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Barry Eichengreen on the End of the Dollar

January 31, 2012

by Dan Richards

You are delivering a talk at this conference on the reform of the International Monetary Fund, which you call an unfinished agenda.  Can you provide the backdrop to that talk?

The IMF is – how should one put it politely – a work in progress. It has evolved over time, and now it is working with a group of 20 countries to try to put some structure on the operation of the international financial markets and the global economy.

The fund essentially faces three challenges. Number one, it is engaged in surveillance, trying to identify economic problems where they threaten global economic and financial stability, and it hasn't always done a good job. Number two, it must respond to those problems through emergency lending and other means when they are detected. Again, it hasn't always carried out that function as well as it might. And number three, it has to regain the confidence of its members, partly by improving its operations and partly by improving its own governance, so that rapidly growing countries are better represented there.

There have been criticisms of some of the moves that the IMF enforced in terms of austerity when developing countries ran into debt problems.  Are you thinking about that as well?

The current example of that is ironically not in a developing country, but in Greece, where a very severe economic crisis required outside intervention. The IMF became the indispensable agent for intervening. The European Union and Greece’s EU partners couldn't negotiate tough conditions, and couldn't reach an agreement with the Greek government about what kind of difficult steps they would take in return for outside financial assistance.  So they had to turn to the fund.

Greece is a case where it is clear that painful cuts have to be put in place, and that the Greek government has been living way beyond its means. The problem though is that the same medicine was applied elsewhere in other countries that have turned to the IMF for assistance, including Portugal and Ireland.  A valid criticism of the fund has been that in the past that it hasn't varied its advice sufficiently with circumstances. It has always gone to the same playbook, and there is some evidence of that problem still today.

For the IMF to make a significant change in its approach and in its process and philosophy, it presumably depends on the key members of the IMF buying into that. We saw a change in leadership at the IMF last year with Christine Lagarde, formerly the finance minister in France, taking on the role as the head of the IMF. Do you have the sense that there is an appetite among the leading developed countries which have historically been the principal funders of the IMF for that kind of dramatic change?

It's hard to generalize about the leading countries. They understand that the IMF has to change with circumstances, and learn from its mistakes. The last couple of managing directors of the fund, not only Mrs. Lagarde, but Dominique Strauss-Kahn as well, have both been intellectually flexible, and they have succeeded finally in moving the IMF into the 21st century.

In addition, the fund is doing a couple of other things that I'm aware of. Number one, they have an independent evaluation office where people independent of the fund and some internal folks who are independent of operations evaluate what has worked and what hasn't.  In addition to that, they are trying to become more diverse in terms of what kind of people they hire.