Opinion & Commentary
Chance for IMF reform
Last week’s appointment of Anne Krueger as deputy managing director of the International Monetary Fund heralds a serious possibility that it could be reformed.
Her appointment follows that of Alan Meltzer as Deputy Secretary of the US Treasury. The Meltzer Congressional Committee recommended that the IMF and the World Bank required substantial reform to justify their existence.
The Left sees the IMF as the vehicle for industrial country, notably US, pressure and hence as a cause of developing countries’ economic and social problems.
'The globalisation lobby argues that IMF loans should be larger, interest-free and conditionality-free'.
How could this be funded? The IMF is called in when disastrous economic policies have impoverished countries and created payments crises. To avoid bankruptcy, they fail to tax higher-income groups, but reduce their social expenditures. They blame IMF conditionality, which they don’t implement properly, for their problems.
It’s difficult to deal with the attacks from the Left because the IMF’s real shortcomings are so serious that they are damaging their clients and weakening international capital markets. There are three main problems. From leading macroeconomic research in the 1950s and 1960s, the IMF’s analysis has so deteriorated that most of the hundreds of reports and studies it issues annually are at best mediocre. IMF papers often lag behind, and fail to take into account, the analysis being done in countries it purports to serve.
The IMF failed to see the difficulties faced by East Asia in 1997. Its reports and IMF, or IMF-sponsored, staff in the region, got the basic issues wrong.
It was not recognised that ‘picking winners’ led to crony capitalism to such an extent that exports were undermined. Cronyism in banking was ignored. When exchange rates were overvalued to protect the cronies’ assets, the IMF did not withdraw from the region.
Fiscal policies were claimed to be sound because budgets were balanced, although taxes were highly skewed in favour of the rich and the lack of social and physical infrastructure investment was crippling. Not surprisingly, given its analytical weakness, conditionality conditions were inappropriate though absurdly detailed.
When the IMF finally got around to recognising that Indonesia was in trouble, it came up with an economy-wide hodge-podge of 70 policy reforms as conditions for a rescue package (which the World Bank and the Asian Development Bank joined). The 70 conditions were whittled down, but remained so voluminous that they were unenforceable.
The treatment of Thailand and the Republic of Korea was similar. Malaysia wisely decided to opt out of the ‘hard loans for soft advice’ as Václav Klaus put it when a fledgling Czech Minister of Finance in the early 1990s. The rescue package for Indonesia, Thailand and the Republic of Korea was more than $1.2 billion.
The conditionality was so rubbery that it was easily ignored. It enabled these countries to bail out their non-performing banks and the cronies who had received loans.
The other major beneficiaries were careless international lenders who failed to do their homework and should have lost their shirts. Private debt was transformed into public debt that lower income people will have to service with their taxes.
'A dangerous aspect of the IMF’s operations is the creation of moral hazard in national and international capital markets'.
The IMF has rescued countries that are badly managed again and again. Brazil has received rescue package after rescue package without improving the structure of its economy.
Altogether the IMF’s considerable activities in Latin America have failed to promote growth or equity. The situation in Africa is worse. Russia and other East European countries have become sink holes for IMF moneys that find their way to western and offshore banks.
It’s dubious whether the IMF can be reformed. Anne Krueger is a strong candidate. She specialises in macroeconomics and trade. Her contributions to economics make her a strong contender for the Nobel Prize. She is an experienced manager, having served as the Vice President for Economics at the World Bank in turbulent times during the 1980s. Anne’s parents were Australian. She has maintained an interest in Australia and has many Australian friends. She was the most recent Bonython lecturer for The Centre of Independent Studies.
She will need very strong support to succeed in turning the IMF’s economic analysis around. Hopefully, the Australian Government will join the US in providing it.
About the Author:
Emeritus Professor Helen Hughes is a Senior Fellow at the Centre for Independent Studies.
