By Michael Prowse, Senior Visiting Fellow
Moises Schwartz, the new director of the IMF’s Independent Evaluation Office (IEO), is reaching out to the Fund’s critics. At a briefing at New Rules last week he urged the non-governmental sector to propose topics for investigation. As Mr Schwartz is drawing up a work programme to present to the IMF’s Executive Board this is an opportunity that should be grasped.
The IEO was established in 2001 to conduct “independent and objective” evaluations of Fund policies and activities. It operates at arm-length from the IMF’s Board and is fully independent of Fund management.
Non-governmental organisations ought to make suggestions because the IEO exists in part due to the pressure they exerted in the late 1990s. See for instance “Policing the Policeman – the Case for an Independent Evaluation Mechanism for the IMF” by Angela Wood and Carol Welch of the Bretton Woods Project and Friends of the Earth, US, April 1998.
Mr Schwartz takes up the post after serving as president of Mexico’s National Commission for Retirement Savings. He held many senior positions in Mexico’s central bank and finance ministry and is a former IMF executive director for Mexico and a group of other Spanish speaking nations. After decades as a top financial official, Mr Schwartz will need to work hard to convince sceptics that he does not share the prejudices and presumptions of those he is supposed to be monitoring – that he brings a genuinely open mind to his difficult task.
In discussing the two projects he has inherited from his predecessor, Mr Thomas Bernes, his tone was decidedly balanced. The first is an evaluation of the IMF’s research effort. Mr Schwartz says the research department’s work is often excessively academic, not focused on the practical issues confronting the Fund and member countries. A further problem is that the operational departments have little or no say in the research department’s priorities. Nor do executive directors exert much influence. An external assessment conducted a decade ago - the Mishkin report – also concluded that the Fund’s research was insufficiently relevant to policy issues but it failed to bring about the required cultural and institutional changes.
The second inherited project is an evaluation of the Fund’s performance in the years running up to the global financial crisis – 2004-2007. Did it provide sufficient advance warning? Were its warnings heeded? Again Mr Schwartz does not pull his punches. The Fund’s task is to prevent economic crises or, if this isn’t possible, at least to give early warning of emerging problems. He suggests the Fund failed in two different ways.
The primary failure was that it did not connect the dots. It failed to give adequate warning of impending problems because it just did not anticipate the magnitude of the crisis. This was partly because its economists have traditionally regarded the financial system as of secondary importance. Fund staff did not know enough about derivatives, credit default swaps and so forth to evaluate the dangers. Although officials scattered across departments had concerns about different aspects of the emerging crisis, it seems there was no mechanism for centralising and analysing this data.
The secondary failure is that the Fund tends to be most effective in its interactions with small low-income countries. A recent IEO evaluation noted “continuing strategic dissonance with large advanced countries about the Fund’s role”. Many large countries regard the surveillance process “as lacking value and/or even-handedness”.
IMF officials can be diffident if not subservient when dealing with major shareholders such as the US. Thus even if senior staff had doubts about the stability of US financial markets, they probably would not have challenged the policies of Alan Greenspan (then Fed chairman) and other top US officials. In the same way even if junior Fund staff had doubts, they probably would have kept quiet rather than question the decisions of their superiors.
So what are Mr Schwartz’s plans for future evaluations? Which of the Fund’s activities does he think are most in need of objective scrutiny?
Broadly speaking, the IEO has two major fields for investigation: the effectiveness or otherwise of the Fund’s various policies; and the effectiveness or otherwise of its governance and relations with other key institutions. He is considering evaluations in both these fields.
As regards Fund policies, surveillance is back on the agenda even though it was the subject of a previous IEO report. This reflects its centrality to the Fund’s mission: if surveillance had worked, the 2007-09 crisis would not have occurred. He is also looking at various design and technical issues: why, for instance is the Fund’s advice on inflation not even-handed (it tends to take a tougher line with smaller countries)?
As regards Fund structure and external relations, he is considering evaluations of its internal governance and of its relations with external stake-holders, such as the World Bank and civil society. Why, he asks, is the Fund so often stigmatised – blamed for the implementation of harsh policies even when other institutions take a larger role, as for instance in Greece?
In a previous study of Fund governance (2008), the IEO was highly critical of the role of the Board of executive directors – the body to which it is answerable. At New Rules, Mr Schwartz appeared sympathetic to suggestions that it should now scrutinise the structure of the Fund’s internal management. At present the various departments report to a very lean senior management team: the managing director and his three deputies. One shortcoming of this tight hierarchical structure is that horizontal relationships between departments are weak. This structure may partly explain why the Fund failed to join the dots and predict the 2007-09 crisis.
Since Mr Schwartz’s is seeking suggestions for future evaluations, here are a few possibilities.
First, the IEO could usefully assess the Fund’s performance as a development institution. Although the Fund intends its crisis support for low-income countries to be strictly temporary, in practice its interventions are often prolonged. This means that macroeconomic stability cannot be its only goal. It must also seek to promote equitable and sustainable development. How do its programmes measure up by these criteria?
Second, it is ironic that the Fund (at the behest of member states) engaged in a brutal downsizing programme in 2007/08 just as the worst economic and financial crisis since the 1930s was brewing. The IEO should evaluate the reasoning behind this downsizing exercise. Did those responsible reflect sufficiently on the implications of economic cycles? The demands on the Fund will always fluctuate over time, but expertise and experience cannot be built up quickly in response to each new crisis.
Third, Mr Schwartz should examine the Fund’s staffing policy. Traditionally it has hired PhD economists most of whom possess a rather narrow set of macroeconomic skills. Many of the Fund’s tasks require different backgrounds – the crisis revealed the shortage of senior staff with expertise in finance. But the problem runs deeper. The Fund needs generalists with negotiating rather than technical skills, and it needs staff with government and civil society experience and with qualifications in other social sciences. It also needs to have far more women in senior positions.
NGOs and civil society groups should take Mr Schwartz at his word and put forward proposals for evaluations. He is likely to take any coherent suggestion seriously. Although he must submit a list of proposals to the Fund’s executive directors, he will make the final decision on the IEO’s work programme.
It also is worth reflecting that governance and policy issues are intimately linked, as the current debate over quotas illustrates. What the Fund chooses to do in the field, and how it satisfies its mandate, will depend on the nature of its staff and the way it is organised internally. Proposals on governance reform could thus be just as significant as proposals for the evaluation of policies.