[stop-imf] IMF: We're Not the Problem

[Robert Weissman]

(Note date)

The IMF is Not the Problem
By Kenneth Rogoff
Economic Counselor and Director, Research Department
International Monetary Fund

Syndicated and Published in the following:
The Nation (Thailand) on October 30, 2002
L'Avenir (Congo), Business Day (South Africa),
Business World (Philippines), Taipei Times (Taiwan),
Aripaev (Estonia), Logos Press (Moldova)
Delovoy Peterburg (Russia), Finance (Slovenia),
El Cronista (Argentina), El Diario (Chile),
El Observador (Uruguay), Financial Mirror (Cyprus)
Independent (Bangladesh).

Throughout much of the world, the IMF is caricatured as a demon of
austerity. Wherever the IMF appears on the scene to provide financial
assistance, painful government budget cuts seem certain to follow. This
image of austerity appeals to the emotional need for stories with
villains.
After all, good villains sell books=97including books about globalization
that demonize the IMF.
But does the image reflect reality? Is the IMF, the member of the UN
family
charged to maintain global financial stability, really so evil or
misguided
that it can only propose policies that inflict economic pain instead of
alleviating it?
I admit that the IMF has its faults, and I don't aim to gloss over them.
Until a year ago, when I left a professorship at Harvard University to
become the Fund's chief economist, I was a vocal, if perhaps not
vitriolic,
critic of the IMF's management of the international monetary system.
Although the IMF has changed a lot in recent years, there is no denying
that there are still major holes in the international system=97not least
the
lack of a fair and orderly procedure for dealing with highly indebted
countries that become insolvent. The IMF is working to fill that gap
now.
But the austerity charge is misconceived.
Troubled countries knock on the Fund's door for financial assistance
only
when all other creditors have turned their backs. In most cases, a
country
is already in desperate fiscal straits by the time IMF economists arrive
on
the scene to discuss a loan.
More often than not, the country has over-extended itself financially
through some combination of imprudence and bad luck. Countries come to
the
IMF precisely because they know that it will lend to them when no one
else
will, and at interest rates lower than most could only dream of, even in
the best of times. IMF loans thus relieve austerity: they help
governments
limit the amount of budgetary belt-tightening required in a crisis.
You think I am crazy? Allow me to draw an analogy from my personal
finances. Just after I finished school, my older brother Hal ran into
some
financial difficulties. He and his wife had started ripping out all the
walls, plumbing, and wiring in their modest Washington apartment, hoping
to
refurbish it prior to the arrival of their first child. It was an
ambitious
plan, but it seemed doable=97until Hal started having problems with his
baking business.
Suddenly they found themselves desperately over-extended. Hal went to
the
bank for a loan, but with his business struggling, he didn't qualify.
With
all his credit cards at their limit, and all his cash gone, Hal finally
came to me for a loan. I had managed to put aside some modest savings,
which I freely lent him indefinitely at zero interest.
Even with my help, things weren't easy. Hal had to work longer hours
than
ever before, and he still had to sharply cut back on household
expenditures
across the board. But my loan did help, eventually Hal's business
recovered, my nephew was born and=97much later=97the apartment remodeling
project came to a successful conclusion.
Now, did my brother blame me for the period of belt-tightening austerity
his family had to face? No, obviously not.
Admittedly, this is a simplistic analogy, but it captures the essence of
the issue. Yes, I did not ask Hal what, exactly, he planned to do with
my
money (would he use it to fix his plumbing, to help his business, or
would
he waste it somehow?). When the IMF comes in, it typically applies some
degree of conditionality, as would any other lender, to ensure that its
loan is eventually repaid, and used for its intended purpose. Unlike my
loan to Hal, the IMF usually does ask government officials to show how
they
plan to put their country back on its feet.
Indeed, it is this planning dialogue that does more than anything else
to
help stabilize the economy and restore a viable balance of payments. It
is
not always an easy process, and reasonable people can and do disagree
about
the design of IMF-supported programs both before and after the fact. The
IMF really does need to listen to its critics and constantly to seek
better
ways to accomplish its aims. But it is patently absurd to charge that
misguided IMF policy advice is the main reason why debt-crisis countries
face austerity.
When a country finally suffers through austerity and repays its IMF
loans,
no rich private shareholder gets fat as a result. The IMF's shareholders
are its 184 member countries, and the Fund does not really pay
dividends,
other than in an accounting sense. As soon as one country repays its
loans,
the IMF is better placed to re-lend the foreign exchange to the next
country in crisis. However effective the IMF's crisis prevention efforts
are, realistically there will always be a next crisis country.
Yes, the IMF needs many changes, as does the broader international
financial system within which it operates. But saying that it causes
austerity is like saying that doctors cause plagues.