IMF at 60: Reform Still a Long Way Off
Bangkok Post, April 22, 2004
Knight-Ridder/Tribune Information Services - April 19, 2004
It's a quiet anniversary, the 60th year of the International Monetary Fund and its sister institution, the World Bank. It seems only the protestors who will gather in Washington D.C. for the organizations' annual spring meetings will be calling attention to the birthday of the most powerful financial institutions in the world.
For the IMF especially, this is in keeping with tradition. Until the Asian economic crisis began in 1996, the Fund was pretty much able to stay out of the news. But that crisis shook world financial markets and brought, for the first time, censure that couldn't be ignored. Joseph Stiglitz, then Chief Economist of the World Bank and soon to win the Nobel Prize in his field, publicly criticized the IMF for worsening the situation of Indonesia, South Korea, Thailand, and the Philippines.
It seemed that the Fund, together with its main supervisor -- the U.S. Treasury Department -- had helped cause the crisis by encouraging these countries to open up their financial markets to "hot money" that flowed out just as easily as it had flowed in. Treasury then intervened to block a plan by Japan to resolve the crisis without the IMF. The Fund proceeded to pour gasoline on the flames by insisting that these countries raise interest rates (as high as 80 percent in Indonesia) and cut spending while their economies were shrinking.
The crisis then spread to Russia, Brazil, and Argentina, and the IMF chased after it with more wrong advice and tens of billions of dollars in loans. The repetition was remarkable. Each country had a fixed exchange rate -- their currency was tied to the dollar -- and in each case the domestic currency was overvalued. In each case this was hurting the country by making its imports artificially cheap and its exports too expensive. And when the crisis hit, both Russia and Brazil had to raise interest rates through the roof -- in order to keep money in the country -- and borrow enormously in order to keep the fixed, overvalued exchange rate.
The alternative would have been to let their currencies fall, but the Fund said this might cause hyper-inflation, and it provided the loans to maintain the fixed exchange rates. The result: in all three countries, the currency collapsed anyway, there was no hyperinflation (or even sustained high inflation), and the devaluation helped each economy recover. The IMF could hardly have been more wrong if it had tried to be.
Of course this was just one high-profile string of failures, and not necessarily the worst. Russia during the 1990s lost nearly half of its national income while following IMF programs and advice for its transition to a market economy, an economic collapse not previously seen in the absence of war or natural disaster. And the Latin American experiment with IMF reforms has also gone belly-up: for the whole five years 2000-2004, we are looking at almost no growth (about 1 percent total) in income per person. This follows a miserable 11 percent for the two decades 1980- 1999, as compared to 80 percent for the pre-reform era of 1960-1979.
Of course the IMF is not always wrong. There are times when a country is truly living beyond its means -- borrowing too much either at home or from abroad -- and there is a need for "adjustment." But the Fund's decades-long losing streak has prompted calls for reform of this unaccountable institution -- along with its larger but subordinate partner, the World Bank.
Washington has the predominant voice at the IMF, since Europe and Japan almost never oppose the U.S. there. This puts the U.S. Treasury Department at the top of a creditors' cartel with enormous power, since those who refuse the IMF's prescriptions are generally denied credit from other major sources.
That power is beginning to break down. For example, Argentina has stood up to the IMF several times since the Fund offered no help to its collapsed economy two and a half years ago. Argentina's courage has paid off: the economy grew at a rapid 8.7 percent last year, and is expected to grow 7.1 percent this year.
But reform of the IMF remains a distant dream. For the foreseeable future, at least, the Fund will remain one of the few economic consultants that has to pay its clients to take its advice.