The IMF’s dwindling fortunes
‘The imf is back,” declared the International Monetary Fund’s managing director, Dominique Strauss-Kahn, at its annual spring meeting earlier this month in Washington. And not a moment too soon either. To hear the organization’s economists tell it (as they mingled in five-star hotels, long black limos and posh restaurants with bankers, businessmen and finance ministers from around the globe), they’ve arrived on the scene just in time to help solve the world’s financial crisis.
But despite the bravado, the reality is that today’s IMF is not what it once was. These days, the world’s most famous deficit police force is running a whopping small-country-size $400-million annual deficit of its own and is being forced into some of the same kinds of “structural adjustments” it used to impose on indebted Third World nations. In just the last four years, the IMF’s total loan portfolio has shrunk from $105 billion to less than $10 billion; over half of the current portfolio consists of loans to Turkey and Pakistan. To cut costs, the agency is reducing staff and closing offices.
The IMF’s loss of influence is probably the most important change in the international financial system in more than half a century. Until just a few years ago, the IMF -- originally created at the Bretton Woods conference on international economic cooperation in 1944 -- was one of the most powerful financial institutions in the world and the major avenue of influence for the United States in developing countries.
This wasn’t so much a result of the money that it lent -- the World Bank loans much more -- but because of its position at the top of a hierarchy of official creditors. Until a few years ago, a developing-country government that did not meet IMF conditions risked being economically strangled. The World Bank, regional banks such as the Inter-American Development Bank, rich lender governments and sometimes even the private sector would withhold lending until the government reached agreement with the IMF.
At the top of this powerful creditors cartel sat the U.S. Treasury Department, which holds a formal veto over many of the IMF’s decisions and is an informal power within the organization that marginalizes even the other rich countries. Developing countries -- the ones that have historically borne the brunt of IMF decisions -- have little or no effective voice in the decision-making of the organization, where the majority of votes of the 185 member nations are assigned to the rich members.
But the IMF lost credibility after presiding over a series of economic disasters. Latin America, for example, suffered its worst long-term growth failure in modern history under the IMF’s tutelage since 1980. The IMF’s “shock therapy” program in Russia vastly underestimated the time it would take to transition from a planned to a capitalist economy in the early ‘90s. The result was a lot of shock and no therapy, and tens of millions were pushed into poverty as the economy collapsed.
The Asian financial crisis in the late 1990s was a tipping point. The IMF and the U.S. Treasury helped cause the crisis by pushing for the removal of important regulations on foreign capital flows. Then they made it worse with their policy recommendations, prompting economist Jeffrey Sachs -- now head of Columbia University’s Earth Institute -- to say that “the IMF has become the Typhoid Mary of emerging markets, spreading recessions in country after country.”
Some of these mistakes were because of incompetence; others were driven by ideological or special interests. But the result was that developing countries began voting with their feet, piling up international reserves so that they would never have to borrow again from the IMF cartel.
The IMF-supervised Argentine disaster from 1998 to 2002, which pushed the majority of Argentines below the official poverty line in a country that was previously one of the richest in the region, further sullied the fund’s reputation. Argentina then defied the IMF, refused its conditions, got no international help and rapidly transformed itself into the fastest-growing economy in the hemisphere. This too was noticed.
The collapse of the IMF creditors cartel has been a huge blow to U.S. influence. It was most pronounced in Latin America, where most of a region that used to be referred to as the United States’ “backyard” is now governed by states that are more independent of Washington than Europe is.
The problem is that poorer developing countries, especially in Africa, remain dependent on foreign aid from the IMF (and the World Bank and other sources) to fund their basic budget and import needs. This can be harmful to their development and their people. In recent years, the IMF -- insisting that such measures are necessary to hold down inflation -- has imposed conditions that limit their public spending and, according to the fund’s own internal evaluation, have prevented these countries from spending aid money on urgent needs, such as healthcare and education.
These countries need to join the rest of the developing world in breaking free of the IMF’s policy conditions. The U.S. Congress may consider legislation that would pressure the IMF to use some of its huge gold reserves for debt cancellation and to limit the IMF’s control over policy in poor countries. These would be important steps forward for the world’s poor.