Are the Bretton Woods Twins - the World Bank and the International Monetary Fund (IMF) - being forced into major governance and ideological transformations? Consider first the World Bank. Its soft-lending arm, The International Development Association, has been constrained by fiscal austerity in most developed economies, which used to fund it. As for the World Bank itself, Chinese and European institutions provide far larger external loans to its traditional clients. This apart, the institution faces major governance issues: Last week, in an unprecedented move, the World Bank staff association, in a letter to the bank's board, referred to a "crisis of leadership" and demanded an end to the era of "American males" being appointed as its presidents. The present chief executive is an American of Korean origin, a medical doctor and anthropologist. (Since the birth of the Twins in 1944, an American has always headed the Bank, and a European the Fund.) One positive sign is the appointment of Paul Romer as chief economist last month. Romer is famous for being a contrarian, and a critic of the increasing "mathiness" of economics.
The IMF may also have a leadership issue later this year. To be sure, Managing Director Christine Lagarde was recently re-appointed for a five-year term, but is facing a court case in her native France for some decisions taken when she was the finance minister. The board obviously believes she was not at fault. It would be extremely embarrassing to the august institution if its third successive managing director were to be guilty of immorality. (Of her two immediate predecessors, one was forced to resign after a sex scandal, and the other was responsible for mismanaging the affairs of a commercial bank after his retirement from the IMF; he was also caught claiming personal expenses from that bank.) This apart, one finds continued signs of a possible change in the "neoliberal" ideology propagated by the institution over the last four decades: liberal capital account and market-determined exchange rates; fiscal austerity; an independent central bank; and deregulation of markets.
One example is an article by Jonathan Ostry, Prakash Loungani and Davide Furceri in the June 2016 issue of Finance and Development, an official quarterly of the IMF: the title is "Neoliberalism: Oversold?". Looking at the effects of removing restrictions on cross-border movement of capital and fiscal consolidation/austerity, the article comes to three disquieting conclusions:
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The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.
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The costs in terms of increased inequality are prominent. Such costs epitomise the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.
- Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, its advocates still need to pay attention to the distributional effects.
The article is particularly critical of portfolio investment and speculative debt inflows. It claims that since 1980, there have been 150 episodes of surging capital inflows in 50 emerging economies, and 20 per cent of the time that resulted in a financial crisis. To be sure, other economists - from Jagdish Bhagwati to Dani Rodrick to Joseph Stiglitz - have warned of these possibilities for long. Bhagwati considers the IMF's ideology of liberal capital flows an example of crony capitalism between Wall Street, the US Treasury and the IMF. Rodrick has claimed in the same issue of Finance and Development that the "boom-and-bust cycles are hardly a sideshow or a minor blemish in international capital flows; they are the main story". Stiglitz believes the IMF "had pushed deregulatory policies, including capital and financial market liberalisation, that contributed to the creation of the (2008) crisis and to its rapid spread around the world" (Freefall by Joseph Stiglitz).
At a time when global growth is slowing down, and so is cross-border trade, policymakers perhaps need to go back to the views of the two main architects of the Bretton Woods agreements, John Maynard Keynes and Harry Dexter White. They believed that a regime of "unfettered capital flows was fundamentally inconsistent with the macroeconomic management increasingly expected of governments, and with a liberal international trade regime" (Finance and Development, June 2016, "Guilt by association", Atish Rex Ghosh and Mahvash Saeed Qureshi).
Do we need to go back to the wisdom of the founding fathers - and away from the Reagan-Thatcher neoliberalism?
The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
