Silent Revolution : The International Monetary Fund, 1979-89

James Boughton

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2001
• eBook ISBN: 9781557759719

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1 The Silent Revolution

Revolution or Evolution?

During the 11 years from 1979 through 1989, the world economy evolved in seemingly small but ultimately dramatic and profound ways. From a starting point at which the state was viewed as holding a primary responsibility for controlling economic development, the “third world” gradually diminished and even rejected that role in favor of privatization and reliance on market incentives. From a starting point at which central planning and international barter isolated much of the “second” or Communist world from the global market, internal reforms in China joined with the gradual enfeeblement of the Soviet empire to break down the barricades from central Europe to eastern Asia. From a starting point at which the largest industrial countries held sharply divergent macroeconomic philosophies and maintained that each country should pursue its own independent course, the “first world” took at least tentative steps toward more cooperative and mutually consistent policies. The philosophical and economic barriers between North and South and between East and West remained in place at the end of the 1980s, but the means for destroying them were nearer and more evident than ever before in history. This “silent revolution,” as Michel Camdessus named it in a more specific context,³ brought an unprecedented importance to the IMF as every region in the world struggled to keep its footing in an increasingly dynamic and global economy.

Was there a revolution in international political economy in the 1980s? History does not accept such drama readily, and the term cannot be asserted without justification. No single event gave definition to a silent revolution: no storming of the Bastille, no Declaration of Independence, no satyagraha campaign, no Long March. The Fund as an institution underwent surprisingly little structural change as it responded to the challenges of this decade. But in some dimensions, the world economy changed diametrically from the beginning of the decade to the end, and that drift ultimately wore a revolutionary cloak.

The term “silent revolution” in this book refers to a shift in the prevailing paradigm for international economic and political relations, away from tendencies toward autarky, insularity, mercantilism, and governmental planning and control over economic activity; and toward a common set of beliefs and policies based on open international trade and finance, competitive pricing and production decisions, and cooperation between countries. To a great extent, the silent revolution of the 1980s resulted from a shift in economic philosophy toward a new classical synthesis in which government has an indirect role in, but not a direct responsibility for, ensuring national economic prosperity; in which private economic activity is promoted through good governance and the development of physical and social infrastructure.⁴ That shift was not born in the 1980s; in some aspects and in some countries, such trends had long been apparent. Nor did it occur as a complete or final revolution in more than a handful of countries. From a global perspective, the silent revolution could also be described as a Quiet Evolution. To write such an epitaph, however, would greatly understate the significance of the decade for the world economy—and for the IMF.

The upheavals of the 1980s forced the Fund to reconsider its role and its ability to guide and shape the international monetary system. Throughout the decade, the staff, management, and Executive Board of the Fund debated and struggled with policy issues that went to the heart of the nature of the institution and that continued to resonate throughout the 1990s.

• In response to expanding international private credit markets, should the Fund become less of an official financial intermediary and more of a financial and policy adviser?
• Could the Fund rely on markets to provide international finance when and where it was needed, or should it devise new ways to influence private capital flows?
• Should the Fund borrow from markets to supplement its traditional lending resources?
• In response to a shift in demand for official financing from industrial to developing countries, should the Fund get more involved in structural reforms and long-term lending, or should it reduce its own lending and defer more to the multilateral development banks?
• In a system of floating exchange rates, should the Fund attempt to influence the major countries to stabilize their rates and coordinate their economic policies, or should it concentrate its energies on smaller countries where its influence was more likely to be felt?
• Was it feasible to rebuild the international financial system around the SDR as the “principal reserve asset,” as mandated by the Fund’s Articles of Agreement?
• Was there a significant role for unconditional financing for developing countries, or would the Fund have to get even more deeply involved in formulating economic policies in borrowing countries?

Leadership at the IMF

An even broader theme that came to the fore in the 1980s was the potential conflict between the Fund’s primary role as a monetary institution and the overseer of the international monetary system and its emerging role as a guiding force in economic development. The fifth Managing Director, H. Johannes Witteveen (from the Netherlands; in office 1973–78), guided the Fund into development-oriented activities such as lending for longer maturities and on concessional terms, but he also forcefully argued that the Fund’s essence was its monetary character. Reconciling that apparent paradox became increasingly difficult in the 1980s—and even more so in the 1990s—as the Fund became more deeply entrenched in the task of helping developing countries formulate beneficial and sustainable economic policies.

To a striking degree, the story of the Fund’s responses to these themes and to the silent revolution in policymaking is a story of the influence of Witteveen’s successors, the two men who led the institution through the 1980s: Jacques de Larosière, who became the Managing Director some six months before the start of this narrative; and Michel Camdessus, who succeeded him in January 1987. Both French; both graduates of the École Nationale d’Administration (ENA, the prestigious academy whose graduates are familiarly known in France as “enarques” and constitute an elite corps of corporate and government leaders); both former directors of the French Treasury; one a former and one a future governor of the French central bank, the Banque de France; both holders of the same paradoxical vision of the IMF as a sound financial institution dedicated to improving the welfare of developing countries. De Larosière and Camdessus were nonetheless dramatically different in style and even in substance.

Jacques de Larosière de Champfeu was born in Paris in November 1929, was raised and educated there, and spent his entire pre-IMF career at the French treasury and finance ministry. In 1974 he was named Chef du Cabinet (chief of staff) to the minister of finance, Valéry Giscard d’Estaing. When Giscard became president of France later that year, de Larosière became Director of the Treasury, the post he held until moving to Washington to head the IMF in June 1978.

De Larosière, whom The Times of London characteristically called “the IMF’s Gallic mastermind,” tackled the job of Managing Director as a technical as much as a political challenge. He understood well that each of the Fund’s 134 member countries (the number when he arrived in June 1978) brought its own unique issues, problems, and pressures to the table, but he took as a guiding principle that the institution should deal with all countries in as even-handed and uniform manner as possible. In conducting surveillance over macroeconomic policies, both in the public arena and in private meetings, he criticized the fiscal excesses of the United States in the same carefully structured tones that he applied to those of Argentina or Tanzania. In evaluating requests for loans, he consistently stressed that each country’s economic program had to be fully financed: in the Fund’s parlance, the task was to fill the “financing gap” and restore viability to the country’s external accounts. The Fund was and is a political body, but the consistency and technical clarity of de Larosière’s approach to problems usually prevented him from being blown far off course by strong political winds.

De Larosière’s stress on technical clarity and his disciplined style led to his being widely misunderstood as a technocrat. In his first few years as Managing Director, he built on Witteveen’s initiatives to greatly expand Fund lending to low-income countries and to find ways to subsidize that lending. He vigorously advocated the creation of a special lending window at the Fund to help developing countries finance food imports, and he encouraged the staff to work on issues related to the alleviation of poverty and the provision of basic human needs. Over the next few years, he expanded the Fund’s interaction with the United Nations, including UNICEF and the UN Development Programme. In his last two years in office, he supported the reinstatement of lending on highly concessional terms to the poorest countries. For a time, he was accused of being too soft in his lending decisions, but he gradually developed a sterner reputation and that side of him became largely forgotten.

A defining personal characteristic was de Larosière’s habit of reading each of the hundreds of draft documents that crossed his desk each year with painstaking care. A 30-page staff report on a loan request or a surveillance review would come back to the author after a few days with several notes penciled in the margins in the Managing Director’s tidy (and tiny) handwriting, often questioning the consistency of statements or numbers in different sections of the paper or asking why footnotes did not seem to match the text or the tables. In meetings with finance ministers and central bank governors, he often knew at least as much about the details of their economic policies as they did. During day-long meetings of the Executive Board, he would work his way through fistsful of pencils, meticulously writing and rewriting his summing up of the meeting until every nuance was right. He astonished all who heard him with the precision of his nearly unaccented English, and he occasionally embarrassed Executive Directors from Anglophone countries by gently interrupting to ask if they had not really meant something slightly different from the phrase they had just chosen.⁵

De Larosière viewed the Executive Board as a forum for nearly unlimited debate. During his tenure of 8½ years, the Board often met long into the night until every Director had said his piece (even though statements often were simply read from texts that had been prepared in advance). Although this practice made for a lot of weariness and was not a model of efficiency, it did create an atmosphere in which every view could be fully and fairly presented and no Director felt slighted because of difficulties of language or expression.

As Managing Director, de Larosière had little tolerance for disloyalty, and he expected both hard work and high standards from his staff. He sparked fear and respect, but he also strongly defended the staff both in the Executive Board and in outside forums. When he left the Fund in the midst of his second term, his lavish praise of the staff—for their “dedication, professional competence, integrity, and capacity for hard work and personal sacrifice in the interests of the institution”—was fairly interpreted as heartfelt, and he received a rousing farewell from the several hundred staff who gathered in the tree-lined ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Content Page
• Foreword
• Preface
• List of Abbreviations
• 1. The Silent Revolution
• I. Revolutions in the International Monetary System
• II. Revolutions in Managing International Debt
• III. Revolutions in Structural Adjustment
• IV. Evolution of the Institution
• Index
• Figures
• Footnotes