Communication, Engagement, and Effective Economic Reform: The IMF Experience

By Nemat Shafik
Deputy Managing Director, International Monetary Fund
London, March 7, 2013

As prepared for delivery

I am honored to be with you today to deliver the 2013 Maggie Nally Memorial Lecture, and would like to thank the Chartered Institute for Public Relations for inviting me.

Maggie Nally was ahead of her time in many ways, and became the first woman President of the Institute of Public Relations in 1976. As a woman I am grateful to the barriers she overcame to clear the path for women like me who came afterwards. She also embodied the values that we at the IMF aspire to achieve in our communications—honesty, integrity, and professionalism. It’s nice to have her children here in the audience.

I would like to start by looking at the forces that shape the way we communicate today, before turning to what this means for institutions that are involved in shaping economic policy. I will end with a few examples that illustrate what these sweeping changes have meant in practice for the way we at the International Monetary Fund engage with our member countries to support economic reform.

I look forward to hearing your thoughts as communications professionals.

A Hyper-Connected World

Something big has happened in recent years. In just a few years, the world went from connected to hyper-connected in a way that is impacting every job, industry, and institution, as discussed by New York Times columnist and author Thomas Friedman in his book "The World is Flat" and other recent writings. Basically, we have seen an iRevolution, which means that virtually everyone, everywhere has access to a handheld computer, tablet, or cell phone, which can be activated by voice or touch to work, entertain, learn, protest, and collaborate.

Today, there are 1.5 billion global social media users. If this were a country, it would be the largest in the world. There are over 3 billion mobile phone subscriptions, with some of the highest penetrations in India and Africa. So this is not just a phenomenon in rich countries. Even the poorest countries of the world are hyper-connected.

This hyper-connected world is, in turn, transforming the world of influence—and how policy is shaped. A 2013 poll by Edelman Trust showed that less than 1 in 5 people trust business or political leaders to tell the truth.

The old top-down pyramid of authority, which includes governments, business, academia, and elite media, is losing ground. A new bottom-up set of influencers are gaining fast: coalitions and networks of civil society organizations, activists, and youth. Via technology (especially social media), their messages can go viral––at great speed.

Let me give you a few examples: The Indian woman demanding dignity, justice and women’s rights via the internet. The people in Egypt who via Twitter galvanized the Arab Spring. The bloggers in Beijing demanding anti-pollution reforms—that succeeded in passing legislation. The atrocities of Kony and the rebel army in Uganda, which went viral on You Tube—and prompted military intervention by the African Union. And then there was my own experience this morning when I gave a speech on health and fiscal policy, which was quoted in a blog by the Guardian just 15 minutes after I had walked off the stage.

So what we see is that the old pyramid of authority is giving way to a new “diamond of influence”. It is not just that the old elites are being challenged by a new group of influencers. Because of technology, both groups have to reach out to much broader constituencies than before—because they are connected. The sphere of influence is no longer vertical but, increasingly, it is flattening out. It is horizontal.

In this new world of horizontal trust, the connections transcend geographic and political borders. They are global. And they are human. So while people may no longer trust banks or bureaucrats, they do trust their peers—in this case their Facebook “friends” all across the world.

Let me now turn to another theme that is shaping the world of communications and policy.

Rise of the Virtual Middle Class

There is another trend at work as well—one that is closely linked to the emergence of the hyper-connected world. Thanks to technology and the spread of education, more people are empowered at lower levels of income. They think more as the “middle-class”—demanding social justice, equality, and above all “voice”.

This rise of what Friedman has termed the virtual middle class represents a tectonic shift: the industrial revolution was 10-million people strong; this revolution is several billion people strong.

In some ways, it is good news: a world that can be a much more democratic—perhaps even “hyper-democratic”; a world where everyone has the potential and means to express his or her views, be heard, and feel included.

But there are risks. When the wisdom of the cyber crowd rules, policy can swing in volatile ways, and be influenced by sudden “digital wildfires”. There is also the danger of cyber attacks and cyber terrorism. Above all, the access to almost unlimited information provided by the internet can amplify the frustration of those who feel left out, as they become aware of how other people are able to live their lives. Social media is very effective at protest or bringing systems down as we saw with the Arab Spring, or with the challenge that the Occupy Wall Street movement was to the financial industry, or the rise of web based protest parties like the Pirates in Germany or the Five Star movement in Italy. But social media is less good, it seems, at rebuilding an alternative system.

Adapting to a Changing World

So what is the bottom line? The world of the next 10 years will be hyper-connected, and is also likely to be hyper-democratic. This development has major implications for intergovernmental organizations such as the IMF, which have traditionally been focused on interacting mainly with governments, and which are part of the old pyramid of authority.

To stay relevant, we have to adapt and embrace this new world, but do so in a way that does not undermine our role as trusted advisor to governments. So what does that mean in practice?

The IMF’s Role

The Fund’s main purpose is to ensure the stability of the international monetary system. We are a cooperative of 188 countries who pool their resources to support each other in times of economic distress. We support our members by offering policy advice, extending loans to countries in economic difficulty, and by providing technical know-how and expertise. If I were to attempt a summary of the IMF’s role, it is to speak inconvenient truths when they need to be spoken, put the numbers on the table, and make objective recommendations about what needs to be done. This is not often a recipe for being popular.

For most of its history, the IMF believed it was most effective working behind the scenes as a discreet advisor and letting governments talk to the public. There was also a view that governments often needed someone to blame for tough decisions and if we had to take the blame, that was a good price to pay for getting the right things done. We accepted that sometimes the messenger had to be shot for the common good. So all IMF documents were confidential, our Board meetings were secret, our teams who traveled to countries never spoke to the press. One of our resident representatives in an African country was reprimanded by his boss for his name appearing in one of the local newspapers.

This approach failed miserably after the Asian crisis in the late 1990s. The Fund made policy mistakes in Asia; but they were compounded by a failure to communicate the rationale for those policies that were correct. The IMF learned some hard lessons from the Asia crisis—what to say, how to say it, who to say it to. It ushered in the first steps to modernize our approach—today, virtually all of our reports are now published, our Board's deliberations are reported on the web, our teams are mandated to do outreach when they visit countries, our resident representatives are trained and encouraged to communicate.

As the world has become more democratic and connected, the Fund has had to learn more about politics. One particular challenge for the IMF, as a largely technocratic institution, has been to understand the importance of electoral cycles in modern democracies and how they interact with the ability to implement reforms. In politics (as in so many domains of life), timing is everything and we have had to learn to be sensitive to when there are political opportunities for reform and when they have to wait. The rise of non-state actors and the trend toward hyper-democracy makes this an even more challenging task.

Communicating During the Great Recession

The global economic crisis and its aftermath have compounded the difficulties of navigating a hyper-connected and hyper-democratic world. The Fund found itself in the epicenter of responding to the crisis—designing rescue schemes for many countries in Europe, mobilizing resources to strengthen our war chest to a trillion dollars, trying to support countries in the Middle East after governments were toppled there, and advising countries across the world on how to cope with the crisis. We advised many countries to spend, if they could, to avoid the risks of a depression and to make sure that the poorest were protected. This was in stark contrast to our earlier reputation of always advocating austerity, but as Keynes said “when the facts change, I change my mind.”

In this difficult economic, political and social context, the Fund has been treading a fine line: engaging with governments to nudge reforms along, speaking out publicly when it has felt it was necessary and engaging—where possible—with opposition leaders, trade unions, civil society organizations, and other groups that often disagree with the policies of their government.

Let me briefly describe four recent examples that illustrate how our approach changed during the Great Recession—Iceland, Jordan, Greece, and central banking.

Iceland

Iceland was the first country to experience the full force of the global economic crisis. The banking sector, which had grown to five times the size of the economy, collapsed and the IMF was called into help in November 2008. The government was very much in the driver’s seat in designing the program. We worked with them to design a reform program that was very unorthodox—it included capital controls, an initial fiscal easing followed by a tough consolidation, and a substantial increase in welfare spending to protect the poor. The trade unions were important partners as was parliament. We also worked alongside the government to explain the program to the public—in print, in broadcast, via twitter, and by blogging.

By the first half of 2012, growth had recovered to 2.4 percent of GDP and unemployment had come down from a peak of over 9 percent to 6 percent. Because welfare spending was protected, income distribution was actually more equal at the end of this painful adjustment program. At the end of the program, the IMF and Iceland’s government organized a conference to take stock of what had been achieved. The conference was streamed live, and more than 11,000 people watched it online, most of them Icelanders, who participated actively in the discussion by tweeting their questions and comments. A good example of how to engage the forces of hyper-democracy and hyper-connectivity.

Jordan and Energy Subsidies

Last year, price subsidies in the Middle East and North Africa cost around $210 billion, more than 7 percent of regional GDP. Besides being very costly, such subsidies do not do a good job at supporting the poor. For these reasons, the IMF has been advising governments to phase out general food and fuel subsidies with more targeted cash-transfer programs aimed at the most vulnerable. But reform has eluded many countries in the region because they fear a backlash from their populations.
Jordan, where I was yesterday, is one country that has struggled with how to implement subsidy reform. Late last year, the government announced that it would convert general fuel and electricity subsidies to targeted ones after having reversed similar reforms in the past. While the measures did spark protests, a concerted effort to explain how and why the subsidies would be phased out, and what would replace them, helped mitigate the political fallout. Essential was the design of a targeting scheme so that only the better off would face full market prices. Cash transfers were provided to 70 percent of the population to protect them from rising prices.

In this case, the IMF's role has been to provide Jordan and the dozens of other countries that subsidize energy with convincing empirical evidence that shows why getting rid of subsidies is better for the poor and for the environment and creates space for more valuable investments in education, health or infrastructure. We also understand that phasing out subsidies takes time and it is important to give countries the space to build a political consensus for reform.

Greece

Let’s turn to one of the most challenging cases—Greece—which has been going through wrenching adjustment for the past five years. The crisis in Greece is rooted in a loss of competitiveness and a massive fiscal deficit caused by unsustainable increases in pensions and wages.

Take wages, which have outpaced productivity growth for years. Unit labor costs—a key measure of competitiveness—increased by over 35 percent in Greece during 2000-10, compared to just below 20 percent in the eurozone. Since the start of the drive to make Greece’s economy more competitive, unit labor costs have dropped by 15 percent from their pre-crisis peak.

On pensions, it’s a similar story. Greece was spending 17 percent of its GDP in 2012 on pensions compared to the euro area average of 12 percent of GDP. Reforms under the program will reduce pension spending to about 14 percent of GDP in 2013. Pensions below €1000 per month have been left untouched, to ensure that the most vulnerable are protected.

This speaks to a more general point: The Greek program has been designed with a particular emphasis on protecting the most vulnerable social segments, both in terms of spending and tax measures.

The Fund has also insisted that tackling tax evasion to improve fairness and burden sharing is a major plank of the program. We have had mixed success. Progress requires simplifying the tax code and improving tax collection, particularly for the better off who are not paying their fair share. But we understand that asking a society to make such major sacrifices is only possible if the burden is shared fairly.

Central Banking

One of the most interesting developments in this crisis has been how the previously boring and highly secretive world of central banking has moved to center stage. As fiscal room is limited, central banks have tried to do all they can, including some unconventional things, to support economic recovery. When I was an economics student, our textbooks taught us that central banks implemented monetary policy through "open market operations" of buying and selling government paper.

Today, one of the most important tools of central bankers is communications—what we now call "open mouth operations." Central banks often don't have to buy anything to move markets—they just have to say something. Perhaps the best example of this is Mario Draghi’s statement last summer that he would "do whatever it takes" to preserve the euro. The statement alone, without a single euro being spent by the ECB, reduced the interest rates paid by Southern European countries.

Challenges and opportunities

Let me conclude by noting that in taking this new approach, we have also learned that many people don’t really know very much about the IMF. Opinion research shows that the more people know about us, the less negative they become—at times, they even think that we are doing a good job and that we should do more to push governments! So we have also made it a priority to better explain what the Fund is—and what it isn’t.

Here, social media, including Facebook and Twitter, have helped us reach new audiences, in particular young people. More than 100,000 people now follow IMF Managing Director Christine Lagarde’s on Twitter. On Weibo—the Chinese equivalent to Facebook—she has more than 2 million followers.

Whenever possible, the Fund also tries to speak to people in their own language. Since 2007, much of the material posted on the IMF’s website is now routinely translated into six priority languages, which include Arabic, Chinese, French, Japanese, Spanish, and Russian. The Fund has also launched Spanish and Arabic blogs, which features posts by senior staff and management on key issues facing those two regions.

We have also faced the challenge of speaking with one voice. In the past, when only the Managing Director of the IMF spoke to the media, it was easy to ensure we spoke with one voice. Now we have to spend a lot more time internally debating what our messages are on key global issues and making sure that key staff are equipped to deliver those messages in a consistent way wherever they are on the planet.

We also face challenges coordinating messages with our partners. For example, on the key European crisis cases we work closely with the Eurogroup composed of 17 finance ministers, the European Commission and the European Central Bank. In the midst of delicate negotiations, the IMF is pretty happy to be boring. Our spokespeople will repeat ad nauseam that “We are negotiating with the authorities on a macroeconomic framework that will deliver a sustainable path for the economy” until the journalists get fed up with asking us. But for politicians, it is hard to be boring when a journalist shoves a microphone in your face. Maintaining message disciple can be hard but avoiding a cacophony of messages is key during a crisis.

Final Thoughts

I have tried to give you a sense of how we see the current communications landscape and how our own approach has evolved in response to our experience, especially with the recent global economic crisis. We are an inter-governmental organization that has to work with non- governmental actors in a hyper-connected and hyper-democratic world. We have to explain what we do and choose our media strategically for different messages and audiences. We have to get many people to speak with one voice. We have to coordinate with our partners to make sure that we are in harmony. And we have to do all of this while working on highly sensitive issues in the midst of crisis.

In trying to balance all of these priorities, the one lesson we cannot ignore is that we need to listen and reach out to make sure people understand what we are trying to achieve. Communication is a two-way street. Friedman put it well in his book, "The Lexus and the Olive Tree": "No policy is sustainable without a public that broadly understands why it’s necessary and sees the world the way you do."



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
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