The Resurgence of the Washington Consensus

By John Gershman

0106krueger.pdf

In another sign of its penchant for going "back to the future" in foreign policy, the Bush administration has, over the objections of the International Monetary Fund's Managing Director Horst Koehler, forced the IMF to offer the number two spot at the Fund to Stanford economist Anne Krueger. Krueger served as vice president of economics and research at the World Bank from 1982 to 1986. In addition to Krueger, other new appointments at the Fund include Timothy Geithner, former under-secretary of Treasury for international affairs in the Clinton administration as head of the IMF's policy department, and Gerd Hausler, a former top official at the German central bank to lead the Fund's new International Capital Markets Department, which aims to strengthen the IMF's monitoring of capital flows to developing countries. Finally, Harvard economist Kenneth Rogoff will replace Michael Mussa as the new chief economist. (Rogoff worked in the Fund's Research Department from 1982-83).

These appointments, and Krueger's in particular, illustrate three elements of the Bush administration's approach to foreign economic policy in general, and the IMF in particular.

The first is America's continued domination of the IMF. News reports indicate that the Bush administration pressured the Koehler to accept Krueger as his number two, over Koehler's preferred candidate, Timothy Geithner, because of the latter's high profile in the Clinton administration. Continuing a long bipartisan tradition in U.S. foreign economic policy, the IMF's autonomy from the administration in Washington continues to be narrowly circumscribed.

Second, these appointments reflect a de facto endorsement of the Washington Consensus in general and the IMF's approach to the Asian crisis in particular. The IMF's role in the Asian crisis was criticized by a range of people, including citizens' groups in Asia and in the North as well as mainstream economists like Jeffrey Sachs and former World Bank Chief Economist Joseph Stiglitz. Geithner, who worked for Kissinger Associates prior to joining the Treasury Department in 1988, was a key player on the U.S. Treasury Department negotiating team during the Asian economic crises of 1997-98. Meanwhile Krueger has defended the IMF approach to the crises in Korea and Indonesia, arguing, for example, that "Koreans and the rest of the world are better off because of the Fund's activities during the very difficult crisis period and its aftermath." Firmly ensconced in the Washington Consensus, Krueger is a strong advocate of free trade and critical of the failure of Northern countries to open their markets to developing countries' products, particularly agricultural commodities. She will oppose efforts to integrate labor and environmental concerns into IMF operations, and has been a sharp critic of efforts to do so at the WTO.

Third, Krueger's appointment reflects a repudiation of the most radical prescriptions of the Meltzer Commission for a wholesale scaling back of IMF operations. In a recent paper Krueger argues that "especially in a world in which capital outflows can magnify quickly, an institution such as the IMF seems absolutely essential for ensuring the world's ability to react in a timely fashion. And, as long as there are weak financial systems negatively impacted by exchange rate movements and/or capital outflows, it will continue to be necessary for the IMF to address financial restructuring, as well as exchange rate issues."

Krueger's reform proposals will tend more toward tinkering than an overhaul, and will encourage the Fund to focus on crisis management and efforts to reform countries' financial systems in ways that facilitate capital flows and strengthen the private sector. Rogoff, the new chief economist, is also opposed to any significant expansion of IMF operations. He is critical of efforts to coordinate exchange rates among the world's major currencies, and is also opposed to increasing the IMF's role as a "'deep pockets' lender of last resort."

This is more in tune with Bush administration practice, if not its rhetoric. President Bush campaigned against the kinds of bail-outs the IMF provided to Mexico, the Asian countries, Brazil, and Russia during the Clinton administration, and Bush's National Economic Council Chief Lawrence Lindsey and Secretary of the Treasury Paul O'Neill have echoed the Meltzer Commission's recommendations. But to date the Bush administration has supported recent bailouts of Turkey and Argentina.

(John Gershman <john@irc-online.org> is a senior analyst with the Interhemipsheric Resource Center and Asia/Pacific editor for Foreign Policy in Focus.)