On December 19, 2016 Christine Lagarde, the managing director (MD) of the International Monetary Fund (IMF), was convicted in French courts for misusing public funds while working as the French Finance Minister almost ten years earlier. Specifically, Lagarde had been accused of negligence for not appealing a $420 million arbitration settlement between the French state and entrepreneur Bernard Tapie. One clear question, with profound implications, permeated the case: Will Lagarde remain director of the IMF? The board of directors at the IMF and other international leaders were quick to respond, throwing their support behind Ms. Lagarde almost immediately after the conviction.
This is not the first time an IMF managing director has been embroiled in scandal. Dominique Strauss-Kahn, the former MD, resigned after both financial and sexual scandals. But controversy around the IMF is not limited to its individual leaders — the IMF as an institution has faced myriad challenges to its credibility in recent years. Developing countries, specifically the BRIC (Brazil, Russia, India, China) and East Asian countries, have been pressuring the IMF to distribute seats more proportionally within the Fund, and be more even-handed in its guidance to countries. Greece is set to default again on its debt obligations on February 20, 2017, and the IMF’s “austerity programs” response to the Great Financial Crisis (GFC) of 2008 have done little to stabilize the EU. Much of the debate surrounding the IMF has focused on whether or not to keep Lagarde on as MD, but she is just one piece of the larger crisis of credibility and legitimacy. In order to regain popular support, the IMF needs to address all components of this crisis, including proportionate representation and reform of its neoliberal policies. At the same time, the IMF should avoid ceding to populist pressure because it is important to create a countervailing force to the possible harm of unfettered public opinion.
One component of the IMF’s perceived illegitimacy is the lack of internal representation for developing countries. Recently, several developing countries have risen to prominence, most notably the BRICs and several East Asian countries like Korea and Japan. The IMF is set up such that several metrics of economic influence determine how many seats a country has at the Fund. While this is logical in principle, the ratios of seats to specific metrics like population, percentage of World GDP and political power are increasingly disproportionate, with Western countries wielding most of the influence.
Some believe this has resulted in the IMF turning a blind eye to Western countries’ affairs. The lack of oversight is a possible explanation for the massive, unopposed deregulation of Western markets. Furthermore, the United States is the only country in the Fund to have veto power — a power exercised in order to uphold the US’s agenda. Particularly pertinent, the United States delayed legislation for several years in the IMF to “increase the representation of developing countries in the Fund’s governance structure.” This disproportionate representation may not represent a threat to the existence of the institution as a whole, but notions of representation or “input legitimacy” are crucial for the credibility of an institution. Recently, there have been efforts to increase representation in the IMF. Beyond the five year review of quota shares, the IMF has made, “two ad-hoc changes to benefit under-represented countries” since 2000. Additionally, the 14th General Review of Quota in 2010 promised to put China as the third-largest quota sharing holder, and all BRIC countries in the top ten. Still, their quota shares under the new agreement are below the calculated share the IMF uses. At a time when the Fund needs to bolster its institutional credibility, more proportional representation will superficially improve its perceived legitimacy, as well as lead to more evenhanded oversight that can compensate for scandal and crisis.
More central to the IMF’s institutional crisis is its mismanagement of the global monetary order. Its institutional role has been to buttress an international monetary order through neoliberal principles. Generally, neoliberalism, or the neoliberal consensus, refers to the set of ideas and policies that create monetary order by promoting stable exchange rates, free trade, and capital mobility. Specifically, neoliberalism set up political and economic institutions in the 1970s and 1980s to promote globally harmonized policy, standards for economic growth, and transparency in sovereign monetary affairs. Perhaps the most important of these institutions, the IMF conducts surveillance on sovereign spending, budgets, debt to GDP ratios, capital mobility, exchange rate stability, and free trade. It releases annual reports on countries’ compliance with international norms, gives out conditional lending to countries with balance of payment deficits or debt, and administers “structural adjustment programs” in developing countries.
However, neoliberalism’s propensity for over-financialization (a deregulation of markets and an abiding faith in market forces) ultimately led to over-leveraged banks and the housing bubble which brought global markets crashing in 2008. In the past 40 years of the neoliberal order, most laborers have not seen real wage growth, and 90 percent of economic growth has gone to the infamous “top 1%.” Likewise, the response to the GFC has not been much better. The response included the austerity measures against countries in banking crises (Portugal, Spain, Ireland, Iceland, Italy, Greece etc.), which further hurt their economies. As a result, Greece is set to default again on its debt obligations on February 20th. Nearly all of the “southern sinner states” including Greece, Italy, Spain, and Portugal have unemployment rates of ten percent or greater, and several countries in Europe have voted in right-wing populist leaders, or are poised to do so in the coming elections.
It is apparent that the IMF, by advancing harmful neoliberal ideas, has played a role in mismanaging our monetary order and creating the conditions for an erosion of public trust. Given the magnitude of these problems, it is more important the IMF respond to the lack of growth in Europe (and the burgeoning pressure on domestic constituents to cover that burden) than it is to fire Christine Lagarde or establish more proportional representation. The IMF’s focus should be on taking action to reverse its past harmful policies – austerity measures, deregulated markets, strict adherence to low inflation rates, low government spending, and the unwillingness to give loans to countries in crisis could have a real impact on stimulating growth, for example. Doing so would bring positive economic consequences while also challenging the neoliberal status quo.
However, as the IMF pursues these reforms it needs to remain insulated from populist pressure. Since the IMF is meant to offer insight into the financial situation of many countries — countries that might have an incentive to paint a different picture of their finances — it is crucial that the IMF remains separate from domestic political pressure. The Fund must further be able to create and enforce international standards separate from national political desires. The challenge is thus gaining popular support without influence from public opinion. In order to retain legitimacy then, the IMF must focus on reforming its representation system and its approach to the world economy — measures the public cares about, but aren’t simply a response to the whims of a given nation.
Ultimately, the IMF faces an institutional crisis because of misplaced ideology and misguided monetary management. Reforming in these two areas represents the best chance to salvage the IMF. But, in the more immediate future, the IMF must also consider whether to fire Lagarde. Lagarde’s resignation as a measured response for reform should not be so easily dismissed. If the goal is ideological reform in the IMF, replacing the MD is a plausible way to start. However, given that many of the national governments that have traditionally backed the IMF and helped maintain some semblance of neoliberal order — France, the United States, the UK, etc. — have all buckled to some anti-globalization, anti-Eurozone, and anti-EU movements, it is understandable that the IMF maintains a symbolic hard stance against populist movements by keeping Lagarde in power. And as stated, it is important that the IMF remain insulated from populist pressure or public opinion.
Institutional reform works best when it is exactly that: reform. A more rapid, revolutionary shift in the IMF’s responsibility, positions, and ideology might do more to destabilize its institutional strength than anything else. Therefore, increasing the role public desires play in IMF policy threatens the IMF as an institution. Reforming neoliberal stances, by easing austerity, pulling back inflation standards, and permitting greater government spending after times of financial crises not only stand a real chance to bolster the IMF’s institutional strength but are also distinctly different than appealing to public opinion. Yes, reforming neoliberalism is a response to public grievances, but in this case, the demand for reform is grounded in the Fund’s own institutional failure. With that, we can reasonably hope the IMF adapts in the coming years.
