Of all these, perhaps the case of Lagarde could well have a bigger impact on the global economic system at a time when globalisation is under attack from the US president-elect who wants to put “America first” — and seems to be on a collision course with China, the world’s second-largest economy and largest trading nation. To be sure, the IMF’s Board has reaffirmed its confidence in Lagarde after the French court judgment. But could the case reduce her influence and power in the institution? Incidentally, her immediate predecessor was forced to resign after a sex scandal, and his predecessor, too, has been convicted of corrupt practices when, post IMF, he was chief executive of a banking group in Spain.
Coming to IMF under Lagarde, one has seen several major policy/ideology changes in the institution under her stewardship. Over the earlier three decades it seemed too much in thrall to a neoliberal, laissez faire ideology — liberal capital account, market-determined exchange rates, fiscal austerity, etc. Any questioning of the orthodoxy within the institution had unfavourable repercussions on the heretic’s career. To quote from two, first-half 2011 reports by its Internal Evaluation Office: “The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink and intellectual capture... The staff reported that incentives were geared towards conforming with prevailing IMF views… The staff saw that conforming assessments were not penalised, even if proven faulty... Policy recommendations provided in some research publications did not follow from the research results… A number of country authorities and researchers noted that IMF research tended to follow a preset view with predictable conclusions that did not allow for alternative perspectives.”
Under Lagarde, who took over as managing director in July 2011, this seemed to be changing. Some examples:
- The 2012 “institutional view” on the capital account accepted the need for capital controls in certain circumstances;
- The inclusion of the Chinese yuan in the basket of currencies, which determines the value of the special drawing rights, the IMF’s unit of account, in the last quinquennial review. There was considerable opposition to this from the neoliberal community as the yuan’s exchange rate is managed by the central bank and China maintains capital controls;
- A spate of papers published recently questioned the legitimacy of neoliberal economic policies. To site one example, an article in the IMF publication Finance and Development, in June 2016, “Neoliberalism: Oversold?” argued that liberal capital account and fiscal austerity reduce growth and increase income inequalities;
- Acceptance that its earlier estimate of the fiscal compression ratio (fiscal deficit reduction divided by its impact on gross domestic product growth, both as percentage of GDP), at 0.5%, was grossly wrong, and that it can be as high as 1.9!
- Pleading for debt relief to Greece from its institutional creditors like the European Central Bank and the European Commission, if its economy is to recover.
One is hoping for similar fresh thinking on issues such as market-determined versus managed exchange rates; inflation targeting and independent central banks; etc, now that the court case is over and Lagarde can fully focus on leading/guiding the institution she heads.
Punishing banks
Last week there were two reports of foreign banks being fined respectively for mis-selling of residential mortgage-backed securities in the US; and violation of the Foreign Exchange Management Act in India. The former amounted to $12.5 billion between two banks, and the latter to Rs 60,000 (less than $1,000) over five banks. (One bank is common to both the groups.) While the nature and scale of their “crimes” may be significantly different, surely any punishment should be a deterrent for the future? Else, why impose it?
The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com