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Monday 23 May 2011

Brown had his faults but he helped steer IMF policy, pushed aid on to the global agenda and took the lead when banking was near collapse.

Monday 23 May 2011

Imagine that in the aftermath of Tony Blair's landslide victory in the 1997 general election John Major had pitched for the job as managing director of the International Monetary Fund only to be told that the new Labour government was backing a French candidate instead.

Blair would have been accused of being vindictive towards an old adversary, even though he had been prime minister on the day the Bank of England took on George Soros and lost. It would have been seen as not just small-minded but unpatriotic to plump for someone from across the Channel.

David Cameron and George Osborne are unlikely to face similar censure for their blackballing of Gordon Brown's bid to succeed Dominique Strauss-Kahn at the head of the IMF, but their treatment of the former prime minister is shabby nonetheless.

Let's be clear: Brown made plenty of blunders during his 13 years first as chancellor and then prime minister. He did not abolish boom and bust; he failed to tame the growing power of the City; he left the economy far too dependent on two or three sources of growth.

But he was also the longest serving chancellor since Gladstone; he presided over the IMF's key policy committee expertly for almost a decade; he drove forward an international agenda on development and he took the initiative when the global banking industry was about to implode in the autumn of 2008. In any other country for that matter, that would make him a serious contender for the job. Not in Britain.

In part, this is due to personal factors. Both Cameron and Osborne feel that Brown treated them w ith contempt and hostility when he was in office, and so feel under no obligation to a political opponent. The reason for the snub goes deeper than that, though.

Since Labour's defeat at the general election a year ago, the coalition has been keen to portray Brown as the prime minister who left the country in a state of near-bankruptcy, thus making the current painful austerity measures inevitable. Plenty of voters share this view and they might find it strange for the government to be trashing Brown's record on the one hand and bigging him up for the IMF job on the other.

It is also a sense of their insecurity perhaps that neither Cameron nor Osborne fancies having Brown taking pot shots at them from the fund's HQ in Washington. Under Strauss-Kahn, the IMF has been kindly disposed towards the gamble the government has been taking with fiscal policy; ministers think they will get an easier ride with Christine Lagarde in charge, and they are almost certainly right about that.

If all this seems a bit domestically focused, that's because the government doesn't really have an agenda for the international institutions. Cameron and Osborne dutifully turn up for meetings of the G8, the G20 and the IMF, but are happy to take a back-seat role. To take just one example, the G8 will be meeting in Deauville this week at a time when the three leading European countries – Germany, France and Italy – have broken the solemn aid promises they made at the Gleneagles summit in 2005. Under Blair or Brown, the UK would have made one hell of a fuss about that. There has not been a peep out of Cameron or Osborne, for whom aid spending appears to be merely about the detoxification of the Tory brand.

Similarly, the government's support for Lagarde appears to be based on the fact that she is not Brown rather than on what the French finance minister plans to do with the IMF. Again, this is depressingly parochial.

The IMF exists to ensure the smooth running of the global economy, to provide early warnings of problems ahead and to act as a firefighter when problems arise, as they inevitably will. It was found sadly lacking before and during the financial crisis of 2007-08 – not just failing to identify trouble ahead but actively promoting the financial free-for-all that caused the speculative frenzy. When the bubble burst, the fund lacked the resources to fulfil its role as a lender of last resort.

There is a big agenda for the new managing director, because most of the problems that caused the biggest downturn since the 1930s have not gone away. They have simply been brushed under the carpet by policymakers eager to return to business as usual.

As it has been since it was established at the 1944 Bretton Woods conference, the fund is badly placed to rectify imbalances in the global economy. After the second world war, the overwhelming power of the United States meant Washington was able to insist that the burden of adjustment always fell squarely on the weak, with no reciprocal obligations on the strong. It was up to a country running a balance of payments deficit to reduce its import bill through deflationary policies; the country running a balance of payments surplus was required to do nothing.

Almost seven decades later, Washington perhaps now regrets this asymmetrical approach, since the US runs the world's biggest current account surplus and the big creditor nations – China, Japan and Germany – are under no obligation to boost US exports by expanding their domestic demand.

The next MD should, therefore, be pushing for a pact for growth and employment. Under Strauss-Kahn, the fund began work with the International Labour Organisation to promote policies that would ensure growth is employment-rich, and to explore policies that would create a social protection floor. This work needs to be accelerated.

In addition, the IMF needs to recognise that there is often a tension between the pursuit of full employment and financial liberalisation, particularly when the free movement of capital leads to speculative bubbles. Reform of international finance, with a less dogmatic approach towards capital controls, is needed.

The fund also has to ensure that it can both spot trouble brewing and, crucially, have mechanisms in place to ensure that its warnings are heeded. There has been much talk in recent years of multilateral surveillance, in which the key players in the global economy would agree to implement mutually supportive policies, but little evidence that the warm words have been turned into meaningful action.

Nor is there likely to be while large chunks of the emerging world remain deeply suspicious of the IMF, led as it is by the US and Europe. China and other Asian countries have built up huge reserves since the Asian crisis of the late 1990s, with destabilising consequences for the global economy, to ensure that they are not forced to go cap in hand to the fund. Further reforms to governance – to ensure that developing countries have more say in the running of the IMF – would help generate a more collaborative atmosphere.

Finally, there is the broader agenda of multilateralism, which includes climate change and trade. These are not strictly within the fund's remit but it has a role in promoting policies designed to make growth less environmentally damaging and trade flows more balanced.

So that's the agenda, and a full one it is to be sure. In an open and fair process, potential candidates would be measured against this sort of template. Will this happen or will the IMF job be subject to the usual mix of carve up, power politics and backstairs intrigue? Silly question, to which we already have the answer.

 


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