This essay is part of a strategic dialogue on the IMF. The accompanying essay by Martin S. Edwards is here and his response to Ambrose is here. Martin Edwards’ response is here.
The International Monetary Fund (IMF), the Washington-based multilateral institution charged with overseeing the global macro-economy, has had a rollercoaster year. At its last annual meeting, held jointly with the World Bank in October 2008, participants could peruse displays in the World Bank lobby about the current crisis. But these displays referred to the food and fuel crises that developing countries had been staring down during the previous months. The enormity of the global financial crisis was still being digested by the very international financial institutions that were supposed to predict such problems, help avert them, and resolve the negative impacts.
In 2008, the IMF was reeling from a convergence of its own organizational crises. It was losing its client base. All of its biggest borrowers were paying back their loans early to free themselves from the notoriously stringent IMF conditions, which constrict economies by hiking interest rates, imposing inflation and deficit caps, mandating public-sector layoffs, slashing domestic budgets, and more. That meant a solvency crisis. Without its big borrowers the IMF was not generating the income it needed, was facing its first-ever budget deficit, and was laying off 10% of its workforce. As a result, the IMF was suffering a legitimacy crisis rooted in its anti-democratic voting structure, which puts control of the IMF’s considerable power to shape developing countries’ economic policies in the hands of a minority of wealthy countries.
At the time of those meetings the IMF was negotiating its first crisis-related loan, to Iceland. A gauge of the seriousness of the crisis, this loan represented the IMF’s first to a developed economy since 1976. The loan to Iceland also turned out to be the beginning of a dramatic reversal of the IMF’s fortunes. A planet’s collective misery, it seems, can be a bureaucracy’s saving grace.
As the IMF prepares for its 2009 annual meeting next month in Istanbul, it again — as in the 1980s and 1990s — strides the global stage as a prime force in determining the world’s economic fate. It has introduced reforms with some positive features. But it has not questioned, much less shifted away from, the “market-fundamentalist” orientation it has prescribed and enforced for so long.
Back on Top
For those concerned about the impact of IMF conditions — which had continued unabated in the poorer countries of Africa, Central America, and the Caribbean that could not afford to pay off their loans — there was a certain satisfaction in seeing the IMF repudiated and twisting in the wind. But however well-deserved the animus against the IMF, there is some logic in the rejuvenation of the institution during a major financial crisis. Addressing such problems is what the IMF is supposed to do, after all. It’s not clear, however, that the IMF should pursue that mission by assuming the role of chief policymaker in developing countries, where its short-term orientation collides with the imperative for expansion and development.
The IMF’s role as the lead agent for addressing the financial crisis’s impacts in developing countries was decreed in April by the G-20, the newly emergent politburo of the global economy. This set of the largest global economies came up with a headline pledge of $750 billion to be routed through the IMF. Some of that has yet to materialize. And $250 billion of it is actually a new issue of Special Drawing Rights (SDRs), which requires no capital outlay. Very little of the funding — about $50 billion at most — was designated for low-income countries, which despite being on the margins of the global economy are the most vulnerable to sudden shocks.
As the IMF resumes its high-profile role — and that appears to be a foregone conclusion — the question is: Will it (or more to the point, the governments that control it) learn from past errors? Will its interventions be done in a less damaging way?
Looking at its performance so far, the answer appears to be: not really.
The IMF’s Managing Director Dominique Strauss-Kahn, about halfway through his five-year term, appears to be the most politically adroit head of the institution in memory. But although he made a splash as the crisis hit the headlines by coming out in favor of stimulus spending, even if it meant higher deficits, it soon emerged that he meant that advice only for industrialized countries. For countries with less wherewithal, the IMF suggests some familiar medicine: Keep inflation very low, reduce your deficits, reduce your spending, cut out domestic borrowing, and eliminate subsidies for basic goods.
The IMF thus advised the United States and Europe to adopt counter-cyclical policies (to counteract the crisis) by plowing resources into reigniting their economies. But it told other parts of the world to apply the brakes in the midst of their skid and then wait for the rich countries’ spending to trickle down and rescue them. Meanwhile, the collapse in prices for developing countries’ commodity exports, migrants’ remittances, and foreign investment will accelerate the downward spiral for the world’s most vulnerable people.
The New IMF: Looser, Restructured, and Generous?
But maybe the IMF isn’t the ogre it once was. After the G-20 London meeting, as part of a series of reforms for low-income countries, it doubled access limits to its funds, announced zero-interest rates for the next two years, unveiled a plan to raise more money for loans. Of course, more money available from the IMF raises the familiar question: Is it worth the tradeoff? But with the other reforms the IMF is implementing, could it be that new IMF loans are now, contrary to what activists have long maintained, better than no money at all?
The IMF’s creation of the Flexible Credit Line (FCL) received the most publicity. Advocates hailed it as, at last, a program of precautionary crisis assistance that could attract clients (at least two previous attempts flopped). It offers very large credit lines to countries that can demonstrate firm adherence to the IMF’s policy criteria (though the FCL criteria haven’t been published). Ideally the countries would not need to use the funds, but if the need arose, they were guaranteed. In its most novel feature, the program disburses funds without any conditions.
Rather than disappear, however, the conditions have essentially migrated from loan reviews and letters of intent to undocumented pre-conditions: you can’t get in this club unless you’re already a high performer in the IMF’s eyes. The proof is in the FCL’s limited use. In six months it has attracted only three successful applicants. If other countries could qualify for unconditioned, high-value credit lines, they would certainly avail themselves. The three countries that have — Mexico, Poland, and Colombia — are all economically stable and relatively unscathed by the global crisis (and, as has been pointed out, all close U.S. allies). Countries that really need a program like the FCL cannot qualify for it.
Accommodating Reality
The IMF has asserted frequently that it has loosened some of its quantitative conditions in response to the global financial crisis. And it does appear that they have tolerated higher budget deficits and inflation rates from client countries. According to the IMF, low-income countries with programs had a projected 5.3% inflation rate for 2008 (as of October 2007), but now it estimates the average inflation rate across its LIC borrowers at nearly 12%. And the IMF can live with that. But they have also been clear that these are temporary measures. Once the impacts of the crisis recede in a given country, it should return to strict monetary and fiscal discipline. The IMF, then, is doing little more than bowing to reality. Under crisis conditions, countries have not been able to meet the strict targets demanded by the IMF. If it did not exercise some generosity in this regard, it would have to suspend dozens of loan programs.
This looseness is far from what civil society has demanded from the IMF, whether before or after the crisis. The IMF routinely requires low-income countries to meet ultra-low inflation targets, usually in the neighbourhood of 5%. Most economists consider this well below the acceptable inflation level for growing, developing economies. These targets constrict LIC economies and prevent governments from providing essential services like healthcare and education.
Civil society groups have been calling for a reorientation toward medium- and long- term economic planning. This means prioritizing the services and development priorities that low-income countries desperately need. The temporary loosening the IMF has practiced recently is merely a pragmatic leniency in a time of crisis; it is unlikely to allow sustained additional spending on services or development.
New Labels for Old Bottles?
In July, the IMF announced a restructuring of the programs that it uses to lend to low-income countries. These reforms have not yet been formally approved by the IMF board, though such approval is virtually certain. Thus far the IMF has only released a schematic outline of the new structure, with no detail on how conditionality linked to the various facilities might change (or not change). All signs are that the net conditions won’t change substantially, making this largely an exercise in “re-branding.”
The most surprising change is the elimination of the Poverty Reduction & Growth Facility (PRGF), the IMF’s main lending instrument for low-income countries. The PRGF was introduced with great fanfare in 1999 as the replacement for the notorious Enhanced Structural Adjustment Facility (ESAF), the source of the harshest IMF programs of the 1980s and 1990s. The PRGF added a requirement that programs be framed with civil society participation, through formulation of “Poverty Reduction Strategy Papers (PRSPs).”
Under the new structure, it appears that the PRSPs will be de-emphasized, no longer a pre-requisite for loans (though they will still be used in some form). The new name for the PRGF is the Extended Credit Facility; differences other than the new flexibility around PRSPs are not yet clear.
The Standby Credit Facility will provide short-term loans to low-income countries that do not require more elaborate programs (which would come under the Extended Credit Facility). It is the most likely site for an expansion of IMF activities in low-income countries. Under this new facility, low-income countries that do not wish to have a three-year program (which the Extended Credit Facility would presumably be offering, like the PRGF), but cannot trace all their difficulties to external sources, can now be accommodated. This could lead to new temptations that could draw in low-income countries not currently under an IMF program.
The last of the new facilities is the Rapid Credit Facility, which will succeed facilities for countries affected by conflict or natural disaster and the Exogenous Shocks Facility rapid-access component, introduced just a year ago. The latter vehicle has been the most interesting innovation for low-income countries. It offers low-conditionality loans with just one upfront disbursement (hence no review through which the IMF could threaten suspension or new conditions). In some cases the resulting programs still had significant conditions (such as Ethiopia’s February loan), albeit fairly narrowly focused; in others, such as Kenya’s May loan, it appears that the conditions are quite minimal (though a 5% inflation target is still called for).
Is this restructuring good news for low-income countries? Until we know more about the conditions that will accompany loans under the new facilities, it is premature to make any judgements. But civil society has long been arguing that the IMF needs to limit — or totally withdraw from — its involvement in developing countries, since it is not equipped to foster development. A new restructuring probably indicates an expectation that the IMF will continue to lend to low-income countries for some time. The loose design of the Standby Credit Facility could well increase the number of loans being made. So, in that larger sense, these reforms are probably bad news.
Recommended Directions
The United States or any other government will not likely consider opposing the adoption of these reforms, and it is not clear that civil society should invest energy in such opposition. A more important task would be to find alternatives to conventional IMF loans. The international community — the G-20 and powerful governments like the U.S. — should seek other ways to support the countries most affected by the global financial crisis. And make no mistake: More support will be required. The money supplied to the IMF for low-income countries is not adequate under any circumstances, and the conditions the IMF will attach are all too likely to land countries in new troubles.
Governments and the international community should be looking toward recommendations like those made in the report of the UN’s “Stiglitz Commission.” The Commission has urged the creation of new global regulatory agencies and a reformed global reserve system. It has called for a new, more democratic credit facility and an international bankruptcy court. All of these recommendations would do more to address the real causes of the financial crisis than any policies the IMF is likely to recommend.