The IMF and the democratic deficit

Christine Lagarde, managing director of the IMF – who voted for her? (picture IMF)

An enquiry comes in, referring back to a letter published in the Guardian in 2002 (read it here) on the lack of democracy in the IMF.  Is that still true of the IMF now?  Of course, in those days the IMF was a vehicle for Europe and America to impose their vision of austerity and recovery on overly-indebted developing countries, and wise Europeans were concerned about the lack of democracy in that process.  These days, European countries themselves are the recipients of IMF instruction on how to manage their economies, and many more Europeans are asking where this authority comes from.

The truth is that the IMF is not an autonomous actor in the sense that it makes up its own policies.  No, it is the expression of a broader consensus on what the right economic strategy should be in order to deal with the financial crisis and return to growth, but that only makes the questions stronger.  Where does this broader consensus come from?  Who voted for it?

The national governments that are signing up to this consensus are doing so with the consent of their national parliaments: some are being pushed in that direction, like in Germany and in Finland; others are pulling them along behind them, as in Greece or in Italy.  The procedures of national democracy are being observed, but it still does not feel entirely right.

We come back to the notion of the democratic deficit, as originally coined by federalists in the 1970s: the people of Europe wanted something that their system of governance, based on democratic national governments, was unable to give them.  The conclusion at the time was that national democracy was not enough, a conclusion which remains true today.

(It was with the creation of the single market and a more active European Union that the term “democratic deficit” acquired its second meaning, that there were decisions being taken beyond the reach of the democratic system in which we live.  Successive amendments to the EU treaties, from Maastricht to Lisbon, have largely put that concern to rest, but note the word “largely”.)

National governments are compelled to follow the austerity consensus for fear of the consequences if they do not.  Creditor countries want to minimise their risk of loss, so they are demanding cuts, cuts, cuts.  Debtor countries have to cut in order to maintain access to financial support in order to stay afloat at all.  Neither group can take a bigger, broader view.

This website has discussed before (here and here and here) the economic rationale behind the austerity policy – it makes sense to cut down on public sector waste and to make tax collection fairer and more effective, but it does not make sense to cut those aspects of the state that promote rather than impede economic recovery.  There are fine judgements to be made about how to interpret each example of state activity – there is no simple division into “productive” and “unproductive” as libertarians would sometimes tell us.

The fact that the most indebted countries, such as Greece and the UK, are still in decline, relative if not absolute, shows that they have cut too much.  Even the IMF itself has conceded as much.  The policies being followed are clearly wrong, but why cannot better ones be followed instead?

This is where the democratic deficit comes in.  Each country is doing what it feels it needs to n its own circumstances, and the sum of all these individual decisions is smaller than its parts.  A collective decision about what to do would be much better.

A collective decision would enable creditor countries to have much more confidence in the long-term ability of the debtor countries to repay, and that confidence would in itself make it easier for the debtors to do so.  A collective decision would not expose the weaker countries so brutally to the financial markets, giving them more time to restructure their economies and strengthen their financial and fiscal institutions, and thus making it viable to cut less.

But there is little scope for such a collective decision at present.  The European Commission, which is the institution created precisely to lead such collective decisions, is relatively weak, and national governments, despite the obvious benefits from doing so, are reluctant to see it strengthened.  Indeed, if the EU were acting more effectively in dealing with this matter, the IMF would not need to be involved at all.  The EU as a whole remains a rich part of the world and is quite capable of dealing with its own problems if it chose.  The problem is that it lacks the ability to make that choice.


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