IMF - Camdessus Misses the Point

STRATFOR.COM
Global Intelligence Update
Weekly Analysis November 15, 1999

IMF's Camdessus Misses the Point

Summary:

The recent resignation of Michel Camdessus from the directorship of the International Monetary Fund (IMF) invites us to consider the effectiveness of the IMF and other international entities in managing the global economy. There has been much criticism of the IMF. Our perception is that more than a failure, the IMF has been largely irrelevant. From its management of the Third World debt problem to its mishandling of the Asia crisis, the IMF did not and could not understand the real forces driving economic development. The problem is not so much the people as it is the focus. So deeply linked to existing economic forces and orthodoxies, the IMF is incapable of recognizing emerging forces and new realities. It always manages to miss the point.

Analysis:

The resignation of the leader of the International Monetary Fund, Michel Camdessus, two years before the end of his term is a punctuation mark in economic history. He came into office at a time when the world's major economic issues were Third World debt, the United States' inability to compete with Japan and Gorbachev's attempt to restructure Russia's economy. He leaves at a time when the major issues are the growing irrelevance of the Third World to the global economy, the inability of Japan to compete with the United States and the cataclysmic failure of economic reform in Russia. Camdessus and the IMF were deeply involved in all of these issues. What is fascinating is that despite its involvement, the institution has been largely irrelevant - except when it has been harmful.

It is important not to personalize the failure. This is not about Michel Camdessus. It is not even about the technocrats who manage the IMF and its sister institution, the World Bank. Rather, it is about the impersonal forces that govern the international system and the fantasy that a de-nationalized technocracy can manage that system. The story of Camdessus' tenure is not about incompetence or corruption, although there was plenty of the former and the jury is still out on the latter. Instead, his tenure is about impotence: the inability of the technocrats to either understand or control the forces at work. No one could have done the job. The job was undoable.

Consider the case of Third World debt. Back in the 1980s, Third World countries found themselves unable to repay billions of dollars in debt owed to the world's banks. Had they all gone into default together, they threatened to damage or even sink the global economic system. Under U.S. Secretary of State Nicholas Brady, a scheme for refinancing the debt was devised, with the IMF playing the role of policeman of Third World economies by linking lines of credit to painful austerity. One might take this as a triumph for the IMF and international institutions. Indeed it was, until we recall the origins of the crisis.

During the 1970s, the world saw a massive increase in the price of global commodities, led by oil. The conventional wisdom was that commodity prices would only go higher. The Club of Rome and other sophisticated observers of history pointed out that we were running out of scarce resources. The world was compared to a space ship: resources were being exhausted by growing populations and intensified industrial use. It followed that the price of commodities like oil, copper and wheat could only go up. If the price of commodities went up forever, it followed that the best place to invest your money was in commodities. This was rocket science, right? The primary producers of commodities were Third World countries that lacked industrial capability but controlled natural resources sorely needed by the industrial world. Any sane investor in the 1970s knew that investing in industries that purchased raw materials was dumb, while investing in producers of raw materials was smart.

So everyone, particularly the international banking community and the World Bank, began pouring billions of dollars into ventures from Mexico to the Philippines to Nigeria, all designed to produce raw materials. Since oil was going to cost 40, 50 or even 100 dollars a barrel on spaceship earth, the cost of production was not critical. The price was going up and it was important to get in while the getting was good. All of the technocrats simply knew this and the entire international economic system became skewed toward investing and lending to Third World commodity producers.

Of course, the inevitable happened. It turned out that while the world may have a finite amount of oil or copper, there were still huge untapped reserves. When Third World megaprojects started production, the price of commodities collapsed. When prices fell below the cost of production, projects went bankrupt. We suddenly had a Third World debt crisis, which Nicholas Brady and the IMF moved in to clean up. The Third World debt crisis originated in an ideology of commodity scarcity that led to an avalanche of investment decisions that wound up invalidating the ideology through its success.

The debt crisis, however, was not resolved by Brady, the IMF or any other multinational institution. For Third World countries, the development decisions made by their governments with the encouragement of the international development community created a long-term capital shortage that has left a legacy of misery. Nor is it clear that multinational communities solved the crisis for the first world either. The simplistic projection of a future in which commodity producers dominated industrial commodity consumers was rendered false not only by the collapse in commodity prices. It was also rendered irrelevant by another phenomenon in the early 1980s: Microsoft.

Microsoft, and the endless other software and related companies that appeared during the 1980s, altered the equation that had obsessed the World Bank and most other serious economic thinkers. The emergence of computing technologies meant that it was possible to have increased economic growth without similar increased commodity consumption. Microsoft, after all, produces wealth without consuming commodities in proportion to growth.

The extraordinary growth of the American economy has many causes. There is no doubt that the persistent growth of productivity in the United States is due to the efficiencies introduced by computing. Even Federal Reserve Chairman Alan Greenspan has acknowledged this, while also acknowledging that it is hard to calculate impact. This much is apparent. At a time when productivity should be falling, inflation and interest rates soaring and the economy moving toward recession, growth in productivity - driven by the effects of computing - is maintaining growth at unprecedented levels.

When Camdessus came to the IMF, Japan produced cars and cameras at lower prices and better quality than the United States. He leaves at a time when the ability to produce cars and cameras is much less interesting than the ability to write software. Production has shifted in a way that is almost metaphysical. The hardware that runs a web server is much less valuable than the immaterial intellectual property that resides on the server. The decoupling of value from physical production, its shift to intellectual production, is a millennial shift whose full meaning will not unfold for many generations. To overstate it, the Japanese bet on hardware while the Americans bet on software.

It has been said that the IMF mishandled the Asian crisis. The reason for this is simply that the institution and its leadership could not believe that Asia was having a systemic crisis. Camdessus and his peers believed so deeply in the assumption that Asia would be the powerhouse of the 21st century, he could not accept the fact that the entire Asian enterprise was in jeopardy. For Camdessus, Asian industrial efficiency owned the future. The economic problems that arose were merely national problems solvable with a good dose of IMF discipline. Camdessus did not see that Asia as a whole was crumbling because he did not understand that Asia's industrial efficiency was both real and increasingly irrelevant. A new game was being played, in which the Asians weren't able to compete.

There were, of course, other problems. The IMF staff deals in numbers. It assumes the numbers they see are in some sense connected to reality. The IMF missed the extent of Asia's banking problems because no one, including the Asians who collected the data, knew what the real numbers were. The lack of transparency, as the IMF likes to call it, or lying through your teeth, as we prefer, left the institution with a set of bogus numbers. In the case of Russia, the distance between economic statistic and bald- faced lie has always been short but has recently become infinitesimal.

Camdessus was no better and no worse than anyone else in his position. The real issue is whether the world needs his position. The role of the IMF is to provide central management at the highest level for the international financial system. The concept misses this point: the highest level is not where the international economic system is located. While the IMF was focused on refinancing Western debt with petrodollars and novels were being written about Arab world dominance, the real history of the future was being written by unknown companies like Apple and Microsoft. When Michael Dell devised a more efficient way to sell the computer parts Asia could barely make a profit on, creating a multi-billion dollar company in a few years, Camdessus had neither heard of him nor if he had, would have taken him seriously.

Men like Camdessus are infatuated with yesterday's problems and yesterday's elite. They owe their power to those who at the top, and therefore, have nowhere to go but down. Ironically, Karl Marx understood it best when he spoke of capitalism and the "constant revolutionization of the means of production." Capitalism is constantly overthrowing itself, that is its single constant. Camdessus is not a stupid man. The people working at the IMF are not stupid people. But they are institutionally incapable of seeing the forces reshaping the international economy, because their focus is on the capital cities of the world and that is simply not where history is being made. The organizations that will define the next twenty years of history are probably completely unknown to anyone today. Certainly no one in Washington knows of them or takes them seriously. Therefore no one at the IMF can possibly know what is really going on in the world's economy.

The idea that you can manage an economy from the top down is the central fallacy. When the IMF governors meet, they can't possibly know the economic entities and forces redefining the system, precisely because they are no longer down in the trenches, creating the future. That means the IMF will, at best, have some sense of what happened yesterday, maybe - depending on the numbers - it might know what is happening now, but has no way of understanding what will happen tomorrow. Therefore, the governors will not wind up making bad decisions nearly as often as they will wind up making irrelevant ones. That is why, as Michel Camdessus leaves, we can't help but think of him as the man who kept missing the point.

(c) 1999, Stratfor, Inc.

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