Overhauling the IMF
The International Monetary Fund turns 65 this year. Until the current economic crisis, it had reduced its workload drastically to a near-retirement level. Its total loan portfolio plummeted by 92 percent in four years. But like many senior citizens who have been hit by the world recession, the Fund has kept working past retirement age – and is now expanding its responsibilities.
The IMF has a track record, which seems to have been almost completely ignored in discussions of a proposed $750 billion increase in its resources. Nearly twelve years ago a financial crisis hit Thailand, South Korea, Indonesia, the Philippines and Malaysia. The word “contagion” became part of the financial reporting lexicon as the crisis spread to Russia, Brazil, Argentina and other countries.
The IMF’s response to that crisis was roundly criticized by economists at the time. Jeffrey Sachs, then at the Harvard Institute for International Development, called the IMF “the Typhoid Mary of emerging markets, spreading recessions in country after country.” Nobel Laureate economist Joseph Stiglitz, also criticized the Fund for its mishandling of the Asian crisis, and went on to write systematic critiques of a number of IMF policies.
In the Asian crisis, the Fund failed to provide desperately needed foreign exchange when it was most needed. It then imposed policies that worsened the downturn. It did the same in Argentina, and lent tens of billions of dollars to prop up an unsustainable exchange rate, which inevitably collapsed along with a record sovereign debt default.
After that experience, many middle-income countries piled up reserves so that they would never have to depend on the Fund again.
No one at the IMF was held accountable for the mistakes that caused so much unnecessary unemployment, lost output, and poverty. Nor were any major reforms of the institution introduced. The Fund has 185 member countries, but a handful of rich countries – mostly the U.S., Europe, and Japan – have a solid majority and the U.S. Treasury is the Fund’s principal overseer.
The IMF claims that it has changed, but a look at nine “standby arrangements” – its basic short-term loan agreement — that it has negotiated since September of last year reveals a number of the same mistakes that it made in the last crisis. All of them provide for spending cuts, despite the IMF’s avowed commitment to a worldwide fiscal stimulus.
El Salvador has signed an agreement with the IMF that prevents it from using expansionary fiscal policy – as the United States is now doing – to counter a downturn. Since El Salvador has the U.S. dollar as its currency, fiscal policy – increased spending or lower taxes – is practically the only too it has to fight a recession that is practically inevitable as the U.S. economy continues to shrink. El Salvador gets 18 percent of GDP in the form of remittances from the U.S., and exports about 9.6 percent of GDP there.
Pakistan has agreed to significant spending cuts, as well as raising interest rates, despite negative demand shocks to the economy. Ukraine has also had to battle with the Fund over public spending cuts, despite the fact that GDP is falling by 9 percent this year and the country has a low public debt.
These and other examples indicate that in spite of the depth of the world recession, the Fund is too willing to sacrifice employment, and increase poverty, in pursuit of other goals. A country can always reduce a trade deficit by shrinking its economy, since that causes households and businesses to import less. The main purpose of IMF lending in the current crisis should be to enable low- and middle-income countries to do more of what the rich countries are doing: adopt stimulus packages that counter the downturn.
Most countries can do this, if they do not run into balance of payments problems. China, for example, has nearly $2 trillion in international reserves, and can therefore pursue a large fiscal stimulus. If the IMF were willing to help, more countries could follow suit.
Governments should not commit more money to the IMF without requiring that institution revisit its recently negotiated agreements, and adopt serious reforms that will require accountability and changes in policy.
MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research.