The IMF Has Protesters Fooled

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The International Monetary Fund has managed to fool activistsprotestingglobalization in Washington this week. The protesters view the fund in theway the lending agency portrays itself: tying its loans to strictconditions, the fund has been a force for global capitalism.

But the gap between IMF rhetoric and reality keeps growing. The marketrevolution that protesters so despise has occurred because the policies ofcountless Third World governments -- generously supported by the IMF -- havefailed. To the extent that the fund has provided finance to regimesuninterested in reform, the agency has slowed liberalization and worsenedthe economic situations of numerous countries.

That has occurred despite the fund's famous conditionality. Russia, forexample, has received fund aid for years even though it has not compliedwith the "tough" conditions the fund has set for it. The IMF's debt reliefinitiative for some 41 poor countries, whatever its merits, is an implicitadmission that its past loans to those nations have failed. Its creditproduced debt, rather than development.

Over the years, the agency has transformed itself from a monetaryinstitution that provides short-term loans to maintain internationaleconomic stability to an agency that provides long-term foreign aid. In theprocess, the fund has turned countries into loan addicts. Seventy countrieshave depended on IMF credit for 20 or more years. As the accompanying graphshows, once a county receives IMF credit, it is likely to become dependenton fund aid for most, if not all, of the following years. That does notspeak well either of the conditionality or of the temporary nature of IMFlending.

Knowledge of this perverse effect prompted former Russian Deputy PrimeMinister Boris Federov last year to warn against a new loan to Russia, whichwas subsequently approved: "I strongly believe that IMF money injections in1994-1998 were detrimental to the Russian economy and interests of theRussian people. Instead of speeding up reforms, they slowed them." The IMFhas since suspended that loan program due to Moscow's non-compliance withits conditions.

In that sense, Russia is not unique. The fund's conditionality has littlecredibility around the world because the IMF has an institutional incentiveto lend. It must provide credit in order to survive. The fund's virtuallyindiscriminate lending behavior has made that point abundantly clear toborrower countries, something that further undermines the agency'scredibility. The recent report by the Meltzer Commission on internationalfinancial institutions confirms the problem. The Commission surveyedresearch on conditionality, including studies by the IMF and World Bank, andfound "no evidence of systematic, predictable effects from most of theconditions."

The IMF is most effective at promoting liberalization when it ceases tolend. Economic reality tends to concentrate the minds of policymakers indeveloping countries. Unfortunately, suspensions of IMF aid are rare, theyoccur usually in highly visible cases when countries grossly violate IMFagreements, and they are temporary. The Meltzer Commission has thus calledon the fund to no longer provide long-term credit, a proposal with whichU.S. Treasury Secretary Lawrence Summers agrees. The Overseas DevelopmentCouncil also concurs and adds that the IMF's "involvement in deeperstructural issues in economics-even in times of crisis-should end."

In its role as aid agency and crisis manager, the IMF has been ineffectiveat promoting self-sustaining growth and market reforms. Countries that havereformed, such as Argentina or South Korea, have not done so because of IMFimpositions. Crisis has been the determining factor for change. As theMeltzer Commission reports, even in crisis countries, "Neither the IMF, norothers, has produced much evidence that its policies and actions . . .[cushion] the decline in income and living standards." Despite IMF lending,the world will continue to become more globalized than ever. At some point,the irrelevance of the lending bureaucracy may even become evident to thoseactivists mistakenly deriding capitalism and the IMF in the same breath.