The impending election of a new IMF Managing Director affords the opportunity to think anew about the qualifications required. The IMF will remain one of the most important global institutions to stabilize the world’s financial system, in spite of its tarnished reputation as the source of immiseration, unemployment and social devastation as a result of its “programs”. This reputation was acquired especially after the 1990s Asian crisis, but also earlier and later IMF programs.
The present crisis shows once more over how important it would be to stabilize the financial system. Reinhart’s and Rogoff’s “This Time is Different” shows clearly that the impact of the consecutive crises has increased that they have become a threat to the world economic system. Since the Bretton Woods System with fixed exchange rates was blown to pieces in 1971, financial activities have multiplied; deregulation of financial market actors has enabled ever more complex products which in the end did not serve the needs of the real economy, but only the self-serving financial sector and its beneficiaries themselves. IMF has been instrumentalized by the USA (its largest shareholder with a blocking voting share) to cement to predominance of the US dollar in the world financial system – with devastating effect both for the USA and more for the rest of the world. The financial crises in Latin America, Southeast Asia, Russia und finally industrial countries have driven millions of people into poverty and despair; they have exacerbated the gigantic income disparities within and between countries, where median incomes have stagnated and high incomes have multiplied; this has not only reduced effective demand, but threatens increasingly social and political cohesion. Single-issue extremist parties have captured many countries’ political systems, as distrust in mainstream parties has increased, given their frequent involvement in financial machinations and their succumbing to the lobbying might of the financial industry.
The only positive side effect (hopefully) of this disillusionment is the revolt of the Arab street against its rapacious oppressors. This revolt is less for (Western-cherished) “freedom”, than for a decent life and prospects of a better future for the next generation.
Sachs goes regional
Jeffrey Sachs, whom I deeply dislike on account of his (unfortunately successful) propagation of “shock therapy” in the transition of Russia and Eastern Europe, gets a few bonus points for his terms of reference for the new IMF boss in an article of the Financial Times on May 31. He requests of this person:
a) to manage the importance of the US dollar as global currency, since globalisation has led US events to spill over into the whole world; he suggests instead a basket of world currencies, the dollar, the euro, the renminbi, the rupee and possibly the real – a suggestion reminiscent of Keynes’ Bancor.
b) Sachs wants strong regional monetary authorities which provide the public good financial stability within each region; this would require to harmonize financial market regulation, taxes, fiscal coordination and infrastructure projects in each region – de facto strong regional monetary funds.
c) IMF in Washington should concentrate on closing tax and regulatory havens with the purpose to stop the downward escalation of tax rates and regulations – which he sees as one of the sources of the financial crisis.
d) Since many of these proposals concern the immediate interests of countries and regions, the new IMF director needs considerable leadership qualities. It does not require a European, or a Chinese or Mexican, but rather a person who thinks global, not national, not regional. This IMF needs somebody who credibly wants to build a truly global system. Not power politics, but a truly wide search would reveal a number of suitable candidates.
I share Sachs’ preference for regionalism and for the importance of combating tax evasion and regulatory downscaling. Tax havens prevent that taxes accrue to those countries in which economic activity occurs and lowers global tax revenues. They lower corporate income taxes and increase the pressure on indirect taxes and labor taxes – both regressive and harmful for employment. Sachs’ program is curiously limited.
I agree with his regional approach, since any “global” solution from above meets insuperable national and regional resistance and cannot account for the historical, cultural and economic differences between regions. We need a bottom-up construction in a multi-polar system which should combine to a harmonized global solution. Thus, it would be a task for the new IMF chief to promote the harmonization of regional solutions and assure their compatibility. This would mean a balancing out of the existing regional economic imbalances between blocks. At the same time, such regionalisation could establish trade-creating effects within the regions, as well as increase intra-regional capital and labor flows, as well as overarching transport and communication infrastructure. Such a general shortening of transport distances would also be beneficial for the global climate.
Sachs does not speak about regional monetary funds, a topic touched by the Asian attempts of the Chiang Mai Initiative, the European Crisis Mechanism, and others, or whether a joint global IMF should persist. Any regional solution would require an overarching balancing mechanism.
The question remains, whether between the major currencies fixed, flexible or managed exchange rates should prevail. Given the experiences of the last decades, I would give preference to managed exchange rate mechanisms, with relatively narrow bands, but the possibility of larger adjustments.
An important question to be solved would be how to distribute the responsibilities of financial market supervision between regional blocks in case of globally active financial actors, and especially who will bear the costs of re-capitalising failing systemic banks. The recent crisis has shown wide gaps in the latter. Attempts via the Vienna Initiative to start closing these gaps still need to be completed.
The IMF has shown in recent years that it can accept criticism and has started to change its ways. A new director will have to have extraordinary vision and leadership. If regionalisation à la Sachs would happen, this would probably distribute the global IMF’s strongest negotiating leverage, its 750 billion $ kitty, among the blocs and thus leave the global IMF in a position where its strongest argument can be backed up only by moral suasion. This points to the need for an even stronger personality.