Author: James Smalhout
Just when it seemed that IMF managing director Horst Köhler had lost a mother lode of irreplaceable talent, the Fund announced in early June that a bevy of world-class stars would be joining its senior staff. This changing of the economic guard may well be the most impressive in recent years, involving some of the best and brightest willing to serve in the public sector from academe and beyond.
Stanford University economist Anne Krueger, 67, heads the new line-up, replacing Stanley Fischer as first deputy managing director, the Fund’s number two position. Her job carries a five-year term.
Fischer, a consummate diplomat and an economist’s economist, came to the IMF widely esteemed after a brilliant career teaching at MIT and the University of Chicago. Fischer’s act, by all accounts, will be a hard one to follow. He virtually ran this pivotal institution under managing director Michel Camdessus.
But Krueger arrives with no shortage of stature. And her appointment is nothing if not symmetrical. Fischer replaced her once many years ago as vice-president and chief economist at the World Bank. This time, she’s doing the honours. Krueger has also served as president of the American Economic Association, the leading group of professional economists in the US.
The young and meteoric Timothy Geithner, undersecretary of the US Treasury at the end of the Clinton administration, will assume command of the Fund’s key policy development and review department, in the wake of Jack Boorman’s retirement. And Gerd Hausler, formerly chairman of Dresdner Kleinwort Benson, takes the helm of the recently created capital markets department.
Hausler, formerly a member of the directorate at the Deutsche Bundesbank, had established himself as an eminent person after serving with other heavy financial hitters on the Group of 30 and the board of the Washington-based Institute of International Finance. Finally, Harvard economics professor and chess international grand master Kenneth Rogoff will take over as head of the Fund’s research department, following the departure of the witty and incisive Michael Mussa.
What does the arrival of this new group portend? “I would say that this represents a repudiation of the Meltzer Commission approach,” says Professor Isaiah Frank, a longtime student of the IMF at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington. “None of these people would be in favour of restricting financial aid in the way that the Meltzer Commission proposed.”
The Meltzer Commission recommended, for example, that the IMF restrict its loans to a relatively small group of countries that meet strict credit quality standards beforehand, that it lend only for a very short term and that it charge a penalty interest rate. Professor Frank, however, thinks that the new team is likely to hew to a line much closer to the one proposed by a Council on Foreign Relations task force two years ago. That report called for less reliance on very large IMF-led lending packages of the sort seen ever since the 1994 Mexican peso collapse and a reduction in the scope of IMF conditionality.
Conservative iconoclast
Krueger has been an avid promoter of both the World Bank and the IMF, despite her sometimes harsh critiques. “If they hadn’t been created at Bretton Woods,” Krueger said during a speech at SAIS in late 1999, “something like them would have been created very quickly, and for that matter, if they didn’t exist now, something like them would probably be invented. But I don’t think it would be quite as good as what we’ve got.”
Still, she recognizes that the roles of both the Bank and the Fund now need clarification because the original vision under which they were founded is out of date. Krueger believes that the Fund makes a very useful contribution to developing countries by supporting policy changes in times of balance of payments problems. She also thinks that it might be worthwhile to strengthen, not reduce, the Fund’s role in crisis management as private capital flows become more and more important.
“I am not naive enough to think that politics will always stay completely out of Fund decisions,” Krueger also said in her SAIS speech. “One can envisage clean solutions to the major problems raised by financial crises. But the world is never nice and clean.”
Krueger has often played the role of a sort of conservative iconoclast. Known for her strong opinions and for not pulling any punches, she left her imprint on the World Bank by confronting the received orthodoxy during her tenure as chief economist there from 1982 to 1986. Krueger, almost single-handedly, moved the Bank toward strong support for liberalizing trade in developing countries, for opening up to foreign investment and for privatizing state-owned enterprise.
Nor was that the first time that Krueger broke the established mould. She’s a brilliant but oddly conservative product of two institutions that tend to be associated with American liberalism. She did a first degree at Oberlin College in Ohio and she earned her PhD at the University of Wisconsin. Her early work on the costs of lobbying -known to economists as rent-seeking – helped to establish her reputation in academic circles.
IMF watchers, however, don’t expect Krueger to make nearly as many waves at the Fund. “The IMF doesn’t need a shake-up as much as the Bank did in the early 1980s,” says Edwin M Truman, the longest serving director of the Federal Reserve’s international finance division (Euromoney, May 2001) and now a senior fellow at the Institute for International Economics in Washington. “And the Fund is much more sympathetic to her philosophical views, given its more conservative economic orientation.”
The Bush Administration initially had tapped Krueger to join the White House Council of Economic Advisors, but the IMF offer took priority. “The key factor in the selection of Anne Krueger was her acceptability to the Bush administration,” one experienced IMF hand told Euromoney. “That probably was 60% of the decision. The remainder hinged on the chemistry with Köhler and her stature or competence.”
Lex Rieffel, a senior adviser at Washington’s Institute of International Finance, points out that the IMF executive board, where the US government has more votes than any other member, must approve the selection of the first deputy managing director, but that the managing director chooses the heads of the IMF’s 15 departments.
Policy linchpin
Köhler clearly broke new ground with the Geithner appointment both by going outside the Fund and by choosing somebody who was not a card-carrying PhD economist. Geithner holds a master’s degree in east Asian studies and international economics from SAIS. And he took his undergraduate degree from Dartmouth College in New Hampshire, a member of the prestigious Ivy League.
“The culture of the IMF has been to groom the very best people to be department heads,” observes another anonymous source. “The first among equals has been the director of the policy development and review department (PDR). That person traditionally has been one of the most influential and respected members of the IMF staff, with the status of somebody like a permanent secretary in a parliamentary ministry.”
Köhler, in effect, has embarked on a strategy to change the Fund’s corporate culture. Recruits selected from outside the Fund, with the Geithner and Hausler appointments, now will head a total of four departments. Another outsider, Stefan Ingves, only recently took charge of the exchange and monetary affairs department. These appointments represent the largest infusion of outsiders in recent times.
“Bringing in more outsiders will tend to make the IMF less insular,” Rieffel continues, “and Köhler almost certainly hopes that it will become more open and adaptable to a changing world.” One also would suspect that placing a non-career outsider at the head of PDR represents a shift in the balance of power from the staff to the front office.
The opportunity to join the IMF now clearly is a boost for Geithner, who had been on the outs in Washington as a result of his role during the Clinton Administration. Geithner, age 39, is clearly a man to watch. Heading PDR puts him on track, if he is successful in that job, to become first deputy managing director in the likely event that the Democrats recapture the White House at some point later in his career. People who know him expect Geithner to go to exceptional lengths to please Köhler and – no mean feat – to earn the respect of the IMF staff.
Geithner brings a lifetime of international experience with him to the Fund. He grew up as the son of a Ford Foundation executive in such far-flung places as Rhodesia, Zambia, India, Thailand and China. Geithner joined Kissinger Associates after finishing his studies at SAIS and then moved on to the Treasury.
His track record, as the US Treasury’s man in Tokyo during the early 1990s, propelled his career into higher orbit. “Geithner is wise well beyond his years,” says Truman who worked for him for more than two years at the US Treasury. He played a key role in convincing the Japanese to chip in $13 billion to cover the cost of the Gulf War and later to open their markets to US financial services firms. He also had the political savvy to see that Asia’s smaller countries wouldn’t agree to the idea of an Asia Fund modelled on the IMF but dominated by Japan. He successfully tapped those sensitivities to help deep six that proposal, while avoiding the charge that American imperialism was thwarting an Asian solution.
Geithner, for his trouble, was promoted to assistant secretary of the US Treasury for international affairs in 1997 and then to under secretary in 1998.
The man became something of a legend inside that department. Geithner, for example, once tricked Lawrence Summers, the secretary of the Treasury and now president of Harvard University, into believing that the White House had decided to provide him with Secret Service protection as a result of his role in the proposed overhaul of the Internal Revenue Service.
At the IMF, Geithner will provide a stark contrast with his predecessor, Jack Boorman, a career IMF official retiring after 25 years’ service. One of Boorman’s great strengths was his capacity to act as the Fund’s institutional memory and that earned him grudging respect from some of the Fund’s most determined opponents. “Boorman is a very smooth, savvy and knowledgeable person,” a congressional source told Euromoney. “But do you really want somebody like that who’s not sympathetic to reform to be in such an important policy position?”
Geithner won’t have the same grasp of institutional detail. And he carries some heavy baggage from the Clinton years as far as congressional conservatives are concerned. They are quick to decry his defence of the large-scale bailouts that characterized US policy during the 1990s. “In a world of substantially greater capital mobility,” Geithner told the Securities Industry Association last October, “it would be both a policy mistake and not fully credible to forswear the capacity to respond to exceptional crises with exceptional financial force. The most effective financial intervention by the official sector may, in some circumstances, be large in relation to traditional measures of access, such as [IMF] quota.”
The new head of the Fund’s policy department has rejected the view that recent crises were merely short-term liquidity problems triggered by financial contagion. “We have not seen a serious financial crisis that did not have important causes in fundamental weakness of policies and institutions in the affected country,” he pointed out.
Geithner also sounded the now-familiar theme that private investors should be part of the solution to financial distress, although the latest IMF-led package for Turkey included no private-sector component. “Private investors,” he has argued, “should not expect to be protected from adverse outcomes by official action.”
What’s his agenda? Geithner has been pressing for more clarity about the different roles of the IMF and the Paris Club in order to reduce uncertainty facing the markets. He also seems prepared to push for greater disclosure by the IMF as well as other multilateral agencies and their member governments. Countries should be telling their creditors more about their economic and financial needs, Geithner has been arguing, as well as about the content of their IMF programmes. The Paris Club should be prompt and systematic about communicating the key terms of debt reschedulings and the official sector should provide regular, up-to-date information about the scale of Paris Club claims on a country, the repayment profiles and arrears. Geithner, perhaps most importantly during this time of transition, has been urging officials to be clear and public about the factors that will guide financial assistance going forward.
Market outreach
Beyond Geithner, Horst Köhler’s spring recruiting drive snared another wunderkind in the person of 50-year-old Gerd Hausler to head the Fund’s brand new capital markets department. Hausler, like Geithner, does not hold a doctorate in economics. Instead, he took a law degree from the University of Frankfurt. He had been the youngest-ever member of the Bundesbank’s directorate before departing for a post at Dresdner Bank in 1996. “That sort of thing didn’t happen in Germany,” says Sir David Walker, former chairman and now senior adviser at Morgan Stanley International in London. “People who joined the board of the Bundesbank were there to stay, but I think Gerd was seen as someone who had an exceptional capability in understanding markets.”
Dresdner put him in charge of its investment banking operations and he came to London as chairman of Dresdner Kleinwort Benson. There, Hausler won credit for turning around the flagging fortunes of DKB during the years just before Dresdner’s aborted merger with Deutsche Bank. But Hausler resigned in the wake of that debacle and he recently has been serving as a senior adviser to Deutsche Börse.
“For a new IMF managing director to find an internationally known German who understands capital markets and was prepared to come to Washington was obviously quite a coup,” Walker continues.
The Fund had little choice but to recruit for this position from outside, given that private capital flows now play such an enormous role in emerging-market countries as well as in their periodic financial crises. Köhler concluded early on that the Fund needed a department dedicated solely to interacting with the markets and he plans to carve out the new group from Mike Mussa’s old research department.
The IMF had been reluctant to engage the private sector, partly for lack of confidence. Few IMF people, at the middle or senior levels, have experience working in the capital markets. Most came to the Fund with public sector backgrounds in finance ministries or central banks. The Fund also felt inhibited by the need to maintain confidentiality, usually involving sensitive information supplied by member countries.
“It’s extremely important to maintain confidentiality,” observes Walker, “but it’s not the case that private-sector contact with the IMF needs to be at the frontier. Gerd has very high standards and I am sure that he will be able to cope with these issues – not least after running an investment bank – in a way that maintains confidence on all sides.”
Research virtuoso
Next, enter Professor Rogoff, aged 48, expert par excellence in international macroeconomics and finance. Rogoff, as such, fills a critical gap in Köhler’s new team. Neither Geithner nor Hausler, after all, are economists. And Krueger is largely known for her work in development and trade. Rogoff’s book, Foundations of International Macroeconomics (MIT Press, 1996) with Maurice Obstfeld, has emerged as the standard text for graduate-level study in the field.
Rogoff began his career at the Federal Reserve Board where he is credited with research about the predictive accuracy of exchange rate determination models from the 1970s. That work remains highly influential even today. Rogoff held tenured positions at the University of Wisconsin in Madison, the University of California at Berkeley and Princeton University, before joining Harvard’s economics department in 1999.
Rogoff, a deep thinker, eschews interest in the short term. And many are expecting him to refocus the priorities of the research department in line with this instinct when he arrives at the Fund.
“In chess, one bad move cancels out a lot of good moves,” he said shortly after moving to Harvard, “but in economics you can make mistakes and then learn from them.” Rogoff placed second in the US chess championships at the age of 22 and played that year in the world championships as well.
The Fund’s research department, of course, is responsible for producing the closely-watched World Economic Outlook (WEO) reports. Students of the IMF will be following the WEO’s fate during the period immediately ahead, particularly after Köhler hives off the capital markets group and Rogoff takes over the remains.
Rogoff, more generally, told Euromoney in 1998 that many of the IMF’s current activities should be shunted over to the World Bank or another institution. “I would sharply pull back the Fund’s presence in the world’s poorest countries,” he said then. “IMF missions travel to many African countries and the poorest countries in the former Soviet bloc on virtually a monthly basis. The Fund is taking on so much that it could start to become ineffective.” Rogoff wanted to limit the Fund to working with the “top 40” countries.
Still, Rogoff thought that the IMF was working very well. It had a relatively small staff, an elite culture and information moved freely inside the organization. “If they try to expand too much,” he said, “the IMF would lose much of that. You just can’t keep giving it new responsibilities all the time, but that’s what has been happening recently.”
The IMF’s biggest problem, according to Rogoff, was the World Bank. “The Bank always has been a more political animal,” he pointed out. “Many of the problems stem from needing to make the World Bank work better and for it to take over some of the roles that are being performed by the IMF. World Bank loans always have been much softer than IMF loans.”
Rogoff acknowledged that it can be easy to criticize the IMF from outside and wasn’t sure what he would do differently had he been there when the loans to Russia were approved or during the 1994-95 Mexican peso collapse or as the Asian crisis unfolded. “These were countries on the brink of incredible political instability,” he said. “It’s important that the IMF make good, sound loans and that it continue to exist, but it’s also really important that Russia not go berserk. It has nuclear missiles and the potential to destabilize the world. These were tough calls, even though they violated every principle that the IMF had in the past.”
Rogoff concluded that it would be wrong to have a rigid model for what the IMF is supposed to do. It has reinvented itself four or five times since Bretton Woods and it now serves as a vehicle through which the wealthiest countries coordinate their actions vis-à-vis the developing world. “It is good that the IMF was so flexible in the 1990s,” he maintained, “because we would not want historians to look back and say that ‘the IMF was rigidly sticking to its guidelines while the world fell apart at the end of the 20th century.'”
Bones of contention?
These four new hires – Krueger, Geithner, Hausler and Rogoff – may be about to start playing on the same team. But they could clash on some important issues behind the scenes. “I wouldn’t be surprised if they got into some interesting conflicts,” predicts one source who knows most of them well.
Krueger has said that there’s no room for a middle way when it comes to exchange rate regimes. Only freely floating currencies and, at the other extreme, completely fixed approaches like currency boards or dollarization can stand the test of time. But Rogoff forcefully has argued that any fixed exchange rate is a technical mistake and he emphatically includes currency boards in that group.
Geithner, meanwhile, makes no apologies for the enormous IMF-led bailouts during the Clinton years and gives every indication that he would recommend the same approach again. Krueger, by contrast, has pointed out that the math is simple. The IMF won’t be able to sustain such a policy for long.
Finally, Rogoff could go toe to toe with both Geithner and Krueger over the IMF’s deep involvement in developing countries. On the other hand, says Truman: “They have a lot in common. They all see themselves as market oriented and each one is as sharp as they come.”
