|
|
|
|
Crises and Recoveries: Multinational Failures and National Successes
By Alan Reynolds
Introduction
The overused phrase "economic crisis" became surprisingly familiar over the past decade, being more often used than the word "panic" a century ago. The more the International Monetary Fund attempted to predict and repair economic crises, the more unpredictable and irreparable such crises have seemed to be. Perhaps the cure is not helpful. Perhaps the cure is the more serious disease.
Criticism of IMF lending generally focuses on two issues: (1) the allegedly counterproductive impact of IMF-demanded adjustment programs on the borrowing countries' economic performance, and (2) the moral hazard effect in which the sheer availability of loans at below-market interest rates encourages more national politicians and their foreign lenders to take imprudent and excessive risk. This paper will focus on the first point, but I believe it is closely related to the second. If IMF-required policies are perceived of as leaving the country with less income and more debt, then we should expect them to be poorly received by financial markets. In 1997-98, the Korean stock market fell very sharply shortly after the IMF program was revealed, Indonesia's credit rating was downgraded after the IMF program was revealed, and Russia devalued and defaulted a few weeks after the IMF program was revealed. Lane and Phillips (1992) suggest "weighing the possibility of moral hazard against other implications of the availability of IMF financing in alleviating the effects of crises." I suggest there is no such trade-off: IMF loans involve moral hazard and IMF programs aggravate rather than alleviate economic crises.
Full Text (PDF, 13 pages, 65 KB)