The IMF: The World’s Most Essential Septuagenarian
The third in the Canadian International Council’s series focusing on the global economic order in the run-up to Larry Summers's visit to Toronto, Brett House celebrates the often maligned IMF.
As it nears the 70th anniversary of its conception at the Bretton Woods Conference in 1944, the International Monetary Fund (IMF)—whose biannual meeting starts today—is arguably the public institution most essential to the future of the global economy. Yet plenty of people are still convinced it is either evil or useless.
Perhaps more than any other body, the IMF has acted on the dictum that you should never let a good crisis go to waste; and since the failure of Lehman Brothers in 2008 and the onset of the Great Recession, the IMF has had a very good crisis indeed. From resolving Greece’s existential threat to the euro zone, to a recently mooted $18 billion loan to support Ukraine, the Fund has re-established itself as the world’s key financial firefighter.
During the crisis, the IMF has approved 154 new loans, paid out $182 billion to countries in need, and provided technical assistance to 90% of its 188 member countries. It’s helped countries avoid the spread of beggar-thy-neighbor trade restrictions. It also pushed the G20 to agree in 2009 to commit $1 trillion to fight the recession followed up by an additional $2 trillion in January this year.
It’s also worth remembering that a few years ago, things were looking a lot less rosy.
The IMF came from behind
A spate of financial upheavals in the late-1990s and early-2000s rocked Asian and Latin American countries that had been touted as stars in implementing IMF-sanctioned policies, and knocked the IMF’s credibility. Only a few years later, after the burst dot-com bubble had been mopped up, the Fund’s large emerging-market borrowers began falling over themselves to pay back their IMF loans early. It was irrational: IMF money was cheaper than the private capital that replaced it. But the message was clear: emerging markets would rather cut off their nose to spite their face than remain under the IMF’s watch.
That put the Fund’s entire raison d’être as an insurer against crises into question. Lending revenues fell; the Fund’s budget was squeezed. At the time, mainstream economics was dominated by talk of a “great moderation” in business cycles and the end of crises. As Robert Lucas put it, the “central problem of depression prevention has been solved, for all practical purposes.” The IMF’s major shareholders militated for an early-2008 downsizing of the Fund’s staff. After all, it’s hard to justify maintaining a fire department when we don’t expect any fires.
And so when Lehman Brothers collapsed in September 2008, the IMF was at a nadir in its relationship with emerging markets, hamstrung by staff cuts, and had too little lending capacity to fight all the fires the crisis started. Then-managing director Dominique Strauss-Kahn’s public apology for “an error of judgment” in pursuing an affair with a subordinate further embarrassed the Fund.
All this makes the fact that the IMF pulled off the coups of the ensuing years that much more remarkable.
Answering the critics
Nevertheless, the Fund’s critics continue to level their well-worn barbs. They contend that the IMF’s activities remain too opaque, its forecasts are too rosy, its surveillance overlooks major vulnerabilities and, as a result, it fails to anticipate too many crises. Some fault the Fund’s operational model as inherently flawed: its mere existence encourages countries to over-borrow and creditors to over-lend, since both know the IMF will bail them out if it all goes wrong. Others take the IMF to task for policy prescriptions they deem too focused on austerity, riddled with onerous conditions on governments while being too easy on private-sector creditors.
In short, their beef is that the IMF is too timid. Yet this is just another way of saying that we—the shareholders of the IMF through our governments—are overly cautious. The IMF management and staff will do only as much as our representatives on the Fund’s executive board empower them to do.
There are more direct answers to the criticisms too. If austerity remains at the heart of some IMF aid, it’s because a crisis-stricken government is unable or unwilling to adjust in other ways, or because other countries won’t help it get back on its feet. “Bailing in” private-sector creditors—making them take bigger losses when a government defaults on its debts—remains difficult because we still lack a bankruptcy-like mechanism or forum to facilitate restructurings of debt that can’t be paid.
Standard criticisms of the Fund also ignore some of the changes it’s undergone in recent years. The IMF has become very transparent: it publishes nearly everything it writes. If something doesn’t get published, it’s usually because a country mentioned in a paper refused to authorize its release.
Finally, critics of the IMF tend to dwell on individual failures while glossing over a much broader track record of success: The last seven decades have been marked by unprecedented economic and financial stability. Global GDP grew by an astounding 900% over the course of the 20th century. The IMF helped Europe rebuild after World War II, mid-wifed the nascent economies of newly independent Africa and Asia during the 1960s, and helped the former eastern bloc countries become market economies during the 1990s.
The world now needs the Fund as much as ever
Over the last few decades, countries worldwide have moved in varying ways to replicate the IMF’s model of open markets, prudent fiscal policy, price stability, and investment in the key pillars of growth. Since 1995, this agenda has produced the highest average growth rates in sub-Saharan Africa since independence.
Still, as a conference on the IMF today will detail, there’s room for additional improvement. The archaic European lock on the IMF’s managing directorship must be replaced with a fully open nomination process. The US Congress needs to ratify increased capitalization and redistribution of IMF voting rights to emerging countries. Republicans are opposing this move, which president Barack Obama first championed in 2010, but it’s clearly in America’s interest: The change costs the US nothing and would shore up the IMF’s capacity to do things like aid Ukraine.
Finally, as IMF head Christine Lagarde recently argued, the Fund needs to incorporate gender, inequality, and climate change into all of its work. The days should be over when a finance minister can quip, as one recently did in Davos, that these things “aren’t in his job description.”
Six years after the onset of the 2008 financial crisis, the world economy is still caught between a rock and a hard place: governments built up a mountain of debt to fight the Great Recession, but as Larry Summers observes, growth is still too weak to make this debt sustainable. More financial crises lie ahead, and we will need a strong IMF to play its critical role in resolving them.
The IMF is never going to be loved for its work. If central banks are charged with withdrawing the metaphorical punchbowl just as an economy’s party gets going, the IMF is the annoying, slightly too-prim-and-perfect relative who visits every year to scold you to shape up while offering tough love if you can’t.
It’s a role that’s as thankless as it is essential. And the IMF does it well.