Don’t fear the IMF

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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