We in the less developed world sometimes view the machinations of the IMF somewhat cynically, especially as being developed world centric in its approach and recommendations . The recent report of The Independent Evaluation Office which was established in 2001 to conduct independent and objective evaluations of IMF policies and activities accordingly came as a pleasant surprise in partly validating such views and my own view that the euro area is not practically workable in its present form. The report entitled The IMF and the Crises in Greece, Ireland, and Portugal assessed the IMF’s engagement with the euro area during the series of crises which hit several euro area countries from 2010 to 2013. The report is available at http://www.ieo-imf.org/ieo/pages/IEOHome.aspx Among its findings, under a number of headings:
- Surveillance. While the right issues were identified “it did not foresee the magnitude of the risks that would become paramount. At the euro area level, IMF staff’s position was often too close to the official line of European officials, and the IMF lost effectiveness as an independent assessor.” It believes IMF staff missed the overall build-up of banking system risks in some countries but did successfully identify many unaddressed vulnerabilities. It reasserted its earlier view of “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches. These factors were compounded in the case of the euro area by a ‘Europe is different’ mindset that encouraged the view that surveillance was largely the responsibility of euro area institutions and authorities” This is quite a damming assessment of a key international institution accountable to 189 countries.
- Decision making. As regards the 2010 assistance to Greece “there was no open and early discussion of the pros and cons of all options available to the IMF. The revision of the 2002 exceptional access framework, also made in May 2010, did not receive the customary careful review and deliberation by the Board.” Modifications were made to this framework in a non-transparent way and without the usual deliberation.
- Working with European partners. Numerous parties were involved and there was no “clear demarcation of responsibilities, an agreed policy on the sharing of confidential information, a mechanism to address differences of view, or a unified analytical or conditionality framework.” Technical judgements were subject to political pressures at an earlier stage than normal. Because it was thought unlikely that a euro area would need assistance no proper thought had been given to the possibility, including involvement of such regional institutions as the ECB.
- Program design and implementation. Less overly optimistic growth projections would have enabled the European partners to consider “additional and more concessional financing”. Lessons from previous crises were not applied and in some cases not insisted on, when European views were allowed to prevail. No Plan B was formulated. IMF performance was “close to exemplary in Ireland but severely wanting in Greece.”
- Accountability and transparency. The handling of the crises reinforced the perception that Europe was treated differently, some members of the Executive Board were not kept informed, internal reviews of the programmes were long delayed and lack of documentation was a serious problem, with “some sensitive documents…..prepared outside the regular, established channels.”
- Lessons Learned. Providing large scale financing without debt relief merely postpones the problem. Increase the rigour and transparency of the process and look at ways to avoid the use of resources simply to bail out private creditors. From the Greece experience – tailor solutions to the circumstances of monetary unions “given the large structural component of programs when exchange rates are fixed.” From Ireland experience – take quick strong action, communicate effectively, be proactive and closely engaged. Crisis programmes – in a fixed exchange rate union internal devaluation (via domestic price reduction) is slow with growth and exports not increasing as hoped. “Clearer operational guidance for the IMF’s interaction with regional financing arrangements would be helpful for delineating responsibilities.”
- Procedures needed to reduce the room for political intervention. Better processes needed to ensure agreed policies are followed and not changed without careful deliberation. Clarify guidelines applicable to currency union members and establish a policy on alignment with regional financing arrangements. Improve governance via accountability and transparency and independent evaluation.
Christine Lagarde does not give the impression of someone who will happily accept what seem to be fairly damming findings if one reads between the lines. Her view: “The conclusion I draw is that the Fund’s involvement in the Euro Area crisis programs has been a qualified success.” Yes, it was a crisis without a close precedent but there were obviously serious deficiencies in the processes regardless of the outcomes. The European solution of doing as little as possible and kick the can a little further down the road was allowed to prevail too often. She accepts most of the recommendations, albeit one conditionally.
The arrangements between the World Bank, IMF, USA and Europe appear a little too cosy for the rest of us and do not help the perception of international institutions by underdeveloped nations.