Treasury Secretary Robert Rubin insists that the International Monetary Fund (IMF) is “the right institution” to resolve the Asian crisis and that it deserves an additional $18 billion from U.S. taxpayers. But the burden of proof falls on the Clinton administration, which must explain why the IMF has any credibility either in moving crisis countries toward market reforms or in detecting financial crises in the first place.
IMF bailouts have not prevented Mexico-style crises from occurring or stopped them from spilling over once they’ve begun. Asia’s financial turmoil has instead spread with each IMF intervention. And Indonesia’s currency is sinking to record lows even after the IMF arranged a third emergency loan package since last fall. It appears that these developments have not occurred despite the Fund’s “aid,” but largely because of it.
None of this is too surprising given the Fund’s record of creating loan addicts rather than economic success stories. A review of the agency’s “short-term” loans is revealing. Through 1998, for example, 19 nations have been using IMF aid for at least 30 years; 31 countries have borrowed from it for at least 20 years; and 36 countries have relied on IMF credit for between ten and 19 years.
IMF bailouts are harmful because they provide money to governments that created the problem to begin with and that have shown themselves reluctant to introduce necessary reforms. After providing billions of dollars to Indonesia, for instance, the Fund pleaded with the former Suharto regime to end certain subsidies and government bailouts of well-connected industries. No wonder few people had confidence that President Suharto and his cronies would undertake the wide range of other necessary economic measures.
Giving money to such governments does not tend to promote market reforms; it tends to delay them because the financial aid takes the pressure off governments to reform. In 1994, for example, Boris Fyodorov, President Boris Yeltsin’s former deputy prime minister for finance, warned against further IMF aid to Russia: “The sooner this money is handed over, the sooner we shall see a change in policy—in the wrong direction. I recall how Mikhail Gorbachev, after each new loan, would lose interest in any kind of economic reform.”
Rather, a suspension of loans concentrates the minds of policymakers in the affected nations. The reason, after all, there is any talk or movement toward reform in Asia today is not because the IMF has arrived and suggested that policy changes should be made. Economic reality is forcing those changes.
But can’t the IMF apply strict conditionality to bailouts? Here again, the Fund has little credibility, and not just because of its record of creating long-term dependency. The problem is institutional. A country—especially a highly visible one—that does not stick to IMF conditions risks having its loans suspended, as has repeatedly occurred in Russia over the years. When loans are cut off, recipient governments tend to become more serious about reform. Note that the IMF encourages misbehaving governments to introduce reforms by cutting off its loans. In 1997, for example, Yeltsin responded to the suspension of the IMF’s $10 billion credit by naming reform-minded officials to key government posts.
Unfortunately, once the expected policy changes are forthcoming, the IMF feels the need to resume lending. Indeed, the IMF has a bureaucratic incentive to lend. It simply cannot afford to watch countries reform on their own because it would risk revealing the IMF’s irrelevance. The resumption of credit merely delays the process of reform, unnecessarily prolonging a country’s economic problems. The IMF’s bureaucratic incentive to lend is well known by both the Fund and recipient governments, making its conditionality that much less credible.
Can the IMF be expected at least to detect ominous financial developments and offer timely warnings? Rubin and others suggest that the world badly needs better economic surveillance. The Fund, says IMF chief Michael Camdessus, should fill that role. Never mind that the IMF was already charged with that mission and it failed to alert anyone about problems in Mexico, Thailand, South Korea, or Indonesia. Instead, the IMF praised all of those economies right up to the outbreak of crisis.
The superficially appealing answer might be that IMF should strengthen its role as a watchdog agency that provides an “early warning” system in case of potential financial troubles. Yet it is unclear how such a mechanism would work. As economist Raymond Mikesell asks, “Who would be warned and when? As soon as the financial community receives a warning that a country is facing financial difficulty, a massive capital outflow is likely to occur, in which case crisis prevention would be out of the question.”
On the other hand, if the IMF perceives serious financial difficulties in a country and does not disclose that information, then it undermines its credibility as a credit-rating agency for countries. That appears to have been the case in Thailand, where the IMF now claims to have privately warned Thai officials about the economy before the crisis erupted. The Fund’s credibility would be further undercut by inherent conflicts of interest: in many cases, it would be evaluating countries in which it had its own money at stake. Only by ceasing to lend could the agency increase its integrity; at that point, however, its country evaluations would merely replicate a service already available in the market.
As it stands, the IMF is actually undermining the market, which would provide less-expensive solutions to currency crises. Absent the Fund’s intervention, creditors and debtors would do what they always do in cases of insolvency or illiquidity—they would renegotiate their debts or enter into bankruptcy procedures. In a world without an IMF, both parties would have an incentive to do so quickly because the alternative, to do nothing, would mean a complete loss. Thus, not only does the Fund discourage rapid policy reform, it hinders a fast and more just resolution of private-sector payments problems.
The IMF is not the correct institution to solve problems in today’s increasingly liberal global economy. Dramatically changed world conditions are not making the IMF less relevant than when the agency was founded; they are merely making the Fund’s irrelevance—and its potential for harm—much more evident.