Why We Need the IMF
Since the outbreak of the Asian financial crisis, it has been open season for attacks on the International Monetary Fund. We have been told that the prospect of IMF bailouts caused the crisis and that the IMF's existence, if continued unchanged, will result in many more financial disruptions. Distinguished former cabinet officials, writing on this page, have asked "Who Needs the IMF?" And this newspaper has added its editorial voice to the chorus.</br></br>Here's a more balanced perspective: In a globalized economy, everyone needs the IMF. Without the IMF, the world economy would not become an idealized fantasy of perfectly liquid, completely informed, totally unregulated capital markets. Investors and lenders would still make decisions on the basis of imperfect information, and they would have to take into account the absence of an international lender of last resort. This would be a serious, perhaps devastating, defect. In fact, we got a good sense of life without the IMF in the 1920s and 1930s. The results included widespread competitive devaluation and trade wars in response to balance-of-payments problems, followed by a plunge into global depression and world war.</br></br>Without a guarantor of international liquidity, many good loans would not be made. Fundamentally sound private investment projects in emerging markets can be dragged down by decisions external to the businesses involved. Even prudent government policies can be waylaid by unforeseeable shocks. Either way, fundamentally good investments will run into temporary liquidity problems. In a world of flexible exchange rates, such temporary problems can be magnified by accompanying drops in the value of the domestic currency. IMF programs finance the adjustment necessary to give these countries and firms time to let their fundamentals pay off.</br></br>Thus, the IMF is the sovereign nations' credit union. It imposes strict conditions on countries' policies for bridge loans to get through hard times. Only a multilateral institution like the IMF could exert the discipline required without causing an unacceptable affront to a country's sovereignty. The benefits to the borrowing nation are that the adjustment program will be less painful and any resulting contraction less severe. The benefits to the lending countries are not only the availability of those credits to themselves, if and when they need them (as even the U.S. has), but a smaller contraction of world demand associated with the borrowing country's adjustment.</br></br>Some have claimed that these IMF conditions have been misapplied in the Asian crisis, demanding either too much austerity or unjustified structural reform. But IMF conditionality is highly pragmatic. Since the current crisis was not caused in large part by macroeconomic policies, but by financial fragility and lack of transparency, the conditions were designed to respond to those causes. The fund has been ready to renegotiate its programs and to loosen austerity (such as the inflation target for South Korea) as matters stabilized. There always is room for improvement in individual IMF programs. But attacks on the basic idea of IMF conditionality are thoroughly misguided.