IMF’s Georgieva Says Covid Crisis Is a Chance to Fix Capitalism
IMF Managing Director Kristalina Georgieva looks at the Covid Crisis as a chance to fix capitalism.
(Bloomberg Markets) -- When Kristalina Georgieva became managing director of the International Monetary Fund last year, she brought unique experiences to the role. The first IMF head from an emerging market, she grew up in Bulgaria when it was a Soviet satellite state. Unlike her predecessor, France’s Christine Lagarde, who now leads the European Central Bank, and most of the 10 men who came before them, Georgieva didn’t build her reputation at a finance ministry or central bank. Instead, the environmental economist spent her career in academia, at the World Bank, and at the European Commission. But she says that prepared her well for what the IMF calls the “Great Lockdown”—the biggest economic shock since the Great Depression. As the Covid-19 pandemic halted business activity around the world, the organization fielded emergency loan requests from more than half of its 189 members, the most in its history. Seeking inspiration, Georgieva spent her 67th birthday this summer at the Bretton Woods, N.H., hotel where the IMF and World Bank were born in 1944. She spoke with Bloomberg Markets on Sept. 11 about her background, the challenges the IMF is confronting, and her commitment to building a greener and fairer world economy.
STEPHANIE FLANDERS: Good to see you, it’s been a while. You were in a triple act with [then-IMF Managing Director] Christine [Lagarde] and the outgoing head of the World Trade Organization [Roberto Azevêdo] in a panel I moderated in spring of 2019, which was great fun. I came away from that hoping that you would get another big job, and you did.
KRISTALINA GEORGIEVA: Actually, I was thinking—preparing for our conversation today—that so many of the things that I have been doing in my life were for this moment in our history. But we will talk about it.
SF: We have a lot to talk about. As you have said yourself, you have an unusual background for a managing director. You’re not the first woman, but you’re certainly the first to lead the institution from a country that’s an emerging market, a country that’s had many IMF programs itself. How do you think your unusual personal experience has shaped your approach to this job?
KG: Well, I think that in my life story, there are three chapters that are very relevant for what I do today. One is living on the other side of the Iron Curtain and then going through a very painful transition when the IMF was really very relevant for my country. And what that taught me was the high cost of bad policies and the benefits of good policies. I had that built-in instinct: I see a queue, I line up. Doesn’t matter what they’re selling because we were in a scarcity economy. And that was so obviously wrong that we were depressing the entrepreneurial potential and underutilizing our capabilities, leading to people having less and less opportunities. So I was a very big proponent from those days of making a place for competition, relying on markets to help allocate resources.
But then comes the second chapter in my life when I went to the [World] Bank. I had this incredible privilege to be part of transforming how we think about development, that we cannot just narrowly focus, zero in on growth, GDP. We have to think about the sustainability of growth, the environmental and social impact of growth. We have to think about governance and corruption because they matter for how successful we are. And at that time, being at one point director for environment for the World Bank, I also could see that there are very significant risks in front of us, especially with the changing climate, for which we cannot rely single-handedly on markets. So there is a role for markets, there is a role for policies that correct the imperfections of markets.
It’s not very well known, but I wrote my Ph.D. on environmental policy in the United States in the ’80s, and what I specifically studied was using market forces and correcting market imperfections, specifically on dealing with the problem of sulfur. But what I would say, above all, is hugely relevant for what I deal with now with the Covid crisis is having been [the EC’s] Commissioner for Crisis Response and Humanitarian Aid. And what that taught me was to brace for the unexpected—act decisively—and focus on the most vulnerable people.
So what is the philosophy that all that led to? One, macro decisions have micro consequences. They affect the lives of people, and we have to think about those consequences with an eye to doing things right, to be as fair and inclusive as possible. And two, that when you are in a crisis of this magnitude, you also have your unique chance to move the world forward and to make growth more sustainable, fairer, and actually smarter.
SF: Just to go back a little bit to your background, what you were saying about your experience in Bulgaria, and your Ph.D. thesis. Was it easier at that time to be studying U.S. environmental policy than Bulgarian environmental policy?
KG: So why did I choose this subject matter? It is an illustration of something that I’m very proud of: I’m resourceful. In my days, in a communist country, you were expected to justify the validity of your thesis by quoting Marx, Lenin, and the party congresses. I did not have a problem with Marx as a philosopher, as an economist. It doesn’t mean I’m a Marxist, but at least he has, intellectually, a logical construct. I did have a big problem with Lenin, for obvious reasons, and an even bigger problem with the party congresses. So I said to myself, What is it that these guys have said nothing about?
Well, the environment. And the U.S. In the ’80s there were lots of deficiencies in environmental policy, and I can criticize the U.S., right? I was the first environmental economics Ph.D.—there was nobody that would know more than me on that subject matter. I had an incredibly supportive professor, a very smart man with huge integrity, who really gave me a helping hand to put out my Ph.D., defend it, and publish a lot in those days on it.
A member of my family got very severely ill for completely avoidable reasons—because of groundwater pollution. If we had access to information, he would have not gotten sick. So that was another reason I felt that the environment deserves more attention, because it matters to the well-being of people. I can tell you that from the moment I got into this area, I felt I did find my calling: that there can be rational policies that are good for people and good for the economy.
Long term, the biggest crisis we are going to be dealing with is the climate crisis, and the fund ought to be on the forefront. Our responsibility is financial stability, growth, and employment. If we don’t cope with this climate crisis, there will be a massive negative impact on growth, on jobs, and on financial stability.
On the mitigation front, the fund is now very clear in what it means in terms of public expenditures, how to use the stimulus for the right purpose, what level of price of carbon there should be, in what form. We advocate for a tax—we think it is the most efficient way. We say currently, if you think globally, the tax is $2 a ton, it should be $75 a ton if we are to reach the Paris Agreement objectives.
SF: How is the IMF going to force the kind of change you need in thinking about the climate? The developing countries that you have leverage over are not the ones at the heart of the response.
KG: Right. So the fund is a unique organization because it has a triple mandate, or instruments for action: One is the financial capacity of the fund. And you’re right, if you talk about financial capacity, countries that need the fund are emerging markets.
But it has an even more important service, the surveillance function. We are the one and only institution that holds its hand on the pulse of the world economy and on each and every country through the so-called Article Four consultations. And then we have an even more important instrument, the FSAPs, the financial sector assessment reports. And we do it for every country, rich or poor, advanced economies and developing countries. So what I would like to see is that we do our duty through this surveillance function to identify policy objectives and then, on evidence-based rationale, recommend a pathway for everybody.
Now, of course, our job is to take a horse to water, and it is up to the horse to decide whether to drink or not.
SF: When you say that we should be accelerating our efforts on climate, does that mean you think government should be willing to let companies go bust if they’re unable to make that transition?
KG: When we put the economy into a standstill, the right policy response was to support companies across the board. Central banks, financial authorities, and institutions like mine have poured resources so that there is a floor under the world economy. And at that stage of the emergency response to a very unusual crisis, it would be wrong to try to differentiate. You don’t have the time. And you would do more harm than good if you differentiate.
We are now at the point where we are seeing the signs of recovery. That is moving us to a different phase where our advice from the fund is threefold: One, prioritize a definitive end to the health crisis everywhere. Even if advanced economies and some emerging-market economies revitalize themselves, if their trading partners are in trouble, that drags the world down.
Two, start now thinking about how to gradually move support towards what you want to see in the future. Are jobs being protected? Are jobs being created? Now why is a green recovery very attractive? Because the green recovery can be a job-rich recovery. You can have a lot of jobs created in climate resilience, reforestation, dealing with land degradation, improving infrastructure to withstand climate shocks, building installations. A lot of the renewable energy is job-creating.
The third part is, think about creating equality of opportunity for the future. Invest in people, invest in education, invest in internet accessibility. One thing that I’m eager for the fund to play a role in is this combination between social safety nets and social safety ropes—provide incentives for people, especially young people, women, those that are most affected in this crisis. And it is great for the economy, it is also great for social cohesion.
In 2019 we talked about protests, people out on the street, because not only did we have low growth and low productivity, the benefits of growth were skewed towards one part of society. These problems have not gone away. What is new is we are pouring huge fiscal stimulus. Why not use it to address those problems as well?
SF: Governments are drowning in red ink, and they are sometimes worried about supporting jobs that are not sustainable. I noticed in an article you did with IMF Chief Economist Gita Gopinath that you said they should err on the side of caution. Are you worried governments will pull the plug too soon?
KG: We are, because we still have the painful memories from the global financial crisis when there was that concern about—and rightly so, obviously—debt and deficits. And in the view of people here in the fund, not enough was done to prevent inequality from growing. The last decade has been a decade of increasing inequality. We would like to see support provided. It is a very special time with interest rates being so low to negative, so governments and corporations can borrow, they do borrow.
SF: You talked about the lessons of the global financial crisis. Your predecessor, Christine Lagarde, supported fiscal austerity programs in the U.K. after 2010, even over some of the concerns of people in the IMF such as then-Chief Economist Olivier Blanchard. Are you saying now you think there is more risk of governments borrowing too little than borrowing too much in this environment?
KG: Yeah, because a return to growth would require, first and foremost, to prevent a collapse of businesses and a massive increase in unemployment. If we don’t do it in an environment when it is affordable, then how are we going to bottom out from this crisis? Governments today can be very creative around how they support businesses. For example, they can take equity in companies. Over time they can exit from this equity. There are some interesting ideas: You get access to financing, but you agree to pay higher taxes for a certain period of time as you return to profitability, as you return to normalcy. Or, thinking of the other parts of the economy that are growing exponentially because of this transformation we are doing, could they be more helpful?
It can happen that, one, we improve dramatically on tax collection, we put our foot down on tax avoidance, and two, we get the wasteful subsidies out now. Energy prices are down. I cannot think of a better moment to get rid of fossil fuel subsidies. Three, governments can think, What is my revenue collection in the future? Maybe they go for a carbon tax in a more aggressive manner, so they create an incentive for greening the economy.
And, of course, we will have to very seriously think about revamping taxation in terms of digital tax. Before this [pandemic], we had to do it. Now we have to do it even more. So it doesn’t mean that we just spend, spend, spend and we don’t think about how we’re going to pay it back. One of my colleagues crafted a beautiful phrase: “Spend more, but keep the receipts.” So if we want to, if we want to come out of this crisis more efficient, smart, green, fair, now is the moment to work on these policies. I think now there is a much higher social acceptance, especially if we balance what we do for economic transformation with what we do for the fairness of our societies.
SF: It’s so interesting to hear you. My experience in the U.S. Treasury was during the Asia financial crisis. The IMF advice then was quite controversial, requiring lots of conditions for programs. A lot of money has gone out of the door of the IMF during the crisis with relatively few strings attached. In fact, the World Bank seems to be worrying more now about debt than you are. Has the IMF gone soft?
KG: You know, we actually are joined at the hip with the bank when it comes down to debt sustainability, and I’ll come back to that point. What I think you see at the IMF is recognizing that at a time of crisis, we do have a role of first responder. And in this role as first responder, when we provide emergency financing—we have done $30 billion for 75 countries, 47 of them low-income countries—we have to really move fast. That does not mean—and I cannot stress it strongly enough—that we are doing this blindfolded and with no attention to how the money is spent.
First, let’s remember the fund assesses the health of institutions in each and every country. And there are some countries we have not been able to provide emergency financing because they haven’t satisfied our safeguards. So that’s that. We haven’t done it. It is not like everybody who came in, we said, “OK, here it is, your check.” Second, we do have—they may be very light—but we do have requirements. Countries have to submit a letter of intent. And in this letter of intent, they take on certain obligations. Many of them have committed to do ex-post audits so we know what they spend the Covid-related money on and how effectively.
Currently we have $270 billion of exposure, disbursement. Of those, slightly over $90 billion is in the last months in this crisis. About one-third. So we haven’t poured money willy-nilly up to the capacity we have.
Of the $90 billion, some of the funding goes to countries with very strong fundamentals like Chile, Peru. What we do there is to enhance their buffers, which is a very, very good thing for them to ask for and for us to do.
Some countries are—like Egypt, Ukraine—traditional fund programs. Now we are going to have Argentina. And in each and every case, we look at debt sustainability. We had to not provide emergency financing in cases where debt is not sustainable and the country is not able to bring it to sustainability.
So the fund, as you know it, hasn’t gone anywhere. What I think you see differently now in the fund is a recognition that extraordinary times require extraordinary action. I am very, very proud of the fund staff. Because for countries that have their own currencies or have access to markets, putting this floor under the economy was easier. For the 47 low-income countries where we provided emergency financing, we are the lifeline. We are the source of money to pay doctors, to pay nurses to protect the most vulnerable part of the economy, the most vulnerable people. And we demanded it ought to be done.
SF: Your leadership style has been to be in control of more things. There’s traditionally been quite strong deputy managing directors beneath the managing director. When you arrived, you quickly strengthened your role. Some people say you want to take all the decisions. Is it fair to call you a micromanager, or is that unfair?
KG: I delegate. You can be sure that I’m not doing everything. I actually take my title seriously. It says “managing director.” And if it is so, then I need to be responsible, to know what is going on, to know the team, to know where we are strong, and to engage in the most important decisions. It doesn’t mean that I engage in every single decision. Not at all. I have a very good team. If people look around, they would see Geoffrey Okamoto, smart, dynamic; Antoinette Sayeh, very experienced, extremely reliable. I have Mitsuhiro Furusawa, very good on the finances of the fund. And I have Tao Zhang, who actually helps me a lot on issues that are related to how we think about the future, the future of data, the future of climate policy, the future of IP and its role.
To make good decisions, it is important to bring different perspectives. At the fund, that was not so much the tradition. It was more kind of vertical decision-making that went boom, boom, boom up, and by the time it comes to the top, it’s kind of decided already.
I think we have to be mindful that the world is changing very rapidly. We have to help countries to be agile and resilient to more frequent shocks, but we can only do it if we ourselves are agile, adaptable. And that to me means bringing people together and being sure that we all are part of the decision-making in a way that there is unity of purpose built through it.
SF: We are now seeing the U.S.-China relationship on a very different trajectory, and those are two very important countries for the IMF and part of the leadership of the IMF. When you think about the risks, are you preparing for a time when the world could divide in two and thinking which side is the fund going to be on if you have to take sides?
KG: First and foremost, keep the membership together. We did take, with [World Bank President] David Malpass, the initiative on debt service suspension [for the world’s 73 poorest countries]. And we are looking at how we can bring countries together, including China and the other G-20—everybody else—on supporting a pathway to debt sustainability.
Obviously, I am concerned that when trade tensions start spilling over in technology, we might get into two different standard settings, and that would impact growth, and it would impact the ability of the fund to do its part.
SF: Could the IMF function as an institution if the U.S. and China are not talking to each other?
KG: This is my job, to make it possible for them to talk to each other. I would not give up. I came from the other side of the Iron Curtain. Remember in the Cold War, even then there was space for people to talk to each other. I actually would do everything I can for the fund to be a place where we rationally come together, where we make decisions for the bigger public good. And, you know, the arc—if I just borrow this—longer term it bends towards improvements. So I am a relentless optimist, Stephanie. I would pour my heart so the arc bends towards improvements and the fund keeps the membership together.
SF: Since we’re going right back to the beginning, you studied at the Karl Marx Higher Institute for Economics. Have you also been brushing up your Marx? Marxist economics is more fashionable now in the face of the challenges of capitalism.
KG: I am not in favor of abandoning capitalism. Capitalism is the one system that gives a chance for people to excel. I mean, I am an example of somebody who came from that system into a capitalist, competitive environment, and I have done quite well. I do believe that we have to constantly strive to improve that system [capitalism], and the very important improvement that we need to achieve is inclusiveness, a sense of fairness, and for that the fund has its own contribution to make.
So, living in a centrally planned economy that rejected capitalism—been there, done it. But it doesn’t mean that we should accept without any criticism the way our economies are functioning. There is a better world that we can strive for. —With Eric Martin in Washington
Flanders, based in London, is the head of Bloomberg Economics.
©2020 Bloomberg L.P.