Daisy Martin talks with Sean Hagan, General Counsel and Director of the Legal Department at the International Monetary Fund.
Daisy Martin: Hello Mr Hagan! Welcome to Saint Andrews and thank you very much for talking to me today. Since you started at the IMF in 1990, what was the biggest economic challenge you have faced and what were the key lessons you learnt from it?
Sean Hagan: What I think is interesting is that even though I have been at the Fund for 27 years, it feels like I have had a number of different jobs because the Fund has changed so much over these years. This is also because the crises, the IMF has had to deal with have evolved in their nature and required a different type of response. When I joined the Fund in 1990, it was the last phase of the Latin American debt crisis, but shortly after I arrived there was a hugely different set of economic issues, which were due to the collapse of the former Soviet Union. This meant there was a need to put into place institutions that could support market oriented policies, central banks and ministries. They needed to establish the rule of law. Shortly after this, there was the Asian Financial crisis, which involved over-indebtedness among a number of Asian countries. This required debt restructuring both of the banks and the corporations; presenting a new set of challenges for the Fund. Then, there was the Sovereign Debt Crisis in Argentina in 2001. Then, perhaps most importantly, the Great Recession, which was unprecedented, because of the broad cross-section of countries affected, not just in the region but globally, and affected all the balance sheets: of the sovereign, of corporations and even of households. Therefore, there really was insolvency in all groups of society and in that respect, a very different challenge that had never been faced by the IMF before. Then, at the end of this recession, came the euro-zone crisis; this was challenging because we were dealing with countries in currency union, and therefore there was no ability to use exchange rate policy as a way to adjust. During this crisis, the Fund had to also adapt to making decisions with partners. It is important to see how these crises are similar, but also how they are different.
DM: So, based on the fact that the Great Financial Crisis was so challenging for the IMF, what was the specific role of the IMF during the crisis and what lessons has the the IMF learnt from it? Do you believe a crisis like this could ever happen again?
SH: In discussing the Great Recession in terms of the lessons learnt by the Fund, I think it is important to distinguish between the two roles the Fund plays. Firstly, it undertakes an annual assessment of members’ policies and gives advice to countries to promote not only economic growth but also financial stability. These policies are designed to prevent the type of crisis that occurred. In retrospect, we did not do a good job in terms of predicting this crisis. We knew there were macroeconomic imbalances but did not realize the impact of having excess financial leverage and the macroeconomic impact of the deleveraging and securitisation processes that were present. Therefore, the ferocity of the crisis took us by surprise. We have tried to internalise these lessons by integrating, in our annual assessment of members, much more the macroeconomic implications of financial leverage. This is called the Macro financial linkages.
Secondly the Fund is called upon to resolve the crisis: Crisis Resolution. This was challenging because a broad spectrum of the members were affected, from low income countries to emerging economies but also advanced economies. In this resolution, one of the Fund’s strengths was that it is relatively flexible and were able to create new types of instruments that could help countries deal with these types of pressures. For example, some countries with excellent policies were still being hit by the markets and experiencing significant capital outflows. These countries came to the Fund for a signal that their policies did not need adjustment and a commitment to Financial resources. Therefore, the Fund created a sort of Insurance policy called the Flexible Credit Line, fulfilling the criteria needed by these countries, with excellent policies, and restored confidence in the markets.
DM: What are the biggest challenges when dealing with countries in crisis like Greece?
SH: Okay, let’s talk about Greece. Greece presented us with a very specific set of problems. As you know, there were several countries, within the eurozone that experienced a Financial Crisis, such as Greece, Ireland and Portugal. These countries built up a significant amount of debt because when they joined the EU borrowing costs became very low. They used this to finance activity and it got to the point where they couldn’t service these claims.
To solve this problem, we first, we had to get the country to engage in fiscal consolidation, where they have to adjust their level of spending, so they have sufficient financing to pay their claims in order to convince the market that they can repay. What became clear, not only with Greece but with many countries, was that in order to have a sustainable level of debt, you need to be able to grow out of your debt. You therefore, need to have economic growth that will stimulate the fiscal revenues that enables you to repay your debt. It has always been understood that excessive fiscal consolidation can be counter-productive because it undermines growth.
However, they key for many countries for growth is increasing competiveness. This is normally achieved by an exchange rate appreciation. In the euro-zone, however, they had lost control over their exchange rate policy (because Eurozone partners share a common currency). They had to undertake internal devaluation, by lowering prices in order to generate growth and engage structural reforms, to open up sectors otherwise regulated. This takes time and is extremely challenging.
Additionally, the debt level could be so high that there is no way of growing out of it. This means it is unsustainable. This happened in Greece. In this case, you have to approach your creditors for debt re-structuring. In Greece, these were largely private creditors. Ultimately, what really needs to happen is a bilateral restructuring, which the Fund is currently pushing for.
DM: How do you think the recent anti-globalisation movements will affect the role and position of International Organisations, like the IMF, in the international system?
SH:If you look back the IMF was created in a post War environment, where many statesmen were convinced that WW2 was created by the economic nationalism that occurred in the 1930s. This fueled extremist political policies. At the time, the Fund stood for economic nationalism being counter- productive. They believed it was in the interest of every country to cooperate, especially in an open trading system. It was created as a type of machinery for this cooperation. They stand for the belief that an open trading system and liberal policies are in the interest of governments and its citizens. However, they also recognize that globalization has its costs: losers and winners. For example, an open trading system has productivity gains as it creates jobs but also creates economic dislocation for those whose jobs disappear because of trade. The Fund advises on how to proactively help this portion of society. There has to be an understanding that for economic growth to be sustainable it has to be inclusive and include a broad section of society. This is why the Fund has decided to focus on policies such as gender participation, inequality and corruption.
DM: What do you think are the future challenges of the IMF?
SH: The future challenges will be to explain to people why globalization is in the interest of the member countries and help them manage the adverse impacts of globalization.
DM: On a very different topic, what would be your advice for any St Andrews students wanting to pursue a career in the IMF?
SH: I believe there are many opportunities for students wanting to go into public policy. When they decide to do so, they should consider which particular route they wish to follow. This is because, even though it may not be a specific field that interests them, with a degree of dedication, the interest comes. In other words, interest comes from hard-work rather than hard-work coming from interest. This reflects my own experience, where I knew I wanted to work in international public policy but I did not have a particular interest in the IMF. It happened that a position opened up there and my interest in the organisation grew.
DM: What skills do you think are recommended for students planning on joining these organisations?
SH: I think it is important to have a passion for public policy which will create a level of intellectual curiosity. Employers look for this perhaps more than anything else; more specifically, they look for adaptability and initiative.
The St Andrews Economist would like to warmly thank Mr. Hagan for sitting down with us, and the Foreign Affairs Society for inviting him. The St Andrews Economist is the official student-run publication of the St Andrews Economics Society. The above content has been edited for clarity.
Featured image by: IMFphotos/Flickr