The IMF: Bad Watchdog with a Bad Attitude

March 16, 1998 • Commentary

The International Monetary Fund is demanding transparency on the part of Asian governments, whose concealment of financial data and outright deception helped cause the regions economic crisis. But even as the IMF insists on full and accurate information, it remains one of the world’s most secretive bureaucracies. The agency’s opacity undermines its credibility and allows the fund to dodge accountability.

Openness would surely help to answer the most basic question about the fund’s performance: How successful is the IMF in helping countries reform their economies and achieve self‐​sustaining growth? Numerous independent studies have found that the IMF creates long‐​term aid dependency, that its credit slows the process of reform and that it has a bureaucratic incentive to lend. Of course, IMF officials claim otherwise, but they continue to keep many of the agency’s documents, economic evaluations and policy prescriptions confidential.

The fund, for example, has never publicly produced a thorough assessment of its own effectiveness as has the World Bank. Harvard’s Jeffrey Sachs has derided the agency for making it “extremely difficult for outside observers to prepare a serious quantitative appraisal of IMF policies.” Even after the IMF grudgingly began to publish the stipulations of some of its loan packages, the head of the Institute of International Finance, Charles Dallara, complained that the information the fund provides is woefully inadequate for the needs of market participants.

But what if countries began providing the fund with the data it demands? Could the IMF at least be expected to detect ominous financial developments and offer timely warnings? Treasury secretary Robert Rubin and others suggest that the world badly needs better economic surveillance. The fund, says IMF chief Michel Camdessus, should fill that role. Never mind that the agency was charged with that mission and utterly failed to alert the world to problems in Thailand, South Korea, Indonesia or the Philippines — a task at which it had promised to do a better job after failing in Mexico in 1994. Instead, the IMF praised all of those economies right up to the outbreak of crisis.

The IMF is in an awkward position but is reluctant to admit it. It seeks openness from countries in exchange for loans, but is unwilling to be open itself, even as it asks for increased funding.

Rather than acknowledge negligence or inattentiveness to the impending Asian financial crisis, the IMF has refused to accept responsibility. When asked if the fund’s performance in Asia and Mexico was not evidence of failure, Camdessus responded: “This is a joke. It is true that Mexico revealed the importance of transparency.… But the fact is that we are not suppliers or producers of statistics. These are produced by each individual country.” William Keegan of the London Observer put it aptly: “By calling for ‘transparency,’ [the World Bank and the IMF] admit they did not know what was going on.”

Not only has the fund shifted blame for its obvious lack of vigilance; it is asking for $18 billion in U.S. funding and making the superficially appealing recommendation that the IMF strengthen its role as a watchdog agency that provides an “early warning” system in case of potential financial troubles. Congress should of course deny support to any bureaucracy that responds to requests for transparency with smugness. Yet even if the IMF somehow transformed itself, it is unclear how a warning 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 it issued warnings about the economy before the crisis erupted but kept those concerns confidential. The fund’s credibility is further undercut by inherent conflicts of interest: in many cases, it would be evaluating countries in which it has its own money at stake; in all cases, it would be evaluating countries that, as member‐​owners of the IMF, have contributed to the fund’s pool of resources. Only by ceasing to lend could the agency increase its integrity. At that point, however, its evaluations would merely replicate a service already available.

The IMF is in an awkward position but is reluctant to admit it. It seeks openness from countries in exchange for loans, but is unwilling to be open itself, even as it asks for increased funding. The IMF assures us that it will do a better job at surveillance without acknowledging its poor record at that task. In the final analysis, the fund cannot credibly undertake that task. Congress should reject the IMF’s demands for more money and recognize that it will always be an unreliable watchdog.

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