MEMORANDUM
TO: Rodrigo Rato,
IMF Managing Director
FROM: Jeffrey D. Sachs
RE: Running the Fund
You are taking over the International Monetary Fund (IMF) at a critical moment. A decade ago, globalization looked like a sure winner. Expanding world markets and global cooperation, many thought, would extend prosperity and foster peace. But today, the world is at war. The gap between the richest and poorest people is wider than ever. The vaunted capacity of economic integration to mitigate extreme poverty and environmental degradation looks illusory. The world needs effective international institutions more than ever, yet the legitimacy of the IMF is at a low ebb in many parts of the world.
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From the start, the IMF has lived with a particular tension. It is an international organization with 184 member countries, and the IMF Articles of Agreement call on it to represent all of its constituent members. Yet the fund is governed by rich nations, foremost among them the United States. How you handle this tension will determine your own success or failure as the new managing director, as well as the continued relevance of the IMF at a time of enormous international strain. On key issues such as foreign aid, debt relief, and exchange-rate policy, you must learn to represent the entire world, not just the U.S. and European governments that put you into your job.
MONEY TALKS (AND VOTES)
The way you arrived at the IMF speaks volumes about how the institution functions. Although your record as minister of economy in the last Spanish government is impressive, you were not an obvious candidate to lead a global financial institution with major operational responsibilities in the poorest countries. You were not a leading figure in the great debates of the past decade regarding the East Asian crisis, the initiative on highly indebted poor countries, capital market liberalization, African poverty, or other issues of central concern to the IMF. Indeed, you owe your job to a non-transparent process in which the richest countries dominate and most of humanity has little say. Still, given your professional skills and the respect you command among your peers, there is widespread hope and anticipation that you will rise to the occasion.
The fund's governance starts with some basic arithmetic. The IMF operates on a voting system based on each country's quota at the fund, rather than a system of one person, one vote (or one country, one vote). The United States, with 5 percent of the population of IMF member countries, controls 17 percent of the vote. Europe has a remarkable 40 percent of the IMF vote, with just 13 percent of the population. China and India comprise 38 percent of the world's population, and just 5 percent of the vote at the fund. Little surprise that the United States and Europe jealously guard their voting powers.
Nothing happens at the fund without the say-so of the United States and Europe. If decisions are by consensus, it is only because developing countries long ago learned not to lock horns with rich nations on matters of financial diplomacy. The IMF, after all, can do great financial damage to unruly countries, causing them to lose not only the resources of the fund, but also those of the World Bank, regional development banks, the Paris Club, the London Club, and private creditors, all of which are influenced by IMF judgments.
The institution prioritizes the interests of rich countries, and especially those of the United States, at every turn. When the United States wisely sought to forestall a Mexican default in early 1995, the IMF was induced to make an emergency loan of unprecedented size. When, on the other hand, the U.S. Treasury was wary of lending to Ecuador in late 1999 following that country's default to private creditors, the IMF withheld a pending loan. That decision helped topple the financially strapped government in Quito in early 2000. When ideologues in the Bush administration wanted to punish an allegedly left-wing government in Haiti, the IMF obligingly froze lending in 2001. Eventually, the Haitian economy crumbled and the elected government was ousted. Either through action or deliberate inaction, the IMF has repeatedly influenced politically charged issues of privatization, trade, and financial market policy in emerging markets at the behest of rich nations.
Countries siding with U.S. geopolitics have a much easier time getting IMF loans and debt relief. Countries labeled ideological opponents, by contrast, have had funding frozen at tremendous cost to their poor citizens. Most shocking, the IMF has asked the poorest of the poor for unconscionable belt-tightening and debt servicing since the early 1980s, because the United States, Japan, and most of the leading creditor countries in Europe showed little interest in extending debt relief or increasing development assistance. Debt relief for the poorest countries has been slow, grudging, and inadequate. The IMF has helped by dressing up fiscal austerity as a macroeconomic necessity.
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