TRUMPISM VS. THE IMF

With a new anti-trade U.S. president, is the mission of the International Monetary Fund under threat?

We are an agent of financial stability in any country where we operate. A leading power like the United States has a vested interest in economic prosperity, stability and peace. CHRISTINE LAGARDE, managing director, IMF

Christine Lagarde is racing through Uganda in a black SUV. It’s a bumpy road — not the only one the IMF chief is likely to encounter in the age of U.S. President Donald Trump.

Since the Second World War, the United States has set the agenda for the world economy. The International Monetary Fund has been one of its main tools. The IMF helped steady the finances of war-ravaged Europe, enthrone the dollar as the international currency and shore up U.S. allies from Britain to Korea. Above all, it promoted a Washington consensus based on the free movement of capital and goods. You could call it globalization.

And it could be going into reverse. Trump took office raging against the loss of American manufacturing jobs and wealth, pinning the blame on trade, and questioning the purpose of postwar institutions from NATO to the European Union. He’s not the only western leader winning votes by trashing elites and their global projects. Meanwhile China, the world’s rising economic power, is building its own system for extending influence through credit. Where does that leave the IMF?

Right where it’s always been, according to Lagarde.

“We need to stick to our knitting and deliver on what was our mission,” she said en route to Uganda’s presidential palace last month.

She attributes the slowdown in world trade to economic weakness — “when you have less growth, you tend to be a little bit more protective of your turf” — and says both may prove temporary.

Lagarde dismisses the idea that the IMF may find itself at crosspurposes with the new administration. “We are an agent of financial stability in any country where we operate,” she said. “A leading power like the United States has a vested interest in economic prosperity, stability and peace.”

Almost everyone likes those things; it’s how to get them that provokes arguments. On that question, there are signs the U.S. and the IMF are diverging.

“We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs,” Trump said in an inaugural address far removed from the IMF world view. “Protection will lead to great prosperity and strength.”

Then, consider where and why the IMF has made its biggest loans lately. To Greece, with the goal of holding the EU together; Trump says he’d welcome its breakup. To Ukraine, helping prop up a fledgling anti-Russian regime; Trump wants to get along with Russia.

More broadly, the IMF channels rich countries’ cash to poorer ones, often requiring austerity and export-oriented policies in return. Trump says he’ll stop using U.S. resources to make others rich, has no interest in imposing American templates, and wants to import less stuff anyway.

“The extreme manifestation of Trumpism is diametrically opposed to the founding principles of the IMF,” said James Boughton, the IMF’s official historian for two decades until 2012. The IMF is “going to have to play a very delicate game.”

To be sure, it’s not clear how much of Trump’s campaign rhetoric will survive into government. And the deal-maker-president might discover that the IMF has its uses, said Benn Steil, author of The Battle of Bretton Woods, a history of the IMF’s founding conference. “I could paint a scenario in which he effectively looks like a multilateralist, because he finds a way to do deals that are in America’s interests,” Steil said.

Still, some Trump aides have been critical. David Malpass, the former Bear Stearns chief economist, is said to be the top candidate to head international affairs at Trump’s Treasury, where he’d be a key liaison with the IMF. During the Asian crisis of the 1990s, Malpass scolded the IMF for driving borrowers into recession by requiring them to devalue and raise taxes.

That concern with weakened currencies is likely to redouble in the Trump era as the U.S. seeks to move toward balanced trade. Treasury Secretary Steven Mnuchin told Lagarde in a phone conversation that he expected the IMF to “provide frank and candid analysis of the exchange rate policies of IMF member countries,” the Treasury said Tuesday.

There’s a case to be made that the U.S. gets good value out of the IMF. Each dollar it commits only adds US2 cents to America’s budget, because defaults rarely happen, according to the Congressional Budget Office. In return for its contribution, which currently stands at approximately US$164 billion, America has the biggest say on the IMF’s board. It can’t veto individual loans, but when U.S. interests are aligned with the EU’s — which they mostly were, before Trump — they tend to prevail.

The IMF has already survived one major mission-change. It’s known today as the lender of last resort to countries facing balanceof-payments crises. But in its first three decades, the IMF managed the world’s currency order.

That was the role assigned at Bretton Woods in 1944, when the IMF and World Bank were set up. Forty-five nations attended the summit, but two men dominated it: John Maynard Keynes and America’s Harry Dexter White. From the back of her car in Uganda, Lagarde calls them the “founding fathers.”

Their goal was to avoid a repeat of the 1930s, when competitive devaluations and tariff wars led to the collapse of world trade. Keynes wanted the IMF to act as a central bank of central banks, denominating their accounts in a new global currency. It would let members devalue or borrow with relative ease. Both creditors and debtors would pay interest on their holdings, discouraging large trade surpluses as well as deficits.

White’s plan was more creditorfriendly, reflecting the U.S. position as world lender. There would be no new currency: IMF members would tie their money to the dollar. They couldn’t devalue without consulting the IMF, and were only supposed to borrow short-term to close balance-of-payments gaps.

The system turned out to have a flaw: It depended on the supply of U.S. dollars backed by gold. That link came under pressure as the U.S., financing social programs at home and war in Vietnam, slipped into persistent deficit. In 1971, president Richard Nixon took the dollar off the gold standard, ending phase one at the IMF.

Today there’s a patchwork of floating rates, pegs and currency unions like the euro. It’s not working to everyone’s satisfaction — notably Trump’s. His team has called out several countries, from China to Germany, for gaming the system.

Money courses around that system on a scale that would have been unimaginable at Bretton Woods. Massive trade imbalances built up. The dollar remains central. The risks were laid bare in 2008, when a collapsed U.S. housing bubble led to world recession.

Since then, some financial leaders — among them the governor of the People’s Bank of China, Zhou Xiaochuan, and his U.K. counterpart Mark Carney — have gently hinted that something more like Keynes’s plan might be in order, to reduce the world’s dollar dependency.

Lagarde doesn’t see that happening on her watch. “It didn’t happen in 1944, when the world had destroyed itself,” she said. “I’m not a dreamer.”