A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  I’M Fired

  If the UN’s main challenge over the past decade has been how to persuade people to take an interest in its problems, the International Monetary Fund has had no such problem: It is probably the most reviled international institution in the world. And hatred of the fund is not limited to the financial losers—in the United States, anti-IMF feeling is as wide as the political spectrum. In the eyes of the Republican right, it is an “economic arsonist” that uses taxpayers’ money to bail out international speculators. The Democratic left accuses it of putting economic orthodoxy before the well-being of the poor.

  More generally, people just do not think that the IMF works very well. In a 1999 poll of some thirteen thousand people around the world, only one in twenty said they had “a lot of confidence” that the IMF could solve the world’s economic problems. (The figure crept over one in ten only in the Philippines and India.)[5] The fund has also attracted the opprobrium of all manner of panjandrums: George Shultz and Walter Wriston have called for its abolition; Jeffrey Sachs of Harvard accuses it of driving much of the developing world into recession; Rudi Dornbusch, another celebrated economist, once compared Michel Camdessus, the fund’s boss during the Asian crisis, to “a croupier” in “the casino” of emerging markets.[6] Even the World Bank has distanced itself from its twin.

  What kind of institution could produce this sort of response? The broad answer is, one full of people like Stanley Fischer. A Zambia-born economist, Fischer rejoined the fund in 1994 from the Massachusetts Institute of Technology, where he worked with Dornbusch and Paul Krugman. Technically, Fischer was second in command during the Asian crisis, but he was often the IMF’s public face, though, one suspects, not entirely of his own choosing. Although he has the vigorous obstinacy of a professor who knows his subject so much better than his pupils do, the quiet Fischer does not look like a natural pugilist. Even when he had time to attend public gatherings, he often gave the distinct impression that he would rather be reading a book. Had his boss not been a Frenchman—or as Newt Gingrich liked to stress, “a French socialist”—Fischer might have been spared such ordeals.

  Most conspiracy theories about globalization are balderdash, yet it is certainly true that many important decisions about the world economy in the late 1990s were made by a small cabal of technocrats at four institutions in p. 173 Washington, D.C.: the World Bank, the IMF, the U.S. Treasury, and the Federal Reserve Board. All the people involved—not just the technocrats but also their leading critics—had spent their lives pontificating in Boston and administrating in Washington. Larry Summers, the former treasury secretary, once worked as the World Bank’s chief economist, a job he inherited from Fischer; the two men also shared a house on Martha’s Vineyard and wrote a number of papers together. Summers’s right-hand man during much of the Asian contagion, his former classmate David Lipton, worked at the IMF for eight years and spent some time advising eastern European governments with Jeffrey Sachs. Joseph Stiglitz, the World Bank’s chief economist and a fierce critic of both the IMF and Fischer, earlier worked with Summers on a report on the Asian “miracle.”[7]

  Not all of these people are as reserved as Fischer. One European prime minister privately described the talkative Summers, who subsequently became president of Harvard University, as “the Richard Holbrooke of economics.” James Wolfensohn, the World Bank’s chairman, is sociable to a fault, hugging almost everybody he meets. But many of them still seemed uneasy about even the moderate amount of celebrity that came with their jobs. (One technocrat learned that he was famous from his dry cleaner, who had just seen him on a Korean-language channel.) There was also something rootless about their lives. Throughout the late 1990s, the likes of Summers and Fischer seemed to be almost permanently airborne. During South Korea’s crisis, the IMF’s economists shuttled from the luxury of the Seoul Hilton to a collection of cubicles at the Bank of Korea, where they meted out economic justice to local bankers pleading for dollars. The one thing they rarely saw was the country itself.

  Both critics and admirers have pointed to similarities of such people to Robert McNamara’s whiz kids, who did a decent job running Ford before going on to do a lousy one running the Vietnam War. They shared the presumption that all they needed to do was apply their brains, and the world’s messes would be cleared up. On the other hand, there has also been something decidedly “unwhizzy,” almost sluggish, about the IMF. For starters, it has never quite recovered from being put in a city, over Keynes’s objections, where the finest art is that of the filibuster. In today’s volatile world economy, long-winded overviews of economic data matter less than the ability to react to minute-by-minute changes in the real world. Worse, the IMF’s doors are closed evenings and weekends, and its employees switch off at the end of the day rather than remain on call—a fatally irresponsible approach in a world in which the currency reserves of entire countries can be decimated in a matter of hours. IMF lore has it that one desperate Asian finance minister p. 174 calling at a late hour found himself explaining his problems to the only person in the building: a security guard.

  The fund’s basic problem is that it tries to combine several incompatible roles: those of a bank, an insurance company, a regulator, and a public-sector charity. The principle behind the organization is simple enough: Its 184 member governments keep money on deposit with it in return for being able to draw on its collective resources if they ever need help supporting their currencies or paying their debts. But the practice is fraught with contradictions. The fund’s general approach is a strange mixture of sternness and generosity. It insists that borrowers change their ways immediately, but it lends money at extremely generous rates.

  The fund’s culture is an equally strange mixture of arrogance and impotence. Unlike the Federal Reserve, it does not deign to release its minutes, and its internal audit system is something of a farce. On the other hand, it can barely write a check without calling the U.S. Treasury first. America, which has 18 percent of the votes at the fund, calls the shots, and finance ministers often bypass the fund to talk to American officials.[8] In 1999, when Time magazine rather strangely decided to hail on its cover the three men who had “saved the world economy” (Time’s definition of the world presumably excluded most of Asia, Latin America, and Russia), it picked Summers, his predecessor, Robert Rubin, and Alan Greenspan.

  Beyond the Report Card

  The Time cover also points to what is perhaps the most important question of all: Was the world really saved? Or did it just get lucky? There is already a temptation to forget just what a close call it was in August 1998 when both Russia and Long-Term Capital Management hit the rocks.[9] The late 1990s saw a vast number of national economies devastated by runs on first their currencies and then their banks.

  Optimists tend to blame a good deal of what happened on the fund. Certainly, its report card was mediocre at best. Until shortly before many of the busts, the fund was lauding the economic management of the countries concerned. Many of the hardest-hit countries (notably Indonesia and Russia) were operating under IMF programs when their economies disintegrated—the equivalent of a suspiciously large number of patients dying in a hospital. And in the best tradition of the medical profession, the subsequent bill was enormous.

  There are some excuses. Some of the IMF’s patients had spent the past p. 175 thirty years on diets of cigarettes and cholesterol. Others tried to commit suicide when they were told that they needed to mend their ways. And to make matters worse, the hospital’s board spent half of its time ignoring the hospital itself and the other half squabbling about what should be done. Bill Clinton waited fourteen months after the crisis started before taking his first serious initiative: support for global cuts in interest rates.

  On the other hand, the fund should bear a good deal of the blame for both causing and prolonging the crisis. In selling Anglo-Saxon capitalism to emerging countries, the fund was (to adopt another metaphor) rather like a hard-selling pet-shop owner who tells you what
a wonderful companion a dog is but neglects to mention that it needs to be fed and walked every day. Anglo-Saxon capitalism is not a rule-free utopia; on the contrary, it relies on a mass of rules and institutions, such as bankruptcy laws, central banks, and trust-busting authorities. In Indonesia, the Suhartos presumed that they had the IMF’s blessing to treat the country as their personal property. In Thailand, regulators saw nothing particularly unusual about lying about their reserve levels.

  The IMF’s bungling continued after the crisis had begun. Its policy of pushing interest rates to sky-high levels and forcing governments to slash budgets ushered in a wave of bank closures. In Indonesia, the IMF’s decision to call for an end to food and fuel subsidies at a time when millions of people could no longer afford the necessities of life was blatant political interference that sparked riots. In a typically defensive report issued in January 1999 that analyzed its record in South Korea, Indonesia, and Thailand, the fund admitted that it had “badly misgauged the severity of the downturn” but then went on to claim that, since the affected countries eventually followed its medicine (which they did only once they had no choice), the signs of recovery were evidence that it had been right.[10] But the recovery also reflected external factors, such as the American consumer’s enormous appetite for cheap goods, not to mention the resilience of the fund’s patients.

  A Better Way to Do Things?

  Some of the causes of the black marks on the IMF’s report card are now being fixed. The fund is already putting more stress on market regulation in the countries it oversees; it is also becoming a little more transparent and its senior officials a little more market savvy. A few of its technocrats now admit that it should not meddle in domestic politics. But many of its failings are plainly institutional. The IMF is an organization that was set up to do one p. 176 thing (monitor a system of fixed exchange rates) but now does two others (supervise the global financial system and be the lender of last resort) for which it lacks both the resources and the formal independence. Symptomatically, even the IMF’s best-known success, the bailout of Mexico, was not its own work; it was the United States that stepped in, prepaying for two billion dollars’ worth of oil.

  The fund’s failures—and the unspoken fear that it could all happen again—has led to a fierce debate about the need for a new financial architecture. This debate has at least forced the IMF to come up with new ideas of its own, rather than just sulkily defend its actions. But this debate is a classic example of the “bright shining city” type of argument. Most reformers want to conjure up a system that will satisfy what Zanny Minton Beddoes has dubbed “the Impossible Trinity”: It must respect national sovereignty (nobody wants the IMF to boss around the Fed), deliver firm regulation (to prevent global panics), and allow global capital markets to be as free as possible. In practice, we can nearly devise a system that can satisfy two of these three things, but never all three.[11]

  Given the Impossible Trinity, consider two of the most straightforward remaining options: imposing capital controls and abolishing the IMF. While capital controls are usually restrictive and even counterproductive, many developing economies are, in the words of Barry Eichengreen of the University of California at Berkeley, “not ready for prime time.” Precautionary taxes on short-term capital inflows, then, can help protect undeveloped financial systems, if used in moderation.[12] There is also something a little hypocritical about mutual funds—which usually impose penalties on savers who want to withdraw their money—screaming bloody murder when countries try to do the same thing. Yet for anybody who sees the enormous potential of globalization, capital controls remain a step backward.

  Relative to the specific question of how to redesign the global financial system, capital controls obviously respect national sovereignty, since they are imposed by the countries concerned. But they equally clearly fail to allow free capital markets. And, unless they are applied with great subtlety, it is not clear that they help regulation much either. Capital has a way of finding its way around barriers, and even if it is caged, it then tends to become ever more prone to cronyism. Gangsters everywhere welcome the introduction of controls.

  Getting rid of the IMF would satisfy two elements of the trinity: respecting national governments and allowing free capital markets. Many would add that it would also improve regulation of the world economy. By one calculation, in the fifteen years before 1998, there were one hundred banking p. 177 crises in emerging markets.[13] Nor is there much evidence that the IMF has obviously improved the lot of the poor. A Heritage Foundation study of the eighty-nine poorest countries that received IMF money between 1965 and 1995 found that in forty-eight people were no better off than they were before they received the loans and in thirty-two they were poorer.[14]

  The heart of the institutional case against the fund, however, is that it encourages “moral hazard”: The very existence of the IMF prompts both lenders and borrowers to engage in ever riskier behavior. If the IMF had not bailed out Mexico, people would have thought twice about lending their money to Russia, and Russia might have been a little more disciplined about how it spent it. But the moral-hazard gambit can be used to undermine just about any sort of insurance scheme, and it willfully ignores the political (and perhaps moral) need for such schemes. The same Republican leaders who want to abolish the fund would not dream of depriving their voters of bank-deposit insurance, even though it clearly encourages moral hazard. The prospect of a systemic failure of the world’s financial system is sufficiently horrifying that it is worth taking precautions against it, even if they encourage some risky lending.

  The serious debate is, thus, about reforming the fund, not abolishing it. The participants fall into two groups: builders (who want to expand the fund’s role as a financial supervisor and also turn it into a better-equipped lender of last resort) and trimmers (who want to cut back one or both of these roles). This squabble inevitably ties into the wider argument about exchange rates. To simplify, trimmers nearly all support freely floating exchange rates: If the IMF did not need to help countries defend their currencies, it would not need so much money. The IMF’s addiction to fixed rates has, the trimmers point out, cost a fortune and also, through high interest rates, caused untold misery. Builders reply that pegged exchange rates have given plenty of countries the chance to develop their economies in relative security without the plague of inflation. Today, people tend to forget that in 1993 prices in Brazil were rising at an annual rate of 2,400 percent.

  The builders naturally include the IMF itself. Fischer argues that there is a way for the IMF to become a credible crisis manager without being able to print its own money.[15] Under his scheme, the fund will judge countries by a variety of criteria, such as how they supervise their banking systems; “good” ones will “prequalify” for IMF money in times of crisis. Cash will also be available to countries that do not qualify, but they will have to pay higher interest rates. Another builder is George Soros. Under his much sketchier scheme, the IMF will become a global central bank that will somehow provide liquidity to all markets; meanwhile, a spin-off of the IMF, an internap. 178tional credit-insurance corporation, will calm jittery foreign investors by guaranteeing international loans (up to a limit) in return for a fee.

  The problem with building up the IMF is that it runs straight into questions of national sovereignty: National politicians will never allow such an unaccountable body the power that it needs. If the fund were the same size relative to world trade that it was at its foundation, it would have $2.5 trillion at its disposal—roughly nine times what it has at the moment.[16] (Fischer argues that the fund could get by with a lot less.) But even when the IMF thinks it has enough money and even when it dispatches it well in advance, it still often cannot defend a currency. When the IMF dispatched the first $9 billion of its $41 billion package to Brazil in October 1998, it boosted the country’s reserves to more than $50 billion; the markets, however, correctly sensed that the local currency was overvalued—and within three mo
nths the Brazilian authorities were defeated.

  The builders also put a lot of faith in the IMF’s technocrats, who would establish the criteria for “good” countries (in Fischer’s scheme) or decide upon the country credit limits (in Soros’s). For Fischer, this trust in his own kind is perhaps excusable; for Soros, a man who owes much of his fortune to the incompetence of bureaucrats, it beggars belief.

  Above all, there is the underlying problem that, when push comes to shove, political expediency always triumphs over economic principles. Some countries—Russia is one, China almost certainly another—would fail the IMF’s transparency tests. Yet they would also plainly be too important to fail.

  The trimmers, who want to hand over bits of the IMF’s job to other institutions, are on slightly firmer ground, but they also face questions of practicality. In a world of freely floating exchange rates envisaged by Jeffrey Sachs, the fund’s main job in a crisis would be to prevent overreaction, reassuring investors that a country’s finances are sound and mitigating the impact of devaluations on the poor. The actual rescue would be left to a new global bankruptcy court, similar to America’s chapter 11, which would bail creditors “in,” forcing foreign lenders to pay part of the price. In other schemes, the IMF would remain a lender of last resort but lose its regulatory role to a body that would specialize in international markets.