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The IMF—Keynes' Non-Candidate

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in the Business Standard, New Delhi
May 25, 2011

© Business Standard

Let us suppose that it were John Maynard Keynes rather than Angela Merkel, Timothy Geithner, and their ilk deciding on Dominique Strauss-Kahn's successor to head the International Monetary Fund (IMF). Who would the Great Man have chosen? Though an exercise in fantasy, this is actually a question that Keynes addressed seriously if not directly.

At the first annual meeting of the IMF in Savannah, Georgia, in 1946 Professor Keynes made a memorable speech outlining the three desirables and one undesirable for the Bretton Woods twins, the IMF and the World Bank (in an interesting choice of genders, Professor Keynes dubbed them "Master Fund" and "Miss Bank").

Drawing an analogy with the christening party for Princess Aurora in the fairy tale "Sleeping Beauty," he said the good fairy would confer three gifts on the twins: first, a many-colored coat "as a perpetual reminder that they belong to the whole world; second, a box of vitamins to encourage "energy and fearless spirit, which does not shelve and avoid difficult issues but welcomes them and is determined to solve them; and third, "a spirit of that their approach to every problem is absolutely objective...."

Professor Keynes' dread was the politicization of the Fund (and the Bank), which he expressed as the curse of the malicious (uninvited) fairy that "you two brats shall grow up politicians; your every thought and act shall have an arrière pensée; everything you determine shall not be for its own sake or on its own merits but because of something else." And if this were to happen, he said it would be appropriate for these institutions "to fall into an eternal slumber, never to waken or be heard of again in the courts and markets of Mankind." His aversion to politicization was also reflected in his plea—overruled, like many others, by the United States—to locate the Fund and the Bank in New York rather than in Washington, DC.

Had Professor Keynes applied these principles to the Strauss-Kahn succession, it is clear who he would not have chosen. Professor Keynes would have seen the past 65 years of European monopoly on the IMF leadership and vehemently condemned that outcome as having made the IMF a monochromatic rather than a many-colored coat. Rather than the one belonging to the whole world and being a truly International Monetary Fund, he would surely have dubbed the institution a North Atlantic Monetary Fund.

Moreover, the objectivity and spirit of wisdom that he wanted for the Fund—and the politicization that he desperately wanted the Fund to avoid—would have made him reject a European candidate. For example, he would have seen the Greek IMF program as unworkable because of its lethal combination of too much austerity, too much debt, and limited prospects for growth. He would also have recognized and would have been scathing about the political calculation that necessitated it (Germany and France wanting their banks not to have to write off the losses from owning dud Greek assets). Also, he would have been merciless about the asymmetry of adjustment within the euro area, with inadequate contributions from the surplus country, Germany, and excessive contributions from the debtors, especially Greece. After all, at Bretton Woods, Professor Keynes fought hard for symmetric adjustment between surplus and deficit countries and lost that battle to the United States.

In recent years, the problems created by China's surplus for the world, and Germany's within Europe, suggest that Professor Keynes should have prevailed at Bretton Woods instead of his American counterpart in the negotiations, Harry Dexter White. If these are the consequences of the display of "political sensitivity" of European leadership at the Fund, let us have less of it, Professor Keynes would have thundered. Precisely because Europe's woes are going to take center stage in the foreseeable future, Professor Keynes would have favored a wise and disinterested non-European over a European forever willing to take the midnight call from Berlin, Paris, Frankfurt, and Brussels.

But if it is easy to see who Professor Keynes would have rejected, it is less easy to see who he might have endorsed among the current list of non-European contenders. This list, which Nicolas Véron and I compiled, includes many impressive candidates, who combine intellect with policy experience and who are politically savvy without being politicians, current or wannabe. Although no one candidate stands out as clearly above the pack, they are impressive enough not to have to fall back on a European.

Which brings me to India: For all the talk about India having acquired a seat at the G-20 table, the lack of it in the wake of recent developments is striking, even deafening. Leaving aside whether India might want to promote any particular candidate, it is unclear what India's views are on the principles and how strongly it is wedded to them. Is the silence the consequence of a considered diplomatic decision to sit on the fence? Or is it simply that an exhausted government of a chronically weak state is unable or unwilling to project power internationally? The lack of a strong voice from India is unfortunate because the strength and legitimacy of multilateral institutions, which are in India's long-term interests, are at stake.

The puzzle here is of a country that is a raucous democracy, with its million mutinies and abundantly argumentative voices within, but which seems to opt for silence and disengagement externally. The danger here is that if India, along with others, sits on the sidelines, and the international debate is not strongly engaged, there will be decision making by default. This will only serve to perpetuate the status quo, of an important multilateral institution that remains basically non-universal in its legitimacy, deficient in wisdom and objectivity, and unduly politicized. If, like in Sleeping Beauty, there is then a long slumber as Professor Keynes feared, India should not complain.


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