In the maelstrom of debt engulfing the eurozone in 2009, IMF Managing Director Dominique Strauss-Kahn was “the right man in that place at that time” – both for Europe and for the Fund’s own stature. That favorable judgment is part of a well-informed, nuanced overall account of his record at the IMF that was given to European Affairs two days before the first report surfaced of the scandal that led to his downfall. The insights and evaluation came from Edwin “Ted” Truman, a highly esteemed international economist. Currently a senior fellow at the Peterson Institute for International Economics in Washington, Truman has held many senior positions in the U.S. government and in the IMF.
Under Strauss-Kahn, the IMF transformed itself from being an enforcer of rules on developing countries to becoming a pivotal player in helping rescue European countries and even the euro itself amid a transatlantic financial meltdown. As a sign of its revived prominence, the Fund tripled its resources for lending. Retracing these developments in his question-and-answer session with European Affairs on Friday, May 13, Truman, a prominent “insider-outsider” in the Fund’s evolution, offered an incisive summing-up of what Strauss-Kahn succeeded in changing at the Fund and a partial list of some challenges that remain.
EUROPEAN AFFAIRS: As long ago as 2005, you had been calling on the IMF to shift its main focus away from developing countries and come to grips with the looming issues in industrial nations and the overall global economy. That change came with the economic crisis that started to engulf the world in 2007: it became a forced opportunity for change of this kind and the IMF seized on it to re-emerge as an institution with a leading international role. In other words, the IMF had outlived its old role and has found a new one. Much of the credit for this performance has gone to Dominique Strauss-Kahn as the Managing Director of what is generally seen as a top-down institution. Is that giving him credit where credit it due?
EDWIN TRUMAN: I think that’s right. It’s important to separate “year one” of the crisis, which was 2007-2008, from “years two and beyond,” starting in the autumn of 2008. Dominique Strauss-Kahn became Managing Director on November 1, 2007, and in that first year of crisis people were saying “where is the IMF?” Dominique Strauss-Kahn did publicly support the modest stimulus program in early 2008 by the Bush administration and urged other countries to follow suit, which they generally did not. By the fall of 2008, even though they [at the Fund] had voiced premonitions that things might be quite serious, the IMF’s credit outstanding was at the lowest level in decades. But in the post-Lehman phase [the firm collapsed in September 2008], things cranked up rapidly and the Fund responded in traditional ways, with some country programs, and in non-traditional ways, by creating new lending vehicles and tailoring the structure of IMF conditionality. As a result it moved to the center of the system. The Managing Director and his colleagues recognized that the Fund was short of money, so he and they went out and lined up more than $250 billion in credit lines from countries in addition to the Fund’s normal resources from quotas, and that phase was transformed into the expansion of the so-called New Arrangements to Borrow by $500 billion -- in effect, doubling the total of the bilateral credit lines. That’s how things unfolded.
Q: In this radical transformation of the Fund’s importance, what role did the Managing Director assume and how important was he in developments at this turbulent time?
TRUMAN: Part of this is style and personality. In my view, Dominique Strauss-Kahn was the right person in that place at that time. He is a relatively more pro-active policy-maker than his two immediate predecessors. That doesn’t mean they were bad as policymakers: they had both been senior officials, and they would not have sat on their hands. [But] they would have been less inclined by temperament to jump into problems and drive the process to quick results. That “pro-activity” of his served the institution and the system very well during that period.
Q: In the European Union, which was the epicenter of the sovereign-debt threat, he and the Fund seem to have been players at the core of the crisis response, weren’t they?
TRUMAN: Yes, and here again, for the EU there were two phases. The first involved lending to Latvia, Romania, Hungary, and Ukraine as well as Iceland, which you can regard as part of the broader European region. There was some resistance on part of the Europeans to the idea of seeing the Fund get involved in lending to EU member states: Latvia, Hungary and Romania. There was some tension there, at least as I observed it. Skill was required on the part of the Fund’s Managing Director and other senior officials in the institution, in order to coax or cajole and certainly to stand ready to help the Europeans deal with these problems as they became too large for the EU to handle alone – too challenging financially and maybe intellectually. Then there was the second phase that involved the eurozone itself with the debt crises in Greece, Ireland and Portugal. There again there were sensitivities. Even Dominique Strauss-Kahn, despite being a former finance minister of France, could not go to the Europeans and just say, “you guys need the Fund.” He had to do a certain amount of delicate diplomatic work to get to the position – which I think is good for the Fund and good for Europe – where Europe finally agreed that the Europeans would be better off with some role for the Fund [in helping handle the financial rescues and management of sovereign-debt problems]. He was able to deploy his diplomatic skills: he knew Europe and, secondly, by that time at the onset of winter 2010, things had been going on for 18 months in the crisis, the Fund had more of a track record, and the Managing Director had more of a track record on being able to deliver.
Q: Turning to a related dimension of the crisis and its international fall-out, the Fund and its Managing Director also seem to have been centrally involved in the drive for global financial reform. How would you delineate their role in that field?
TRUMAN: That’s a little more complicated. International financial regulatory matters are an area where the Fund has been involved since the 1990s, largely with its creation of a mechanism called the “financial-sector assessment program” (FSAP). But actual regulations and the framing of regulatory and supervisory regimes were not under the de facto jurisdiction of the Fund. What had happened in the 1990s was that the regulators and central banks agreed – some people would say “conspired” – to set up the Financial Stability Forum (now the Board) as the principal entity to coordinate such matters, rather than the Fund. There was some unhappiness over that among some at the Fund. As things have evolved, the Fund’s role has been one of cooperation with the Financial Stability Board. There have been some tensions because they’re different organizational structures, but they do have joint projects, such as an early-warning exercise. To me, as an insider-outsider, they seem to be working together reasonably well. The Fund has also provided some independent judgments that have been helpful in promoting the debate on financial-sector reforms. But the Fund has been less central in this area than on the lending/rescue package side of things.
Q: Going forward, what do you see as the Fund’s main role?
TRUMAN: When you ask about the IMF, you have to say what you mean. On the one hand, the IMF is the senior management and staff, and they have a role keeping the membership honest – as people say, as ruthless truth-tellers to top policymakers. But the Fund is also its membership [of 187 countries] and the membership is embodied in the IMF Executive Board. On some important issues such as surveillance and the commitment of members to global economic and financial stability, the Fund, with its management and staff, can prod. But in the end, if commitment is going to be there, it is going to be made by the membership, particularly the major countries. The management and staff can push the envelope with new mechanisms such as the new “spill-over” reports and with assistance in the G-20 Mutual Assessment Processes. There are some tensions in the latter case [of the Mutual Assessment Process] between the Fund and its staff, on the one hand, and the broader membership and the G-20 countries, on the other. How to develop a more effective role for the Fund in coordinating policy in the future is probably the central question over the next decade – and whether the [187-nation] membership will encourage the management and staff of the Fund to do so. The view of Dominique Strauss-Kahn, as I have heard him explain it, is that “we’re all in this together.” So even if people can say that there is some “jealousy” between the G-20 and the rest of the world [represented by the Fund’s membership], it doesn’t do anybody any good. In other words, the G-20 has to bear in mind the interests of the broader community of nations.
Q: There have also been changes in the Fund’s own governance, notably with regard to how representative it is and therefore how legitimate. The Fund – at least the Finance Ministers of member countries – have voted for some reforms on these complicated arrangements, which you have famously dubbed the questions of “shares” (quotas and voting power) and “chairs” (meaning seats on the 24-member Executive Board). What should we understand here?
TRUMAN: There have actually been two phases of that. One phase was done under Strauss-Kahn’s predecessor, which ended up with very modest changes to voting representation (chairs) and the creation of a new formula for IMF “quotas” (meaning funding obligations and rights) and the voting powers based on these “shares.” When the second phase of the crisis broke in late 2008, some disappointment emerged about how little had been accomplished with these changes -- which were finally adopted by governments in 2008 and just approved a few weeks ago. So the issues were reopened, including voting shares and also the chairs issue of representation on the Executive Board. This latter question primarily involved reducing the relative representation of Europe as a whole and thereby increasing the representation of developing and emerging nations.
It was much more difficult to reach an agreement on chairs because of the perceived over-representation of Europe on the Executive Board: Germany, France and Britain appoint their own Executive Directors, and other chairs are held at one time or another by up to seven other European countries. So this was a tremendously thorny question within Europe. In the event, the U.S. forced the question, both on a second revision of shares and on the chair issue. The process led to a quite substantial reallocation of voting powers, diminishing the representation of the broad group of traditional advanced industrial countries and also making reallocations within the voting blocs in favor of faster-growing countries -- the more “dynamic” economies, in the lingo. This change involved politics in the best sense of the word, i.e. compromise and negotiating about technical solutions. My sense is that it would not have happened as well and successfully as it did without the active direction and support of the Managing Director.
The question of chairs and their reallocation was a little more complicated, and Dominique Strauss-Kahn appeared to not entirely want to see the question come onto the table last summer. In the event, he was actively involved in seeking a solution. The outcome, speaking a little bluntly, left some people not entirely happy about it both inside and outside Europe, but that may simply mean that no one can make all the people happy all the time. In any event, the compromise reached there has not yet been implemented so we don’t know exactly what’s going to happen. Judgment on the success of that agreement will have to be left for historians to decide.
------European Affairs