In early November the head of the world’s leading multilateral agency made a remarkable public bid for survival. Speaking in São Paulo, addressing the world’s most powerful finance ministers, Dominique Strauss-Kahn, managing director of the International Monetary Fund, announced that his institution was the right one to lead us out of our financial and economic malaise. Conveniently overlooking some uncomfortable facts — that the IMF must at least share responsibility for getting parts of the world into this soup, and that it failed to predict the coming financial storm — Strauss-Kahn told his audience that the world needed ‘a stronger IMF, particularly as far as early warnings are concerned’.
In this the Frenchman was at least half correct. If this crisis has taught us anything, it is that we desperately need some sort of early warning system for the global economy. All of us — from slack-jawed governments to maxed-out mortgage borrowers — are guilty of succumbing to the idea that this bubble was just part of a natural economic cycle. Clearly it wasn’t, and we were no better braced for its cataclysmic bursting than England was prepared for its massive default to (of all people) Italian creditors in the 1340s, or France and Spain were prepared for their repeated national bankruptcies in the 16th century.
The questions that now have to be asked are these. Who should regulate the world’s financial markets and ring the bell marked ‘impending economic doom’? Will our leaders be able to agree on who is best placed to regulate this new world order? And last but not least, are multilaterals — the big clunking word chosen to describe the assortment of bumbling, anachronistic institutions vested with calming global markets and bailing out troubled nations — really capable of solving our manifold economic woes?
Once upon a time, the role of the multilateral was set in stone. Founded at the tail end of the second world war at the New Hampshire resort of Bretton Woods, the leading agencies have stuck pretty much to their original remit. The IMF acts like an austere patriarch, attempting to provide global macro- economic support and stimulus by checking and balancing exchange rates, international trade policies and balance-of-payment issues. The World Bank prefers the guise of a nanny figure, gently admonishing sovereign states on their domestic failings and occasionally topping up their pocket money.
Both Washington-based Bretton babies are now preparing to celebrate their 65th birthdays — the IMF in July 2009, the World Bank in December 2010 — a good pensionable age in much of the developed world. And as senior citizens go, both earn a generous annual stipend. Last December, Britain pledged £2.8 billion to the World Bank, leapfrogging America to become its largest sovereign donor. One might reasonably query why our government should have wished to achieve this pinnacle of global financial largesse months before being forced (with zero multilateral aid) to bail itself out.
Indeed, until very recently the future of the multilateral was in doubt. ‘A year ago, I would have said that the IMF and the World Bank would be gradually phased out,’ says Pieter Bottelier, a lecturer at Harvard university who worked at the World Bank for 28 years, ‘but recent events have changed everything.’
Those events surprised the two Washington institutions just as much as they surprised you and me. Like the CIA in 1989, which was comically underprepared for the toppling of the Berlin Wall, the current crisis found the IMF and the World Bank asleep at the switch. Both leading multilaterals have been shedding staff for years, with the IMF losing 500 employees in 2007 alone. It is now desperately scrambling to rehire.
‘None of us foresaw the magnitude or speed with which subprime led to the financial crisis and put the entire global economy in a tailspin,’ one senior IMF official told The Spectator. ‘Frankly we still don’t understand why it happened. The whole financial system is undergoing a massive heart attack, and we have no idea if we have passed the worst yet.’
When leading multilaterals have hit the headlines in recent years, it has been for all the wrong reasons. Scandals of the flesh at the highest levels of both institutions have angered donor governments. At the IMF, Strauss-Kahn was forced to apologise after conducting an extra-marital affair with a former IMF employee, Piroska Nagy. His future remains unclear. Over at the World Bank, former president Paul Wolfowitz, a Bush-team neocon and architect of the war in Iraq, went a step further, resigning in June 2007 after being found guilty of pushing through a generous pay increase for his girlfriend Shaha Riza, also an employee of the bank.
It might also be argued that our current economic malaise has been at least partly precipitated by the neo-liberal policies of multilaterals of all hues, from the IMF down to relative tiddlers such as the International Finance Corporation. These institutions have long prescribed ultra-free-trade policies, forcing troubled emerging markets and regions — Africa and Latin America in the 1980s, Asia in the 1990s — to undergo financial ‘shock therapy’ in order to gain access to IMF or World Bank capital.
The therapy involves forcing sovereign nations to scrap social benefits and cut public sector jobs while opening up to foreign financial services and instruments. It is notable that two of the countries that have stubbornly held out against integration with the global financial system, China and India, are those least affected by the credit crunch.
All in all, it hasn’t been a red-letter year for the multilateral. Yet in a hugely ironic twist of fate, this financial crisis could lead not to their demise but their salvation.
We live at a crossroads in our economic history. What we need, now more than ever, are sturdy, widely respected structures blessed with decades of institutional capability and accumulated wisdom. Since we have nothing of the sort, the only option left is to trust the IMF and the World Bank. Both may score a full ten on the dunce scale this year, but they employ thousands of analysts and academics who do nothing but sit at their desks all day coming up with ways to prevent everything going belly-up. And in recent weeks they have acted with surprising alacrity: in the first two weeks of November, the IMF spent $50 billion bailing out five nations: Iceland, Hungary, Serbia, Pakistan and Ukraine. Some critics warned that the fund, which is capitalised to the tune of $250 billion, would soon run out of cash. Though senior executives quickly scotched the notion, it reminded many observers how threadbare the IMF’s finances remain.
What then should become of these institutions? IMF chief Strauss-Kahn wants the fund to monitor member countries’ policies more strictly, winkling out any regional financial discrepancies. That sounds reasonable, if a little vague and late in the day. Perhaps better would be to force the IMF to become the international financial regulator none of us want and all of us need: something akin to the serpent monitoring apple consumption in the Garden of Eden.
The IMF and the World Bank, or perhaps a combination of the two, would need to be capable of monitoring and supervising the world’s now horrendously complex financial markets. They would need to identify and eradicate the sort of internationally tradable financial products — credit default swaps, collateralised debt obligations, bundles of subprime mortgages — that got us into this mess, while approving new instruments that create wealth and act as a positive force for stability.
A single m ultilateral acting as a proper global institution, with greater input from the likes of China, Brazil and India, would also need to decide on the degree of leverage permissible in financial services, and on the licensing of new financial regulators. The IMF would also look more ‘international’ if it scrapped the super-veto that America, its largest donor, regularly wields. Other 1940s anachronisms — the right of America to appoint the World Bank president and for Europe to impose its choice of managing director, usually French, on the IMF — must also surely go. Finally, the new body would need to incorporate some sort of Defcon-style system warning of bubbles forming in world markets, from level five (say, an overheating Latvian housing market) right up to Defcon 1, for maximum readiness precipitated by massive international financial meltdown.
‘We need to have a way of knowing when things are going wrong,’ says Bottelier. ‘[Former US Fed chairman Alan] Greenspan’s prescription that a cure is better than prevention is now totally discredited. We need to know when bubbles are being created and when they are becoming dangerous. We need a warning system, and there’s no better institution set up to do that than the IMF.’