Understanding the IMF Debate.

AuthorWILLETT, THOMAS D.

The International Monetary Fund (IMF) was established along with the World Bank during the international negotiations at Bretton Woods, New Hampshire, near the end of World War II to oversee the operation of the postwar international monetary system and to provide financing for countries with balance-of-payments problems. In its early days, it helped facilitate a rapid expansion of world trade and the recovery of war-torn economies. For decades, such success allowed the IMF to operate in relative obscurity. Over time, however, the system of adjustable exchange rates devised at Bretton Woods proved incapable of operating effectively in a world of growing international capital mobility. Currency crisis became increasingly common, culminating in a breakdown of the exchange-rate regime in the early 1970s.

During the decades preceding the breakdown, the IMF had become so closely identified with the exchange-rate regime over which it had presided that many observers assumed that the end of that exchange-rate regime would also spell the end of the IMF. The pessimists expected a catastrophe to result--a return to the economic warfare of the 1930s. The optimists, in contrast, expected that floating exchange rates would take care of all international monetary problems and that an organization such as the IMF would no longer be needed.

Both views were wrong. We experienced neither a catastrophe from nor a solution of all the problems. Both predictions were flawed because they were based on a lack of understanding of the full range of the IMF's activities. Those activities included discouraging the use of competitive depreciations, which had added greatly to the costs of the Great Depression in the 1930s, and providing a mechanism to encourage countries to follow sound monetary and fiscal policies. These rationales for the IMF continue to be important even if all countries have adopted flexible exchange rates,(1) Furthermore, despite the collapse of the formal international system of pegged exchange rates, many countries continued to peg their exchange rates. Therefore, although the IMF's roles have evolved substantially over time, the organization has not yet become obsolete.(2)

Whether the IMF has been doing a good enough job is another issue. In many developing countries, where the IMF has long been a household word, it is infamous for forcing countries into austerity programs. In recent years, this IMF role as the bad cop who forces countries to live within their means and offers meager amounts of financial assistance in exchange for the adoption of macroeconomic stabilization and market liberalization policies, has been played within the former communist countries now struggling to adjust to the ways of the market. Although finance ministers and reform-minded economists in developing countries have often seen the IMF as a valuable friend, many politicians in those countries seek political advantage by vilifying the organization. Many citizens in emerging economies and on the far left in the industrial countries have long been critics of the IMF.

Until quite recently, interest within the industrial countries in the operations of the IMF had been limited almost exclusively to a small group of experts, interest groups, and policy officials. Lately, however, many on the far right in the United States have joined in condemnation of the IMF, and leftists have taken to the streets in public demonstrations against the IMF as an agent of globalization. Combined with widespread concerns about the IMF's failure to prevent the rash of international financial crises that plagued the 1990s and increasing fears about the effects of globalization, attacks on the IMF have begun to receive extensive attention, including heated debates in the U.S. Congress. In March 2000, the IMF joined the World Trade Organization (WTO) as a poster child for the evils of globalization when the same group of nongovernmental organizations (NGOs) that had created such havoc at the WTO meetings in Seattle converged on Washington, D.C., to attempt to shut down the IMF during the meeting of its oversight committee from national governments.

What should national policymakers and the general public make of this phenomenon? We might be inclined to suspect that anything viewed as bad by both the far right and the far left must be terrible indeed. Giving us pause about this interpretation, however, is that most of those in the middle do not share this opposition to the IMF. Indeed, looking closer, we see that the far right and the far left agree on this issue only because they have vastly different perceptions of what the IMF actually does. The two groups cannot both be correct in their perceptions of the IMF, but they can both be wrong, and indeed they are. Few of the harshest critics from either side really know very much about the IMF.(3) Instead, the comfort of strong ideological commitments and a few anecdotes consistent with their views give many on each side all of the information they think they need.

One might think that the strong attacks for opposite reasons coming from both sides would give each side pause. Can the IMF really be such an agent of socialism if the left wants it abolished? Can it be such an agent of global capitalism if the right wants it abolished? Seemingly, each side thinks that it may safely ignore the ideas espoused by the other.

Defenders of the IMF can make (and have made) a case that the opposition from both the far left and the far right shows that the IMF is doing a good job. One major criterion of the efficiency of democratic institutions is the degree to which they conform to the preferences of the median or average citizen. On this score, political outcomes should lie in the middle of the spectrum of underlying preferences. Accordingly, the Fund can point to the attacks of the left and the right as balancing out one another.

Although the attacks on the IMF from the far left and the far right are often misguided, a successful defense from those attacks does not logically imply that all is well. Indeed, there is overwhelming evidence that such is not the case. In my judgment, the Fund is predominantly a force for good, but contrary to the far left's perception of it as an all-powerful bully dictating the behavior of the poor and the weak, its record of securing compliance with its programs has been poor. And far from being run by autonomous international bureaucrats completely insolated from the oversight of national governments, in a number of instances the IMF has been forced to abandon its economic principles in order to do the political bidding of its major shareholders, the governments of the United States and the other industrial countries.

The IMF needs strengthening, not abolition, but calls for sensible reform have received relatively little attention in the public media. Such calls are much less dramatic than protests in the streets. Informed discussion colored in shades of gray lacks the bumper-sticker punch of the black-and-white visions of those on the extremes. Fortunately, however, this imbalance is beginning to be corrected. During the last year or so, several groups of experts have prepared important public reports on the IMF. As one would have expected, there is less than complete agreement among these reports, and most of them contain minority dissents, but on a substantial core of issues there is extensive agreement. In this article, I highlight a number of major areas of widespread agreement and discuss some of the most important remaining disagreements.

Recent Reports

Two of the recent reports are official. One was commissioned by the IMF itself (International Monetary Fund 1999) and was prepared by three leading outside experts who canvassed the views of a broad range of officials, academics, and private-sector experts. The second official report was mandated by Congress and was prepared by the International Financial Institution Advisory Commission (2000), chaired by Allan H. Meltzer and hence known as the Meltzer Commission. This group, consisting of six experts picked by the Republicans and five picked by the Democrats, included academics, leaders of policy institutes, and former government officials and members of Congress. It held a number hearings and solicited the views of a wide range of experts and interested parties. The third report came from a task force commissioned by the Council on Foreign Relations (1999). This task force was chaired by Carla Hills and Peter Peterson. Morris Goldstein, a former senior IMF official now with the Institute for International Economics, served as its project director. The group consisted of prestigious academics, leaders from the private sector, and other members of the policy community.(4)

When the Meltzer Commission's report was issued, the press made much of the fiery rebuttals contained in the minority (Democrat) statement. That reporting created the impression that the commission's efforts had produced little more than a statement of divergent partisan views. The minority report did sometimes resort to heated language, for example, accusing the majority (Republicans) of reliance on "misinterpretations of history and fruity analysis" (International Financial Institution 2000, 119).

Some of the minority criticisms have substance. The majority report is somewhat too negative when it characterizes research on the effectiveness of IMF programs as having found that "IMF interventions ... have not been associated, on average, with any clear economic gains to recipient countries" (International Financial Institution 2000, 40).(5) Certainly, the left widely perceives the IMF as hurting the countries it is supposed to help. Much of that criticism arises from an excessive focus on the short run and a lack of understanding of macroeconomics. The IMF is seldom called in before domestic economies have gotten out of control. Usually the situation...

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