Christine Lagarde, the IMF and the World Economic Forum
Christine Lagarde has once again used the World Economic Forum meeting in Davos this week to highlight her quest to refocus the International Monetary Fund on the task of reducing inequality. Mme Lagarde has repeatedly made such statements at the WEF and I’ve covered these on this blog before.
Speaking at a Bloomberg sponsored event on the ‘squeezed and angry’ middle classes throughout the world, she reminded the audience that she had warned of the destabilising political effect that inequality might have. With the rise of populist political movements now very much in evidence she was once again making the same warning.
I have previously noted the IMF’s interest in inequality under Lagarde and went to meet some of the people in the Fund responsible for the research published in 2013 and 2014 to ask them about it. I concluded then that the concern was genuine but that this was motivated in the main by a concern to prevent political destabilisation rather than an egalitarian ethical standpoint. To be clear here – this is not a critique of the individuals; they appeared to have a very developed ethical commitment to equality, but an organisational one. It seemed to me then that what had enabled their work on inequality (which had been around for a long time) was the stance of the IMF’s Managing Director (Mme Lagarde and Dominique Strauss-Kahn before her) but also the context of increasing political instability. I called this the ‘New Global Politics of Inequality from above’.
The struggle for reform
This week Lagarde commented on her own struggles to turnaround the IMF to focus on inequality. It is worth reading this at length:
“[back in 2013/14] we were demonstrating that excessive inequalities were putting a brake on sustainable growth… I got a strong backlash from economists in particular saying that it was not really any of their business to worry about these things, including in my own institution, which has now been very much converted to the importance of inequality and studying it and providing policies in response to that… we now have a very opportune time to put in place policies that we know will help…”
So to summarise this and the tenor of the Davos debate:
- Mme Lagarde recognises that inequality is a problem;
- Davos stakeholders and policy makers should worry about this because it is bad for growth and creates political instability;
- she has tried, against resistance, to change the IMF and to lead the G20 with some success, to focus more on putting in place policies to reduce inequality.
For those with an ethical or just pragmatic concern to reduce inequality some important questions arise from this. These are about how much the Davos set (such as international organisations like the IMF, multinationals, the G20, policy makers and leading NGOs) have genuinely taken action to reduce inequality as a result of this kind of analysis.
So, is the IMF really trying to reduce inequality?
I can’t answer for all of these different organisations, but recent research I undertook with Dr Paul White, did focus on the extent to which the IMF has changed. We undertook our analysis in several stages.
First, we looked at high level pronouncements and reports from the Fund on the subject of inequality. Speeches from Lagarde herself and several important research and policy documents do indeed have a strong focus on reducing inequality. They map out both the case for reducing inequality and identify a series of evidence based conclusions about precisely which sorts of policies might increase or reduce inequality in different types of country.
Next, we took that list of policies: that is the policies that the Fund itself says will reduce inequality. Rather than evaluating ourselves whether these policies would reduce inequality, we took that at face value and looked for evidence that these policies were being promoted by the Fund when it works with member states.
Few international organisations have as direct a channel of influence on their member states as the IMF. This comes mainly in two forms. The IMF regularly provides advice and recommendation to all members (nearly all countries in the world). While these recommendations are not mandatory, they do carry some weight because capital markets may view this advice as sensible and therefore access to funding for government programmes may be affected if governments ignore it. For governments who borrow from the Fund, this advice obviously has much stronger leverage; it is often part of the conditions that the Fund attaches to receiving financial support.
The next step was to look at the operational guidance that IMF staff work under when producing advice to member states. We wanted to see the extent to which the policies the Fund says reduce inequality are present in that guidance. There have been several changes to this guidance recently and at a headline level concerns with sustaining growth and reducing inequality appeared to have triggered those changes. Evidence then of Mme Lagarde’s reform programme.
But when we looked at the actual detail of the changes to the operational guidance and the various supporting documents, it was difficult to discern the emphasis on reducing inequality. It seemed that whatever message had come from the top about this, got lost somewhere in the technocratic process of re-drafting the operational guidance.
Finally, we looked at recent IMF documents providing advice to member states. We looked only at recommendations produced after the new operational guidelines were in place. We were specifically looking for recommendations which echoed those in the Fund’s own lists of policies which might reduce inequality. We also searched the documents for any mention of concerns with inequality, income distribution and the like. Perhaps unsurprisingly, we found very little evidence of any of this.
So it seems that while there may be an attempt to reform the IMF to focus on reducing inequality, this has not yet fully percolated through the organisation to operational practice. We shouldn’t necessarily be surprised. Reform takes time after all.
Rhetoric and practice
There are several possible explanations for the lack of change.
Perhaps it is an ‘organised hypocrisy’ or ‘legitimation strategy’: high level pronouncements on socio-economic and gender inequality are a veil for the real business of the Fund, which is unconcerned with these sometimes negative consequences of promoting growth and global market integration.
Alternatively, perhaps it merely represents institutional stickiness: reform takes time and not enough time has passed. If either of these explanations is adequate, research like that undertaken by Paul and I, as well as others (Best, Broome, Kentikelenis et al., Weaver, Gronau and Schmidtke etc) help to keep the pressure on and support the reform efforts of committed leaders like Lagarde.
I am not yet in a position to be definitive on this, but I suspect something of both these explanations, placed in a broader analysis of the role of international organisations in the expanding global economy, is the real answer. But to stand up that conclusion, more research is necessary.
Where to from here?
For me the next phase in my research on the IMF is to continue to audit policy documents to see whether there is any identifiable change in practice. I also intend to enquire with Fund staff, and perhaps Christine Lagarde herself, as to what they think explains the apparent dissonance between high level policy and practice.
Whatever the outcome of this research, it is important that those involved in highlighting the issue of global inequality, continue to keep the pressure on, to hold the powerful to account. That includes the IMF, Mme Lagarde and all those present at the Word Economic Forum this week of course.
The World Economic Forum (WEF) is meeting this week in Davos, Switzerland. The annual conference has a long history of bringing leading individuals from the worlds of business, government and academia together. Following criticism and protest in the 1990s and early 2000s, the annual meeting has also been opened up to ‘civil society’ and webcasts now enable the interested public to peek into the proceedings of the once very secretive meeting.
The WEF prides itself on being an ‘agenda setter’ and bringing the ‘international community’ together to tackle common global problems. This international community is broadly conceived and now takes in key multinationals, international NGOs, international organisations and the leaders and senior politicians of leading states, as well as senior academics from across the social and natural sciences. To illustrate this point, the Co-Chairs of this year’s meeting included Winnie Byanyima (Executive Director of Oxfam International), Jim Yong Kim (Director of the World Bank) and Eric Schmidt (Chief Exec of Google). Many hundreds of participants from these sectors will be present at the meeting and contribute to the discussions.
The conference theme this year is ‘the New Global Context’ and is underpinned by four pillars. These include the challenges associated with maintaining global cooperation in the context of geo-political shift and ‘decentred globalism’; the challenge posed by slow growth and the need to make this more sustainable and resilient; the promises and challenges of new technology; and social instability.
Something of a ‘pinch of salt’ is needed when decoding some of this: it suits the forum organisers to present significant systemic challenges as requiring imminent attention, because that suggests a stronger purpose for the forum. However, the agenda does highlight some significant risks facing the global system, and which it has a track record of outlining, particularly in its Global Risks Report, the tenth annual iteration of which was published last week.
Risk management has become a hot topic among international organisations in recent years. In my paper due to be presented at the International Studies Association annual convention in New Orleans in a few weeks time, I take a look at the role of international organisations in managing systemic risk in the international system, in the context of academic debates about the emergence of a world society.
In the paper, I argue that a world society is emergent, but this is better understood as a ‘world market society’ (WMS) in which the process of world market integration is ‘ecologically dominant’ (to borrow a phrase from Bob Jessop) over other aspects of it, such as increased social connectivity, the development of shared cosmopolitan identities and the extension of democracy and human rights.
I also argue that if a WMS is emergent, it also has some important institutional promoters – these being supra-national institutions such as the World Economic Forum, but also inter-governmental organisations like the World Bank, International Monetary Fund (IMF) and Organisation for Economic Cooperation and Development (OECD). These organisations have a long track record in promoting world market integration. But the same organisations are also now increasingly engaged in identifying risks to the continued process of world market integration and attempting to manage these.
For the many activists and critics who have traditionally viewed these organisations negatively (for e.g. the anti-globalisation movements of the late 1990s and early 2000s, the Occupy protestors and the like), this can be superficially confusing. For one of the major themes in work put out by the WEF, the OECD and the IMF over recent years has been to lament the world wide rise in inequality and its now widely recognised negative impacts on growth, social stability and the vulnerability of the financial system.
My paper charts the various research and strategy reports put out by these organisations over the last few years which make these arguments. It also reports on interviews undertaken with senior figures at the OECD and IMF in the last few months about their work on inequality. The tenor of these interviews was that these high profile reports on inequality should be taken at face value; they represent a serious concern with the growth of inequality.
So how can the apparent serious interest of these organisations in containing and/or reducing inequality be reconciled with their commitment to the process of world market integration ? Afterall world market integration is a principal factor in the increase in inequality in the first place.
The answer lies in ‘risk management’, and by understanding risk in a dynamic way. As Paul Cammack argues, risk management to these organisations is about seeing risk as both positive and negative. Risks are positive when they are about pro-market behaviour – rewarding investments in skills or product development. Risks are negative when they corrupt market behaviour.
In this sense prominent negative risks are climate change or natural disasters because they undermine confidence in market-based risk taking and lead to market failure. As if to reinforce Cammack’s point, the World Bank’s annual World Development Report in 2014 was titled Risk and Opportunity and much of it was focused on how to incentivise positive risk and contain negative risk.
Inequality can be understood in this way too. Inequality is seen by these organisations as positive when it leads to disproportionate rewards for some, and therefore incentivises market-based risk. However, there is a level of inequality when the costs of negative risks outweigh these positive ones. This is the case where inequality leads to social and political instability or undermines trust in political institutions and the status quo of uneven wealth and power distribution.
To cite an example from a recent OECD report, it is also negative when it undermines market based risk taking: for instance when unequal societies mean that the poor do not invest in their skills development for future reward, because they cannot forgo today’s consumption, or they see the potential benefits as too uncertain. Clearly, in the judgement of those responding to the WEF’s Global Risk survey in recent years, and the OECD and IMF, inequality has risen to a level when these negative risks are now outweighing the positive ones.
The argument underpinning my paper is then that the new concern among international organisations with inequality – what might be termed a ’New Global Politics of Inequality’ – is just one example of their role in managing the risks associated with world market integration. It is a genuine concern, but it is not necessarily progressive. Rather it should be seen as a feature of these organisations attempting to save World Market Society from its own in-built crisis pressures.
None of this is to question the individual motivations of some of the committed people that I spoke to about their work on inequality inside these organisations. Many of them were genuinely committed and from a progressive desire for a more equal distribution of power and resources. They reported long-standing commitments and work in the area of inequality which stretched far beyond the recent organisational support for it. However, what seemed clear was that their work and ideas were allowed to come to the fore, and given organisational prominence, precisely because the context had changed. From an organisational standpoint, inequality had moved between the categories of positive and negative risk.
There are many reasons why this shift in organisational perspective occurred. On the one hand protest and activism was significant. The Occupy movement, resistance in Southern Europe to the imposition of austerity and the Arab Spring were all major triggers for shifting organisational agendas. So too is the increasing uncertainty among international organisations about their leadership and facilitation of the international community in a world of geo-political power shift from the US and ‘West’ to a multi-polar world. Dealing with inequality and social fragmentation as well as the impacts of this on consumer demand and environmental problems like resource depletion and climate change, in the context of reduced leadership capacity worries these organisations greatly. Watching the webcasts of discussions at Davos reaffirms this conclusion substantively.
A final question relates to the role of advocacy in this context. A future avenue for my research, and one currently being explored in our Global Inequalities research group by doctoral researcher Priyan Senevirantne, is what role leading NGOs are playing in this process?
Oxfam has been one of the loudest critics of increasing inequality, and no doubt has been influential in putting the issue on the agenda of the institutions of world market society. Oxfam’s critique is that WMS is skewed toward the very rich. Its analysis is far more radical than that of the IMF or OECD because it clearly suggests that there is something inherently wrong with the WMS itself.
However, by engaging with the WEF process as an insider, surely Oxfam risks becoming a part of the WMS: that is part of the very problem it is seeking to address. Priyan’s research suggests that many international NGOs – not necessarily Oxfam – are indeed becoming central elements of the very system that they were established to change. Other excellent research even suggests that protest itself is becoming a commercial proposition and stripped of its radical and system-changing objectives. A natural extension of my ISA paper would then be to explore the way in which Oxfam and other similar organisations engage with the institutions of the WMS and the effect that this has on the radicalism and progressiveness of their objectives. Watch this space.