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Foreign Policy
Summer 1998
The IMF: A Cure or a Curse? *
By Devesh Kapur **
Pity the poor IMF: Even as Republican Senate leader Trent Lott blasts its managing director Michel Camdessus as a "socialist from France," protestors in turmoil-ridden Asia denounce it as a stalking horse for American capitalism. Unfortunately, while the IMF’s record of intervening in the Asian financial crisis is more complex than such name-calling suggests, it is no more comforting. More than 50 years after it was created to help countries cope with economic crises, the IMF is badly in need of some structural reforms of its own.
The fund has come under harsh criticism before, most recently for its handling of the Mexican peso crash in 1994–95. The consequences of the IMFs actions there, and in the debt crises of the 1980s, are manifest in its role in the Asian crisis. As in Mexico, its diagnosis of the Asian crisis has emphasized the internal roots of the problem: the failure to control large balance-of-payments deficits; the explosion in property and financial markets; mismanaged exchange rate regimes; rapidly expanding financial systems that were once poorly regulated; and an unwillingness to act decisively once confidence was lost.
But the fund’s focus on in-country factors has deflected attention from both its earlier endorsement of these countries’ policies and its unbridled cheerleading on removing the barriers that impede globalization. Indonesia, Malaysia, and Thailand had thrived for years, despite weak financial systems and numerous destabilizing external events, including the oil shocks of the 1970s and the soaring dollar of the early 1980s.
Of course, these countries did make egregious mistakes. However, their economies were undone not by visible internal flaws, but by the unforeseen impact of the global capital flows that the IMF sought to set free. In response to their collapse, the fund assembled a mammoth financial package—$17 billion for Thailand, $43 billion for Indonesia, and $57 billion for Korea—whose disbursements were linked to the countries’ meeting a range of conditions that seem to go well beyond the fund’s mandate, and whose objectives reflect a troubling lack of institutional self-restraint.
What can we conclude from the IMF’s handling of the Asian crisis? First, many analysts now agree that foreign financial flows should be regulated in some way; the question is how to make openness to the market less perilous. Although less-developed countries such as those in Asia undoubtedly need to open up to the world’s capital markets, they would be well advised to do so at a pace commensurate with their capacity to develop sound regulatory and institutional structures. In particular, tighter limits on short-term foreign borrowing, especially by banks, may well be essential.
A second conclusion is that "moral hazard"—the propensity in both borrowing countries and their creditors to take excessive risks because of the implicit insurance offered by bailouts—applies to the IMF as well as to borrowers and creditors. The steady expansion of institutional objectives (and loan conditions) has occurred because borrowing countries bear a disproportionate share of the political, economic, and financial risks of IMF programs. There is little downside to these programs for the fund’s major shareholders, its management, or its staff. The damage resulting from the IMF’s mishandling of the Indonesian banking sector, for example, was borne entirely by Indonesia, not by the IMF or the board that signed onto these conditions.
A third conclusion is that the continued expansion of the IMF's power and mandate is bad for debtor nations, for the global financial system, and, ultimately, for the IMF itself. The increasing scope of loan conditions implies that during a financial crisis, the fund should take over more and more of a country’s decision-making process, without any commensurate increase in accountability. Moreover, the IMF’s widening agenda has made it both less effective and more vulnerable to politicization, thus tarnishing the technocratic reputation that is essential to the credibility of its prescriptions.
The final conclusion is that by placing the onus of adjustment solely on debtor countries, the fund’s actions relieve any pressure on creditor countries to change the status quo, whether the creaky architecture of international organizations set up 50 years ago, an exchange rate regime whose gyrations trap weaker countries, or the increasingly ineffective regulation of international finance.
This last point is one that U.S. Congress would do well to keep in mind. Ultimately, the limitations of multilateral institutions such as the IMF reflect the limitations of those nation-states that created them. If power should go hand in hand with responsibility, then those countries with the most power in these institutions should foot the bill—bearing the blame for their failings and assuming the greatest responsibility for their rejuvenation.
Further Reading
Doug Bandow and Ian Vásquez, eds., Perpetuating Poverty: The World Bank, The IMF, and the Developing World (Washington: Cato Institute, 1994)
Graham Bird, IMF Lending to Developing Countries: Issues and Evidence (London; New York: Routledge, 1995)
Charles W. Calomiris, "The IMF’s Imprudent Role as Lender of Last Resort," (Cato Journal, Winter 1998)
Michel Camdessus, "The Role of the IMF: Past, Present, and Future" (Washington: Annual Meeting of the Bretton Woods Committee, February 13, 1998)
Kevin Danaher, ed., Fifty Years Is Enough: The Case Against the World Bank and the International Monetary Fund (Boston: South End Press, 1994)
Martin Feldstein, "Refocusing the IMF" (Foreign Affairs, March/April 1998)
Stanley Fischer, "The IMF and the Asian Crisis" (Forum Funds Lecture at UCLA on March 20, 1998)
Margaret Garritsen de Vries, Balance of Payments Adjustment, 1945 to 1986: The IMF Experience (Washington: IMF, 1987)
Manuel Guitian, "Conditionality: Past, Present and Future" (Washington: IMF Staff Papers, December 1995)
Harold James, International Monetary Cooperation since Bretton Woods (Washington: IMF and New York: Oxford University Press, 1996)
Tony Killick, IMF Programmes in Developing Countries: Design and Impact (London; New York: Routledge, 1995)
Allan H. Meltzer, "Asian Problems and the IMF" (Cato Journal, Winter 1998)
Jacques Polak, The Changing Nature of IMF Conditionality (Princeton: Princeton University Press, 1991)
Steven Radelet and Jeffrey Sachs, The Onset of the East Asian Financial Crisis (Cambridge: Harvard Institute for International Development, March 1998)
Joseph Stiglitz, "The Role of International Financial Institutions in the Current Global Economy" (Address to the Chicago Council on Foreign Relations, February 27, 1998)
John Williamson, ed., IMF Conditionality (Washington: Institute for International Economics, 1983)
Notes
*: The following abstract is adapted from Professor Kapur's article, originally published in the Summer 1998 issue of FOREIGN POLICY. All rights reserved. Back.
**: Devesh Kapur is an assistant professor at Harvard University and the author, with John Lewis and Richard Webb, of The World Bank: Its First Half Century, two volumes (Washington: Brookings Institution Press, 1997) Back.