This article was originally published on CrisisJam.
The Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) has recently reviewed the Fund’s performance between 2004 and 2007 and concluded that, far from spotting the crisis coming, the IMF helped bring it on, especially through its advocacy of ‘light-touch regulation’. According to the IEO, as reported by the Bretton Woods Project, “the IMF missed key elements that underlay the developing crisis”, especially the disastrous evolution of the US financial system, of which IMF staff were “in awe”. The IEO documents how “the IMF praised the US for its light-touch regulation and supervision that permitted the rapid financial innovation that ultimately contributed to the problems in the financial system. Moreover, the IMF recommended to other advanced countries to follow the US/UK approaches to the financial sector.”
So is the IMF stupid? The IEO seems to think that, institutionally, it is indeed rather dumb, suffering as it does from an “insular culture” and “silo behaviour and mentality”. And this may be partly true. Brazilian economist Fernando Carvalho notes that ‘by both training and experience the Fund staff has always shared the view that the Anglo Saxon model of capitalism is superior to all its alternatives’ and that financial globalisation is an unambiguously good thing – despite the absence of evidence for any such claim. But apparent stupidity typically serves some interests over others.
For example, the IMF approach to Eastern Europe is to insist that governments’ fiscal policies caused the problem there, rather than the decisions of private banks. At one level, this can be read as just plain wrong. But, as Daniela Gabor has documented, this approach “legitimises policy advice that imposes ‘antisocial’ measures (wage cuts, public sector layoffs, taxes on consumption) in order to protect financial sector returns”. So, not so stupid from the point of view of the financial sector.
Something similar holds true for Egypt, where an April 2010 IMF report noted that ‘Sustained and wide-ranging reforms since 2004 had reduced fiscal, monetary and external vulnerabilities, and improved the investment climate. These bolstered the economy’s durability, and provided breathing space for appropriate policy responses.’ Commenting on this rather optimistic assessment, John Dizard of the Financial Times draws the following conclusion:
These aren’t quibbles about minor inaccuracies, or arguable ideological differences. There were imminent, overwhelming problems that either evaded the IMF’s attention, or that it chose not to report. So European leaders might want to reconsider whether they can depend on the IMF to act as a monitor, let alone arbiter, of good macroeconomic policy for member states.
As Dizard notes, even if some IMF economists had spotted the economic powder keg in Egypt, they might have chosen not to report it – mainly because the Mubarak regime was a favoured ally of the IMF’s main patron, the United States. Again, willful blindness can make perfect political sense.
It is important to emphasise that this is not a crude conspiracy theory. Certainly, senior IMF officials would be alert to US sensitivities regarding Egypt and to the priorities of Western banks in Eastern Europe, and would help ensure that those interests are served. But the rigid, if empirically destitute, worldview of IMF economists may be genuinely held – inculcated through the brainwashing that passes for an economics education in the US and UK and advanced by the promotion and in-house editing practices of the Fund (and those of other institutions, such as the World Bank). The question is less about how many people are stupid, and exactly how stupid they are, it is more about the economic and political functions apparent stupidity serves.
But two can play at that game, and glaring examples of the IMF getting it wrong can serve a useful political function for resistance in Ireland and elsewhere. Every time a mainstream commentator says something like ‘the IMF are the experts on this’, we can say ‘that would be the guys who helped cause the crisis in the first place’, or ‘are we talking about the same people who said the Middle East and North Africa was really stable’?
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