Don’t fear the IMF
The International Monetary Fund is, in many places, the organisation that everybody loves to hate. According to some, the IMF is bad for the poor, women, economic stability, and the environment. Joseph Stiglitz, whose influence is amplified by his Nobel Prize, blames the IMF for causing and then worsening the economic crises it was called on to resolve. The IMF purportedly does so to save capitalists and bankers, not ordinary people. Though untrue, this belief does enormous harm and limits the potential good that the IMF can do.
For starters, consider how the world deals with refugee crises, such as Syria’s, and the way it deals with financial crises. As its name indicates, the United Nations High Commissioner for Refugees is a person, not an institution. He or she heads an “office,” not a full-fledged organisation. This weakness is what forced German Chancellor Angela Merkel to bully her European Union partners into a more coherent response to the ongoing influx of asylum-seekers.
By contrast, the system to prevent and resolve financial crises is anchored by a full-fledged institution: the IMF. It may not be perfect, but, compared to areas such as refugees, human rights, or the environment, it is light-years ahead.
It is easy to misunderstand what the IMF does. The bulk of its efforts are dedicated to crisis prevention. As Franklin D. Roosevelt said at the 1944 Bretton Woods Conference, where the IMF and the World Bank were established, “Economic diseases are highly communicable. It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbours, near and distant.”
That is why the 44 countries in attendance, and the 188 that now belong to the IMF, agreed to “consult and agree on international monetary changes which affect each other… and they should assist each other to overcome short-term exchange difficulties.” Operationally, this is expressed in socalled Article IV consultations. These formal policy discussions between the IMF and member governments, typically carried out annually, are written up, reviewed by the Fund’s Board of Executive Directors (representing all 188 governments), and published for anyone to read online. This is a standard of collective surveillance and transparency to which organisations addressing other issues should aspire.
The IMF has been instrumental in developing the tools with which countries measure, assess, and improve their current macroeconomic position: fiscal and monetary policy, as well as financial, currency, and price stability. It helps countries find better ways to implement measures in all of these fields, and it seeks to identify broad lessons from the experience of many countries that may shed light on the options that any particular country has.
Through dialogue, research, advice, technical assistance, and training, the IMF has helped create a global community of practice. Today, it is much easier to be a central bank president or a finance minister than it is to be a minister of health or justice. This is not because the challenges are easier, but because the international community of practice, led by the IMF, provides a level of support that simply does not exist in other areas.
The IMF’s most controversial activities come during times of crisis management and resolution. Countries ask for IMF financial assistance when they are in trouble and have lost or fear losing the ability to borrow on international markets. The IMF can mobilise hundreds of billions of dollars of member countries’ money to give borrowers the time to get back on their feet. Its resources dwarf the sums that the international community can mobilise for other issues, because its money is lent and is supposed to be paid back.
In exchange for its financial support, the IMF typically requires countries to address the imbalances that caused their problems, not only so that they can repay the money, but also for their own good, so that they can restore their creditworthiness (and hence their access to capital markets). But it is too easy to confuse the pain caused by the crisis itself with that caused by the remedy.
To be sure, the IMF inevitably makes mistakes, partly because the questions and issues it must address are constantly changing, so that it never knows whether the current state of thinking is adequate to new challenges. But it is a sufficiently open organisation that it can and must be responsive to its critics.
Now consider the alternative. A world without the IMF looks a lot like today’s Venezuela. Hugo Chávez became the darling of IMF bashers, including Stiglitz, when he suspended Article IV consultations in 2004. As a consequence, Venezuelans lost access to the basic economic information that the country is obligated to share, through the IMF, with the world. The break prevented the international community from expressing its voice as the country undertook truly irresponsible policies, spending in 2012 as if the price of oil was $197 a barrel, not $107.
With the collapse in the price of oil since then, the economy has gone into a tailspin: GDP is contracting at a record pace, inflation is in excess of 200%, the currency has plunged to less than 10% of its previous value, and massive shortages have emerged.
Venezuela has tried to finance itself with the help of the China Development Bank, which does not impose the kind of conditionality that IMF bashers dislike. Instead, the CDB lends on secret terms, for uses that are undisclosed and corrupt, and with built-in privileges for Chinese companies in areas like telecommunications (Huawei), appliances (Haier), cars (Chery), and oil drilling (ICTV). The Chinese have not required that Venezuela do anything to increase the likelihood that it regains creditworthiness. They merely demand more oil as collateral. Whatever the IMF’s faults, the CDB is a disgrace.
The tragedy is that most Venezuelans (and many citizens of other countries) believe that the IMF is there to hurt, not help. As a consequence, they eschew the massive resources and wisdom that the international community can offer at a time of economic crisis to lessen the pain and hasten recovery. That has left them far worse off than the IMF bashers can bring themselves to admit.