Saturday, April 25, 2009

The International Monetary Fund returns

By Andrew Walker
Economics correspondent, BBC World Service, Washington
"The IMF is back".

Those were the words of the International Monetary Fund's managing director, Dominique Strauss-Kahn, after the G20 summit in London.

That summit saw a proposal for a trebling of its resources for lending to countries hit by the financial crisis.

The G20 proposal was for the IMF to have access to $750bn (£513bn) - to spell it out; three quarters of a trillion dollars.

That massively increased supply of funds is a response to a hefty increase in demand for the IMF's help, which comes in the shape of loans.

Since the crisis entered a new phase last year, the Fund has made loan commitments approaching $150bn, including its largest yet - a line of credit to Mexico of $47bn.

That is not all money that has been handed over. If things do not go too badly, some of it never will be.

Mexico, for example, is not planning to draw on that large line of credit, but can if needs to.


And there are more in the pipeline. Mr Strauss-Kahn says discussions are in hand with other countries too.

It is an extraordinary transformation of the IMF's position.

Professor Adam Lerrick of Carnegie Mellon University in Pittsburgh, an expert on the IMF, says "it is truly a miracle".

"They have been resurrected from the dead".

Two years ago, he says, the IMF's outstanding loans were worth $10bn - down from £100bn in 2003.

But in the last six months they have put out more money than in any other comparable period in their history.

Moral hazard

So the IMF is back in business. But the controversy that has long followed the agency has not gone away.

Professor Lerrick has a concern about what economists call "moral hazard" - a term, incidentally, that I knew from the text books, but never expected to use in polite company.

In this context it is the idea that the behaviour of governments and international lenders is influenced by the very knowledge that the IMF is there, ready to come to the rescue.

It makes crises more likely to happen than if there were no financial fire brigade.

Governments are more likely to follow risky but popular policies, such as big spending programmes. Foreign banks are more willing to make risky loans because an IMF bailout would mean they would still be repaid.

Professor Lerrick thinks that most of the loans the IMF has made so far in response to the crisis do create that danger.

He argues that the newest type of IMF credit line - Mexico was the first example - is different.

It is only available to countries with a record of what the IMF considers strong policies.

That, Professor Lerrick says, reduces the moral hazard problem, though it does not eliminate it.

Friends and foes

The other principal criticism, and one with a long history, is the economic policy conditions that come with most IMF loans -though not with the new type of arrangement that Mexico has made.

The allegation, a familiar one, is that the IMF requires governments to pursue policies that make recessions worse, notably tightening their budgets by curbing public spending.

Mark Weisbrot of the Center for Economic and Policy Research in Washington says that is the opposite of what the IMF is encouraging most developed countries to do.

He says IMF financial support should be used to allow countries to stimulate their economies.

"It defeats the purpose to require them to do the opposite," he says.

He argues that the IMF should not be given this central role in responding to the crisis unless it reforms in a way that prevents it repeating what he calls "the serious errors it made in the last major crises of the 1990s" - a reference to the wave of problems in East Asia, Russia, Turkey and Latin America.

But the IMF has its friends too.

John Williamson of the Peterson Institute of International Economics in Washington says there is no other source countries can turn to for the additional currency reserves they need.

He also defends the IMF's policies - though he does not want to go out on a limb and say the IMF always gets it right.

Countries going to the IMF have a problem with their international balance of payments, he says, and fixing that inevitably means spending less.

So, as Mr Strauss-Kahn says, the IMF is back. And so are the arguments about whether it helps or not.

Story from BBC NEWS:

Published: 2009/04/24 08:12:33 GMT

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