This response is part of a strategic dialogue on the IMF. The original essay by Martin S. Edwards is here, and the original essay by Soren Ambrose is here. Edwards’ response is here.
While the new facilities which Martin Edwards highlights represent a positive direction, I do not think they represent a new phase in the IMF’s relationship with client countries.
The promise of large credit lines and the absence of conditions have made the Flexible Credit Line (FCL) more attractive than its predecessors. No government ever tested the earlier versions, largely due to fear of the stigma attached to any IMF agreement, even a precautionary one. Under such circumstances, the FCL should be very attractive, but only three countries (Mexico, Poland, and Colombia) have qualified for the program during its first six months. Its criteria, then, are likely quite stringent, which means that the FCL, at least, is maintaining the high standards Edwards advocates.
But we should ask whether the job of a public, multilateral financial institution is to create instruments available only to “countries with substantial access to international markets.” Where private markets are working, providing signals for investors and the required capital for developing countries, public intervention is less important than in countries for which the system does not work. And there are plenty such countries today.
As Edwards notes, the international community has designated the IMF as the lead agency in dealing with the impact of the global crises in developing countries. It has been accorded unprecedented resources for the task. Should the largest portion of those resources be dedicated to backing very high credit lines for countries that can procure resources elsewhere? Putting aside the question of the IMF’s suitability for the moment, should these resources go to assisting countries with immediate needs and populations put in deeper peril because of the crises?
Low-income countries in Africa, Central America, and other regions have the greatest vulnerability to the current crises because of their extreme dependency on export commodity prices, migrants’ remittances, foreign investment, and aid. As Edwards notes, the IMF has a program of short-term emergency loans for such countries, which started in 2008 under the Exogenous Shocks Facility, and will soon be renamed the Rapid Credit Facility.
In fact, it is not clear that the IMF has applied, or will apply, the level of rigor Edwards advocates in choosing its beneficiaries. Its logic has been that countries suffering because of external factors, such as the global financial crisis, should be able to access relatively small emergency loans with few conditions or delays. This aspect of the Exogenous Shocks Facility is one of the few examples of the IMF putting its responsibilities as a public institution ahead of its usual role as enforcer of economic orthodoxy. Edwards, it seems, would advocate a retreat from this program as currently structured when, in fact, current IMF practice in this case should be retained.
But Edwards should not worry about the possible erosion of the IMF’s role in providing useful information to investors (or, as is more often the case for low-income countries, donor governments). Whereas the IMF once downplayed its function as a “gatekeeper” passing judgment on developing countries’ economic program, it now advertises its “signaling” as a primary service.
Indeed, this role causes most concern about the IMF among civil society groups. The IMF has a long history of imposing myriad conditions on developing countries in return for loans and enforcing them with the threat of signaling to other donors and lenders that they should suspend their assistance or investment.
Rather than simply try to “stabilize a country’s balance of payments,” IMF conditions for developing countries have arguably perpetuated poverty and instability. For 30 years, and continuing today, the IMF’s short-term, zero-sum economic outlook has meant that developing countries around the world have been forced to slash budgets, cut public wages, and maintain deficit and inflation rates at draconian levels.
The standard IMF demands, including single-digit inflation rates, prevent the hiring of needed teachers and medical staff in some of the world’s poorest countries. The IMF’s insistence on ultra-low inflation (5% is the most common target) constricts growth in countries that require more rapid expansion if they are ever to get out of the poverty trap. The IMF itself acknowledges that it’s not a development institution, and nowhere is this more apparent than in its failure to take a medium-term view of the needs of the poorest countries. The low-conditionality short-term loans from the Rapid Credit Facility are a step in the right direction, but still just a small part of the IMF’s work. Such loans — minus the destructive conditionality still attached to some of them — should become the only interventions the IMF makes in low-income countries.