It is difficult to describe a spiral without raising one’s finger. It is more so to write about financial crises without involving the International Monetary Fund (IMF). After all, when it was set up, its role was to monitor global financial systems with a view to ensure stability. Looking back, its record is controversial and achievements questionable.
Indeed, there is a global divide. There are those who argue that the Fund failed to foresee the major financial crises whether in Mexico or Latin America in the 1980s or the Asian crisis of 1997 or even the worst crisis in recorded history which erupted in 2008. It is accused of being partisan and serving the interests of advanced countries more than the emerging economies. At another level, there are economists, mostly in the U.S., who value the role of the Fund in bringing about integration of global financial markets by establishing rules, norms, standards, etc. They also draw attention to the morphing of Fund approaches over the years to capture changes in global dynamics. The divide is between those who abhor the Fund and those who keep faith in it. Joseph Joyce, the author of this book under review, belongs to the latter category. In fairness, he is not an uncritical votary and in many pages he draws attention to its infirmities and failings.
In lucid prose, Joyce guides the reader along and provides an account of the Fund from its establishment under the Bretton Woods Agreement and moves forward to narrate many episodes such as the Mexican default, Asian crisis of 1997, the growing financial imbalances and ends with the Great Recession which imploded in 2008-09. He manages to describe the responses of the Fund to them and also how the Fund changed its stance or style to accommodate politico-economic matrix. The narration is skillful and scholarly. There is an introductory chapter which summarises the themes developed in other chapters. Moreover, each chapter begins with a synopsis of themes handled and the end of each chapter leads on and links deftly with the next. This kind of narration should have its appeal as a text book on the IMF in U.S. universities.
Mythical, not historical
Our quarrels however are with the broader theme proposed. The author tries to create an impression that the Fund is a creative organisation having a soul of its own and assumes newer roles to suit the changing dynamics. He implies that the Fund, like Phoenix, has risen from ashes after responding to the latest crisis. He suggests how from the palmy days of the Bretton Woods Agreement when the Fund was overseeing the par values of member currencies and managing capital flows, it has got back to a similar role after decades of turbulence and meandering.
This account is more mythical than historical. As the author says, during Bretton Wood era there was collective action or commitment for group action. It was balanced the served the interest of members fairly. The system collapsed when the U.S reneged unilaterally its responsibility to maintain gold parity and floated the U.S. dollar. The exchange rate system came under strain. When Article IV was amended under extreme pressure from France, the collective action or common purpose was lost. The Fund had lost its mandate. It could still act with some vigour as long as the G-7 was cohesive and was in the driving seat.
With the emergence of economic powers in the South such as India, China, Brazil, etc., the agenda had to be reset. The struggle to rest the agenda is continuing. In the interim, the Fund lost its moorings. It is no surprise the Fund’s handling of emerging economies, especially after the Asian crisis, led to many emerging economies distancing themselves from it.
The Fund had hit its nadir before the onset of the Great Recession in 2007-08 and was clueless about the growing crisis. It was indeed a diplomatic tour de force of the U.S. and the U.K. to have revived G-20 and involved the major emerging economies in handling the crisis. An atmosphere of extraordinary crisis-cum-emergency was created and the IMF was brought in to handle the baby. Mr. Strauss Kahn who happened to be the Managing Director did not fail to seize the opportunity and played an eminently political role. Additional funds were provided to the Fund and the Fund was back in business. Some analysts referred to it as the rise of Phoenix and Joyce adopts it with ease. Sadly, the analogy is incorrect. Though Phoenix was resuscitated, it failed to fly higher as further action to provide funds or reform the Fund did not come about. With some signs of economic recovery and home-made stimulus programmes, the will for collective action has evaporated. The G-20 meets regularly and issues long-winded statements in the nature of homilies.
One controversial theme in the book relates to the new found commitment of the IMF to capital controls. He says: “The IMF adjusted its position on capital controls, showing an intellectual and ideological flexibility that few thought the institution possessed.” This is not correct. A closer study of the IMF documents and allied literature would clearly suggest that the IMF continues to retain its faith in capital freedom. All that it has done, in response to the extraordinary pressure from G-20 and others, is to accept grudgingly a role for capital control as a last resort in the macro-economic set of policy instruments.
Joyce describes many of these developments in the last chapter, “The World Turned Upside Down”. Now the Fund has to deal with the negative developments such as debt hang, sovereign debt, etc. in advanced countries. As the author says, “the IMF soon faced new onset of financial instability in Europe that split the IMF’s members.” Joyce ends with a number of suggestions to reform the IMF and its ownership, control and management. Absent any large scale reform, the IMF will continue to fry in the fires like Phoenix and not rise again.
Though the author refers to many critical and debatable issues, he treats the IMF and its record with kid gloves. He is willing to hit, but unwilling to hurt.
(K. Subramanian is a retired civil servant)