IMF's Fall from Power

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Mark Weisbrot
WashingtonPost.com, April 13, 2007

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The IMF and World Bank are holding their annual Spring Meetings this week. As usual, finance ministers, bankers, business lobbyists, and government representatives from around the world will flock to Washington -- not so much for the official meetings, where nothing too interesting usually happens, but for the networking opportunities that the meetings provide.

The meetings also offer a venue for discussion of global economic issues, some of which the IMF would like to avoid. This year's meetings happen to coincide with the fifth anniversary of Argentina's remarkable economic expansion – one that wasn't supposed to happen, according to IMF. At the Spring Meetings four years ago, in April 2003, the IMF's Director of Research called the country's then year-old economic recovery “a hiatus at the moment from its long economic fall.”

The Fund was wrong, and in the last five years Argentina – the country that IMF First Deputy Managing Director Anne Krueger reportedly came to call the "the A-word" – has grown by 47 percent in real (inflation-adjusted) terms. This makes it the fastest growing economy in the Western Hemisphere during these years, pulling more than nine million people (in a country of 36 million) across the poverty line.

Argentina was one of the IMF's most publicized "successes" turned-crushing-failure at the end of the last century. From 1991 to 1998 the country adopted a host of IMF-recommended reforms: large-scale privatizations (including the country's Social Security System), opening its markets to international trade and capital flows, and a "convertibility system" that pegged the country's currency to the dollar. The economy grew substantially during this period but went into a terrible downward slide beginning in mid-1998.

At the end of 2001 the whole experiment fell apart, with the country defaulting on more than $100 billion of debt – the largest ever debt default by a government. The currency collapsed soon thereafter, and the majority of people fell below the poverty line in a country that had previously been one of the richest in Latin America. The Argentine press began to report stories of children fainting in school for lack of adequate nutrition, and of people hunting down cats, dogs, rats, and horses in order to survive.

In 2002, when the country was flat on its face, the IMF offered no help. Instead, together with other international financial institutions, they took a net $4 billion – 4 percent of the country's GDP – out of the economy that year. They tried to impose a series of unwanted conditions on the government, including demanding Argentina pay more to the defaulted private creditors. The government refused and a long struggle with the IMF ensued.

But just three months after the country's record default, the Argentine economy began to grow. Despite the continuous nay-saying of the IMF and the business press -- it hasn't stopped. It is interesting to look at the IMF's projections for the Argentine economy during this time, which are made at least twice a year in its World Economic Outlook. For 2003, the Fund forecast growth of 1.0 percent, but the economy grew 8.8 percent – an error of 7.8 percentage points.  For the years 2004, 2005, and 2006, the Fund's projections produced underestimates by 5.0, 5.3, and 4.3 percentage points, respectively. These are enormous errors, and they all go in the same direction – at a time when the Fund had an antagonistic relationship with the government of Argentina.

These could just be mistakes – but then look at the IMF's projections for the years 2000, 2001, and 2002, when the IMF was loaning the Argentine government billions of dollars to support policies that ultimately ended in an economic collapse. In these years their projections were way off in the other direction, over-estimating growth by 2.3, 8.1, and 13.5 percentage points. (These projections are all made in September of the previous year).

These mistakes can have consequences, since IMF projections are generally taken seriously by investors and other economic actors. The under-forecasts can influence people's expectations about the economy. Errors of this magnitude and direction raise serious doubts about the reliability of the IMF's projections.

The IMF's forecasting errors are not their only troubles this spring. Not long ago, the Fund was the most powerful financial institution in the world. Its awesome power, which could sometimes make or break governments in developing countries, derived from its position as head of an international creditors' cartel. Governments that did not meet the IMF's conditions would generally be denied credit from the larger World Bank, regional banks such as the Inter-American Development Bank, the governments of rich countries like the United States and Europe, and sometimes even the private sector.

Since the US Treasury Department has a veto over most IMF decisions, the IMF's creditors' cartel was the major avenue of influence that Washington had over developing countries. It remains mostly in effect for the poorest countries, such as in Africa, where governments are highly dependent on foreign aid. But the cartel and the IMF's influence has collapsed in most middle-income countries. This is the biggest change in the international financial architecture since the breakdown of the Bretton Woods system of fixed exchange rates in 1973. It has already had far-reaching and epoch-making consequences, for example in Latin America. Often referred to as the United States' "back yard," the majority of Latin Americans now have left-of-center governments that are more independent from the United States than the European Union is.

Argentina paid off its remaining $9.8 billion of debt to the IMF last year and said goodbye, with Argentine President Nestor Kirchner bluntly stating that the Fund had "acted towards our country as a promoter and a vehicle of policies that caused poverty and pain among the Argentine people." Other countries, including some of the Fund's largest debtors such as Brazil, have also paid off the Fund. The IMF's loan portfolio is down from $96 billion in 2004 to $20 billion today, half of which is owed by Turkey. It is only a matter of time until the rest disappears.


Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, DC.