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IMF chief economist Olivier Blanchard.

SA Economic Outlook

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If you don’t like your icons clasted, then a recent report from the IMF’s (International Monetary Fund) independent evaluation office (IEO) is not for you.

"The IMF and the crises in Greece, Ireland and Portugal: an evaluation by the [IEO]" is as damning an account of the IMF’s modus operandi as you might expect from an extreme left-wing publication.

It’s difficult to know what is the most disturbing aspect of the report’s findings: the hubris, the groupthink, the incompetence, the cronyism, the suspect way Greece was given "exceptional access" to IMF resources, or just the downright mediocrity of an organisation we tend to hold in high esteem.

That the report ever saw the light of day is certainly to the credit of this powerful international institution. It will be some comfort to the many developing nations that have been on the receiving end of IMF strictures to know that the IEO is vigorously independent in making its evaluations. It is the only part of the IMF that emerges with integrity from this whole sorry mess.

More typical of the attitude we’ve come to expect was the managing director’s response. Christine Lagarde opted to gloss over the most troubling implications of the report. "Overall, the conclusion I draw is that the fund’s involvement in the euro area crisis has been a qualified success," was her rather self-satisfied response to the report’s many devastating findings. Lagarde said the crisis in the euro area was unprecedented and that fund-supported programmes had succeeded in buying time to build firewalls, preventing the crisis from spreading, and restoring growth and market access in three out of four cases — Ireland, Portugal and Cyprus.

The events at the centre of the report are the crises that hit several euro area countries from 2010 to 2013. "The crises, coming so soon after the global financial and economic crisis of 2007-2008, and occurring in a common currency area comprising advanced and highly integrated economies, posed extraordinary challenges to European and world policymakers."

The report assesses how the IMF responded to these events. The answer? About as well as a third-rate MBA study group. Despite all its resources, its experts and its access the IMF seemed to achieve little more than you might have expected of a gung-ho university research team.

"IMF staff, along with most other experts, missed the build-up of banking system risks in some countries. In general the IMF shared the widely held ‘Europe is different’ mindset," says the report.

It’s hardly comforting when it then goes on to note that once the crisis started the IMF team was able to identify many unaddressed vulnerabilities. Better late than never, perhaps.

"Lack of analytical depth, rigour, or specificity and the failure to highlight sufficiently the need for stronger remedial action in a currency union were among the factors that undermined the quality and effectiveness of (IMF) surveillance," says the IEO before drawing the inevitable damning conclusion that at the euro area level "IMF staff’s position was often too close to the official line of European officials and the IMF lost effectiveness as an independent assessor." This particular weakness had previously been flagged by an IEO evaluation of the IMF’s pre-2008 global financial crisis. That evaluation identified several areas of concern including "a high degree of groupthink, intellectual capture and general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches."

Despite some early reservations about the euro project it was evident that by the time the crisis broke the IMF, as commentator Ambrose Evans-Pritchard remarks, had become a euphoric cheerleader for the euro project. This tendency became a little more sinister in the case of Ireland’s crisis, where IMF staff had wanted the senior unsecured creditors (major global players) of Irish banks to share some pain. The proposal was abandoned following input from the IMF’s largest shareholders, the US and EU, who were host to these global players.

So it seems that for all its claims about being an even-handed global governance body (the IMF is governed by and accountable to the 189 countries that make up its near-global membership, says its website) the IMF is, just like any profit organisation, driven by the interests of its major shareholders. If this is the case then how should we view its claim to be working on behalf of 189 countries to foster global monetary co-operation and secure financial stability?

What are the chances of this report getting some airtime at the upcoming IMF and World Bank annual meeting in Washington in October? Sadly not much, given how inept the IMF board was in handling the situation. It was misled by its own staff and played "only a perfunctory role" in key decisions related to one of the most serious threats to global financial stability since the IMF was established in 1945.

"The weakness of the board in exercising its oversight responsibilities has been a recurring issue in the governance of the IMF," says the IEO in its iconoclastic report.

Surely it is time either to bury this icon or subject it to a complete overhaul?