Sunday 5 June 2011

The IMF needs to outgrow Europe (Sunday Guardian)

Union Minister of Commerce and Industry Anand Sharma with French Minister for Economy, Finance and Industry Christine Lagarde at a meeting in Paris last week. PTI
fter the obligatory disapproving coughs, Dr Manmohan Singh is likely to accept the replacement of one French managing director of the IMF with another. When Christine Lagarde comes to Delhi, she will enter a city teeming with Francophiles, a species that is particularly strong within the Ministry of Defence. She will converse in French with Sonia Gandhi, and perhaps even find time for a celebrated import from her own country, NAC member Jean Dreze. Given the lack of unanimity within The Rest, it is almost certain The West will once again lead the IMF, the way it does every "international" institution set up after the 1944 Bretton Woods conference. And since the demise of the USSR in 1992, the UN system too has come under western tutelage, as evidenced by UN Security Council resolutions that give colonial-era powers to "Coalitions of the Willing" in countries in Asia and Africa. Of course, perhaps by coincidence, such "coalitions" invariably comprise members of Nato, or are dominated by them.
However, allowing the top job at the IMF to remain the monopoly of Europe is a bad idea, one that is likely to prove expensive for Asia, as it watches the money it saves getting diverted into the bottomless pit that passes for public finance in at least a third of EU members. What Lagarde and the rest of her backers seek is money from Asia, and lots of it, to reduce the burden on the EU taxpayer, as the effort continues to make Spain, Portugal, Ireland and Greece borrow their way out of fiscal collapse. Lagarde's top nine priorities out of a total of ten will be Europe, hardly the mindset expected in the head of an "international" bank. While the IMF may function as a lender to these four economies, this needs to be done on a cold-blooded estimate of what they need to do to avoid default. Thus far, in contrast with the bitter medicine that it has forced economies in South America, Asia and Africa to swallow, the IMF has been noticeably kinder towards Greece and the rest of the PIGS, a policy that needs to change.
The reality is that the expansion of the EU on the terms decided upon by the earlier members has proved too expensive to afford. This ruinous policy was initiated by Helmut Kohl two decades back, when he broke every canon of modern economic theory to treat the East German currency as equal to that of West Germany. Had Kohl fixed a more realistic exchange value, the eastern part of a reunited Germany would have developed much faster than it has. And as for the other countries of East Europe, the massive EU effort to enable parity between their social and other infrastructure and that of western Europe placed the tribal loyalty of ethnicity well above reason. Rather than concentrating solely on East Europe, had West Europe given attention to emerging economies in Asia and elsewhere, its returns would have been far higher. East Europe needed to come out of its backwardness at a pace dictated not by emotion but by the logic of economic reality, a process that would have taken about two decades, or the same time as elapsed between the World War II destruction of Japan and Germany and the re-emergence of the two powers. The attempt to telescope this essential process of economic evolution has weakened the financial sinews of the western members of the alliance, and has reduced their relative presence across the world, something that Nato bombs and missiles rained down on the recalcitrant seems unlikely to reverse.
What the IMF under Lagarde will attempt would be for the EU to use this so-called "international" umbrella as a means for channelling savings from Asia and other locations towards the EU's stricken members. But the problems of Europe are too big to be eliminated by savings from Asia, a continent that has already been cheated of more than $2 trillion in savings and investments as a result of the 2008 financial crisis, a disaster in the making of which it had no role. Rather than repeat the mistake made by West Europe since the 1990s, of pumping investment funds into East Europe rather than into locations that have today emerged as the engines of international growth, investors in Asia need to focus on themselves and on markets in Africa and South America.
If the Iraq and Afghanistan wars have bankrupted the US in a way that the Vietnam War could not, the reason lies in the fact that Bush-Cheney sought to funnel all procurement into US entities, rather than make use of production platforms in Asia. Since the 1990s, the EU has made the same mistake as the Pentagon, only on an even bigger scale. By looking only inwards, the EU has reached a stage when several countries within it are certain to default, even while the only hope that it has for economic stability lies in an Asia that has been ignored for too long. Madame Lagarde at the IMF would be more of the same. More of the same policies that have brought the EU to the edge of financial meltdown. Prime Minister Singh needs to do more than politely cough. India needs to throw its weight behind an "emerging economy" candidate, for it is the move away from a Europe-centric approach that is the best policy for the IMF to follow.

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