This has to change. The IMF should have an open, transparent and merit-based process to choose Strauss-Kahn’s successor. Given that Europe and the United States did such a poor job in preventing and mitigating the global financial crisis, such a process would most likely yield a managing director from developing countries.
Agustín Carstens, Mexico’s central bank governor, has officially entered the race as “the” emerging market candidate. This week, he kicks off a campaign by traveling to Brazil, Argentina, Canada and Germany. While a developing country managing director of the IMF would be most welcome, Agustín Carstens’ record epitomises what is wrong with global finance and would send the organisation back to its darkest days.
From 2003 to 2006, Carstens served as deputy managing director of the IMF. This is the period when even the IMF admits that it had hit rock bottom. By the IMF’s own account:
“The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches.”
To its credit, the IMF has attempted to become relevant again and move beyond those dark days, and in the past few years has called for new thinking in general, and has specifically loosened its stances on inflation targeting and capital controls. The new managing director of the IMF must continue down this path if the IMF is to be relevant and effective in the 21st century.
Unfortunately, Carstens has not been able to learn from the crisis and has stuck to the outdated thinking – or as the IMF said “incomplete analytical approaches” – that caused the crisis. Upon leaving the IMF in 2006, Carstens became Mexico’s finance minister. Despite the fact that Mexico was among the developing countries hardest hit by the crisis, on Carstens’ watch, Mexico had one of the feeblest stimulus packages and most uneven recoveries from the crisis in the western hemisphere.
In 2010, Carstens was chosen to head Mexico’s central bank. Yet, while the IMF had started to preach change, Carstens held Mexico to tight inflation targeting and shunned capital controls. Relative high interest rates and unchecked capital flows in Mexico under Carstens have choked off credit for the real economy in Mexico, overvalued the exchange rate, and put Mexico at a competitive disadvantage, especially with respect to China.
This steadfast resistance to reflection and change should come as no surprise, given that Carstens is a “Chicago boy”. At the University of Chicago economics department where Carstens got his training, the now discredited theories of rational expectations and efficient markets have long been gospel. These theories claim that financial markets price assets perfectly and that any government regulation of those markets would drag down the economy. Moreover, when a crisis does hit, it is natural – and there should not be attempts to recover through government stimulus.
It is clear that “markets first, regulation last” has been the rule of thumb for Agustín Carstens for decades. As he tries to woo other emerging markets, he may change his tune during this campaign. Don’t be fooled. The old cliché holds: actions speak louder than words and Agustín Carstens has long been a standardbearer for a “groupthink” that has should never again hold sway at the highest levels of global finance.
appeared in The Guardian UK, June 3, 2011
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