It is six years since the IMF’s fateful meeting in Hong Kong, just before the global financial crisis. I was there. What a peculiar meeting it was. To those paying attention, it was clear that a crisis loomed. Capital market liberalisation was the culprit, exposing countries to the vagaries of international capital flows – to both irrational pessimism and optimism, not to mention the manipulation of speculators.
Yet the IMF was still lobbying to change its charter in order to force countries to liberalise capital markets, ignoring the evidence that this did not lead to enhanced growth or investment, but only to more instability. The crises that erupted later that year undermined confidence in the IMF and led to discussions about “reforming the global financial architecture”.
Six years later, we can say that those discussions did not lead to much real change. The US Treasury and the IMF knew, or at least hoped, that with the passing of the crisis, global attention would turn elsewhere. On this point they were right.
But change has occurred, though sometimes more in rhetoric than reality. Today the IMF is more aware of the impact its programmes have on poverty – though it still does not produce a “poverty and unemployment impact” statement when it presents a programme. The fund has recognised the importance of participation and ownership. No longer are programmes simply a matter between the IMF, central bank governors and finance ministers. The IMF has recognised that there was excessive conditionality, and that these conditions led to a lack of focus.
The IMF has not, however, fully grasped that the conditions were often dangerously misguided and dealt with political issues beyond its mission. After criticising east Asian countries for a lack of transparency, the IMF acknowledged that it, too, was insufficiently transparent, and made reforms – though sometimes it seems to think a better website is a substitute for transparency. It has still not recognised a basic principle of modern democracy: a citizen’s right to know.
After the failure of the Argentina bail-out, the IMF accepted the need for an alternative approach. Earlier, it ignored calls for standstills and bankruptcy, saying that they would entail the abrogation of the debt contract. Finally, the IMF acknowledged that just as individuals need the right to a fresh start, so do governments. Unfortunately, it did not recognise that, as a major creditor, it could never be viewed as an impartial judge, and so could not have a pivotal role. It never fully grasped the political and economic issues underlying the design of bankruptcy laws.
Under pressure from global civil society, the IMF did finally agree to an enhanced debt forgiveness programme for the poorest countries. Regrettably, the standards and procedures it set mean that few countries achieve the debt relief they need. At least in east Asia, the IMF recognised that excessive fiscal stringency contributed to the downturn, though it still pushed fiscal stringency in Argentina when that country went into crisis, with predictably disastrous results.
It is good news that the IMF has recognised the limits of its policies. But we should expect more of the IMF than just doing less harm. Even without capital market liberalisation, the world will continue to face enormous volatility. Crises will not be things of the past.
Those who expected major reforms in the global financial architecture may well be sorely disappointed by the past six years. For any fundamental reforms must address not only the problems posed by the global reserve system and the burdens of risk borne by developing countries, but also global governance. However, there are strong vested interests in upholding the status quo. It is one thing to rearrange the chairs around the table, and quite another to change the table or those who have a seat at it.
So it is no surprise that another annual meeting of the IMF passed last week without any major steps in “reforming the global financial architecture”. Instead, there was much discussion of another sign that something is wrong. The issue of the day was whether China’s exchange rate is overvalued, and if so, what should be done. Developing countries were told, again, to get their houses in order, to address issues of governance and to undertake “painful” structural reforms.
It is, of course, much easier to encourage others to make painful reforms than to look inward. The failed WTO meeting in Cancun should serve as a warning: something is fundamentally wrong with how the global trading system is managed – and with the global financial system. How many more IMF meetings will pass, how many more crises will occur, before this harsh truth sinks in?
· Joseph Stiglitz, professor of economics at Columbia University, is a Nobel prize winner and author of Globalisation and Its Discontents.