Over the past year or two the IMF has made some positive changes in policy and in their published work, some of which challenges the conventional wisdom among central banks and even the past practice of the IMF itself. The Fund, which prior to the current decade was one of the most powerful financial institutions in the world, has presided over a number of economic disasters and was widely seen – at least in the low-and middle-income countries to which it has lent for the past four decades – as generally doing more harm than good. Now there is debate over how much it has changed, and what these changes mean for the IMF itself and its role in the global economy going forward.
First, the good news: last year the IMF created some $283 billion of its reserve currency, Special Drawing Rights (SDRs), available for borrowing by its 186 member countries. This is exactly the kind of thing that should be done in a world economic downturn. It is similar to the "quantitative easing" – i.e. creating money – that the U.S. Federal Reserve and the Bank of England have done during the recession. Although the IMF is not a world central bank, in this case it was acting as one, in a positive way. And the SDRs were made available to member countries without any conditions attached – something the IMF has never done before. Unfortunately, the SDRs were allocated according to each country’s IMF quota, which meant that the high-income countries got the bulk of the money. And of course most of the low-income countries can’t afford to take on more debt. Nonetheless, this was a positive step for the IMF toward developing countries.
The IMF has also recently published some interesting papers which indicate a re-consideration of their views on some important policy issues. The first, entitled "Rethinking Macroeconomics," was co-authored by the IMF’s chief economist Olivier Blanchard and released on February 12. In this paper, the authors question a number of orthodoxies: is the 2 percent inflation target that is common among central banks too low? Should central banks in some countries target the exchange rate? This kind of re-thinking could lead to governments having more room to pursue policies that lead to higher employment.
The second paper, "Capital Inflows: The Role of Controls," is even more important. In this paper, the authors suggest that government controls on capital inflows may help countries be less vulnerable to economic crises. Recall that in the 1990s the IMF, together with the U.S. Treasury department, pressured Asian countries such as Indonesia and Thailand to remove restrictions on capital inflows. This was a major contributor to the Asian financial and economic crisis of the late 1990s, which was brought on by a sharp reversal of the large capital inflows that came in after this de-regulation. The IMF has generally favored removing restrictions on capital flows, despite the fact that there has never been much empirical evidence in favor of such de-regulation.
These papers indicate perhaps an unprecedented level of rethinking at an institution that has represented a conservative orthodoxy for decades. The question is, how much can we expect it to lead to a change in the IMF’s policies – most importantly, the conditions it attaches to lending?
This is where the bad news comes in. In the last few years, the IMF has continued with a long-held double standard: it supports counter-cyclical policies – i.e. expansionary fiscal and monetary policies during a downturn – for the high-income countries, but not so much for low and middle-income countries. In a study of 41 countries that had current agreements with the IMF in 2009, we found that 31 of these agreements had involved tightening either fiscal or monetary policy, or both, during a downturn. This contrasts sharply with what the IMF recommends for the rich countries like the U.S., which is running very large budget deficits and the Fed is holding policy interest rates at near-zero, and has created hundreds of billions of dollars in order to counter-act the recession (although our own stimulus has still been much too small relative to the fall-off in private demand; hence the loss of 8.5 million jobs and the bleak employment picture for years to come.)
Some of the IMF-sponsored macroeconomic policies that have provoked so much ire in the past continue today. The Fund is currently squeezing Ukraine, for example, to reduce its spending, and suspended its disbursement of funds to the government in order to force budget tightening. This despite the fact that Ukraine’s economy shrank by about 15 percent last year, and its public debt was only 10.6 percent of GDP. A country in this situation should be able to borrow as needed to stimulate the economy, and reduce its deficit after it has accomplished a robust recovery. In nearby Latvia, the IMF and European Commission are lending with conditions that have already resulted in the worst cyclical downturn on record, and it is not clear when or how fast the economy will eventually recover.
It also remains to be seen whether the IMF will follow through and change its actual policy on capital controls. If it were serious, it could actually help countries design and implement such policies successfully. But the Fund’s agreement last year with Ukraine, a country that seems to have successfully used capital controls during the downturn, called for these to be phased out.
Most bad policies result from either the power of special interests or ideologically-driven mistakes. The Fund appears to be gradually re-thinking some of its ideologically-driven mistakes, which is a good thing for the institution – and because it is influential, for the world. But the problem is that it is still run by "special interests." First, it is controlled by the finance ministries of the high-income countries – principally the U.S. Treasury department. The borrowing countries have practically no say in decision-making; the 2006 changes in voting shares lowered the rich countries’ majority from 52.7 to 52.3 percent, and proposed changes will take it to 50.9 percent. No significant change there since 1944.
But there is another obstacle to policy change at the Fund that is equally important: within the G-7 governments that run the IMF, their finance ministries are also dominated by special interests. This is certainly true of the U.S. Treasury Department, which has had a disproportionate number of personnel that were previously employed by Goldman-Sachs. To see how influential these corporations are in the U.S. government, we need only look at the "nothing-burger" legislation that the Congress is considering for financial reform, despite massive public anger and the financial sector’s well-publicized excesses in the bubble years leading up to the recession. How much change can we expect from the IMF on such key issues of capital controls while Wall Street and European banks still hold sway over the Fund’s directors?