How independent is the IMF?

In today’s New York Times, David Gordon and Douglas Rediker (who was, until recently, one of the U.S. representatives to the Fund) worry that the Euro crisis is undermining the independence of the International Monetary Fund. Because the IMF has played second fiddle in bailouts orchestrated by Europe, they see a danger that the Fund is subordinating its analysis functions to elements of the EU: 

Moving forward, the I.M.F. must loosen its partnership with the commission and the E.C.B. While coordination remains critical, the I.M.F. should make clear that on financial matters, it remains in sole command of how its resources will be deployed.

In particular, the fund must present its financial analysis separately from any key political deals that might be struck by other troika members, allowing markets to assess the underlying assumptions. Only then will I.M.F. programs lend market players the confidence to re-engage with those countries that desperately need private capital. Maintaining credibility will also reassure the fund’s shareholders that I.M.F. resources are being deployed in a manner consistent with the organization’s mandate as a global financial truth-teller.

If the I.M.F. is involved, it needs to be on its own, and not anyone else’s, terms. Ignoring that truth will have dire consequences for global finance, and bolstering the fund’s resources this week won’t change that.

The trick, of course, is that Europe is heavily represented on the IMF board and led by a former European finance minister. It is of course reasonable to demand that senior IMF officials and staff, whatever their state of origin, act in the best interests of the institution and the international financial system more broadly. But it makes little sense to ask European board members (appointed by European states) to analyze potential loan packages without reference to the broader strategy of their governments. What’s missing from the piece is an acknowledgement that the IMF is in very important respects an intergovernmental organization, and that European governments are key players. 

I also think Gordon and Rediker greatly overestimate market confidence in the IMF. They cite the African overlending of the 1990s and the current Euro crisis as unfortunate departures from an otherwise strong record of independent analysis. But in fact there’s very strong evidence in a much broader array of cases that IMF analysis and lending practices have been influenced by political considerations. Randall Stone, in particular, has done great work documenting how the United States has often intervened informally to loosen IMF conditionalty for key allies and strategic partners. Nor does the IMF have a strong recent track record of independent analysis. The Fund failed completely to sniff out the 2007-2008 financial crisis, and an internal evaluation determined that a variety of cognitive biases may have played a role.

In short, it’s hard to imagine that the Eurozone lending packages are teaching the markets anything new about the Fund’s shortcomings.