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, or IMF.
But in doing so, they left unanswered a crucial question: can IMF, an institution known for requiring stringent anti-spending 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 IMF’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.”
Fiscal discipline: US President Barack Obama with UK Prime Minister Gordon Brown at the G-20 summit in London on 2 April. Of the $1.1 trillion in additional support for the global economy that the meeting has pledged, $750 billion consists of new lending commitments and credit guarantees for IMF. Philippe Wojazer / Reuters
Of the $1.1 trillion (Rs55.33 trillion) additional support for the global economy trumpeted as the core accomplishment of the Group of Twenty summit meeting, $750 billion consists of new lending commitments and credit guarantees for IMF. That hand-off to the fund was a tacit admission that fundamental differences between the US and continental Europe over encouraging major industrial countries to expand their own stimulus programmes could not be bridged.
The escalation of IMF’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 as an enforcer of what they call the “Washington consensus”—the creed of free markets and fiscal discipline.
For many experts inside and outside the fund, that emphasis now seems too narrow for the challenges facing today’s global economy, and possibly even hypocritical.
It is hard to demand fiscal discipline of borrowers when the governments in the US and Britain, at the epicentre of the financial collapse, are running some of the largest budget deficits and most expansive monetary policies on record as they try to spend and borrow their way out of trouble.
As Prime Minister Gordon Brown of the UK declared at the end of the economic summit meeting on Thursday, “the old Washington consensus is over”.
For IMF’s managers, the move away from that consensus—and from 20 years of preaching fiscal caution—poses some very real, and very practical, questions. Most important is whether they can figure out 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, IMF will need to revert to the mission it was given at the time of its birth, when it was less a monitor of good policy behaviour than the anchor of a nascent post-World War II global financial system.
“This goes back to the idea of IMF 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.
IMF was created in July 1944 at a New Hampshire resort, Bretton Woods, where the US and Britain led other nations in creating the first of a group of international organizations that became the pillars of the post-war international system. There have already been signs of change.
Late last month, IMF 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 IMF say the fund has learnt 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 conditions—as evidenced by its consideration of a request this week by Mexico for a $45 billion line of credit.
Compounding this issue is the fact that IMF is, by some accounts, understaffed after having laid off as much as 15% of its staff recently—a pruning that Johnson says was especially ill timed as the fund lost many of its best crisis managers.
Nowhere is tension over IMF’s role more acute than in Turkey, which resumed talks with the fund last Thursday after having broken off discussions in January.
For years, the country—with its chronic budget deficits, high inflation and a succession of governments incapable of carrying out reforms—has been a classic IMF scofflaw, signing agreements and failing to meet conditions.
Under Prime Minister Recep Tayyip Erdogan, the government had addressed many of its underlying economic ailments and, it thought, settled its account with IMF. But the global downturn has again put Turkey’s economy in a precarious state and for months, the Turkish government has been resisting a new deal, despite the entreaties of foreign investors and the Turkish business community.
Instead, Turkey has argued that cutting spending and increasing taxes to close its deficit, as IMF requires, is nonsensical at a time when its economy shrunk by 6% in the last quarter of 2008.
“I don’t want IMF 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 IMF 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 IMF 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 Erdogan and IMF president Dominique Strauss-Kahn met last week in London, before President Barack Obama’s visit to Turkey, suggests that Turkey may well be the first country to benefit from the recent changes at the fund.
©2009/THE NEW YORK TIMES