Will Strauss-Kahn's vision live on?

Before the shocking news of his arrest last weekend, Dominique Strauss-Kahn had gained recognition in global financial circles for his activism in helping to chart the course that brought the world from the brink of financial collapse three years ago.

His humiliating resignation as head of the International Monetary Fund (IMF) in circumstances that seemingly could be taken straight out of Greek mythology (a la Priapus) will cast a shadow over his reputation as a 'sagacious leader' of the Fund. But the fresh thinking he brought to that institution is likely to be the basis for continuing reform of its operations.

Strauss-Kahn was a key figure in convincing world leaders to underwrite the massive financial package to provide urgent liquidity support for emerging economies at the peak of the crisis. At that moment when capital was fleeing from these economies in search of safe havens, and as their foreign reserves were drying up, the IMF was mandated to lead the rescue effort. The stampede was soon reversed in countries like Mexico, Thailand, Turkey and several countries in Emerging Europe (Hungary, Ukraine, etc.).

Contrary to the rigid and ideologically driven approach associated with IMF loan facilities, the Fund is mostly seen as having been more flexible and timely in response to the economic problems of borrowing countries this time around. Jamaica, which has had a topsy-turvy borrowing relationship with the Fund, is among developing countries that secured loan arrangements (at unprecedentedly low interest rates) when access to the private capital markets was not possible. IMF loan funds have helped to stabilise our balance of payments as foreign-exchange inflows from the bauxite industry and remittances declined.

Jamaica's situation

The Fund also provided cover for the restructuring of Government's domestic debt under the Jamaica Debt Exchange programme. With the debt dynamics of Jamaica leading to a default, having the IMF standing behind the programme with a large loan facility and its seal of approval was invaluable. Yet, at the outset, there was hesitancy in facing up to the reality of the need for IMF assistance.

Almost all Jamaicans over 40 years old would have heard the negatives of the Fund's dealings with different Jamaican governments. Our relationship with the Fund has been well documented. Its poor track record in designing and 'imposing' adjustment programmes in developing countries over the past 30 years came under severe criticism from Third World leaders such as Michael Manley, who demanded reform of the world economic system. More recently, the concerns have come even from some of its major developed-country members.

Leading economists from the North like Joseph Stiglitz, a Nobel laureate in economics and former World Bank chief economist, have dismissed its policy mix as inappropriate for developing countries. The liberalisation 'one-size-fits-all' orthodoxy shared by the so-called Washington Consensus (IMF, World Bank, IDB, et al) that required countries to open up their markets and loosen up controls on movements of capital, regardless of local conditions, drew particularly harsh criticism.

Jamaica's precipitate liberalisation of exchange controls in the early 1990s can be traced, in part, to the influence of this orthodoxy on the conditionalities attached to loans from the Washington-based multilateral institutions. While we now have a functioning foreign-exchange market, this has come after painful monetary-policy measures in the 1990s that were partly a response to the instability associated with the currency liberalisation.

Blunt condemnation

Stiglitz has been especially blunt in his condemnation of Fund policies for the severity of the Asian financial crisis of 1997. He has laid the blame on the Fund's insistence on capital-market liberalisation in these countries just at the time of their financial bubble. South Korea, Malaysia, Thailand and others saw their currencies collapse and had to reinstitute controls to restore stability. It is noteworthy that the most successful emerging economies have not stuck to IMF-type prescriptions in terms of content or timing in shaping development policy, though the general thrust is towards liberalising and deregulating of economic activities.

The East Asian tigers Malaysia, Singapore, South Korea and Taiwan have been pragmatic in designing policy, each using a specific state and private-sector, mixed-economy framework to promote growth. So, too, has China, and now India is working out its model. Caribbean economies will have to find their own development dynamic while we are utilising IMF resources to temporarily shore up our external financial position.

In an article titled 'The IMF's change of heart', published earlier this month, Stiglitz, has pointed to the institution's changing posture and suggested that the Fund is moving away from 'long-standing dogmas' about economic policy. As an example, he noted that it was now not blindly opposing government intervention in the financial markets of emerging countries where capital controls are necessary to ward disruptive inflows of 'hot money'.

What is left to be seen is whether Strauss-Kahn's successor, whether a figure from the traditional European grouping or a financial leader from an emerging nation, will share his vision of change as expressed in a speech a few weeks ago: "Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF's mandate. It must be placed at the heart of the policy agenda."

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.