Just a few years ago, some observers were questioning the very existence of the International Monetary Fund. The agency’s lending dried up during the global boom, and the Fund failed in its efforts to bridge policy disagreements between its leading shareholders, including the U.S. and China.
But a global financial crisis and skillful political leadership have restored the Fund to prominence. Since taking over as managing director in November 2007, Dominique Strauss-Kahn, a former French Finance minister, has been an early and vocal advocate of coordinate stimulus efforts to revive the global economy and has won a new role for the Fund in providing early warnings of potential future crises.
He also has beefed up the IMF’s arsenal to combat the effects of the worldwide financial and economic crisis; winning agreement in recent months to bolster the Fund’s lending resources by more than $750 billion and offering a new type of loan—free of policy conditions—to help key emerging market countries insulate themselves from speculative attacks.
Strauss-Kahn spoke recently with Institutional Investor’s International Editor, Tom Buerkle, about the IMF’s newfound status in the global financial system.
Institutional Investor: You have taken a very active role in urging countries to stimulate their economies and in coming up with new lending instruments. How are you trying to redefine the role of the IMF?
Strauss-Kahn: It’s certainly a different IMF from two years ago, and it’s probably very different from the IMF in two years’ time. First, the role of the IMF as a firefighter has been renewed. All those ideas that we don’t need a firefighter because for five years you had no fire have been proven wrong. Second, the role of the IMF as a policy adviser has been enhanced. As early as January 2008 the IMF had asked for a coordinated global fiscal stimulus. What followed was the first time in history that you had such a coordination: Most nations, at least those with the fiscal room, doing the same thing at the same time for the same purpose.
Enhancing the regulation and supervision of the financial sector will give us a new role. The definition of new rules has to be done by regulators—the FSB and others. When it comes to monitoring implementation, we are the main player.
A lot of economists are critical of the Chinese stimulus, saying most of the money is going to export-oriented industries. What do you say to that?
Of course a lot of money is going to export-oriented industries. We shouldn’t be naïve. And the renminbi is still strongly undervalued. But I think the big change is that the Chinese realize that, in a period of time that will not be short, the imbalances in their own economy will create so many problems that they need to rebalance domestic consumption – develop social security, the health system, education, these kind of things. That takes time. It’s the same thing with the savings rate in the U.S. I think the generation of American citizens between 20 and 45 will not behave in the future as their parents did.
In recent months you have won unprecedented resources for the Fund - $500 billion for the New Arrangement to Borrow and a new allocation of 250 billion in Special Drawing Rights. Do you know how to use those resources?
I would prefer not to use it. We do lend more than we ever did in the past, on a real basis and on a precautionary basis. We need to have more resources because we need to address new challenges. We always need to have a big buffer, in case something happens.
Are you reassured or disappointed that you only have three customers [Mexico, Poland and Colombia] for the new Flexible Credit Line so far?
The FCL has been defined in a very selective way so that the pool of countries likely to qualify is very small. It’s good news that all countries likely to qualify are not in need. We could have one or two others. I don’t see a rush to take up the FCL in the crisis.
The amount of reserves in the world today comes to around 10 percent [of GDP?].
And it’s not unreasonable to believe that after this crisis many countries will say, OK to be safe in the future, we need to accumulate reserves. But that will make things even worse in terms of sterilizing resources. The IMF could provide them with collective reserves. The FCL could be adapted to be this kind of collective reserves, avoiding the need for countries to accumulate reserves and freeing resources for development.
How far can the IMF take on a new role in providing early warning of future crisis and prescribing policy responses?
There are several problems with the early warning concept. The first one is that crises are never the same. So, when you build an early warning system, you are using data and experience from the past, but the next crisis will be different. So is it useful? Certainly. Will it be as useful as demanded? Probably not.
The second problem is that, by definition, early warning comes early. You go to see a minister, and you tell him that we see a problem in one year’s time. He says, OK, come back in one year. If you read the Global Financial Stability Report and the World Economic Outlook in 2006 and 2007, you’ll find interesting pages—I’m not saying it was enough—on the subprime market. Probably we were not vocal enough, but the problem is nobody wants to listen.
In 2008, we came to the U.S. administration with a paper trying to wrap up our experience with banking crises. We said, you need a comprehensive plan, you can’t take a piecemeal approach, and recovery will never take place before the cleansing of balance sheets. Nobody wanted to listen to us before Lehman.
How do you make your voice heard? Is the Fund going to be able to credibly and effectively stand up to some of its big shareholders?
The problem is not, do we dare to say to our big shareholder what is wrong. The problem is, do they listen? For these big shareholders, we need to have a role as adviser, behind the scenes. We may have a role of facilitator in discussions. I deny that the Fund could be pressed by a big shareholder not to say something.
