The IMF in Europe: Institutional Evolution

“The IMF Does Europe” offers a glimpse at the changing role the IMF is playing in the world economy. For the last decade the IMF’s neoliberal doctrine and reportedly harsh austerity tactics have led developing nations in need of financial assistance to turn to non-traditional lending sources, such as China, for help. In the wake of the financial crisis and a major image overhaul, the IMF has made a resurgence onto the lending scene – but this time not simply as a lender of last resort to developing nations.

Rather, Europe has become “ground zero for the biggest expansion of IMF lending and influence in years.” And as the article indicates, the stakes are huge. Finding the right balance of firmness and leniency with regards to budget cuts, tax hikes, and a myriad of other financial adjustments will be difficult, particularly given the greater political power wielded by nations such as Greece, Spain, Italy and Ireland. These nations play a much larger role in the global economy than the export-oriented, largely agricultural economies of the developing world. As the IMF enters this new lending frontier, it must look beyond its past experience to develop a comprehensive program – one that ultimately ends in repayment.

IMF Institutional Ideology Inhibiting Critical Analysis of Markets

In his recent article, Hector Torres, former executive director of the IMF, discusses why the IMF failed to recognize the sub-prime mortgage crisis before it fully reared its ugly head. Contrary to many who believe that the IMF was “distracted or looking in the wrong places”, Torres proposes that it was the IMF’s ideological blinders that prevented the organization from identifying the oncoming calamity. The following is an illuminating illustration of the somewhat dogmatic nature of the IMF’s institutional culture:

“Let us now consider…whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.”

With the resurgence of the industrial model and other philosophies that contradict the neoliberal Washington Consensus, there are some signs of emerging ideological diversity at the IMF. However, like any institutional culture, change is slow, must be actively nurtured, and is quick to rescind in the face of a crisis – or even a prominent distraction. Thus, it is critically important that the IMF question the underlying assumptions inherent in both its lending and supervisory frameworks; a critical inward analysis will yield significant insights, in turn allowing for a strategic evolution of the institution’s mission as developing nations reduce their dependence on the IMF as a source of emergency funding.

Return of Industrial Policy

In a recent article on Project Syndicate, Dani Rodrik makes the compelling claim that industrial policy is returning to the forefront of development discourse - in fact, he argues it never really left. Citing China, Chile, and most controversially, the U.S., Rodrik outlines three important policies regarding how industrial policy should be practiced:

“First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks. This requires a government that is “embedded” in the private sector, but not in bed with it.

Second, industrial policy needs to rely on both carrots and sticks. Given its risks and the gap between its social and private benefits, innovation requires rents – returns above what competitive markets provide. That is why all countries have a patent system. But open-ended incentives have their own costs: they can raise consumer prices and bottle up resources in unproductive activities. That is why patents expire. The same principle needs to apply to all government efforts to spawn new industries. Government incentives need to be temporary and based on performance.

Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. To guard against abuse and capture, industrial policy needs be carried out in a transparent and accountable manner, and its processes must be open to new entrants as well as incumbents.”

Rodrik’s points are well-formulated and seem to reflect the lessons learned over the past few decades – but even more importantly, they illustrate the complexities of forming an adequate national industrial policy: determining the appropriate level of government investment, incentives, and transparency without becoming bogged down in the process, slowing market evolution by generating creative and capital bottlenecks and harming the consumer. To say achieving a balance between these tensions is difficult would be an understatement. Nevertheless, in a fast-paced global economy where rapid innovation is increasingly important, Rodrik’s principles provide insight into the general strategies governments must employ to achieve a competitive advantage.

Washington Consensus Cartoon

This cartoon perfectly sums up the socio-political atmosphere surrounding the IMF and World Bank as of late, particularly given China's and the East Asian Tigers' immense success. However, both the relative consistency and quality of continuing success will likely dictate whether this role reversal is permanent or short-lived. (Cartoon originally from Carlos Serra's blog.)

China's "Beijing Consensus" Challenging the Washington Consensus

Since its formal elaboration in 1989, the Washington Consensus has been largely regarded as the premier model of growth for developing nations. However, this framework is increasingly coming under fire as China continues to experience large-scale economic growth, utilizing a methodology almost entirely counter to the Washington Consensus. China's success using this alternative model is garnering attention from other developing nations, who have typically been suspicious of the Washington Consensus since its inception. With China on the rise, unless a catastrophic economic event occurs to dampen the success of this new "Beijing Consensus", it is likely the neoliberal Washington Consensus is on its way out.

Washington Consensus

The Washington Consensus, as delineated by John Williamson, has ten core tenets:

1) Fiscal Discipline
2) Restructuring Public/Social Expenditure Priorities
3) Tax Reform
4) Liberalizing Interest Rates
5) Competitive Exchange Rates
6) Trade Liberalization
7) Liberalization of Inward Foreign Direct Investment
8) Privatization
9) Deregulation
10) Property Rights

Under the model, successful implementation of these principles should result in economic growth in general, and per capita GDP expansion particularly. Regardless of espoused results many have rejected this model, including a majority of the developing world where it is widely felt that the Washington Consensus was simply a new mechanism for the developed core to take advantage of the developing periphery. Indeed, Williamson himself has acknowledged that the Washington Consensus "has been interpreted to mean bashing the state, a new imperialism, the creation of a laissez-faire global economy, [and] that the only thing that matters is the growth of GDP." Argentina’s case is often cited as a quintessential example illustrating the failures of this model.

Beijing Consensus

China, as opposed to the rigid, structural framework of the Washington Consensus, has adopted a much more dynamic, fluid, and tailored policy. It’s driven by three primary themes, which are:

1) Innovation
2) Pursuit of Dynamic Goals/Rejection of Per Capita GDP

3) Self-Determination

Innovation has long been emphasized by China, and it a critical component of the Beijing model. According to Joshua Ramo, “In order to outpace the ‘friction losses of reform’, government must actively innovate in order to address the challenges introduced by the changing economic and social environment. The Chinese government often utilizes public opinion polls and survey to determine the issues most important to the public and address them first.

China’s rejection of per capita GDP as a measure of economic growth is part statistical evolution, part rejection of Western policy frameworks. Instead, the Beijing Consensus places emphasis on measures such as quality of life and individual equity, which helps provide a more comprehensive picture of living conditions and illuminates trends that have a disparate impact on certain groups. By stressing these new metrics, China has also shown the necessity and feasibility of pursuing multiple goals simultaneously. The following quote from Yusuf and Nabeshima illustrates this:

“[China’s development strategy], according to Premier Wen Jiabao, involves putting people first and promoting reform and innovation in accordance with the ‘five-balances’: balancing urban and rural development, balancing development among regions, balancing economic and social development, balancing development between man and nature, and balancing domestic development with opening wider to the outside world.”

Finally, in concert with much of China’s foreign policy, the Beijing Consensus stresses the need for developing nations to resist pressures from developed nations, particularly the U.S. To set an example of this, China claims it does not impose its own priorities or agenda on developing partner nations. This may be debatable, but the fact that China espouses this ideology at all is a stark contrast to the Washington Consensus’ rigid policy framework.

Implications

The schism between the Western “regulatory state” and the Eastern “development state” has become pronounced and will only continue to grow. The Western version has advocated refraining from interfering in the marketplace, except to insure certain limited goals, whereas China has intervened actively in the economy in order to guide and support large-scale, substantive goals. However, it is not the theory itself, but rather China’s success which could ultimately cause the demise of the Washington Consensus. Utilizing this model, China has cut the number of its citizens living in absolute poverty by 235 million. The World Bank confirms, “China has contributed to 67% of the total reduction of global poverty during the last 25 years” (People’s Daily, 2008). With these levels of success, it may only be a matter of time before the Beijing Consensus finds a new home in Washington.

References:

--. 2008. “235 million people lifted from absolute poverty.” People’s Daily (English).

Ramo, Joshua Cooper. 2004. “The Beijing Consensus.” The Foreign Policy Centre.

Williamson, John. 2004. “A short history of the Washington consensus.” Proceedings from 2004: From the Washington Consensus towards a new Global Governance. Barcelona.

Yusuf, Shahid and Kaoru Nabeshima. 2006. China’s Development Priorities. The World Bank.