Wednesday, April 1, 2009

Does the IMF Have all the Answers?

Simon Johnson is everywhere these days, a true media darling: NPR, Wall Street Journal, NY Times, Charlie Rose, Terry Gross, and on and on and on. I am getting a little tired of his voice and, to my mind, his message strikes me as a bit strange. His message is all about the political economy of big, politically powerful banks and his solution is to disempower them politically by kicking all of the higher ups out and breaking up the banks. Fair enough, I suppose, but this type of shock therapy has been pretty hit and miss elsewhere. Then he suggests having some wonderfully neutral and independent organization like (his former employer) the IMF manage the global banking system. Say what? One can make the very same argument about the IMF being too political and beholden to the political interests of the biggest donors and make an even more devastating case that the IMF has in many cases done more harm than good in its interventions. But I am not the right person to say this. Fortunately, Dani Rodrik is. And here I make an exception and cross-post a cross-post. From Mark Thoma:

Dani Rodrik responds to Simon Johnson:

Simon Johnson's morality tale, by Dani Rodrik: Simon Johnson
tells a simple and compelling story:
the U.S. has been afflicted by a version of the crony capitalism that has been the scourge of so many emerging markets, except that Wall Street has bought its
influence and power not by bribery but by shaping the ideology of our times...

The solution, to Simon, is equally clear. Finance needs to be cut down to size. What the U.S. needs is what the IMF would have told any country...

As with any story built around clear villains easy solutions, there is something in this account that is quite unsatisfying. For one thing, I think it puts the blame too narrowly on the bankers. Yes, there can be little doubt that banks badly misjudged the risks they were taking on. But they were aided in all this by the broader economics and policymaking community--not because the latter thought the policies in question were good for bankers, but because they thought these would be good for the economy. Simon himself says as much. So why pick on the bankers? Surely the blame must be spread much more widely.

And I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters--the same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals (as during the Asian financial crisis).

Simon's account is based on a very simple, and I believe misguided, theory of politics and economics. It is an odd marriage of populist and technocratic visions. Countries fail because political elites always end up in bed with economic elites. The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

Among the many lessons from the crisis we should have learned is that economists and policy advisors need greater humility. Too many of us thought we had the right model when it turned out that we didn't. We pushed certain policies with much greater confidence than we should have. Over-confidence bred hubris (and the other way around).

Do we really want to exhibit the same self-confidence and assurance now, as we struggle to devise solutions to the crisis caused by our own hubris?


dw3 said...

the IMF is NOT the answer...good job at pointing out.

Dennis said...

Having recently finished Naomi Klein's Shock Doctrine, I can't say I'm surprised that Johnson would make that claim. I would be sort of surprised if it went over well.