The IMF is up to its old tricks
The IMF’s reputation took a real beating during the Asian financial crisis more than a decade ago. During a financial panic, it decided to impose contractionary monetary and fiscal policies on countries that came to it needing funds in the short-term. I won’t get into the details but Stiglitz’s Globalization and its Discontents and Krugman’s Return of Depression Economics are both good sources that document the folly of the IMF’s thinking.
In the current situation, we need a global institution that can act to help countries in times of crisis. Coming out of WW2, that was essentially the role of IMF, but starting with the 1980s debt crisis, the IMF changed its game to “structural adjustment”, the opportunistic imposition (“leverage” in IMF-speak) of orthodox policies on countries that could not say no. And with dismal economic impacts, particularly on the poor and vulnerable.
The just-announced “bailout” (which sounds like a grant but is really a loan) for Romania (following ones from Latvia and Hungary) demonstrates that the IMF has learned nothing:
The European Union, IMF and World Bank today bailed out Romania with a â‚¬20bn (Â£18.5bn) loan in return for severe cuts in public spending and wages. … Romania, among the poorest of the EU’s 27 members, is being urged to recapitalise its banks, boost its deposit guarantee scheme and toughen supervision, including winding-up laws. It is also urged to undertake “an orderly correction of imbalances in the medium term” and “improve competitiveness” â€“ IMF-speak for savage wage cuts. … At the core of the programme is a commitment by Bucharest to limit the budget deficit to 5.1% this year and to cut it further to 3% â€“ the ceiling imposed by the Maastricht treaty â€“ in 2011.
In other words, Romania is being ordered to do precisely the opposite of what rich countries are doing â€“ the opposite of stimulus. It is true that the EU and World Bank are junior partners in this exercise, but most of the money is coming from the IMF.
Since the Obama administration wants to increase the size of the IMF’s funds for such purposes, it is important that the IMF get restructured to prevent them from repeating the only play in their playbook.
UPDATE (March 27): Joseph Stiglitz adds:
While there is a consensus that all countries should undertake strong
fiscal stimulus measures, many developing countries do not have the
resources, and it calls for a concerted approach for additional funding,
both for spending and liquidity support for countries and corporations in
developing countries that are strained by the current credit crunch.
Developed countries should contribute 1% of stimulus spending; there should be an immediate issue of special drawing rights (SDRs), the “IMF money” that can be used especially to help those facing difficulties, and an expansion of regional efforts, such as the Chang Mai initiative in Asia.
It is important that any assistance be provided without the usual strings.
Conditions such as those which force developing countries to contract
spending and raise interest rates are counterproductive: the intent of the
assistance is to help them expand their economies, thereby assisting the
global recovery. Deficiencies in current institutional arrangements for
disbursing funds â€“ for example, through the IMF â€“ have long been noted, but the reforms so far are insufficient.