Strauss-Kahn’s Legacy at the IMF

Now that Dominique Strauss-Kahn has resigned from his position as Managing Director of the International Monetary Fund (IMF), it is worth taking an objective look at his legacy there. Until his arrest last week on charges of attempted rape and sexual assault, he was widely praised as having changed the IMF, increased its influence, and moved it away from the policies that ? according to the Fund’s critics — had caused so many problems for developing countries in the past. How much of this is true?

Strauss-Kahn took the helm of the IMF in November of 2007, when the IMF’s influence was at a low point. Total outstanding loans at that time were just $10 billion, down from $91 billion only four years earlier. By the time he left this week, that number had bounced back to $84 billion, with agreed upon loans three times larger. The IMF’s total capital had quadrupled, from about $250 billion to an unprecedented $1 trillion. Clearly the IMF had resources that it had never had before, mostly as a result of the financial crisis and world recession of 2008-2009.

However the details of these changes are important. First, the collapse of the IMF’s influence in the decade prior to 2007 was one of the most important changes in the international financial system since the breakdown of the Bretton Woods system of fixed exchange rates in 1971. Prior to the 2000’s, the IMF headed up a powerful creditors’ cartel which was able to tell many developing country governments what their most important economic policies would be, under the threat of being denied credit not only from the Fund but also from other, then-larger lenders such as the World Bank, regional lenders, and sometimes even the private sector. This made the Fund not only the most important avenue of influence of the U.S. government in low-and-middle income countries ? from Rwanda to Russia ? but also the most important promoter of neoliberal economic “reforms” that transformed the world economy from the mid-1970s onward. These reforms coincided with a sharp slowdown of economic growth in the vast majority of low-and-middle-income countries for more than twenty years, with consequently reduced progress on social indicators such as life expectancy, and infant and child mortality.

The IMF’s big comeback during the world recession did not bring the middle-income countries that had run away from it back to its orbit. Most of the middle-income countries of Asia, Russia, and Latin America stayed away, mostly by piling up sufficient reserves so that they did not have to borrow from the Fund, even during the crisis. As a result, even a low-income country like Bolivia, for example, was able to re-nationalize its hydrocarbons industry, increase social spending and public investment, and lower its retirement age from 65 to 58 ? things that it could never do while it was continuously living under IMF agreements for twenty years prior. Most of the IMF’s new influence and lending would land in Europe, which accounts for about 57 percent of its current outstanding loans.

As for changes in IMF policy, these have been relatively small. A review of 41 IMF agreements made during the world financial crisis and recession found that 31 of them contained “pro-cyclical” policies: that is, fiscal or monetary policies that would be expected to further slow the economy, or both. And in Europe, where the IMF has most of its lending, the policies attached to the loan agreements for Greece, Ireland, and Portugal are decidedly pro-cyclical and making it extremely difficult for these economies to get out of recession. The IMF’s influence on Spain, which does not yet have a loan agreement, is similar. And in Latvia, the IMF presided over an Argentine-style recession that set a world historical record for the worst two-year loss of output (about 25 percent) ? a complete disaster.

To be fair, some changes at the Fund during Strauss-Kahn’s tenure were significant. For the first time ever, during the world recession of 2009, the IMF made available some $283 billion worth of reserves for all member countries, with no policy conditions attached. The Fund also made some limited credit available without conditions, although only to a few countries. The biggest changes were in the research department, where there was tolerance for more open debate. For example, there were IMF papers that endorsed the use of capital controls by developing countries under some circumstances, and questioning whether central banks were unnecessarily slowing growth with inflation targets [PDF] that may be too low.

But as can be seen from what is happening in the peripheral Eurozone countries, the IMF is still playing its traditional role of applying the medieval economic medicine of “bleeding the patient.” To be fair to both Strauss-Kahn and the Fund, neither the Managing Director nor anyone else at the IMF is ultimately in charge of policy, especially with respect to countries that are important to the people who really run the institution. The IMF is run by its Governors and Executive Directors, of whom the overwhelmingly dominant authorities are the U.S. Treasury Department (which includes heavy representation from Goldman Sachs) and, secondarily, the European powers (except in Europe, where Treasury defers to the Europeans). Until decision-making at the IMF undergoes a dramatic change, we can expect only very small changes in IMF policy. This can be seen most clearly in the current case of Greece: Strauss-Kahn was aware that the fiscal tightening ordered by the European authorities and the IMF was preventing Greece from getting out of recession; but while he pushed for “softer” conditions, he was unable to change the lending conditions from punishment to actual help. That’s ultimately because the European authorities (European Commission and European Central Bank), not the IMF, are calling the shots ? although Strauss-Kahn had plenty of resistance within the Fund itself, too.

The voting shares of the IMF have changed only marginally, despite all the reforms of the last five years. The share of “emerging market and developing countries” ? with the vast majority of the world’s population — has gone from 39.4 to 44.7 percent, while the G-7 countries have 41.2 percent, including 16.5 percent for the U.S. (down from 17.4 percent pre-reform).

But the voting and governance structure is not currently the main obstacle to changing IMF policy. At this point, the developing countries ? and we should add in the victimized countries of the eurozone ? are not using their potential influence within the Fund. Their representatives are mainly going along with the decisions of the G-7. If any sizeable bloc or blocs of these countries were to band together for change within the Fund, there could be some real reforms at the IMF.

This can be seen from the last decade of struggle within the World Trade Organization, where developing countries have often not accepted the G-7 consensus, and have successfully blocked the negotiation and implementation of rules that would hurt them ? despite the fact that the WTO rules have been, from the outset, stacked against developing countries. It is true that the WTO operates by consensus rather than a quota-based voting structure, but that is not the key difference between it and the IMF. The key difference is in the role of developing countries and their representatives.

There is talk now of replacing Strauss-Kahn with an open, merit-based process of selection, breaking with the 67-year tradition of reserving the position for a European (most often French). At the moment this change does not appear likely to happen. It would be a step forward, but it would be only a symbolic change, and the odds are good that the next Managing Director ? of whatever nationality ? will be to the right of Strauss-Kahn. Real change at the IMF is in the hands of the governments of most of the world ? if they dare to organize it.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This column was originally published by The Guardian.

More articles by:

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

March 22, 2018
Trump Spokesperson Commemorates Invading Iraq by Claiming U.S. Doesn’t Dictate to Other Countries; State Dept. Defends Invasion
Rob Okun
Students: Time is Ripe to Add Gender to Gun Debate
Michael Barker
Tory Profiteering in Russia and Putin’s Debt of Gratitude
March 21, 2018
Paul Street
Time is Running Out: Who Will Protect Our Wrecked Democracy from the American Oligarchy?
Mel Goodman
The Great Myth of the So-Called “Adults in the Room”
Chris Floyd
Stumbling Blocks: Tim Kaine and the Bipartisan Abettors of Atrocity
Eric Draitser
The Political Repression of the Radical Left in Crimea
Patrick Cockburn
Erdogan Threatens Wider War Against the Kurds
John Steppling
It is Us
Thomas Knapp
Death Penalty for Drug Dealers? Be Careful What You Wish for, President Trump
Manuel García, Jr.
Why I Am a Leftist (Vietnam War)
Isaac Christiansen
A Left Critique of Russiagate
Howard Gregory
The Unemployment Rate is an Inadequate Reporter of U.S. Economic Health
Ramzy Baroud
Who Wants to Kill Palestinian Prime Minister Rami Hamdallah?
Roy Morrison
Trouble Ahead: The Trump Administration at Home and Abroad
Roger Hayden
Too Many Dead Grizzlies
George Wuerthner
The Lessons of the Battle to Save the Ancient Forests of French Pete
Binoy Kampmark
Fictional Free Trade and Permanent Protectionism: Donald Trump’s Economic Orthodoxy
Rivera Sun
Think Outside the Protest Box
March 20, 2018
Jonathan Cook
US Smooths Israel’s Path to Annexing West Bank
Jeffrey St. Clair
How They Sold the Iraq War
Chris Busby
Cancer, George Monbiot and Nuclear Weapons Test Fallout
Nick Alexandrov
Washington’s Invasion of Iraq at Fifteen
David Mattson
Wyoming Plans to Slaughter Grizzly Bears
Paul Edwards
My Lai and the Bad Apples Scam
Julian Vigo
The Privatization of Water and the Impoverishment of the Global South
Mir Alikhan
Trump and Pompeo on Three Issues: Paris, Iran and North Korea
Seiji Yamada
Preparing For Nuclear War is Useless
Gary Leupp
Brennan, Venality and Turpitude
Martha Rosenberg
Why There’s a Boycott of Ben & Jerry’s on World Water Day, March 22
John Pilger
Skripal Case: a Carefully-Constructed Drama?
March 19, 2018
Henry Heller
The Moment of Trump
John Davis
Pristine Buildings, Tarnished Architect
Uri Avnery
The Fake Enemy
Patrick Cockburn
The Fall of Afrin and the Next Phase of the Syrian War
Nick Pemberton
The Democrats Can’t Save Us
Nomi Prins 
Jared Kushner, RIP: a Political Obituary for the President’s Son-in-Law
Georgina Downs
The Double Standards and Hypocrisy of the UK Government Over the ‘Nerve Agent’ Spy Poisoning
Dean Baker
Trump and the Federal Reserve
Colin Todhunter
The Strategy of Tension Towards Russia and the Push to Nuclear War
Kevin Zeese - Margaret Flowers
US Empire on Decline
Ralph Nader
Ahoy America, Give Trump a Taste of His Own Medicine Starting on Trump Imitation Day
Robert Dodge
Eliminate Nuclear Weapons by Divesting from Them
Laura Finley
Shame on You, Katy Perry
Weekend Edition
March 16, 2018
Friday - Sunday
Michael Uhl
The Tip of the Iceberg: My Lai Fifty Years On