The Role of the IMF
Joseph Stiglitz, formerly chief economist of the World
Bank, won the 2001 Nobel prize for economics for his for analysis of markets
with asymmetric information.
1997-98 global slowdown in one region-East Asia-spread from there to Russia
and to Brazil, eventually threatening a global meltdown. Even countries
that seemingly had had good macro-management, and been given A and A+
by the International Monetary Fund (IMF), were touched. They found their
interest rates soaring and faced budgetary problems to which their political
systems could not, or did not, adapt well.
The IMF mismanaged that crisis, exacerbating the downturns, and as the
economies in East Asia slid into recession and depression, commodity prices
collapsed. It was as much through the deterioration of commodity prices
and trade as through capital markets that the problems of East Asia spread
around the world.
Then, strong growth in the US helped prevent a downward tailspin. Today,
America's downturn has been part of the problem rather than the solution.
Meanwhile, Europe is discovering that the straitjacket in which it put
itself may have solved yesterday's problems but left it ill prepared for
today's. It has an independent central bank that focuses exclusively on
inflation and, like a child, goes out of its way to prove its independence
every time political leaders rightfully express their concern about growth
and unemployment. Unable to draw upon monetary policy, it also cannot
turn to fiscal policy because of constraints on deficits.
America will weather this storm. It may already be recovering. But the
rest of the world will not be so lucky. Already countries like Singapore
that managed to avoid a downturn in the last crisis have sunk into recession;
and many countries in Latin America are being hit hard, even before they
fully recovered from the last downturn.
While it would be nice to be able to blame macro-mismanagement in these
developing countries-just as the IMF and the US Treasury blame East Asia's
crisis on their lack of transparency-this simply will not do: Even countries
like Bolivia and Uruguay that have continued to earn the IMF's and Wall
Street's respect are now facing recession and worse.
America and the other advanced industrialized countries have a large stake
in what happens-if these countries see increasing unemployment, accompanied,
as it so often is, by urban crime and violence, a further dissolution
of the already fragile social capital, there will be disenchantment with
globalization, the market economy and possibly even democracy.
Fortunately, the international community has already set up an institution
to deal precisely with such a situation. As World War II was coming to
an end, the victorious nations worried that the world would again slip
into another depression. It had only been the war that had moved the world
out of that economic calamity. The same person who had helped us understand
the causes of such downturns and what countries could do played the central
role in crafting a new global institution. The great intellect and international
statesman was Lord Keynes; the institution was the International Monetary
Fund. It was to provide liquidity to countries needing to finance expansionary
fiscal policies to overcome an economic downturn, in circumstances such
as those today, when monetary policy was proving ineffective.
Unfortunately, something happened in the 50 years since.
Today, all too often, the IMF insists as a condition for providing assistance
that countries engage in contractionary monetary and fiscal policy, worsening
the downturn-in contrast to the IMF's founding principles, in which assistance
was to be provided on the condition that countries engage in expansionary
policies. Even countries that might be able to obtain funds to stabilize
their economy through, for instance, the forward sale of natural resources
are pressured not to do so.
And IMF pressure is effective, because without IMF support not only will
countries find it difficult attracting investors, but also much foreign
assistance is conditional on IMF approval. Today, countries are repeatedly
asking, "Why is it that in the US, when you are facing a slump, you
have expansionary fiscal policies? These are the policies that we were
taught in our economics courses in your universities. Why is it that you
go further-pressure was put on Japan to have expansionary policies? But
when it comes to the poor developing countries, least able to withstand
a downturn, with the most inadequate safety nets for those who will be
thrown into unemployment and poverty, you insist on contractionary policies?"
Today, we have the kind of problem that Keynes and others worried about
60 years ago: a global insufficiency of aggregate demand. The problem
is no surprise: A few countries, like China, are running massive surpluses,
in effect spending less than their income, putting the difference into
reserves. Other countries, worried about trade deficits, are trying to
trim them and put aside reserves. The IMF has the capacity to provide
the required liquidity. Even better, it can enhance global liquidity by
providing funds to areas of global concern-to promote a better environment,
to help the poorest and most indebted countries, to fight diseases, to
To be sure, for this all to be done in the most effective way might require
revisions in the charters of the international institutions, better teamwork
between the World Bank, which has as its mandate the reduction of poverty,
and the IMF, which controls the availability of funds, and, most importantly,
a change of mindset, a return by the IMF to its original mandate, a focus
on today's global problems of unemployment and economic downturn.
Much is at stake: Even the countries that have been most faithful in implementing
the IMF reform packages are beginning to doubt. Reform brought a few good
years of growth, but the growth was not sustained; critics say it was
In Latin America, the record since reforms is little if any better than
before (by some calculations it is even worse), and even the good years
can be thought of as little more than a partial catch-up from the lost
decade of the '80s.
What growth has occurred has largely benefited the already relatively
well off-even in a country like Mexico that has seen growth, those at
the bottom have not shared in the gains.
They were told that market reforms would bring them unprecedented prosperity.
Instead, it has brought unprecedented instability. Why should they continue
to believe in these reforms? Why should they not turn to other nostrums,
as false as they might be? Time may be running out.
The IMF and the international community can play either a positive or
a negative role in how the story unfolds. Will there be a new generation
of alienated young men, unable to find gainful employment, disgruntled
with a system that has failed them, as it failed so many of their parents
and grandparents? We have the knowledge to do better. We even have the
institutions to implement it. The question is, will we have the will to