1 00:00:07,860 --> 00:00:15,780 Particularly a pandemic, as we saw, has impact on the economic development of the world as a means to react the same way. 2 00:00:16,200 --> 00:00:22,830 But 911 is we all have seen it, you know, so it's synchronised that moment they might differ. 3 00:00:22,890 --> 00:00:29,370 The shocks that were considered real shocks internally for the organisation, then what might be the global shocks? 4 00:00:30,690 --> 00:00:35,640 Welcome to Global Shocks. The podcast of the Oxford Mountain Program on Changing global Borders. 5 00:00:36,060 --> 00:00:39,690 My name is John King and I'm a research fellow in international relations. 6 00:00:40,230 --> 00:00:44,790 And in this podcast, we're going to explore how international organisations deal with global shocks. 7 00:00:45,570 --> 00:00:51,240 Global shocks are all around us, from humanitarian emergencies to war, financial crises to pandemics. 8 00:00:51,720 --> 00:00:57,150 So how can international organisations respond to them, adapt to them and survive such turbulent times? 9 00:00:57,690 --> 00:01:02,160 To find out, we are entering the conversation with leading figures from these organisations, 10 00:01:02,580 --> 00:01:09,480 to find out how they're affected by crisis and turbulence, what lessons they draw from the past, and what future prospects they have. 11 00:01:18,040 --> 00:01:24,400 Today, we're going to take a deep dive into the world of international finance with a spotlight on the International Monetary Fund. 12 00:01:24,640 --> 00:01:28,990 Short. IMF established in the aftermath of World War Two. 13 00:01:29,200 --> 00:01:34,360 The International Monetary Fund came into existence in 1944 at the Bretton Woods conference. 14 00:01:34,720 --> 00:01:40,570 The IMF's primary mission has since been, in its own words, to foster global monetary cooperation, 15 00:01:40,660 --> 00:01:44,380 secure financial stability and facilitate international trade. 16 00:01:44,650 --> 00:01:49,060 Over the decades, the fund has evolved to become a key player in global economic governance, 17 00:01:49,360 --> 00:01:56,380 chiefly by maintaining exchange rate stability and pooling funds from which countries can borrow in the case of balance of payment issues. 18 00:01:56,620 --> 00:02:01,570 But the IMF has often asked governments to impose harsh austerity measures in return for its assistance, 19 00:02:01,720 --> 00:02:06,160 drawing considerable pushback to critics in regions like Eastern Europe. 20 00:02:06,190 --> 00:02:14,470 At the end of the Cold War, the IMF essentially imposed neoliberal, laissez faire policies, including deregulation and privatisation. 21 00:02:15,070 --> 00:02:20,920 IMF policies in the 1990 in Thailand and Indonesia have even been denounced as Western interventions. 22 00:02:21,670 --> 00:02:26,170 So that all raises the question of how the IMF can avoid such impressions, 23 00:02:26,290 --> 00:02:30,190 how it can learn from the past, and how it might build resilience for the future. 24 00:02:30,970 --> 00:02:37,270 I spoke to a former chief economist of the IMF, Maurice OBSTFELD, to learn from his firsthand experience. 25 00:02:37,540 --> 00:02:42,490 MORRIS OBSTFELD also is a former professor of economics at the University of California in Berkeley 26 00:02:42,850 --> 00:02:48,130 and has served on the Council of Economic Advisers to the Obama administration in the United States. 27 00:03:07,700 --> 00:03:13,310 Hello and welcome to Global Shocks. Morris OBSTFELD, could you just briefly introduce yourself in your own words? 28 00:03:14,000 --> 00:03:19,400 I'm currently a senior fellow at the Peterson Institute for International Economics. 29 00:03:19,610 --> 00:03:27,950 I have formerly been a for many years a professor of economics at the University of California, Berkeley. 30 00:03:28,220 --> 00:03:31,040 And prior to retiring from Berkeley, 31 00:03:31,040 --> 00:03:40,520 I served on the Council of Economic Advisors in the US Obama Administration and as chief economist at the International Monetary Fund. 32 00:03:40,940 --> 00:03:47,030 Right. So in your own words, from your point of view as an economist, why does thinking about global shocks matter? 33 00:03:47,720 --> 00:03:55,520 Well, all economies are to more greater or lesser extent attached to the rest of the world through trade linkages, 34 00:03:55,520 --> 00:04:04,760 but also other linkages, communications linkages, movements of people, communications diseases, the climate. 35 00:04:04,970 --> 00:04:15,530 So, you know, to pretend that any economy can be removed from shocks or disturbances that occur abroad is somewhat delusional. 36 00:04:15,800 --> 00:04:19,310 And so, you know, particularly in the economic realm, 37 00:04:19,400 --> 00:04:27,770 these interactions between domestic economies and foreign economies are key conduits for the transmission 38 00:04:27,770 --> 00:04:35,340 of shocks and for the mechanisms that intermediate how domestic policies affect the domestic economy. 39 00:04:35,360 --> 00:04:37,490 Even those are affected by global linkages. 40 00:04:37,760 --> 00:04:45,880 So it seems to me that the global perspective, this is one that is absolutely essential for understanding a range of phenomenon, 41 00:04:45,980 --> 00:04:51,080 but especially economic policies and the evolution of the economy. 42 00:04:51,560 --> 00:04:55,550 So in your own words, what's it like to work at the International Monetary Fund? 43 00:04:55,580 --> 00:05:04,250 What does the IMF do exactly? The IMF was established in the 1940s with the purpose of avoiding some of the 44 00:05:04,250 --> 00:05:09,260 worst economic policies that countries carried out during the Great Depression, 45 00:05:09,350 --> 00:05:16,520 often to their mutual detriment with political ramifications that arguably helped pave the way to the Second World War. 46 00:05:16,610 --> 00:05:26,990 Initially, I would say that the goals of the fund were modest relative to what it does today, although at the time they were incredibly far reaching. 47 00:05:27,080 --> 00:05:32,180 But basically to govern the exchange rate relationships among economies, 48 00:05:32,180 --> 00:05:38,360 to promote the liberalisation of international payments connected with international trade, 49 00:05:38,360 --> 00:05:45,620 and to provide a source of credit for economies that might find themselves in difficulty in 50 00:05:45,950 --> 00:05:51,170 meeting their commitments to manage exchange rates in the way that the fund system required, 51 00:05:51,260 --> 00:05:56,810 or that might need credit for, for other reasons, to simply avoid a huge economic downturn. 52 00:05:56,900 --> 00:06:02,510 This exchange rate system that was built into the original IMF articles of Agreement, 53 00:06:02,510 --> 00:06:07,669 which was a system of exchange rates fixed that the United States dollar but occasionally adjustable, 54 00:06:07,670 --> 00:06:12,290 went by the board a little over 50 years ago in the early 1970s. 55 00:06:12,440 --> 00:06:19,280 And since then, the fund has evolved to still exercise surveillance over exchange rate arrangements, 56 00:06:19,280 --> 00:06:23,569 but to allow countries to pursue the exchange rate systems that they feel are most 57 00:06:23,570 --> 00:06:28,670 compatible with their abilities to use domestic policies to preserve domestic prosperity. 58 00:06:28,730 --> 00:06:35,930 The fund has also expanded in the realms of providing capacity development for countries and moreover 59 00:06:35,930 --> 00:06:41,630 overseeing issues connected with financial stability in the period just after World War Two. 60 00:06:41,660 --> 00:06:45,650 The financial interconnections among countries were minimal. 61 00:06:45,950 --> 00:06:52,490 Basically, very little private finance, official finance, but tightly regulated financial markets around the world. 62 00:06:52,520 --> 00:06:57,620 Since the seventies, we've moved to a landscape with less regulated financial markets, 63 00:06:57,620 --> 00:07:03,409 which have exploded in breadth and scope and have raised serious concerns about financial stability. 64 00:07:03,410 --> 00:07:07,160 As we saw in the 2008 2009 crisis. 65 00:07:07,340 --> 00:07:10,729 So the fund now undertakes considerable activity, 66 00:07:10,730 --> 00:07:17,870 evaluating the health of countries financial systems and worrying about the interconnections among those financial systems, 67 00:07:17,870 --> 00:07:26,120 and those might lead to outcomes that are unfortunate in the sense that the 2008 2009 crisis was also unfortunate. 68 00:07:26,210 --> 00:07:33,710 So a large expansion in the realm of the economic transactions that the fund is concerned with, 69 00:07:34,400 --> 00:07:44,180 but also expansion in terms of concerns on other public goods that are relevant to macroeconomic outcomes such as climate and global public health. 70 00:07:44,600 --> 00:07:47,810 So we've just talked a little bit about global shocks in general. 71 00:07:48,260 --> 00:07:53,210 And then you gave the example of the financial crises, of course, of 2008, 2009. 72 00:07:53,600 --> 00:07:57,620 And now my question to you is, during your time working at the IMF, 73 00:07:58,070 --> 00:08:05,510 what stood out to you as the most notable shock that the organisation had to deal with and that you were confronted with in particular? 74 00:08:05,810 --> 00:08:11,160 And how did you. You or your colleagues or the IMF as an organisation deal with that shock. 75 00:08:11,170 --> 00:08:16,750 What was the sort of initial response? What was the go to response by the International Monetary Fund? 76 00:08:17,120 --> 00:08:18,279 Well, when they came in, 77 00:08:18,280 --> 00:08:27,960 the world economy was still digesting the after effects of some events in August 2015 that really set the global economy back. 78 00:08:27,970 --> 00:08:35,500 You know, for several years, China had been suffering from a sharply declining stock market and from capital outflows. 79 00:08:35,500 --> 00:08:41,620 It actually used up about a quarter of its $4 trillion in foreign exchange reserves, 80 00:08:41,620 --> 00:08:50,560 trying to prevent those capital outflows from bringing about a sharp depreciation of its currency, which it feared would have negative ramifications. 81 00:08:50,830 --> 00:09:00,159 And in August of 2015, China carried out a fairly puzzling and non-transparent and unexpected shift in its exchange rate regime, 82 00:09:00,160 --> 00:09:05,049 which involved the devaluation, the small devaluation of the yuan, but also, 83 00:09:05,050 --> 00:09:08,650 you know, very, very sort of murky guidance about what to expect going forward. 84 00:09:08,650 --> 00:09:11,890 And this did set off something of a panic in financial markets. 85 00:09:12,040 --> 00:09:16,030 And the concern was that if China were to simply let its exchange rate go, 86 00:09:16,090 --> 00:09:21,490 this would have ripple effects across the Asian region, which could be destabilising. 87 00:09:21,640 --> 00:09:29,830 So, you know, in point of fact, the markets remained fairly volatile for, you know, roughly nine months after. 88 00:09:29,830 --> 00:09:34,180 That's where a lot of a lot of concerns about what direction China was taking. 89 00:09:34,210 --> 00:09:36,340 What would be the impact on Chinese growth, 90 00:09:36,340 --> 00:09:42,100 which of course is a major component of global growth and particularly important in the benchmark Asian region. 91 00:09:42,520 --> 00:09:51,520 So this was a problem that, you know, it wasn't up to the fund to manage, was mainly up to the Chinese authorities to manage, 92 00:09:51,520 --> 00:09:58,570 but one where we consulted with them and gave advice and where I think the worst outcomes were avoided. 93 00:09:58,710 --> 00:10:02,470 You know, fast forward to June of 2016. 94 00:10:02,590 --> 00:10:06,280 Another shock we were concerned about was the Brexit referendum. 95 00:10:06,370 --> 00:10:12,040 We and the fund, I think like everyone else, observing the ongoing events in the UK, 96 00:10:12,460 --> 00:10:18,210 did not think it's likely that the referendum on Brexit would go in the negative direction that it did. 97 00:10:18,220 --> 00:10:29,800 We way underestimated the power of social media and the power of online targeting, using granular data about voters to modify electoral outcomes. 98 00:10:29,890 --> 00:10:36,700 I think we also underestimated the depth of negative feeling toward the EU and the British ruling 99 00:10:36,700 --> 00:10:43,599 establishment generally in regions that had been regions of the UK that had been industrialised, 100 00:10:43,600 --> 00:10:50,889 where, you know, staple industries such as mining disappeared over the years, you know, which were severely depressed where, 101 00:10:50,890 --> 00:10:57,640 you know, formerly solid Labour voting blocs were in transition in many, many ways politically. 102 00:10:57,700 --> 00:11:02,950 So, you know, at the fund we sort of gamed out what would be the economic consequences of Brexit, 103 00:11:02,950 --> 00:11:10,180 although that was very speculative because you didn't know what type of relationship the UK would negotiate with the EU post-Brexit. 104 00:11:10,190 --> 00:11:13,360 That took years. Something else we didn't anticipate, 105 00:11:13,540 --> 00:11:17,439 but we also worried about the impact on financial markets given what we had just 106 00:11:17,440 --> 00:11:21,700 seen in relationship to China with the financial markets become more volatile. 107 00:11:21,700 --> 00:11:29,709 And could that have a similarly depressing effect on the world economy as the Chinese events seemed to have had for nine months now, 108 00:11:29,710 --> 00:11:37,870 As it happens in June of 2016, the world economy was just starting to recover from the turbulence of the previous nine months, 109 00:11:37,870 --> 00:11:42,159 and a number of indicators were turning up just at the time of the Brexit vote, 110 00:11:42,160 --> 00:11:48,430 which is fortunate because it turned out not to have the sort of systemic financial market consequences that we feared. 111 00:11:48,820 --> 00:11:54,160 That being said, it did set off considerable uncertainty regarding the UK economy, 112 00:11:54,160 --> 00:11:59,620 regarding its ultimate relationship with the EU, and that played out over a stretch of years. 113 00:11:59,650 --> 00:12:03,730 I think it's fair to say that with Brexit did not do any favours for the UK economy, 114 00:12:03,760 --> 00:12:09,440 but the extent to which you can directly blame Brexit, you know, remains, remains contested. 115 00:12:09,460 --> 00:12:17,980 Certainly it's hard to discern the positive effects that were advertised by the proponents of Brexit in the campaign leading up to the referendum. 116 00:12:17,980 --> 00:12:23,799 But the next major shock, I think, was the Trump election in 2016, which, you know, 117 00:12:23,800 --> 00:12:31,460 for which the Brexit vote had in some sense been a bellwether in terms of unveiling the scope for, you know, 118 00:12:31,510 --> 00:12:37,510 social media to play a big role in elections, the scope for voters that it has political leanings, 119 00:12:37,510 --> 00:12:45,070 you think you understand rapidly shift position and the sense of their own frustrations, cultural and economic. 120 00:12:45,640 --> 00:12:52,990 And, you know, the challenge of Trump was to really upend the US economy's sense of global leadership, 121 00:12:52,990 --> 00:12:58,149 to withdraw from key international bodies like the W.H.O., 122 00:12:58,150 --> 00:13:03,490 like the Paris Agreement, to turn to our protection to undertake a trade war with China, 123 00:13:03,490 --> 00:13:06,940 but also, you know, protectionist measures against allies, not just the. 124 00:13:07,190 --> 00:13:11,330 Have been. So this this, I think, was another shot to the world economy. 125 00:13:11,390 --> 00:13:14,480 The macro effects were offset by other factors. 126 00:13:14,480 --> 00:13:21,080 For example, the big U.S. tax cut in 2018 was a positive, at least in terms of macro stimulus. 127 00:13:21,350 --> 00:13:27,300 By the time COVID emerged, I think we were we were seeing the negative effects. 128 00:13:27,350 --> 00:13:34,820 Trump's trade war on global activity. But of course, by that time it's less the fund and less than December 2018. 129 00:13:49,900 --> 00:13:53,740 I'm curious to hear a bit more about the inner workings of the International Monetary Fund. 130 00:13:54,160 --> 00:13:59,200 So let's picture a shock hitting the global economy. What exactly happens within the IMF? 131 00:13:59,350 --> 00:14:05,650 How does the fund respond? How does it decide whether this is a threat to international or global stability? 132 00:14:06,040 --> 00:14:10,270 Which aspect of it is a threat? Which aspect might be an opportunity? 133 00:14:10,660 --> 00:14:19,250 What's going on exactly at those moments? Well, the institution is a complex one with, you know, some functional departments. 134 00:14:19,450 --> 00:14:23,890 The department I headed research is a functional department, so it's fiscal affairs. 135 00:14:23,920 --> 00:14:28,630 So it's money in capital markets, which oversees the financial stability work. 136 00:14:29,020 --> 00:14:40,360 So it's strategy policy review, which basically is the repository of fund doctrine and policy, as it were, and oversees all of the country, 137 00:14:40,360 --> 00:14:49,240 work for, you know, consistency with, you know, fund philosophy, fund practices, fund understanding of macroeconomics, financial economics. 138 00:14:49,300 --> 00:14:57,010 But having mentioned the country work, there are also the regional departments which encompass the various country to European Department, 139 00:14:57,010 --> 00:15:01,300 the African Department, the Asian Department, Middle East, Central Asia. 140 00:15:01,390 --> 00:15:06,790 And each of these departments is a collection of country teams which engage 141 00:15:06,790 --> 00:15:11,800 intensively with the authorities of the countries they are they are in charge of. 142 00:15:11,920 --> 00:15:15,240 And this engagement is is ongoing. 143 00:15:15,250 --> 00:15:17,110 It's not just about crises. 144 00:15:17,590 --> 00:15:29,110 It's about regular review of policy and economic outlook and regular missions to the country to discuss the policy direction and make recommendations, 145 00:15:29,110 --> 00:15:38,680 which recommendations are, of course, non-binding. Unless a country is negotiating a fund program, in which case the conditions of the fund program, 146 00:15:38,920 --> 00:15:45,640 the policy conditionality does become binding as a condition for obtaining resources from the fund. 147 00:15:45,760 --> 00:15:51,940 You know, when when when a shock hits, generally some countries may be more effective than others. 148 00:15:51,970 --> 00:16:02,770 I was not really present for, you know, a truly, truly global shock such as the financial crisis of 2008 2009, like the Lehman shock. 149 00:16:02,950 --> 00:16:09,070 But, you know, more often the shock is centred on a particular country, but it may have spill-over effects abroad. 150 00:16:09,190 --> 00:16:13,930 And then the focus is twofold. First on the country where the shock originates. 151 00:16:14,260 --> 00:16:18,280 And secondly, on its neighbours to manage the repercussions. 152 00:16:18,370 --> 00:16:24,879 There's not much we can do about the neighbours except through heightened scrutiny and engagement with the authorities in the country. 153 00:16:24,880 --> 00:16:29,470 Where the shock originates, there would be intensified discussions and intensified scrutiny. 154 00:16:29,680 --> 00:16:33,730 So, you know, in the case of China, I would say they you know, 155 00:16:33,760 --> 00:16:39,140 the authorities were quite open to discussions with the fund and to the fund's recommendations. 156 00:16:39,220 --> 00:16:43,100 They, of course, did what they wanted. The funds recommendations were not binding. 157 00:16:43,450 --> 00:16:49,929 But I think it's I think the fund's advice was quite consistent with the approach the authorities took. 158 00:16:49,930 --> 00:16:53,980 And whether the fund deserves credit or not is, you know, is open to debate. 159 00:16:54,280 --> 00:16:58,540 But I think at the end of the day, that particular crisis was well managed. 160 00:16:58,810 --> 00:17:05,950 You know, with respect to Brexit, I would say the back and forth with the UK over the years following the referendum. 161 00:17:05,950 --> 00:17:15,310 But while agreements, well attempts were made to negotiate a withdrawal agreement with the EU was more contentious. 162 00:17:15,470 --> 00:17:21,220 You know, the IMF would do its forecasts of different arrangements and how they would affect the UK in Europe 163 00:17:21,220 --> 00:17:25,990 to the extent is these were negative for the U.K. The U.K. authorities would generally reject them. 164 00:17:26,500 --> 00:17:30,970 You know, I think the chaotic nature of the U.K. process spoke for itself, really. 165 00:17:31,900 --> 00:17:35,490 And, you know, the fund's view is that, you know, 166 00:17:35,620 --> 00:17:43,239 the U.K. should try to preserve as much of the structure of European supply chains that had been 167 00:17:43,240 --> 00:17:50,180 established over the previous decades as possible and to be as as little disruptive as possible. 168 00:17:50,200 --> 00:17:55,540 But that's not the way the politics the politics, when, you know, at the same time, the you know, 169 00:17:55,540 --> 00:18:00,490 the private sector sort of did what it could to protect itself from the ongoing uncertainty. 170 00:18:00,640 --> 00:18:05,590 But, you know, the period was, you know, clearly negative for the U.K. in terms of, 171 00:18:05,590 --> 00:18:09,730 you know, very depressed investment, which continues and rather tepid growth. 172 00:18:09,880 --> 00:18:17,350 There's not much you could do about it that the fund except to, you know, sort of preach to the unconverted and, you know, 173 00:18:17,350 --> 00:18:24,370 just sort of take the, you know, the opprobrium in the British political space and segments of the British press. 174 00:18:24,760 --> 00:18:27,100 Right. So let's stay with Brexit for another moment. 175 00:18:27,580 --> 00:18:34,300 If I picture economists working at the IMF trying to figure out a policy, a response to something like Brexit, 176 00:18:34,450 --> 00:18:42,520 do historical precedents play a role in IMF deliberations, or is it rather a kind of background matter that isn't really talked about all that much? 177 00:18:42,730 --> 00:18:49,200 You know, unfortunately, there are relatively few examples of such a self-inflicted wound in. 178 00:18:49,660 --> 00:18:57,010 You know, in history. I mean, we do have trade arrangements breaking up, and it's usually in the context of a wider geopolitical conflict, 179 00:18:57,160 --> 00:19:04,570 which kind of makes it impossible to tease out the specific effects of what one country is doing. 180 00:19:05,440 --> 00:19:10,629 So this is a you know, this is in some way I wouldn't say it's unique, but there aren't a lot of precedents. 181 00:19:10,630 --> 00:19:17,709 So the main analytical tools would be more econometric, just trying to say, well, 182 00:19:17,710 --> 00:19:23,410 suppose we increase trade costs between the EU and the continental EU and the UK? 183 00:19:23,590 --> 00:19:26,900 You know what? What effect do we think that would have on GDP? 184 00:19:26,920 --> 00:19:30,370 Or suppose we increase uncertainty? What effect would that have? 185 00:19:30,460 --> 00:19:35,880 So it's it's, it's all rather you have to make assumptions, so it's all debateable. 186 00:19:35,890 --> 00:19:41,370 But you know, a large number of studies that we did that that were done by private sector 187 00:19:41,800 --> 00:19:46,690 academic economists in the UK all pretty much pointed to the same conclusion. 188 00:19:46,690 --> 00:19:52,270 And you can argue about the precise numbers, but, you know, they were they were negative and they were not negligible. 189 00:19:52,720 --> 00:19:59,170 So if we just think a little bit more about global shocks and what they mean for an organisation like the International Monetary Fund, 190 00:19:59,530 --> 00:20:02,589 I mean there's lots of talk at the moment about policy crisis, 191 00:20:02,590 --> 00:20:09,970 referring to the fact that multiple crises happen at the same time and they intersect and overlap and mutually compound each other. 192 00:20:10,150 --> 00:20:16,150 So does the term mean anything to you and does the IMF actually treat crises case by case as 193 00:20:16,150 --> 00:20:22,060 individual occurrences or rather as connected parts of longer term historical patterns of turbulence? 194 00:20:22,270 --> 00:20:26,229 It depends on the country and it depends really on the the shock. 195 00:20:26,230 --> 00:20:33,460 I mean, when the China episode I described to you, it was clear that the problems were originating inside China, 196 00:20:33,520 --> 00:20:39,520 but they were potential spill-overs to other countries that we needed to be aware of in our policy advice. 197 00:20:39,550 --> 00:20:42,840 You know, when when a small country runs into debt, 198 00:20:42,910 --> 00:20:48,790 problems that will possibly affect its immediate neighbours if it has close trading relationships with them. 199 00:20:49,100 --> 00:20:52,510 But it's typically a country by country exercise. 200 00:20:52,540 --> 00:20:53,440 That being said, 201 00:20:53,530 --> 00:21:00,820 there are situations in which a lot of small countries run into trouble because they are responding to some common macroeconomic development. 202 00:21:00,880 --> 00:21:05,560 So, you know, we have a number of countries now with debt problems or debt distress. 203 00:21:05,740 --> 00:21:11,710 Some of them, many of them have fund programs or renegotiating their liabilities to foreign creditors. 204 00:21:12,010 --> 00:21:17,710 They're not enough at the moment in serious trouble to pose a global systemic problem. 205 00:21:17,800 --> 00:21:25,640 But we have seen such problems in the past. For example, the Asian crisis of 1998, you know, had a major regional impact. 206 00:21:25,660 --> 00:21:30,790 Going back further, the debt crisis of developing countries in the early 1980s, 207 00:21:30,790 --> 00:21:36,550 which was largely a Latin American crisis, not exclusively a Latin American crisis, 208 00:21:36,720 --> 00:21:43,000 reflected the very high interest rates in the United States and the global slowdown that was was a 209 00:21:43,180 --> 00:21:48,530 sort of a crisis within a country group that was widespread and that had much more systemic effects. 210 00:21:48,580 --> 00:21:50,770 And these systemic effects can be rather subtle. 211 00:21:50,770 --> 00:21:58,569 In the case of the debt crisis of the 1980s that followed a period in which large banks in rich countries, 212 00:21:58,570 --> 00:22:02,620 particularly in the U.S., have lent a lot of money to Latin America. 213 00:22:02,860 --> 00:22:07,519 And with so many Latin American countries unable to pay their debts, 214 00:22:07,520 --> 00:22:13,120 did raise the prospect that the banks that had lent to them could get into trouble, 215 00:22:13,420 --> 00:22:21,100 which would have severe financial stability implications in the U.S. and in other rich countries with ties to the US, which is all rich countries. 216 00:22:21,160 --> 00:22:29,020 And, you know, this became a major crisis for the fund together with the Federal Reserve, to to manage over a period of, 217 00:22:29,020 --> 00:22:35,050 you know, nearly a decade throughout almost the entire 1980s, this crisis was being managed in various ways. 218 00:22:35,070 --> 00:22:43,480 So, you know, this is just to say that whether a crisis can truly be treated as an individual matter or is more systemic, it is a matter of degree. 219 00:22:43,840 --> 00:22:47,739 You know, it depends on how deep is the crisis, how widespread is the crisis, 220 00:22:47,740 --> 00:22:53,979 what are the linkages, financial and trade wise, between the crisis countries and other countries, 221 00:22:53,980 --> 00:22:59,260 which may on the surface appear to be in good health, but which linkages determine the network, 222 00:22:59,290 --> 00:23:01,870 through which a crisis can spread through other countries? 223 00:23:01,960 --> 00:23:07,840 You know, similarly with the 2008 2009 crisis, you could have said, well, you know, this is the U.S. housing market. 224 00:23:07,840 --> 00:23:17,290 The ramifications will be contained. But the financial superstructure built on that housing market and the interconnection of that superstructure 225 00:23:17,290 --> 00:23:22,410 with the financial systems of countries the world over turned it into a completely global crisis. 226 00:23:22,420 --> 00:23:28,899 It's basically a matter of degree. And sometimes, you know, it comes as a surprise when the crisis spread, the Asian crisis, you know, 227 00:23:28,900 --> 00:23:34,510 was viewed as a localised crisis in Thailand in 1997 when it broke out and then it just exploded. 228 00:23:34,840 --> 00:23:35,079 You know, 229 00:23:35,080 --> 00:23:43,360 there can be contagion as financial market participants look for similarities and weaknesses in countries certainly not immediately affected. 230 00:23:43,600 --> 00:23:47,680 But then when they act on those perceived weaknesses, crises can spread. 231 00:23:48,220 --> 00:23:55,799 Right. So you're. Expanding in very interesting detail how economic changes affect political dynamics and vice versa. 232 00:23:55,800 --> 00:23:59,660 So how there's a kind of interconnection between political and economic change. 233 00:23:59,670 --> 00:24:03,000 So what role does the IMF play in those dynamics, 234 00:24:03,270 --> 00:24:08,399 especially since the IMF often asks governments to implement pretty tough and drastic changes, right? 235 00:24:08,400 --> 00:24:15,060 So say to decrease public spending, that's politically costly for individual governments and they might lose popularity as a result. 236 00:24:15,480 --> 00:24:23,280 But lots of people also see that as a kind of undemocratic intrusion by an unelected elite of economists sitting at this international organisation. 237 00:24:23,520 --> 00:24:30,210 That kind of pushback can really lead to loss of authority or even membership for institutions such as the IMF in the long run. 238 00:24:30,870 --> 00:24:34,740 So how has the IMF dealt with this challenge in particular in the past? 239 00:24:35,040 --> 00:24:39,000 And what would you say is your perspective on that, your experience? 240 00:24:39,270 --> 00:24:46,680 I mean that the link between domestic politics and policy is always a treacherous one for the fund. 241 00:24:47,190 --> 00:24:56,409 You know, I think that the sort of textbook example of the hazards would be the Asian crisis in the late 1990s, where, as I said, 242 00:24:56,410 --> 00:25:02,820 the crisis in Thailand spread across the region to Asia, to Malaysia, to Korea, 243 00:25:02,940 --> 00:25:09,360 and the IMF came in with programs which, you know, to some extent went beyond its typical remit. 244 00:25:09,360 --> 00:25:12,929 And one of the one of the reasons for that, I think it was a learning experience, 245 00:25:12,930 --> 00:25:18,030 was that if you looked at countries like Indonesia and Malaysia before the crisis, 246 00:25:18,360 --> 00:25:22,380 the fund would have said that their macroeconomic fundamentals are good. 247 00:25:22,530 --> 00:25:30,480 They had sound public finances, low public debt, not big current account deficits, not big fiscal deficits. 248 00:25:30,960 --> 00:25:34,020 And yet when markets turned against them, 249 00:25:34,020 --> 00:25:40,620 this turned up weaknesses in their banking system of a sort that the fund hadn't really been used to focusing on at that point. 250 00:25:40,800 --> 00:25:46,590 And the fund reacted with policies that, you know, were viewed in these countries as quite intrusive. 251 00:25:46,830 --> 00:25:48,360 Following these crises, 252 00:25:48,450 --> 00:25:56,040 the countries built up large war chests of international reserves precisely so they would not have to go back to the fund again, 253 00:25:56,040 --> 00:26:01,230 so they would not have to surrender their policy autonomy to the fund in the event of the crisis. 254 00:26:01,410 --> 00:26:06,270 And so that hopefully those levels of international research, a crisis would not even occur. 255 00:26:06,420 --> 00:26:11,070 It wasn't really until so that the Asian crisis was in 1998. 256 00:26:11,160 --> 00:26:16,350 In 2018, 20 years later, the fund held its annual meetings in Bali, Indonesia, 257 00:26:16,350 --> 00:26:21,419 and the fact that the fund had been able to negotiate to actually come to Indonesia was 258 00:26:21,420 --> 00:26:27,090 the end result of a lot of fence mending between the fund and these East Asian economies, 259 00:26:27,090 --> 00:26:34,530 which were very sceptical of the fund and where finally after 20 years reconciliation did occur. 260 00:26:34,770 --> 00:26:38,790 So it can be it can be very a very strong relationship. 261 00:26:38,950 --> 00:26:42,330 You know, another another example would be the euro crisis. 262 00:26:42,630 --> 00:26:45,520 This was a very complex situation in that, you know, 263 00:26:45,570 --> 00:26:54,000 the IMF was engaged together with the European Central Bank and the Commission in trying to address the crisis. 264 00:26:54,000 --> 00:26:59,820 To the extent that the crisis was fuelled by high public debt levels in some countries, 265 00:27:00,030 --> 00:27:06,390 the fund thought that a response focusing on fiscal austerity would be appropriate. 266 00:27:06,570 --> 00:27:13,650 The problem with fiscal austerity is it also reduces economic output and may actually make the fiscal situation worse. 267 00:27:13,830 --> 00:27:18,240 And arguably in some cases the austerity was excessive. 268 00:27:18,480 --> 00:27:25,260 So here too, there in some countries, the result was a lot of resentment against the fund. 269 00:27:25,800 --> 00:27:27,420 Think about Greece in the sample. 270 00:27:27,630 --> 00:27:37,590 I think the the fund learned as a result of this that fiscal austerity has to be coupled with policy packages that protect the most vulnerable. 271 00:27:38,280 --> 00:27:41,069 You know, for example, you go to an emerging market and you say, well, 272 00:27:41,070 --> 00:27:46,680 you have to balance the budget in part by removing your extensive food subsidies. 273 00:27:47,120 --> 00:27:51,390 So suddenly people can't get enough to eat, right? You can't you know, 274 00:27:51,810 --> 00:27:58,290 you have to be much more targeted in how you go about things to prevent distress 275 00:27:58,290 --> 00:28:04,170 among people who are really going to be hit hardest by even small fiscal cuts. 276 00:28:04,410 --> 00:28:10,050 So the fund has just gotten much more sensitive about these issues in terms of how it designs stabilisation programs. 277 00:28:10,110 --> 00:28:13,769 But, you know, nonetheless, you know, politics still intrude. 278 00:28:13,770 --> 00:28:24,089 You you you can't realistically always be blind to the likely political consequences of policies because they may undermine good 279 00:28:24,090 --> 00:28:32,250 policies much more than would be the case if you change your policies a bit in a way that avoids the worst political outcomes. 280 00:28:32,460 --> 00:28:35,760 And that's just a matter of judgement. That's a matter of judgement. 281 00:28:35,940 --> 00:28:39,540 You know, an example is Argentina. You know, Argentina 2018, 282 00:28:39,750 --> 00:28:49,080 the fund probably was more indulgent to the government should have been given that the consequence of the government losing the election. 283 00:28:49,140 --> 00:28:54,600 Would have been the election of a Peronist regime, which economic policies would have been far worse. 284 00:28:55,020 --> 00:29:01,170 At the end of the day, it didn't work. The Peronist name and their policies were as bad as expected. 285 00:29:01,200 --> 00:29:09,359 And now Argentina is again a it's been sort of yo yoing between market oriented and Peronist policies. 286 00:29:09,360 --> 00:29:17,250 So it's in a market oriented phase with melee and the tango has to make some tough decisions about support for Argentina under this new regime. 287 00:29:17,400 --> 00:29:26,400 And frankly, it's hard to avoid the political implications of what your, you know, your program conditions are just this is just reality. 288 00:29:26,460 --> 00:29:30,370 But that, in turn raises a different matter for the fund, which is that, you know, 289 00:29:30,420 --> 00:29:35,580 countries look around at the programs other countries are getting and call for evenhandedness. 290 00:29:35,730 --> 00:29:38,330 You know, even handedness is in the eye of the beholder. 291 00:29:38,340 --> 00:29:45,980 So, you know, how can how can you sort of adhere to an even handed approach wherein each country embraces the term political challenges? 292 00:29:46,020 --> 00:29:49,550 So it's a tough it's a tough problem. I don't think it's a problem that will go away. 293 00:29:49,560 --> 00:29:53,220 But, you know, it's a problem that the fund is just going to have to navigate going forward. 294 00:29:54,120 --> 00:30:00,600 Lots of commentators have stressed geopolitical divides hardening in the world today and mutually compounding crises. 295 00:30:01,080 --> 00:30:08,760 These make it really hard for international organisations today to navigate a world of instability of crisis. 296 00:30:09,270 --> 00:30:18,210 My final question to you is how can the International Monetary Fund learn from its own past as an organisation, from past shocks as well? 297 00:30:18,750 --> 00:30:25,890 In order to be better prepared for a turbulent future and to improve its resilience in the face of future shocks, 298 00:30:26,640 --> 00:30:31,800 I think there is a process of self-examination within the fund. 299 00:30:32,010 --> 00:30:38,640 A great example is the work on that was done on fiscal austerity under my predecessor, Olivier Blanchard, 300 00:30:38,730 --> 00:30:46,500 just sort of evaluating, you know, the kind of multiplier effects of fiscal contraction in European economies. 301 00:30:46,500 --> 00:30:51,930 And this was very controversial work within the fund. There was a lot of debate within the fund, but at the end of the day, 302 00:30:51,930 --> 00:31:00,780 the research indicated that the fund had way underestimated the contractionary effects of austerity within the context of the European crisis. 303 00:31:01,200 --> 00:31:08,940 And that is pretty now, except it informs the caution with which the IMF views fiscal austerity. 304 00:31:09,060 --> 00:31:18,209 I think there was a huge process of learning as a result of the global financial crisis in 0809, just the risks to the financial stability. 305 00:31:18,210 --> 00:31:24,660 And that's helped propel the very important financial assessment work that the fund does across countries. 306 00:31:24,960 --> 00:31:30,570 Aside from this, the fund also has had for some time an independent evaluation office, 307 00:31:30,720 --> 00:31:40,830 which is an internal freestanding office that regularly assesses fund programs and fund policies and is often quite critical fund decisions. 308 00:31:40,890 --> 00:31:48,810 And, you know, management is never happy when the ILO comes out with a critical report and or some process of negotiation over that. 309 00:31:48,840 --> 00:31:54,749 But it really does reflect, I think, a very healthy mechanism for self-reflection, 310 00:31:54,750 --> 00:31:59,340 for honest, honest self-reflection that the fund management takes very seriously. 311 00:31:59,390 --> 00:32:02,370 You know, there were a number of reports on the euro crisis. 312 00:32:02,580 --> 00:32:10,960 There have been a number of reports on the fund's views on capital account liberalisation, which have changed dramatically over the years. 313 00:32:11,070 --> 00:32:14,980 There's ongoing work. I'm not sure it's been completed yet. 314 00:32:15,010 --> 00:32:18,360 On Argentina 2018 2019 events. 315 00:32:18,540 --> 00:32:26,580 So that's one strength that the Fund has, is an organisation that actually not many organisations have on where the fund deserves a lot of credit. 316 00:32:27,090 --> 00:32:35,399 Well, on that positive note, Maurice OBSTFELD, thank you so much for your time for joining me today on Global Shocks and for sharing 317 00:32:35,400 --> 00:32:40,050 your fascinating insights as a former economist of the International Monetary Fund. 318 00:32:40,170 --> 00:32:43,530 Absolutely. Thank you, Maurice. Great talking to you. Thank you. 319 00:32:45,520 --> 00:32:51,640 You've been listening to Global Shocks, the podcast of the Oxford Modern Programme on Changing global Borders. 320 00:32:52,270 --> 00:32:59,590 My name is John King. I'm a postdoctoral research fellow in international relations and I'm the host and producer of this podcast. 321 00:33:00,100 --> 00:33:05,110 If you enjoyed this episode, make sure to follow us and subscribe wherever you get your podcasts. 322 00:33:05,350 --> 00:33:11,350 Do have a look at the show notes for further reading on today's topic, as well as links to our website and social media channel.