Criticism of IMF gets louder

by Gumisai Mutume

Washington, 18 Mar 2001 (IPS) -- These are not good days for the International Monetary Fund (IMF) as critics, especially those on the right of the political spectrum, attack the international financial institution hoping their criticisms will spur the new US administration to act against the agency.

Much of the attention of the critics is focussed on the giant rescue packages that the IMF recently extended to Turkey and Argentina, which are still to produce economic stability in the two countries.  Argentina’s standby arrangement of $20 billion was approved in March 2000 while the Turkish arrangement was approved in December 1999 with an additional $7.5 billion stand-by credit made available last December.

The IMF went to Buenos Aires last week to meet with government officials over how to pull Argentina out of a 32-month recession as warning bells ring of impending economic problems. Turkey, on the other hand, is recovering from a recent financial crisis that saw its currency lose a third of its value.

When Turkey’s new economic minister, Kemal Dervis, knocked on US Treasury Secretary Paul O’Neill’s door earlier this month, the US administration refused to negotiate any new bailout packages through the IMF and noted that Turkey would be limited, for now, to drawing from what remains from the last arrangement.

The United States is the biggest shareholder in the IMF, holding nearly 18% in shares, and the IMF is generally considered a tool of the US Treasury.

“There are plenty of good economists at the IMF and I do not have a problem with them, but the problem lies with policy makers at the highest level,” says free-market proponent and economist David DeRosa, who is opposed to IMF bailouts and its policy advice to emerging markets.

DeRosa last week released a book titled “In Defence of Free Capital Markets” in which he criticises aggressive interventions such as those carried out by the IMF in times of currency and emerging-market meltdowns.

Widespread dissatisfaction with the way the IMF handled the 1997 Asian crisis and subsequent financial crises has prompted calls for reform of the institution and, more grandiosely, the global financial architecture.

“The question is whether IMF policy has changed with respect to its mission as the lender of last resort,” says DeRosa. “In the days of managing director Michel Camdessus, the IMF transformed itself into a bailout charity, dishing out billions to Mexico, Korea, Southeast Asian nations, Brazil, Russia and a great many other countries in crisis.”

Those opposed to IMF bailouts, such as DeRosa, see O’Neill’s reluctance to provide any new financing to Turkey as an indication that the new administration will not resort to bailouts so opposed by Republican conservatives.

They are also encouraged by a White House announcement that law professor Kenneth Dam, who has been critical of the IMF and its bailouts, will be nominated to the US Treasury Department’s number two position as deputy secretary.

Another key nomination in the Treasury is that of John Taylor as under-secretary for international affairs. He once called for the scrapping of the IMF and has indicated his dislike of bailouts.

Critics of bailouts charge that they undermine one of the fundamentals of a free economy by overriding market mechanisms. They say bailouts are expensive, bureaucratic and cut investors’ losses rather than allow them to bear full responsibility for their bad decisions, leaving the obligation to repay the subsequent debt to that country’s taxpayers.  They say bailouts also hinder free-market reforms.

“To the extent that the IMF steps in and provides money, reform will not be forthcoming,” notes the Cato Institute, a pro-free-market think-tank. “Indeed, despite a post-crisis recovery in some Asian countries, fundamental structural reform has not taken place in any of the Asian countries.”

In its policy recommendations to the US Congress on the IMF, the institute says the United States should reject future additional funding requests from the IMF, avoid giving the Fund new missions and eventually withdraw the country from the institution.

Cato Institute chairman William Niskanen, who headed former US president Ronald Reagan’s Council of Economic Advisers, says US membership in the IMF “is like being a limited partner in a financial firm that makes high-risk loans, pays dividends at a rate lower than on Treasury bills, and makes large periodic cash calls for additional funding.”

On average, the IMF has requested increases in financial resources every five years and it has received them. The last increase came last year, when it requested $18 billion from its biggest shareholder, the United States.

IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion last year, sourced from contributions from its 183 members.

A prominent feature of recent IMF rescues has been their sheer size - the Fund has arranged more than $180 billion in bailout packages since 1997.

The Cato Institute argues that while the IMF says it makes loans in exchange for policy reforms, it has not been successful in turning countries to the free market.

“Instead, the fund has created loan addicts,” notes Ian Vasquez of the institute. “More than 70 nations have depended on IMF aid for 20 or more years, 24 countries have received IMF credit for 30 or more years.”

One of the institution’s most influential opponents has been the Meltzer Commission appointed by the US Congress and which last year recommended the Fund be reduced to a lender of last resort providing funds at punitive rates to solvent banks.

“Lending at a penalty rate avoids the abuse of the IMF as a channel for distributing subsidies to member countries, particularly as a means of facilitating massive bailouts,” says former Meltzer Commission member Charles Calomiris, professor of finance and economics at Columbia University.

“That abuse, we argued, promotes international financial instability by encouraging risk-taking in emerging-market banking systems, imprudent management of fiscal affairs and reckless lending by international lenders,” Calomiris told a recent Congressional hearing.

He says current IMF support for Argentina merely postpones the country’s problems instead of resolving them; Argentina’s debt-servicing obligations have spiralled during the last three years while exports have stagnated.

IMF officials say the mission to Argentina instructed the government of President Fernando de la Rua to cut spending in the order of $2 billion and institute a sweeping reorganisation of state agencies.