Monday, April 28, 2008

Crisis at the IMF?

In the midst of the current food crisis in much of the developing world, the international financial institutions (i.e. the International Monetary Fund (IMF) and the World Bank) are trying to cast themselves as saviors of the developing world. Would that this were true - but the IFIs have never been the saving angels they see themselves to be. At best, the IMF exists to provide emergency budget and balance-of-payments support loans to beleaguered governments, and does so with minimal interference. At worst, the IMF attaches strict conditions to these loans, requiring developing countries to slash public expenditures targeted at poverty alleviation, liberalize volatile portfolio flows to countries without a well-developed banking sector, and helps banks negotiate full repayment on loans made to previous corrupt dictators (like Ferdinand Marcos in the Philippines, or Mobutu Sese Seku in Zaire (now the DRC)).

Fortunately, for all the talk from the IFIs following their semi-annual meetings earlier this month, the IMF is faced with a financial crisis of its own, and its influence is waning. When I was researching the Bank of the South last semester, I also sidetracked onto the IMF to see how their finances looked - and what is obvious is that nearly every country in South America has repaid the fund (with Argentina forcing creditors to accept only 30% of what they were owed, arguing against the fund's bad lending practices and conditionalities). In fact, countries across the globe are repaying the fund at an accelerated pace - even Turkey, which now holds around 40% of the IMF's portfolio, prompting The Economist to call it the "Turkish Monetary Fund." Regardless of the rhetoric, the decline of the international credit hierarchy and the clout of the IMF may end up being a welcome thing, so long as countries with viable and responsible governments retain access to sufficient credit to keep themselves afloat. None of this is to suggest that we are seeing the end of the IFIs, but their influence is, and will probably continue to be, significantly reduced.

A recent CEPR piece presents similar research and analysis in more detail, I highly recommend it.