The IMF and inclusive growth: achieving SDG8

Under the leadership of Christine Lagarde, the IMF endorsed the Sustainable Development Goals (SDGs) and portrayed itself as a champion of inclusive growth. However, little changed in IMF loan agreements, which continued to push the same harmful austerity and deregulation measures of the past. The next leader of the IMF needs to change the core operations of the institution to promote sustainable economic growth, full employment and decent work.

The IMF has not meaningfully supported the SDGs, and its policies undermine the ability of countries to achieve the 2030 Agenda. To illustrate this point, let’s take a look at SDG 8: “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work.”

In a recent report, the International Labour Organization (ILO) shows that the world is not on track to achieve SDG 8 by 2030. For that to change, a major shift in macroeconomic policies is needed.

Orthodox economic policy models, like those promoted by the IMF, focus on supply-side measures and assume that growth will eventually trickle-down. Reality has shown that this is not the case. Furthermore, these models have failed to bring sustained growth the developing world.

Under the guise of “efficiency” the IMF has worked at odds with a decent work growth agenda,  often undermined labour market institutions, pushing for cuts in public wage bills, deregulation and weakening of workers’ rights. This approach, along with sharp spending cuts, lead to a downwards spiral in which the economy shrinks, unemployment grows, poverty soars, and aggregate demand in the economy collapses. The IMF itself admitted that most loan programmes fail to meet  growth targets.

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For the record…

Chronicling the ‘open, merit-based, and transparent process’ thus far

It struck me that in the event Kristalina Georgieva becomes the next IMF managing director (MD) and serves out her two terms, that, ten years from now, when there will once again be calls to end the gentleman’s agreement, we might find ourselves wondering how exactly another European got the job at the time. By what ‘open, merit-based and transparent process’ did the powers-that-be decide that, across their entire membership, the former World Bank CEO from Bulgaria was the most qualified and distinguished candidate (“without taking geographic preferences into account”, of course)?

As most decisions thus far have taken place behind closed doors with only occasional crumbs of information coming through, mostly from a few ardent reporters’ twitter feeds, this is an attempt at establishing a record of the step-by-step ‘open, merit-based, and transparent’ process leading up to Kristalina’s nomination by the European Union, based on public reporting and the, albeit sparse, official information made available (reflecting Brussels’s location in the centre of the known IMF universe, all times are CEST).

• 2 July: Aaaaand we’re off! Lagarde announces her European Central Bank presidency nomination and relinquishes her responsibilities as IMF MD during the nomination period.
• 8 July: Bloomberg reports European finance ministers say it is a “priority” for them to put another European in place, jointly presented by the EU and, in the words of French politician Bruno Le Maire, “without useless rivalries” (erm, should we just stop there?)
• 12 July: The day the Dutch government demonstrates how aggrieved they really feel about being side-lined in the negotiations for top EU positions:
  • Dutch government nominates its former finance minister Jeroen Dijsselbloem and kicks off its lobbying campaign for his candidacy with key governments;
  • Dutch prime minister Rutte softens his stance on US requests to provide military support in the Strait of Hormuz and Syria ahead of his visit to the White House the following week.
• 16 July: Lagarde submits resignation as IMF MD effective from 12 September, after being confirmed as new ECB president.
• 19 July: José Antonio Ocampo, former nominee in 2012 for World Bank president, with “experience in all the areas that might be considered most relevant for the IMF Managing Director post”, publishes his vision for reforming the IMF toward a more effective and inclusive future – to deafening silence from officials…

Will the IMF change its managing director age limit to suit the Europeans?

The maximum age for a candidate to be appointed Managing Director is currently under 65 years old, and currently stipulates that this person cannot hold the position of managing director beyond their 70^th birthday. However, rumours have been circulating as to whether the Fund will scrap this to shoehorn in a favoured European candidate.

Kristalina Georgieva, who is currently the World Bank chief executive and a Bulgarian national, is rumoured to be backed by the French in the leadership race. France plays a particularly powerful role in the selection process as Bruno Le Maire, the French finance minister, is coordinating the European selection process. Georgieva is however 65 years old, meaning that should she be appointed, the IMF would need to change its age limit rule.

It was reported in the Financial Times on July 26 that France had floated the option of changing the age limit, but that did not attract support from the board on Friday . The Financial Times article added that “Nonetheless, people familiar with the matter said the age limit could still be tweaked at a later stage if Ms Georgieva emerged as the board’s choice.”

Just on the same day as the publication of the article – and on the same day that France floated the age limit change – the IMF published an update entitled “Frequently Asked Questions on Managing Director (MD) Selection”. The update had a section at the very bottom of the page entitled “How can the age limit be changed? When can it be changed?”, which noted that: “The Fund’s By-Laws would need to be amended by the Board of Governors by a majority of the votes cast. The age limit could be changed either before or after the nomination period closes. A nominee who is above the age limit could not be appointed Managing Director until the By-Laws were amended to remove or modify the age limit.”

Quota reform impasse likely as IMF faces legitimacy crisis

As the IMF is set to publish its 15th General Review of Quotas by the October World Bank and IMF Annual Meetings, the US has suggested that it will block reforms of quotas in favour of extending the portion of ‘New Arrangements to Borrow’ (NAB), which are designed as a backstop to the Fund’s quota-based financing mechanism (see BWP Observer Spring 2019, see Update 79).

IMF quotas are defined as “the building blocks of the IMF’s financial and governance structure” where a “member country’s quota broadly reflects its relative position in the world economy” and determines its voting share on the IMF executive board. The current formula used to guide the distribution of quotas is calculated in accordance to GDP (50 per cent), economic openness (30 per cent), economic variability (15 per cent) and international reserves (5 per cent).

Quota reviews are supposed to take place every five years. While member states had originally committed to completing the 15^th review in January 2014, the US used its veto to delay the approval of the 2010 14^th review until 2016 (see Observer Winter 2016, Autumn 2015). Moreover, the delayed 2010 reforms resulted in many low-and middle-income countries losing substantial shares of their voting power – such as Nigeria by 41 per cent, Venezuela by 41 per cent, Libya by 39 per cent and Sri Lanka by 34 per cent (see BWP Observer Winter 2016).

This review corresponds with a crisis of multilateralism engulfing international institutions, which could intensify should the IMF uphold the ‘gentleman’s agreement’ to appoint another European its new managing director (see BWP Observer Summer 2019).

Will Mexico back Carstens as the next IMF managing director?

In an interview with Bloomberg published on July 29, Andres Manuel Lopez Obrador (ALMO), Mexico’s President, noted that he would support former central bank governor who now heads the Bank for International Settlements, Agustin Carstens, should Carstens be nominated as a candidate.

ALMO noted that despite their “political differences”, he would hypothetically support Carstens, stating that: “I would like to. I would always support a Mexican, if they’re a specialist in the material…” Earlier this month, Carstens declined to comment as to whether he would be eager to run for the position of IMF managing director.

The discussion around Carstens potential candidacy will conjure up memories of the 2011 leadership race for the IMF managing director. Carstens was shortlisted alongside Christine Lagarde for the position, following the resignation of former head of the IMF Dominique Strauss-Kahn, who was arrested in the US on charges of an alleged sexual assault.

Carstens, however, subsequently failed to galvanise support among emerging economies, who are structurally underrepresented in the current IMF governance configurations. Interestingly, as part of his bid, Carstens noted that should the IMF follow through with the ‘gentleman’s agreement’ and select a European candidate for the post, it may produce a conflict of interest, as Europe struggled with a post-crash debt crisis. He noted: “We could have a situation where borrowers dominate the institution,” stressing that the European region needed a fresh perspective in order to solve the problem.