In the aftermath of the coronavirus pandemic, the International Monetary Fund (IMF) and the world’s major central banks suffered a serious, if self-inflicted, hit to their credibility.
Massive quantitative easing (QE) programmes during the pandemic, as well as goods shortages and supply-side shocks, made inflation and interest rate hikes practically inevitable. But the IMF and others wouldn’t accept the reality they had helped bring about.
The IMF was part of the “team transitory” gang – the group of economists and central banks that deluded themselves into thinking that the laws of economics didn’t apply to them. The fund’s Chief Economist, Gita Gopinath, said in 2021 that “you’re likely to see a transitory bump in inflation, but it’s not going to last.”
This sentiment was repeated as late as April 2022 – a matter of months before the Fed hiked interest rates to a two-decade high in a desperate attempt to restore some control over prices.
If being completely blindsided by rising inflation was a dent to the fund’s credibility, it has hardly helped that the IMF has simultaneously been caught up in various scandals that have further undermined its authority.
Take the case of Kristalina Georgieva, the IMF’s managing director. In 2021, it was revealed that she had deliberately manipulated data during her time leading the World Bank to make the numbers more palatable to the authorities in Beijing. Despite this, Georgieva remained in post. So we now have somebody proven to have modified data for political purposes running what is supposed to be one of the world’s most authoritative economic institutions.
There are also more structural issues at the fund which should be raising eyebrows in more quarters. The IMF, as well as other institutions such as the World Bank, is subject to practically no external oversight. Legislatures of national governments have little, if zero, ability to ask questions or hold officials to account. IMF technocrats cannot be subpoenaed by member countries nor be forced to appear in court. Internal documents are not for the public record. The fund cannot be sued or held legally responsible for mistakes or wrongdoing. Is it any wonder that an organisation set up in this way isn’t operating to the standard the public rightly expects?
Then there’s the minor point that most of the non-Western world openly loathes the IMF and the other Bretton Woods institutions. In the developing world, the IMF is seen as imposing gruelling austerity on nations whose people are already desperately poor. Its insistence on free-floating exchange rates and currency devaluations in return for bailout packages has often helped fuel inflation and therefore eaten away at citizens’ limited funds.
Regardless, the IMF, which is headquartered in Washington and dominated by Western countries, is seen by most of the world as being made for another age. China – which was an impoverished country for decades after the IMF was founded in 1944 – now accounts for almost a quarter of global GDP, more than the US. Britain accounts for barely 2%.
The case for restructuring global governance structures to reflect current realities more accurately is overwhelming, particularly when you also take into account the growing economies of developing markets in the Middle East and Asia, which have limited influence on bodies such as the IMF.
Given this, what’s left of the IMF’s credibility and authority depends on getting things right. The IMF is not doing so. Indeed, it now appears that its officials, not learning the lesson from the “team transitory” debacle, are about to miss another round of inflation.
The situation in the Red Sea now means that price rises are overwhelmingly likely for European and North American markets. Billions of dollars’ worth of goods are being diverted around the Cape of Good Hope, adding 6,000 nautical miles to the journey, and delaying delivery times by up to a month. Put simply, this means less stuff will be arriving into Western markets. Presuming demand remains stable, this will lead to higher prices. There is an almost direct correlation between Red Sea disruption and higher prices.
However, again, the IMF disagrees. Earlier this week, an official wrote that “the clouds are beginning to part” as “the global economy begins the final descent towards a soft landing, with inflation declining steadily and growth holding up.”
It seems that the IMF is about to get inflation wrong again. Especially given all the other factors undermining its authority on the world stage, this could prove to be yet another massive dent to what’s left of its credibility.
Author: Harry Clynch
