In Other Words
Breaking the IMF Habit
Journal of Development Studies, Vol. 40, No. 6, August 2004, Oxfordshire Borrowers beware: the International Monetary Fund (IMF) can be addictive. Several countries have taken so many shots of cash that the IMF has become one of their long-term creditors. This turn of events is an embarrassment for an institution created to provide temporary balance ...
Journal of Development Studies,
Vol. 40, No. 6, August 2004, Oxfordshire
Borrowers beware: the International Monetary Fund (IMF) can be addictive. Several countries have taken so many shots of cash that the IMF has become one of their long-term creditors.
This turn of events is an embarrassment for an institution created to provide temporary balance of payments support. It also raises the hackles of critics who worry that the IMF is becoming too much like the World Bank, which provides long-term financing for development. The IMF is concerned enough that its new internal advisory panel chose "prolonged use" as the subject of its first report.
British economist Graham Bird examines long-term debtors in a recent article for the Journal of Development Studies, "The IMF Forever." The author of a 2002 book on reform of the fund (IMF and the Future) and advisor to the fund panel, Bird extracts patterns from the IMF’s list of long-term users, which is topped by the Philippines, Pakistan, Haiti, Panama, and Senegal. Most are commodity exporters who lack access to private capital that could buffer commodity price swings. The countries generally have rigid budgets that prevent spending cuts in the face of fluctuating revenues, and they are often serial debt reschedulers, owing large sums to the World Bank, regional development banks, and, above all, bilateral creditors.
Bird draws few conclusions about what these dependent nations say about the IMF. Some critics charge that the IMF is unwilling to walk away from countries that have not performed. But just as fund staff are reluctant to renounce problem countries, so too are the Group of Seven (G-7) governments. The IMF negotiates poor countries’ budgets, protecting both poor countries and their rich creditors from potentially unpleasant negotiations — a service that the IMF’s largest contributors (namely, the G-7) often prefer to cutting a country off altogether. The result, warns Bird, is that "a country’s authorities may come to rely on the [f]und to design policy," eroding both "the will and the capacity" to do it themselves.
Bird’s focus on small, low-income users also obscures the fund’s most pressing problem: the risk of prolonged use by large, middle-income countries that received loans in recent years. Between 2000 and 2002, the IMF extended bailout packages to Argentina, Turkey, and Brazil as large as those extended to Mexico in 1995 and South Korea in 1997–98. The results were mixed. There was complete failure in Argentina and qualified successes (to date) in Turkey and Brazil. Even when these bailouts worked, the fund was not repaid as fast as when it lent to Mexico and South Korea, in part because recent recipients had larger overall debts. This new class of prolonged users depends on the IMF not because they lack access to private capital, but because fund financing helps them reassure domestic creditors and survive swings in international markets. Without large IMF loans, these countries could default. Funds stuck in these nations cannot be lent to other countries, raising concerns that the IMF is facilitating a permanent withdrawal of private credit.
Bird’s prescriptions for reducing dependency include helping borrower countries formulate budgets independent of fund assistance. But the biggest problem facing potential IMF addicts is often excessive debt, whether to private creditors or to other governments. Their dependence on the IMF is unlikely to change until their debt falls back to safer levels. Tough love is the right answer in some cases. If the fund wants to prevent a new generation of IMF addicts, it must refuse large bailouts to countries already saddled with unsustainable debt.