THE INTERNATIONAL Monetary Fund is back in business. And how! The volume of its emergency lending, meant to tide countries over when private markets are no longer willing to lend to them, is at an all-time high. It is taken seriously once more at the tables of high finance. Perhaps this is no more clearly evidenced than in its central role in the recent discussions on stabilizing the euro area. No longer is the IMF only the lender of last resort for the poor, weak and struggling nations of the world; to prevent the Greek debt crisis from spreading throughout the eurozone, the IMF stepped in with 30 billion euros worth of financing (far greater than any individual national contribution) to help shore up Athens’s balance sheet.
By the metrics of how much its emergency lending and its programs for troubled countries are needed, the Fund is indeed a successful organization—much in demand. But this very demand is a measure of its failures in preventing the kinds of policies that lead to crises—especially ones of the global variety.
The IMF was set up in 1944 to help revive global trade while averting the “beggar-thy-neighbor” exchange-rate policies that characterized the interwar years. During that time, one country after another devalued its currency and raised tariffs in order to gain a competitive trade advantage over its neighbors, only to see its neighbors respond in kind. The result: the world spiraled downward into depression. The founders of the IMF resolved that the body would maintain surveillance over country policies so that such devaluations did not take place. As well, in case a state became uncompetitive (for instance, because the government overspent and pushed up wages too rapidly—as in the case of Greece today) and unable to raise financing from the markets or other governments, the IMF would lend it money on a temporary basis, so that it could have the time to make the adjustments needed to regain competitiveness. This emergency lending was meant to limit the pain the country and its people faced as its policies adjusted.
The IMF has honed its lending procedures, and in many ways it is very effective at putting out fires. And, as an international bureaucracy, it not only has the ability to demand policy changes that are politically unpalatable in the country that needs to adjust, but it can also serve as a convenient scapegoat. Politicians love to blame the IMF for dictating policies that they themselves know are necessary to get their country’s finances back in order. The IMF has been perfectly willing to serve in this role and rarely challenges politicians.
But even as its ability to restore stability to a country’s finances has improved (of course, there are a number of countries like Argentina and Pakistan whose policies and politics have resisted all attempts at change, and are repeat, albeit reluctant, clients of the IMF), the Fund’s ability to influence more stable policies in normal times, especially policies that will lead to greater global economic stability, is small. This is because its primary means of leverage is the money it can dole out. For recovering countries, the first order of business is to repay the IMF and gain “independence,” a popular objective since the IMF is blamed for the pain the citizenry has had to undergo. Once a country repays the Fund, no domestic politician wants to be seen as heeding its advice—until bad policies drive the country back to the IMF. With limited influence over fragile countries when all is largely well, and a willingness to hand out money when all is not (often to rescue irresponsible banks), the IMF ends up encouraging bad policies. Perhaps equally problematic, it has no influence over large countries that will never need its money, even if those states’ policies have an adverse global impact.
This is a dangerous weakness at a time when the world is becoming more integrated. Countries are agenda setting with only their domestic interests at heart, even though the negative spillovers to the rest of the world will eventually come back to haunt them. The question is: how can the IMF change domestic policymaking to take into account the global good, even while respecting the sovereignty of nations? The only feasible answer may be to turn itself into more of a grassroots advocacy organization.
TO SEE why, consider perhaps the most pressing international economic problem today: global trade imbalances. After World War II, a number of countries focused on exports as the key to rapid growth. First, Germany and Japan, followed by Korea and Taiwan, Chile, Malaysia and Thailand, and now China, Vietnam and the oil exporters have generated large production surpluses that have to be absorbed elsewhere. This would not be a problem if countries, once rich, were able to become more balanced. But both Germany and Japan continue to pump out surpluses, suggesting the path back to balanced growth is not an easy one.
