Economists question IMF's ability to solve economic crisis listen11/14/08 SeÃ¡n Kinane
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World leaders are gathering in Washington, D.C., this weekend for a summit to address the global economic crisis. Already, the Financial Stability Forum and the International Monetary Fund, or IMF, have announced that they will conduct "early warning exercises" to identify weaknesses in the global financial system. But some economists are calling for a reduced IMF role.
The International Monetary Fund is known for imposing austerity measures on developing countries in exchange for emergency loans. Despite this, some world leaders are hoping the IMF can act as a â€œfinancial firefighterâ€ in the global economic crisis â€“ to the distress of some economists. In a conference call on Thursday, Joanne Carter, executive director of the RESULTS Educational Fund, said a declining IMF might be given new life by the G20 summit.
â€œJust over a year ago, the International Monetary Fund faced a shrinking loan portfolio, and in the midst of its own financial crisis was seeking permission to sell part of its gold reserves to finance its operations. At that point, incoming IMF director Dominique Strauss-Kahn identified the most serious issues for the fund as relevance and legitimacy. As the G20 prepares to meet in Washington this weekend, the global financial crisis has seemingly rescued the IMF from its identity crisis.â€
On Friday, Japanâ€™s Prime Minister said his country was willing to lend the IMF up to $100 billion to support countries that are hurting because of the global economic meltdown. But Carter said that as G20 leaders consider the role of the IMF in the current crisis, her group recommends that the IMF should get out of the development business.
â€œWeâ€™re deeply concerned â€” as an organization committed to addressing poverty, disease and illiteracy â€” with the assumption that the IMF should have a central role in response to the financial crisis, particularly in the worldâ€™s poorest countries. The IMF has a long and unfortunate track record of policy conditions and guidance that have constrained the ability of countries to ramp up spending to meet their own health and education needs, to support domestically-led development, and to protect their vulnerable populations.â€
Mark Weisbrot is co-director of the Center for Economic and Policy Research. He said the IMF was heavily involved in the Asian economic crisis ten years ago, in some cases making the situation worse by imposing austerity measures. Since then, middle-income nations have been less prone to seek help from the IMF and are seeking help from regional partners instead, Weisbrot said.
â€œNow, why is this? Well, the IMF has kind of a double standard: they are very willing to support expansionary macro-economic policies, what economists call counter-cyclical policies, in the rich countries. And they have for many years; even before this crisis, they nagged the European Central Bank, for example, to lower their interest rates just to promote growth. But they have a different attitude towards developing countries: there, they very often have supported what we call pro-cyclical policies, that is the economy goes into a recession, and they ask them to cut spending, and raise interest rates, the two most important macroeconomic policies.â€
Weisbrot said the current economic crisis started in the U.S. and other rich countries that bought toxic mortgage-backed securities and it spread from there. Wealthy countries guaranteed their banking systems, causing wealth to exit developing countries. Some countries also can devalue their currencies in order to increase export revenues, or as Weisbrot put it, export their way out of the crisis. But the IMF could play a positive role.
â€œIf you had an institution that really was looking out primarily for the interests of the global economy and not so much for the policy or ideological interests or particular interests of the board of directors that the IMF has often done, you would see an attempt to coordinate exchange rate policy.â€
â€œBut the main thing that countries need is to have the removal of pressures that came from the IMF and the freedom to do things to impose capital controls, impose appropriate regulations on their financial bodies, to take greater public sector role in the financial sector. And the big thing that Iâ€™d like to see come out of â€” you know, the big thing Iâ€™d like to see everybody agree on is that countries should have that freedom.â€
Weissman proposed a six-point agenda with specific reforms for the IMF.
"The first is that the IMF should exit the development business altogether. Second is to eliminate their mission creep. So in the areas where theyâ€™re going to continue lending, as they do the lending, the conditions that are attached to the lending should be very much limited.
"Third is that as the IMF and other mechanisms lead to really massive new public financing flows to developing countries, there should be a debt cancellation. Fourth is that the IMF should be prohibited from advancing any further financial sector liberalization.
"Fifth is that the IMF should be required to let countries pursue the expansionary macroeconomic policies that the United States and other rich countries are now doing, exactly as Mark said. â€¦
"And finally, the IMF has to be prohibited from competing [with] public sector spending on crucial issues like health care and education."