The IMF Has Protesters Fooled

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The International Monetary Fund has managed to fool activists protesting globalization in Washington this week. The protesters view the fund in the way the lending agency portrays itself: tying its loans to strict conditions, the fund has been a force for global capitalism.

But the gap between IMF rhetoric and reality keeps growing. The market revolution that protesters so despise has occurred because the policies of countless Third World governments — generously supported by the IMF — have failed. To the extent that the fund has provided finance to regimes uninterested in reform, the agency has slowed liberalization and worsened the economic situations of numerous countries.

That has occurred despite the fund’s famous conditionality. Russia, for example, has received fund aid for years even though it has not complied with the “tough” conditions the fund has set for it. The IMF’s debt relief initiative for some 41 poor countries, whatever its merits, is an implicit admission that its past loans to those nations have failed. Its credit produced debt, rather than development.

Over the years, the agency has transformed itself from a monetary institution that provides short‐​term loans to maintain international economic stability to an agency that provides long‐​term foreign aid. In the process, the fund has turned countries into loan addicts. Seventy countries have depended on IMF credit for 20 or more years. As the accompanying graph shows, once a county receives IMF credit, it is likely to become dependent on fund aid for most, if not all, of the following years. That does not speak well either of the conditionality or of the temporary nature of IMF lending.

Knowledge of this perverse effect prompted former Russian Deputy Prime Minister Boris Federov last year to warn against a new loan to Russia, which was subsequently approved: “I strongly believe that IMF money injections in 1994–1998 were detrimental to the Russian economy and interests of the Russian people. Instead of speeding up reforms, they slowed them.” The IMF has since suspended that loan program due to Moscow’s non‐​compliance with its conditions.

In that sense, Russia is not unique. The fund’s conditionality has little credibility around the world because the IMF has an institutional incentive to lend. It must provide credit in order to survive. The fund’s virtually indiscriminate lending behavior has made that point abundantly clear to borrower countries, something that further undermines the agency’s credibility. The recent report by the Meltzer Commission on international financial institutions confirms the problem. The Commission surveyed research on conditionality, including studies by the IMF and World Bank, and found “no evidence of systematic, predictable effects from most of the conditions.”

The IMF is most effective at promoting liberalization when it ceases to lend. Economic reality tends to concentrate the minds of policymakers in developing countries. Unfortunately, suspensions of IMF aid are rare, they occur usually in highly visible cases when countries grossly violate IMF agreements, and they are temporary. The Meltzer Commission has thus called on the fund to no longer provide long‐​term credit, a proposal with which U.S. Treasury Secretary Lawrence Summers agrees. The Overseas Development Council also concurs and adds that the IMF’s “involvement in deeper structural issues in economics‐​even in times of crisis‐​should end.”

In its role as aid agency and crisis manager, the IMF has been ineffective at promoting self‐​sustaining growth and market reforms. Countries that have reformed, such as Argentina or South Korea, have not done so because of IMF impositions. Crisis has been the determining factor for change. As the Meltzer Commission reports, even in crisis countries, “Neither the IMF, nor others, 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 those activists mistakenly deriding capitalism and the IMF in the same breath.