficulty getting access to IMF documents; a sign of a major breakdown in internal governance. The IEO was clearly exasperated and noted that many documents on sensitive matters were prepared outside established channels and/or could not be located. Furthermore, the IEO was not able to determine who made certain key decisions, or the basis for those decisions.
In recent years the focus for reforming the IMF’s governance arrangements has been on increasing the quota share of emerging markets. The concern of the emerging markets is that developed countries have a disproportionate say in the IMF, which has biased decisions in favour of the developed countries. The process of changing quota shares and representation in the IMF to better reflect the changes in the global economy has been a tortuous affair. The G20 agreed on a change in quotas which would result in an overall 2.7 percentage point increase in the quota share of emerging markets, and this was to be the first instalment of bigger changes. However it took the US five years to endorse the initial change. Given political trends in the US, combined with its veto power over major changes in the IMF, it will be a long time before emerging markets get a further increase in their say.
But the IMF does not have to wait for changes in the distribution of quotas to reform its internal governance arrangements. In fact, given the concerns of emerging markets and the slow progress in changing quota shares, the IMF should be going out of its way to demonstrate evenhandedness in all its decisions. With the IEO report pointing to a clear pro-Europe bias, it is unfortunate that IMF Managing Director Christine Lagarde rejected the first recommendation by the IEO, namely that the executive board and management develop procedures to minimise the room for political interventions in the IMF’s technical analysis. Remarkably, Lagarde said that there was no basis in the IEO’s report supporting this recommendation. No wonder emerging markets are disillusioned with the IMF.
Lagarde may have baulked at the imprecision as to what constitutes ‘political intervention’, and the technical analysis of IMF staff is only one input to what will always be judgement calls. But the concerns of emerging markets over IMF bias are very real, and have been reinforced by the IEO report.
What Lagarde should have done was to recognise the thrust of the IEO’s assessment and say reforms would be put in place to help ensure that all IMF members will be treated equally, both in terms of access to IMF resources and in surveillance. Designing such reforms would not be straightforward, but at least the IMF would demonstrate that it is trying to deal with identified problems.
Photo: Getty Images/Drew Angerer