Does the Subprime Crisis Hold Lessons for a MFA?
Updated on 16 September 2023
Some of the best managed entities in the business world – transnational financial institutions – have been caught wrong footed. Past dealing with the immediate consequences of their errors, banks are changing their structures better to meet the challenges ahead.
A first structural lesson that seems to be emerging is a clearer articulation of the functions of the Board. Strategy, risk assessment, and management supervision are now identified as separate functions. To facilitate the fulfilment of these tasks, dedicated working groups are created. Far from being an added layer of control, this new structure indicates the recognition that the total is more than the sum of its parts and that a holistic approach is needed.
A second lesson is spreading power within management. Oligarchies tend replace hegemonic structures. Checks and balances will replace power struggles and cumulation of tasks will become less frequent.
A third lesson is likely to be stronger focus on outcomes and longer term results. Quality will find its place side by side quantitative objectives and results.
Are there lessons to be drawn for MFA?
Modern MFA structures tend to follow the ‘principal-agent’ model. The Minister (or Cabinet) is the Paramount Principal, and the MFA is a set of hierarchically structured agents that fulfil the Principal’s orders. At each hierarchical level the same ‘principal-agent’ subordinate relationship applies. Feedback and information percolates up the same structures.
This schematic view highlights several systemic flaws:
(1) Distortion of signals in transmission. Just as the ‘principal’s’ order may be distorted on the way down to execution, so does the information and feedback. Contrary to private firms, where the market provides unassailable feedback to management through the balance sheet, no such channels exist in the public sector.
(2) Vertical power structures. The separation of power between the ‘principal’ and ‘agent(s)’, which is clearest at the interface between the political and the administrative realms, tends to repeat itself within the administration. The space for internal validation, i.e. check and balances, remains limited.
(3) Lack of the global and long term view. In a world where in any case political survival is the overarching goal of the Principal, no structures provide counter-balance. Parliamentary scrutiny is inherently partisan, and even in Cabinet trade-offs among ministries replace independence of views on the topic under discussion.
Whether the current vertical power structures suit policy objectives as well as the personal ambitions of politicians is a matter for never ending debate. A return to the role of political power as an intermediary between a robust administration whose task is to prepare policy and the rough and tumble of partisan politics is worth some renewed consideration.
Meanwhile, some thought might be given to strengthening the global and longer term perspective, which would include both strategy and risk. These issues should be part of the regular agenda, possibly in form of permanent Working Groups of the MFA managerial structure. Some thought may also be given to the possibility of enlarging the Board with outside (and politically independent) directors, whose task would also be to help offset distortions in transmission by providing unfiltered views and know-how.