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.