When speaking of crises, they are usually associated with negative phenomena. After all, the word crisis itself means: “a time of intense difficulty or danger” according to Oxford dictionary. If we look at the protests in UK or 40% jumps in suicide rates in Greece this definition seems like an understatement. But what about the institutions who are meant to stop such crises from happening in the first place. Surely it should be harmful for them too, as they have failed on their mission. But, maybe there is more to it?
Each International Economic Organisation (IEO) has a series of functions or roles it has to fulfil. These roles vary from monitoring and advising to enforcing or punishing. If these roles are carried out by separate institutions, the one who has to carry out the monitoring process should really see themselves as failing in their quest. The second type of an institution would have no work if the first one failed, as there would be no punishment to carry out and not “corrections” to be made. But what about if a single institution carries out both roles? The place where this is most evident is by allowing institution to monitor the situation leading up to the crisis and then proposing measures to solve the crisis. The International Monetary Fund (IMF) is a case in point, especially if we analyse it from a managers point of view.
From an IMF manager’s point of view, monitoring nations is difficult, tedious and not particularly rewarding. One has to have teams to track 197 countries and their governments, analyse what problems are present and what may potentially arise, write reports to governments and have relatively little power. Furthermore, the better an institution does in this role, the less need there is to divert extra resources for states which finance IEOs expenditure. Arguably, the significance of the IMF in particular has waned following the Asian crisis and it was gradually fading into disuse. Because of this, the role becomes relatively uninteresting.
Crisis management or execution, on the other hand, is much more interesting. The example of Asian financial crisis showed that the IMF did not have sufficient funds to correct the situation. Because of this, extra resources were pooled to the Fund. Similarly, the financial crisis of 2009 seemed like a prayer which the BBC called “resurrection” of the IMF. To allow IMF to combat intergovernmental imbalances the G20 proposed to triple IMF loans to 750 billion USD (Walker, 2009). The extra resources have allowed IMF to manage such crises once again thereby increasing the power of the IEO. Furthermore, the target of its loans became relatively developed (Romania, Hungary, Latvia) and developed nations (Iceland, Greece, Portugal). The significance of this is that global crisis tends to empower the IMF. From the perspective of a manager of such an institution, such crises may not be so bad, and may even be desirable.
Based on this simple analysis, it would seem that from the institutions point of view, monitoring could be loosened to allow for crises to occasionally. To avoid such plans, there would have to be costs for an institution to not take such a path. First, there is the human aspect, that prevents people from hurting others and crises are known to bring many casualties. Second, there should be an economic aspect, such as fines, getting fired, reputation downgrade or similar. While the first aspect should be left to sociologists or behaviour economists, the second aspect is lacking. Mr Rodrigo de Rato, the managing director of IMF, left the institution for personal reasons 1 year before the fall of lehman brothers1 and returned as head of Bancia in 2010. Mr. Dominique Strauss-Kahn, the person in charge during the crisis, left office not because of human casualties caused during the bail outs, but because of rape allegations2. In both cases, there was no mechanism to punish the institution for failing monitor the situation leading up to the crisis and rewarded for being the one to safeguard from crisis. This is problematic from a political and economic point of view.
Of course, it is not suggested IMF intentionally pretended not to see the crisis. However, under the current conditions it would have been very logical and rewarding to do so. One option would be to separate the two functions and give it to different departments or even completely different institutions. Another is to hope for the best and trust that humans are either honest or not rational enough to have such a master plan. Either way, even when it comes to crises, it may not be such a bad thing for everyone after all.
Nerijus Cerniauskas
1 http://www.imf.org/external/np/cm/2007/102007a.htm
2 Sudeep Reddy; Bob Davis (19 May 2011). "IMF Director Resigns, Denying Allegations". The Wall Street Journal. http://online.wsj.com/article/SB10001424052748703509104576331623409445148.html?mod=WSJ_Home_largeHeadline. Retrieved 19 May 2011.
