In an exclusive interview on The Hutchinson Report Newsmaker Hour with host Earl Ofari Hutchinson on KTYM 1460 AM Los Angeles on May 27, Jacob Funk Kirkegaard of The Peterson Institute for International Economics

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EOH:    There is concern and criticism that the IMF has been led by European or American Directors.  Where is the leadership battle going in terms of this?

JFK:     I think that the call for an open merit based election process for the managing directorship is a necessary move.  It reflects the fact that the IMF as well as the world economy is no longer dominated by the United States and Europe.  It is a natural transition, as it wants to maintain its global legitimacy.  The key here is to realize that having an open merit base selection process doesn’t exclude the fact that you could have another European managing director, if that candidate turns out to be the best candidate with the most broad based global support.  It looks like Christine Lagarde, the current French Finance Minister, might be such a candidate.

EOH:  With the resignation of Dominique Strauss-Kahn, has that resulted in any change in policies and procedures?

JFK:     I think it is important not to succumb to the “big man of history” fallacy when debating the IMF.  There is no doubt the sudden resignation of Dominique Strauss-Kahn and the legal proceedings have been a substantial temporary distraction.  At the same time, it is important to understand that the IMF is a large organization run mostly by its Board of Directors.  It has a very extensive rule book that basically describes the kind of operations the IMF is engaged in and the type of advice in lending that it gives to its member nations.  None of these things have been affected by this.  I would say it is very much business as usual at the IMF.

EOH:    Who are the biggest borrowers from the IMF and what scale of lending are we talking about?

JFK:     The IMF is sort of like an insurance policy that governments have for each other.  The IMF only lends money when a government gets into financial trouble and loses the ability to borrow money from private creditors.  It fluctuates tremendously from year to year.  In the 1980’s the majority of lending went to countries in crisis in Latin America; in the late 1990’s the majority went to countries in Asia and now, the largest IMF loans go to countries in Europe such as Greece, Ireland and Portugal.  In terms of the magnitude of lending, the IMF has committed to lend approximately $45 billion to Greece over a three year period.  It has similarly committed to $35 billion each to Ireland and Portugal. 

EOH:    A major criticism is that the IMF imposes conditions that undermine the infrastructure of these countries, benefiting the bankers and hurting the smaller nations.  Your thoughts on that?

JFK:     There is no doubt that there are a set of conditions that country governments have to fulfill.  It is an absolutely critical aspect of IMF lending.  When one takes into consideration that the IMF demands that governments reduce their budget deficit, which typically includes cutting back on things like social spending, it has social effect and in the short term can be negative.  But it is important to keep in mind that by the time a government has approached the IMF, it has already fundamentally lost the ability to borrow money elsewhere, and without access to the IMF you would have a bankrupt sovereign.  The social cost of such bankruptcy would far exceed the cost of adhering to the IMF conditions. 

EOH:    What are your thoughts on the criticism that when the countries cannot pay, the IMF will not forgive or modify, which works a greater hardship on the countries?

JFK:     It is important to understand that the IMF is an emergency loan to a country.  The interest rate the IMF charges is always far lower than any interest rate from a private creditor, so there is already a very substantial debt relief given.  When you look at the most recent history, there have been a number of instances of substantial debt relief to the world’s poorest countries by the IMF, the World Bank and other regional development banks.  There was a significant initiative taken by the G8 in 2005 which led to the cancellation of all outstanding debits from the least developed countries of the world.  There is a clear precident that if a country is fundamentally too poor to repay these debts, they can get debt relief.

EOH:    What are the principle types of projects that governments seek money from the IMF to develop?

JFK:     It is very important to make a distinction between the IMF and the World Bank.  The IMF only lends to countries if they have a financial crisis, and they only lend to government.  IMF has a large say in what government can spend the money on.  That is different from the type of lending the World Bank does.  The World Bank lends to individual projects and individual countries such as for hydroelectric dams and other infrastructure projects.  They can loan to these projects, not dependent on whether or not the country is in a financial crisis, but if the World Bank determines that this is a project that has growth and development benefit for the country in question. 

EOH:    In your opinion, who will be the next director of the IMF?

JFK:     My money would be on Christine Lagarde, the current French Finance Minister.  I think she is a very good candidate and she has the advantage that she would represent a kind of change at the top of the IMF by being the first female Managing Director.