IMF: Self-reform is mandatory

SINGAPORE: Come June, Michael Mussa will resign as chief economist at the International Monetary Fund (IMF), whose credibility has eroded spectacularly these past four years. It has failed repeatedly to anticipate financial turmoil.

In fact, it just struck out in Turkey. This, after its failures in Russia in 1998, Thailand, Indonesia and South Korea in 1997, and Mexico in 1994-1995. Turkey's IMF package of US$11.5 billion (S$20 billion) came last December when its lira was under pressure.

The aim? Help the lira keep its peg to the dollar and the euro. But after a public spat between the Prime Minister and President on Feb. 19, investors pulled out. Three days later, the peg was abandoned and the lira went into free fall.

So the IMF failed -- again -- to foresee and prevent another disaster. Why did it help Turkey defend an indefensible peg, a huge gamble given the nation's deep-rooted economic and political weaknesses?

Many would see it as a political decision made at the behest of the United States. Turkey is a dependable NATO ally in that volatile part of the world. Against the IMF's advice, Turkey had insisted on keeping the peg to tackle inflation, which was in the triple digits as recently as 1999.

Holding the lira steady was supposed to force the government to cut its budget deficits and refrain from spending its way out of its troubles. But success depended on Turkey sustaining market confidence.

It could not. Even last year, currency speculators had begun betting the government would implode. Once floated on Feb. 22, the lira plunged 30 percent. It was "only" 24 percent down yesterday.

The IMF says it is creating a unit, the International Capital Markets Department, to anticipate and head off financial crises like this one. Much of chief economist Mussa's research department will be folded into the new unit, which will see a third of his people go. This is why he is leaving.

This hints at one serious shortcoming within the IMF. Mussa has a doctorate from Princeton, like 90 percent of his economists, who have doctorates from American universities. Preoccupation with academic prestige has placed blinkers on what prescriptions doled out can work on the ground.

Or, how problems are understood and defined by the people who will implement and bear its austerity measures.

Recent IMF rhetoric about "participation" and "ownership" of problems has too often meant detailing an action plan to aid recipients, rather than engaging them at the stage of defining policy parameters. Without more diverse hiring, the IMF will continue to be seriously deficient in the "local knowledge" it needs to operate effectively.

If staffing is homogeneous, there is little that is representative in how decisions are made by its executive board, which has oversight over and responsibility for all IMF operations. Decisions are made by consensus, yet formal voting power remains important.

The underlying distribution of votes surely affects the informal politics governing proposals and negotiations long before anything actually reaches the board.

Elsewhere, such as in the United Nations Security Council, consensus decision-making means the most powerful parties take decisions in backrooms and corridors.

Likewise in the IMF, where the United States and its G-7 allies call the shots. And this is the institution that demands transparency and accountability in the profligate governments that seek to borrow its funds!

If it is to achieve the standard of governance it sets for borrowers, self-reform is mandatory -- if consistency means anything. If not, who or what can change it?

-- The Straits Times/Asia News Network