[DEBATE] : Known for Tight Spending, I.M.F. May Have to Loosen Reins After G-20 Windfall
Riaz K Tayob
riaz.tayob at gmail.com
Sun Apr 5 21:21:44 BST 2009
[the problem is the solution....]
Known for Tight Spending, I.M.F. May Have to Loosen Reins After G-20
Article Tools Sponsored By
By LANDON THOMAS Jr.
Published: April 4, 2009
LONDON — Last week, the leaders of the world's most powerful nations
effectively passed the buck — along with hundreds of billions of bucks —
to the International Monetary Fund.
But in doing so, they left unanswered a crucial question: Can the
I.M.F., an institution known for requiring stringent antispending
policies as the price for extending aid to countries in trouble, quite
suddenly disburse public monies to spur growth and at the same time
ensure that they are used responsibly?
"This is the I.M.F.'s biggest challenge since Bretton Woods," said Simon
Johnson, a former economist at the fund who teaches at the Massachusetts
Institute of Technology. "Throwing money at the problem is certainly not
the answer, but on the other hand if you don't force austerity on a
Belarus, you are not credible."
The I.M.F. was created in 1944 at a New Hampshire resort, Bretton Woods,
where the United States and Britain led other nations in creating the
first of a group of international organizations that became pillars of
the postwar international system.
Of the $1.1 trillion in additional support for the global economy
trumpeted as the core accomplishment of the Group of 20 summit meeting
here, $750 billion consists of new lending commitments and credit
guarantees for the I.M.F. That hand-off to the fund was a tacit
admission that fundamental differences between the United States and
Continental Europe over encouraging major industrial countries to expand
their own stimulus programs could not be bridged.
The escalation of the I.M.F.'s responsibility comes at a time when the
fund itself is struggling to redefine its mission.
Criticism of the fund has long focused on its image as a hectoring
policy scold pushing for deep budget cuts, privatizations and other
market-friendly measures more in tune with the demands of foreign
investors than the needs of the local population. That focus, supporters
and critics agree, has branded the fund an enforcer of what they call
the "Washington consensus" — the creed of free markets and fiscal
For many experts inside and outside the fund, that emphasis seems too
narrow for the challenges facing today's global economy, and possibly
hypocritical. It is hard to demand fiscal discipline of borrowers when
governments in the United States and Britain, at the epicenter of the
collapse, are running some of the largest budget deficits and most
expansive monetary policies as they try to spend and borrow their way
out of trouble.
As Prime Minister Gordon Brown of Britain declared Thursday, "The old
Washington consensus is over."
For the fund's managers, the move away from that consensus — and from 20
years of preaching fiscal caution — poses some very practical questions.
Most important is whether they can find a way to ensure that donors'
funds are not squandered while nursing borrowers through a wrenching
global recession for which they bear little responsibility.
To do that, experts say, the I.M.F. will need to revert to the mission
it was given at its birth, when it was less a monitor of good policy
behavior than the anchor of a nascent post-World War II global financial
"This goes back to the idea of the I.M.F. as a source of liquidity, not
a shadow government looking over the shoulders of finance ministers,"
said Philip Lane, an international economist at Trinity College in Dublin.
There have already been signs of change.
Late last month, the I.M.F. announced a revamp of its lending criteria
so that less emphasis is placed on evaluating a borrower's ability to
meet "structural performance criteria," the fund's jargon for such
measures as spending cuts and tax increases.
Supporters of the I.M.F. say that the fund has learned lessons from its
experience working with Asian countries after the region's financial
crisis in 1998 and is now in a position to offer credit without harsh
Compounding this issue is the fact that the I.M.F. is, by some accounts,
understaffed after having laid off as much as 15 percent of its staff
Nowhere is tension over the I.M.F.'s role more acute than in Turkey,
which resumed talks with the fund on Thursday after having broken them
off in January. For years, Turkey — with its budget deficits, high
inflation and a succession of governments incapable of reforms — has
been a classic I.M.F. scofflaw, failing to meet conditions of agreements.
Under Prime Minister Recep Tayyip Erdogan, the government had addressed
many of its underlying economic ailments and, it thought, settled its
account with I.M.F. But the global downturn has again put Turkey's
economy in a precarious state, and for months the government has
resisted a new deal, despite the entreaties of foreign investors and the
Turkish business community.
Instead, Turkey has argued that cutting spending and raising taxes to
close its deficit, as the I.M.F. requires, is nonsensical after its
economy shrank by 6 percent in the last quarter of 2008.
"I don't want the I.M.F. to impose restrictions on our fiscal policies
just to guarantee the money that they give us," said Saruhan Ozel, an
economist at DenizBank in Istanbul, one of the few in the Turkish
private sector who have spoken out against an I.M.F. deal. "Just the
opposite, the government should be able to spend what it needs in order
to get the real economy moving."
Turkey's talks with the I.M.F. were suspended several months before the
fund's recent disclosure that it would demand fewer fiscal concessions
in return for lines of credit. And the fact that Mr. Erdogan and the
I.M.F. president, Dominique Strauss-Kahn, met last week in London,
before President Obama's visit to Turkey, suggests that Turkey may be
the first country to benefit from the recent changes at the fund.
More information about the Debate-list