The banking system had collapsed, bank accounts were frozen, and the country was facing an angry middle class that had been promised that their peso deposits would always be matched by dollars at a one-to-one rate. The economy was at rock bottom, with first-quarter GDP down at a Official unemployment would peak at The majority would fall below the poverty line in a country that until recently had enjoyed among the highest living standards in Latin America.
Overview of Policies and Performance
As it turned out, negotiations would drag on for the entire year of , concluding only after the Argentine economy was already recovering. Foreign creditors, especially from Europe and Japan, lobbied their governments to get the IMF to press for more. The Fund also wanted to slow the growth of the money supply.
This appeared even to conservative central bank and finance ministry officials in Argentina as being another case of dangerous overkill. Like a general still fighting the last war, the IMF saw hyperinflation as a real danger, and that was a major reason for its support of the fixed exchange rate all the way to the abyss at the end of Editorials in the business press were quite bitter, all the way up to the settlement between Argentina and the creditors holding defaulted debt in In both Russia and Brazil, Fund economists had exaggerated the dangers of hyperinflation that could supposedly result from the collapse of fixed exchange rate systems.
But there was one crucial, dramatic showdown between the Argentine government and the IMF in September that was perhaps a historic moment in the history of not only Argentina but also the Fund and the region. The IMF was pushing hard for concessions on a number of issues, including the debt. The government refused to give in, but without a new loan from the Fund, Argentina would not be able to make payments due that month to the Fund itself. Now, this was much more serious than defaulting to private creditors. In such a case, essential credit in the private sector, such as letters of credit from banks that are necessary to carry on normal trade, can be cut off.
Within a week, the IMF backed down and agreed to lend Argentina enough money to maintain its debt payments to the Fund. Clearly the Fund did not act as a lender of last resort, as detailed above. And since the IMF had been the most important avenue of influence for Washington on economic policy in developing countries, U. So this was where the overwhelming majority of IMF lending was now concentrated. Now the IMF had a new role, in the implementation of austerity policies in high-income countries in the eurozone, as well as some middle-income countries in Eastern Europe and the former Soviet Union.
In matters of European economic policy, the United States would defer to the European authorities and their directors and governors within the IMF. Treasury Department mainly calling the shots, as in the case of its decisions regarding developing countries.
Prolonged Use and Conditionality Failure: Investigating IMF Responsibility
Nonetheless, the Fund has something of its own identity and policy direction as an institution, and it is worth examining how much it has changed in its ideas and practices since the Great Recession. It missed the two biggest asset bubbles in the history of the world: the U. Both of these bubbles caused recessions when they exploded, with the bursting of the U. These bubbles were not only easy to recognize in hindsight; they were quite plain and obvious for years before they burst.
Dean Baker took the time to explain the basic arithmetic underlying both of them, well in advance of their collapse. It is no excuse to say, as defenders of the Fund will do, that most other economists and investment fund managers also missed these bubbles. Most of these actors had conflicting interests.
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For example, money managers are often rewarded or punished for their performance relative to their peers. A mutual fund manager who saw the stock market bubble in is faced with a dilemma: if, on the one hand, he pulls out of the stock market, and—before its bursting—it provides double-digit returns for another year to those who stay in, he may very well be punished. On the other hand, if he stays in, the bubble bursts, and his fund loses 20 percent along with everyone else, that could be much less threatening to his job or career.
Overall, it has not done very well in its recommended policies since the Great Recession began. A look at forty-one countries34 that had IMF agreements as of October found that thirty-one of them had been subjected to procyclical macroeconomic policies—either fiscal or monetary policies or, in fifteen cases, both —that would be expected to worsen an economic downturn in the borrowing countries. Sometimes as in the cases of Hungary, Latvia, the Republic of Congo, and Haiti the policy changes appeared to be the result of social unrest or other pressures on the borrowing government.
But the original errors, made after the U. No matter how one looks at it, IMF program lending during the Great Recession had harmful conditions attached for the majority of borrowing countries. Ukraine at this time was facing a number of downside risks that made austerity particularly inappropriate.
Investment in Ukraine was also weak about half its pre—Great Recession peak and the uncertainty surrounding the possibility of further civil conflict weighed upon investors. To be fair, there were a couple of positive developments in IMF policy during this time. It is difficult to say if this had much impact in countering the global recession.
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Most of the funds were allocated to the high-income countries, which had no need for them. The Fund also made some limited credit available without conditions, but it only went to a few countries that happened to have right-wing governments allied with the United States: Poland, Colombia, and Mexico.
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For example, there has been new IMF research that acknowledged that developing countries could benefit from capital controls in some situations. It showed that IMF economists had significantly underestimated the fiscal multipliers in making their growth forecasts for countries during the world recession. In other words, the losses in output and employment were significantly worse than expected because of the error in measuring the impact of government spending and taxation on growth.
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Blanchard and Daniel Leigh followed up with a longer paper that confirmed this result. Blanchard himself has made any number of statements to the press against stimulus policies or against even beginning to reverse austerity as various times. In other words, the glimpses of light in IMF research did not seem to illuminate even high-level policy statements, much less actual policies. And these policies appear to be pretty well entrenched in the high-income countries as well. An examination of sixty-seven Article IV consultations—the reports produced by required regular meetings between the IMF and member governments—for the EU governments during the four years —11 revealed a consistent and disturbing pattern.
This is especially true when we are talking about policies for countries that are important to the people who actually run the institution. In practice, this means that the U. Treasury Department has the overwhelmingly dominant voice, with some input from other rich countries— although Washington generally defers to the European governments on policy in Europe, such as that concerning the eurozone. In general, there are rarely substantive differences between the policy makers of these two huge economies.
So there would probably need to be a big shift in the structure of power at the IMF before there would be major changes in policy. This is true regardless of who is managing director. When Dominique Strauss-Kahn was at the helm, he seemed to be aware that the austerity in Greece was counterproductive not only for Greece but also for the eurozone.
However, there was not much that he could do about it, despite the fact that he had a strong personal stake in the outcome: prior to the scandal that toppled him in , he was planning to run for president of France and certainly did not want to risk having the IMF involved in a major economic failure while he was running the organization.
Similarly, the IMF recently retreated from its demands to the European authorities for significant debt relief for Greece and signed on to a loan program that did not meet its own debt-sustainability criteria—although it will be revisited later this year. The vast majority of the world has little or no say at all in the Fund, and there has been a movement to change that for more than two decades.
The most recent reforms to voting shares, which were proposed in and just recently made effective after five years of delay by the U. Congress, left the U. This is enough to maintain a U. More importantly, for all other decisions the rich countries as measured by the Organization for Economic Cooperation and Development , who generally vote together with the United States, still have 63 percent of voting shares.
Nonetheless, at this point the voting and governance structure is not the main obstacle to changing IMF policy. At present, the developing countries are not using their potential influence within the Fund. Their representatives are mainly concurring with the decisions of the G If any sizable bloc or blocs of these countries were to band together for change within the Fund, there could be some significant changes in policy even with the current lopsided voting shares.
We agree that identifying causality poses formidable problems, especially those associated with the endogenous nature of the decision to request IMF financial support. The evaluation report therefore does not claim that there is strong statistical evidence associating prolonged use with widespread adverse economic outcomes. Moreover, as the staff notes, some of the most important potential negative effects, such as the impact of successive program negotiations on the process of economic policy formulation, are not amenable to statistical analysis.
Nevertheless, the lessons emerging from the case studies are relevant because they involved countries that had been among the most prolonged users and illustrated four different types of prolonged use: prolonged use of concessional resources Senegal ; prolonged use of general resources with high disbursement rates Philippines ; prolonged use of interrupted programs Pakistan ; graduation from prolonged use Jamaica and Morocco. Moreover, the questionnaire responses from the broader group of prolonged users suggest that many of the issues that surfaced in the case studies are of broader concern.
The staff also suggests that prolonged involvement in precautionary arrangements may have different and more beneficial effects from other types of prolonged use. This may well be true, but it is not an issue that we addressed in the evaluation. The Managing Director notes in his statement that the Executive Board will need to take a view on whether specific policies need to be evolved for dealing with prolonged users or whether a broader, preventive approach will suffice.
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The IEO sees the two approaches not as alternatives but as complements. One of the messages that has emerged from the evaluation is that in the past, strategies explicitly approved by the Board for addressing the issue of prolonged use have not been implemented consistently.
It is for this reason that we have recommended the adoption of a definition of prolonged use, distinguishing suitably between low income countries and others, which would help to identify cases where special procedures would be automatically triggered. We wish to emphasize that these procedures do not necessarily imply greater restrictiveness in lending—only greater clarity and due diligence on the appropriate strategy to deal with prolonged use.
In connection with the need for greater selectivity in extending financial support, we agree with the staff para. But we would emphasize two points. First, the Executive Board needs to be given candid assessments of risks, including nonimplementation risks, and of the implications of withholding Fund support, to make such judgments. Second, the long-term interest of member countries is not well-served by having a series of programs with a high probability of nonimplementation. We agree that there is indeed such a general perception but the thrust of our recommendation is that this is not immutable.
The boundaries between surveillance, other instruments e. Such efforts are desirable if, as the IEO report suggests, the insistence on lending arrangements leads to prolonged uses which has significant adverse effects. However, IMF lending arrangements may in fact not always be the instrument best suited to the varied needs of the donor community.
The staff statement in para. We would like to stress that these two messages are entirely consistent: the fundamental issue is one of prioritizing conditionality and ensuring that streamlined conditions including, where appropriate, prior actions are well-integrated with the core program design and lead to effective monitoring.