Future of International Development Institutions – Can Their Failures Be Even Bigger?

A Paper by Václav Klaus, President of the Czech Republic (2003–2013), delivered at the 13th Rhodes Forum, October 11, 2015

Many thanks for the invitation, which gave me the first opportunity to visit this beautiful island. Last time, I was in Greece at the end of June, at a conference in Athens, discussing the untenable Greek debt crisis which had developed as a consequence of this country´s voluntary entry (and continuing membership) in the European monetary union. This arrangement became an unbearable constraint, if not a straitjacket for it. The exchange rate and other relevant economic parameters connected with the Eurozone membership have proved to be in discord with the fundamentals of the Greek economy.

This is, however, not the topic of this conference. Regretfully, because we all could have learned from it. The distinguished (or would be distinguished) international economic institutions – the IMF and the World Bank – didn´t warn Greece from entering the Eurozone. They failed to provide a rational (and economically sound) advice to it. Was it just an analytical error?

I don´t think so. I agree with a harsh statement of a well-known Harvard economist Richard Cooper that “the IMF subordinated its analytical judgement in the case of Greece to the political preferences of European officials and politicians”. This behaviour heavily undermined the IMF´s credibility. Some critics even say that in its treatment of Greece, the IMF didn´t follow its original mandate but was used to help save the European monetary union. This is not for the first time, Greece is not the only example. We still remember the IMF´s misbehaviour in Thailand and Indonesia in the 1990s. I am, nevertheless, convinced that a case study of the recent Greek drama would have been a perfect introduction to this session. But I am not here to do it.

To be fair, I don´t pretend to know (or be able to forecast) “Future of International Development Institutions”. Instead of speculating about it, I want to say very explicitly that I have many doubts about the positive contribution of these institutions to economic development and human well-being world-wide. My views about it are similar to the views of economists who are resolutely critical of the whole concept of development aid. Together with them, I believe that these institutions serve much more the people working in international development institutions themselves than the people in developing countries. They also function as a way of providing a good feeling for the politicians and their fellow-travellers in rich countries.

My other problem – strongly influenced by my experience of living in Europe, in a country which eleven years ago became a member of the European Union – is how to avoid the danger that these international institutions suppress or at least significantly undermine the sovereignty of individual countries, of member states of these institutions. In this respect, I may be also negatively influenced by spending almost half a century in a communist country which was part of the Soviet empire and due to it more or less lost its sovereignty. We are afraid that something similar evolves before our eyes in Europe these days – members of the European Union are also losing their sovereignty.

International cooperation, friendly relations among countries, economic opening-up, free exchange of goods and services are principles that are absolutely fundamental and undisputable. I am resolutely in favour of free markets. The question remains what kind of institutions should be monitoring and supervising the functioning of markets, who should coordinate policies of countries participating in an international system? Should these institutions be built upon intergovernmental principles or upon principles of supranationalism? I am very much in favour of the first type of institutions and very much against the second type. The crucial difference is their impact on the sovereignty of nations (of states). Supranationalism undermines it.

International organizations exist because the economy is global but there are sovereign states. It raises, however, many fundamental questions. Do international organizations help to coordinate policies of individual countries in a way which is beneficial for everyone? Or are they vehicles for imposing the will of certain countries on others? Or perhaps vehicles for imposing the will of a global nomenklatura on all participating countries? This is how Bernard Connolly puts it in the last issue of the journal The International Economy (Summer 2015).

He is rather sceptical about it. In the current global monetary situation – which he characterizes as “disorder and misalignment” the ambition to help everyone is – he says – impossible to achieve. On the contrary, “in current circumstances, international organizations can only be about imposing the will of some countries on others or imposing the will of a nomenklatura on everyone” (p. 18). I am afraid – both as an economic analyst and as a former government official – that he is right.

Real functioning of these institutions, not promises, proclamations and propaganda is what matters. We shouldn´t, therefore, talk about international development institutions theoretically, as if they existed in a vacuum, or talk about them in a normative (or prescriptive) way. These institutions are very real. There are normal people working there, not angels or omnipotent and disinterested philosopher-kings. They are guided by vested interests, not by the reason as such, by the common good, by public well-being, by neutralistic scientific knowledge, by supernatural wisdom. These institutions are composed of fallible human beings. No matter how many first-class economists they hire, they cannot solve the insurmountable problem of the inadequacy of human knowledge, centralized in one place. Friedrich von Hayek´s analysis – so well described in his famous article “The Use of Knowledge in Society” (1945) – tells us exactly that.

I am not talking about evident misbehaviour of these institutions which has, however, happened in so many, well-documented cases. In his article in The International Economy (Summer 2015), German economist Klaus Engelen enumerates the cases of such misbehaviour in the following way: “Undermining the institutions´ governance structures. Using political pressure to take away an institution´s independence and neutrality. Breaking an institution´s statutes and rules for reasons of political expediency. Letting mass conflict of interests erode objective decision making. Losing reputation and credibility among the public. Letting institutions be dominated by major constituencies and blocking agreed reforms. Putting blame on the institutions for failings that national politicians and corrupt elites have been responsible for.” Etc.
There is no way to eliminate them. Those characteristics are built in in these institutions. The only way how to minimize their consequences is to minimize the competences of these institutions. It also requires keeping them intergovernmental, not supranational. It requires to update them, to broaden their membership and to increase their political legitimacy by increasing the voice of rising economies, by adjusting the decision-making structures of these institutions to the increasing share of emerging markets and developing countries in the world trade and GDP.

The international development institutions are here and are here to stay. Their future will not be very much different from now. The best strategy for individual countries is to contribute to the neutrality of these institutions and to introduce maximum rationality to their domestic economic policies so as not to be forced to ask for help from these institutions. This was always my personal strategy even though these institutions and their representatives didn´t like it very much. Let me stop by remembering my – more than two decades old – statement in my capacity as Minister of Finance at a World Bank Conference in Washington DC: I am not ready to pay hard money for soft advice.