February 8, 2017
The Power of Transparency to increase Economic Resilience, with IMF Director Christine Lagarde
By Alvaro Morales Salto-Weis
The challenge posed by populism, which is fueled by an anti-globalization sentiment, can best be addressed by rallying nations around common goals of financial stability, sustainable and inclusive growth, and job creation. “While there can be criticism about this, that or the other, I think around those three pillars I don’t see how we can disagree because I don’t know any policymakers around the world… [who are] saying ‘I want more unemployment, I want less growth, and I want more financial instability,’” she said.
Populism has gained a foothold in the West feeding off public disenchantment with the state of the economy, high levels of unemployment, and a migrant crisis marked by historic levels of people fleeing war zones; its rise has been marked by a protectionist sentiment. This trend has been exemplified by the United Kingdom’s referendum to leave the European Union, Donald Trump’s election as president of the United States, and the fact that far-right political parties in Europe—particularly in France, Germany, and the Netherlands—stand poised to gain more ground in elections this year.
Lagarde said that there is a need to be a “ruthless truth-teller” and admit that while some people have benefited from free trade, others have not; or that while financing has helped entrepreneurs around the world, it isn’t helping women, particularly in low-income countries. “We have to propose the policies that will remedy those issues,” she said.
Greece and the IMF
The IMF warned on February 7 that Greece’s debt is still “highly unsustainable” and “will become explosive in the long run.” The IMF’s board, however, is split on this matter. While most board members believe that Greece is on track to achieve a surplus of 1.5 percent of GDP, others are of the opinion that Greece should push through more austerity measures and aim for a 3.5 percent surplus. Eurozone countries, particularly Germany which is doing most of the lending to Greece, are in the 3.5 percent camp. The Greek government, meanwhile, is reluctant to go down the path of further belt tightening.
Alleviating Greece’s debt burden will require significant relief from European institutions, the IMF said in its annual report on Greece’s economy. Greece requires its European creditors to release cash from a $92.4 billion bailout program agreed to in 2015, but this has become mired in bickering among officials.
The IMF also released a review of the bailout program started in 2012. It concluded that the Greek government is relying on overly optimistic growth estimates.
Greek Finance Minister Euclid Tsakalotos lashed out at the IMF saying its report “fails to do justice” to his country. Lagarde defended the IMF’s conclusions. “People can disagree with our conclusions, but we go in in full independence, with a clear determination to be both the trusted adviser but [also] the ruthless truth-teller,” she said. “We are not sugarcoating.”
“Yes, we are criticized occasionally and I am sure that the Greek authorities didn’t like some of the things that we said, but we also acknowledged… the massive effort undertaken from the fiscal point of view by the Greek population and the huge sacrifices that were made. We also acknowledged that some reforms were conducted,” said the IMF chief.
“We also said that some reforms were still to come, were not completed, had not yet delivered the benefits that were expected in order to unleash the forces of the Greek economy,” she added, citing specifically a need for income tax reform and a sustainable pension scheme.
The power of transparency
Andrea Montanino, director of the Global Business and Economics program, and Mona Vernon, vice president of Innovation Labs at Thomson Reuters, delivered welcome remarks at the Atlantic Council event.
In her address, Lagarde said that the IMF plays four key roles—trusted adviser, global watchdog, fitness coach, and firefighter. Transparency, she said, “allows us to wear all these different hats for the benefit of our global membership.”
Noting the benefits of transparency for emerging markets in particular, Lagarde said it had led to a 15 percent reduction in the spread of their sovereign bonds within three months of the acknowledgement by the markets of the improvements brought about by transparency. However, she conceded, “we are often criticized, and that’s the price we have to pay for accountability.” She added: “Transparency is not pleasant.”
Lagarde spelled out steps that the IMF has taken toward becoming more transparent. These include publishing reports that are available to the public at no cost and an embrace of social media. The Fund, she said, has learned lessons from its secretive behavior at the time of the Asian financial crisis in the 1990s. “The Asian financial crisis really brought to the fold that a lot of the information should have been communicated and that would have been helpful in order to prevent and anticipate” the crisis, she said.
‘Corruption is not a one-way street’
On the question of corruption in the private sector, Lagarde replied: “Corruption is not just a one-way street. It is not just the private sector. It takes two to corrupt—one that gives and one that receives.” Corruption, she said, is an issue that needs to be thoroughly investigated at all levels—public and private.
She expressed the hope that the IMF would do more in relation to fighting corruption because “it leads to very risky and dangerous activities.”
Noting the big debate about the effectiveness of anti-money laundering and counterterrorism financing efforts by the IMF, Lagarde emphasized the importance of good governance and said: “What helps terrorism? What helps the obscure activities that are conducted behind screens? It’s money. So, you have to follow the money.”
She cited the example of Ukraine where, in response to endemic levels of corruption, the IMF had recommended a number of remedies, including anti-corruption measures, anti-corruption agencies, and judicial reform.
Russia, however, has been critical of the IMF’s role in Ukraine and opposed additional IMF aid to its neighbor. Addressing this criticism, Lagarde said: “No country, however big it is, would have any interest in having at its border an economy that is not functioning, that is in economic misery.” She expressed the hope that the IMF’s role in helping Ukraine get back on its feet will eventually be recognized.