Fischer reflects on his IMF tenure
Fischer: Many events—but especially their scale—were unexpected. At the time I came to the IMF, I had no idea how severe the Mexican crisis would be, even though my friend Rudi Dornbusch had already predicted Mexico would be forced to devalue. In 1994, I would not have thought that the Asian countries could experience a major crisis of the type that occurred in 1997–98; even seen from 1996, although we had some well-founded fears about Thailand, the extent of the Asian crisis was unexpected. So was the extent of the contagion after the Russian crisis. When we divided up country responsibilities among the IMF’s three Deputy Managing Directors in September 1994, I happened to choose among my countries three in Asia: Indonesia, Korea, and Thailand. So you might think that I had real foresight, but it was purely accidental.
Fischer: The development of the international capital markets, and of emerging markets as a class of countries, has been extremely important for the work of the IMF, not least because so many crises have been associated with this development. The integration of the transition economies into the international economy certainly kept us busy in the 1990s. And we made important changes in the way we work with our poorest members.
From the IMF’s viewpoint, these last seven years were the period in which the organization became transparent, and that is probably one of the most important things that ever happened to it.
Fischer: The ICMD reflects a recognition that the IMF has to understand on a daily basis what is happening in the international capital markets and has to stay absolutely up-to-date with developments in those markets. Not only is the ICMD designed to perform surveillance on a continuous basis, it should also help member countries access the international capital markets safely, at an appropriate speed: the IMF needs to help its members deal with those markets, to minimize the risks and maximize the benefits that arise from them.
Fischer: The word “bailout” is misleading, not least because we make loans, not gifts, to our members. We are trying to make the international capital markets safer and also to strengthen the economies that are accessing them. If this is done well, there should be fewer crises. But we will never get rid of crises entirely. The move to flexible exchange rates has helped, but—as we’re seeing now with Brazil and Turkey—countries with flexible rates can still have difficulties and may need to borrow from the IMF. Still, they are less vulnerable, and we should therefore see fewer crises, and probably on a smaller scale, than before.
There is a serious question about the scale of IMF lending. We judge the size of a package against the quota, or shareholding, of the country that receives it. But quotas were set up to deal with current account problems, and while 300 percent of quota is a big number when dealing with a current account problem, it can look less impressive when a country is confronting a capital account crisis. Even so, it might be that we have the right scale of lending, taking moral hazard and other factors into account. But I’m not certain that the way we judge the size of packages in this era of massive capital flows and potentially rapid reversals is correct. We need to consider that issue; even more important is the question of whether the international legal framework for countries to deal with unsustainable debt situations should be changed.
Fischer: Some countries have done very well; some have done less well; some have done badly. Russia is now growing and pursuing a consistent market-oriented reform process. I’ve done a fair amount of work with colleagues in the IMF, particularly with my Advisor Ratna Sahay and Carlos Végh, formerly of the Research Department, on what worked and what didn’t work. The answer seems to be that it worked pretty much as we thought at the beginning it would work; namely, countries needed to stabilize the macroeconomy and undertake pro-market structural reforms if they were to secure strong and sustainable growth in living standards.
The transition experience also raised an important set of political economy questions. Particularly, what will induce a country to pursue the path of reform? Those questions are much harder to answer. Most countries that have a prospect of joining the European Union seem to have had more focus to their reform efforts. It’s probably harder for the others. Being a modern economy and looking forward to higher growth in the future is a bit of an abstract goal relative to the prospect of getting into Europe.
Fischer: The question of the relationship between democracy and economic progress has been much studied. In the mid-1980s, everyone was saying that international experience proves that democracies aren’t good for development. “Look at Chile,” they said. But that was fallacious. Chile was the one example supporting that view; there were at least twenty countries where dictators were making a complete mess of the economy. Now that Latin America has gone in a democratic direction—and you see the same in eastern Europe—I’m more and more impressed that it’s the democracies that have done rather well in economic reform. The econometric results are more subtle but point in the same direction. It’s frequently harder to negotiate with democracies, because the authorities have to worry about getting policies and programs through the legislature. But once they do, reforms tend to stick better.
Fischer: The IMF specializes in macroeconomics and structural issues related, or essential, to macroeconomic outcomes. I don’t see how we could fail to be involved in poor countries that need macroeconomic help; they are our members. The notion that they belong to some other institution if they are poor is patronizing and wrong. Their macroeconomic problems are real, and they’re not very different from those of other countries. So we need to have the capacity to help these countries, and I’m glad we have concessional loans that they can afford.
On the question of measuring progress, there is an emphasis on the need for quantitative indicators of economic progress in poverty reduction strategy papers. Per capita GDP growth and poverty rates are the most traditional indicators. But there are others, including life expectancy, school attendance, literacy, and inoculation rates. One striking fact that emerges from the human development indicators in the UNDP’s Human Development Report [see IMF Survey, August 13, page 272] is that even in countries where per capita GDP has been declining, some of the social indicators are improving, including the health-related ones. So it is possible to take a broad-ranging look at what is happening and see whether there’s progress.
Fischer: The IMF’s considered judgment is reflected in the World Economic Outlook, which will be out soon. Over the past six months, we’ve downgraded our growth estimates for Europe and Japan, but not for the United States. It’s hard to predict turning points in growth, but U.S. growth must be close to beginning to turn. It’s hard yet to say whether what’s happening in Europe is just a slowdown or something worse.
It is clear, though, that this is turning out to be a longer growth slowdown than was thought nine months ago, and that we’re in a period of uncertainty. You can paint a downside scenario pretty well, but you can’t paint a massively positive upside scenario. You can see things going somewhat better, but there’s no big recovery scenario in anyone’s computer. I expect we’ll turn around by the end of this year, but it’s not guaranteed.
Fischer: The Brazil crisis is different in that it’s happening to a country with a flexible exchange rate, and the IMF is ready to move in advance of the crisis with precautionary lending. In Turkey, we’re dealing with the aftermath of a crisis related to a fixed exchange rate, so it’s more like the earlier crises.
If we are in a better position now than we were earlier—and I think we are—it’s because financial systems are much strengthened around the world, and because far fewer countries have pegged exchange rates. As a result of that, and of the revolution in transparency and information provided to the markets, there is probably less contagion going on now than there would have been in the past. What we’re seeing from Argentina is very clear contagion to Brazil, but more sporadic contagion elsewhere. There are good reasons to hope that contagion in the system is more limited now. But we should be very cautious: it’s hard to be sure about the likely extent of contagion if and when the next shock hits the international capital markets.
Fischer: No, we’ll never silence our critics, nor, as you suggest, would that be desirable. The IMF is important—it is the principal agency, along with the World Bank, that helps countries in economic trouble. That involves making policy choices. Policy choices are never absolutely clear: we’re bound to make mistakes, and there are bound to be critics. We are where the action is, so we will attract the critics—they’re not going to go off and criticize some agency that has nothing to do with the issues at hand. We need to have that examination, even though it may be painful. So we can’t, and in any case we shouldn’t try to, silence the criticism.
Fischer: We’re dealing seriously with most of the challenges that we can see, although progress on private sector involvement in crises and reducing the volatility of international capital flows has been disappointing. The backlash against globalization is a major challenge that has to be dealt with, and somehow we’re going to have to find ways of turning the situation around in our poorest member countries, many of them in Africa. But there will undoubtedly be challenges arising from future shocks that we did not anticipate. In that regard we can take comfort from history because, if there’s one thing the IMF is good at, it’s responding to challenges. When our critics complain that we constantly reinvent ourselves, it’s another way of saying that, as the world changes, so do we.
The backlash against globalization is a major challenge that has to be dealt with.
Fischer: Experience must have changed my approach, because after seven years I feel more confident about dealing with real-world problems—including crises—than I did at the beginning. But I can’t quite pinpoint what it is that I learned.
Much of what one learns in academic life is not only very useful, but close to essential, in dealing with the problems that come up in the IMF. Everyone should know the basic core of macroeconomics and international macroeconomics. But there’s also a lot of other material—including the game-theoretic literature on policy—that is very useful. I’ve been impressed and surprised that I sometimes find myself drawing on material that I was convinced had no real-world relevance when I first studied it.
A key difference from the textbooks is figuring out how to deal in complicated situations with live human beings: how they’re going to react, what is driving them, what matters to them, which incentives they will respond to, and how. Yet those judgments have to be made all the time, not only about the policymakers and the public in our member countries, but also within the IMF.
When I first arrived, I found it hard to get used to the fact that if I held a meeting, there had to be a conclusion at the end of it—we had to decide one way or the other what to do. In my previous life in academia, you could just say things were unclear and leave it at that. In the IMF’s work, we have to decide what to do even when there is uncertainty about the outcome—but of course the decision has to take into account the uncertainty about the outcome.
Fischer: Yes, what a wonderful time I’ve had, what a wonderful experience it’s been, and how grateful I am for having had the privilege of having this opportunity. The staff of the IMF is superb, and this organization works extraordinarily well. I couldn’t imagine an organization that operates more rapidly in responding to crises or in dealing with problems as they arise. Somehow, the combination of the Board, the staff, and the management works extraordinarily well. I often wonder what drives the culture of this institution and the people in it—it’s pride in what they do, it’s the belief and knowledge that what they do is important, it’s ability—the people are excellent. But there’s something more, which I can’t quite define. And the IMF is not even very large. It’s a great surprise to people that we have a staff of just 3,000, given all the things that we do. I couldn’t have had a more interesting time, I couldn’t have worked with better people, and I’m very grateful.