Home what's New Site Map Site Index International Monetary Fund Search About the IMF IMF at Work IMF Finances Country Info News Publications The Mf Strikes back Espanol Francais By Kenneth Rogoff Economic Counsellor and Director of the Research Department International Monetary Fund Reproduced with permission from FOREIGN POLICY 134 Febr 003)ww1.foreignpolicy. cor Kenneth sRogor Copyright 2003, by the Carnegie Endowment for Imternational Peace Slammed by antiglobalist protesters, developing-country politicians, and An Open Letter to Nobel Prize-winning economists, the International Monetary Fund(IMF) has become Global Scapegoat Number One. But IMF economists are not evil, nor are they invariably wrong It's time to set the record straight and focus on more pressing economic debates, such as how best to promote global growth and financial stability Commentaries for 2003200220012000 19991998 Vitriol against the IMF, including personal attacks on the competence and integrity of its staff, has transcended into an art form in recent People's Republic of years. One bestselling author labels all new fund recruits as"third- China and the IMF rate, implies that management is on the take, and discusses the IMF's role in the asian financial crisis of the late 1990s in the same breath Germany and the ImF as Nazi Germany and the holocaust. Even more sober and balanced critics of the institution--such as Washington Post writer Paul and the ImF The Chastening, should be required reading for prospective fund ls Republic of Korea Blustein, whose excellent inside account of the Asian financial crisis titles that Mexico and the mF economists (and their spouses)find themselves invoke the devil. Really, doesn't The Chastening sound like a sequel Russian federation to 1970s horror flicks such as The Exorcist or The Omen? Perhaps and the ImF this race to the bottom is a natural outcome of market forces. After all, in a world of 24-hour business news, there is a huge return to Thailand and the IMF being introduced as"the leading critic of the IMF E-Mail Notificatio Regrettably, many of the charges frequently leveled against the fund Subscribe reveal deep confusion regarding its policies and intentions. Other criticisms, however, do hit at potentially fundamental weak spots in current IMF practices. Unfortunately, all the recrimination and finger subscription pointing make it difficult to separate spurious critiques from legitimate concerns. Worse yet, some of the deeper questions that ought to be at the heart of these debates-issues such as poverty, appropriate exchange-rate systems, and whether the global financial system enco outages developing countries to take on excessive debt- are too easily ignored Consider the four most common criticisms against the fund: First
An Open Letter to Joseph Stiglitz, by Kenneth Rogoff Views & Commentaries for 2003 2002 2001 2000 1999 1998 People's Republic of China and the IMF Germany and the IMF Republic of Korea and the IMF Mexico and the IMF Russian Federation and the IMF Thailand and the IMF Kenneth S. Rogoff E-Mail Notification Subscribe or Modify your subscription The IMF Strikes Back By Kenneth Rogoff Economic Counsellor and Director of the Research Department International Monetary Fund Reproduced with permission from FOREIGN POLICY 134 (January/February 2003) www.foreignpolicy.com Copyright 2003, by the Carnegie Endowment for International Peace Vitriol against the IMF, including personal attacks on the competence and integrity of its staff, has transcended into an art form in recent years. One bestselling author labels all new fund recruits as "thirdrate," implies that management is on the take, and discusses the IMF's role in the Asian financial crisis of the late 1990s in the same breath as Nazi Germany and the Holocaust. Even more sober and balanced critics of the institution—such as Washington Post writer Paul Blustein, whose excellent inside account of the Asian financial crisis, The Chastening, should be required reading for prospective fund economists (and their spouses)—find themselves choosing titles that invoke the devil. Really, doesn't The Chastening sound like a sequel to 1970s horror flicks such as The Exorcist or The Omen? Perhaps this race to the bottom is a natural outcome of market forces. After all, in a world of 24-hour business news, there is a huge return to being introduced as "the leading critic of the IMF." Regrettably, many of the charges frequently leveled against the fund reveal deep confusion regarding its policies and intentions. Other criticisms, however, do hit at potentially fundamental weak spots in current IMF practices. Unfortunately, all the recrimination and finger pointing make it difficult to separate spurious critiques from legitimate concerns. Worse yet, some of the deeper questions that ought to be at the heart of these debates—issues such as poverty, appropriate exchange-rate systems, and whether the global financial system encourages developing countries to take on excessive debt— are too easily ignored. Consider the four most common criticisms against the fund: First, Español Français Slammed by antiglobalist protesters, developing-country politicians, and Nobel Prize–winning economists, the International Monetary Fund (IMF) has become Global Scapegoat Number One. But IMF economists are not evil, nor are they invariably wrong. It’s time to set the record straight and focus on more pressing economic debates, such as how best to promote global growth and financial stability
IMF loan programs impose harsh fiscal austerity on cash-strapped countries. Second, IMF loans encourage financiers to invest recklessly, confident the fund will bail them out( the so-called moral hazard problem). Third, IMF advice to countries suffering debt or currency crises only aggravates economic conditions. And fourth, the fund has irresponsibly pushed countries to open themselves up to volatile and destabilizing flows of foreign capital Some of these charges have important merits, even if critics (including myself in my former life as an academic economist)tend to overstate them for emphasis. Others, however, are both polemic and deeply misguided. In addressing them, I hope to clear the air for a more focused and cogent discussion on how the ImF and others work to improve conditions in the global economy. Surely that should be our common goal The austerity myth Over the years, no critique of the fund has carried more emotion than the"austerity"charge. Anti- fund diatribes contend that, everywhere the Imf goes, the tight macroeconomic policies it imposes on governments invariably crush the hopes and aspirations of people. (I hesitate to single out individual quotes, but they could easily fill an entire edition of Bartlett's Quotations. ) Yet, at the risk of seeming heretical, I submit that the reality is nearly the opposite. As a rule, fund programs lighten austerity rather than create it. Yes, really Critics must understand that governments from developing countries don't seek IMF financial assistance when the sun is shining, they come when they have already run into deep financial difficulties generally through some combination of bad management and bad luck. Virtually every country with an IMf program over the past 50 years, from Peru in 1954 to South Korea in 1997 to Argentina today could be described in this fashion Policymakers in distressed economies know the fund will intervene where no private creditor dares tread and will make loans at rates their countries could only dream of even in the best of times. They understand that in the short term imf loans allow a distressed debtor nation to tighten its belt less than it would have to otherwise. The economic policy conditions that the fund attaches to its loans are in lieu of the stricter discipline that market forces would impose in the IMF's absence Both South Korea and Thailand, for example, were facing either outright default or a prolonged free fall in the value of their currencies in 1997-a far more damaging outcome than what lly took pla Nevertheless, the institution provides a convenient whipping boy
IMF loan programs impose harsh fiscal austerity on cash-strapped countries. Second, IMF loans encourage financiers to invest recklessly, confident the fund will bail them out (the so-called moral hazard problem). Third, IMF advice to countries suffering debt or currency crises only aggravates economic conditions. And fourth, the fund has irresponsibly pushed countries to open themselves up to volatile and destabilizing flows of foreign capital. Some of these charges have important merits, even if critics (including myself in my former life as an academic economist) tend to overstate them for emphasis. Others, however, are both polemic and deeply misguided. In addressing them, I hope to clear the air for a more focused and cogent discussion on how the IMF and others can work to improve conditions in the global economy. Surely that should be our common goal. The Austerity Myth Over the years, no critique of the fund has carried more emotion than the "austerity" charge. Anti-fund diatribes contend that, everywhere the IMF goes, the tight macroeconomic policies it imposes on governments invariably crush the hopes and aspirations of people. (I hesitate to single out individual quotes, but they could easily fill an entire edition of Bartlett's Quotations.) Yet, at the risk of seeming heretical, I submit that the reality is nearly the opposite. As a rule, fund programs lighten austerity rather than create it. Yes, really. Critics must understand that governments from developing countries don't seek IMF financial assistance when the sun is shining; they come when they have already run into deep financial difficulties, generally through some combination of bad management and bad luck. Virtually every country with an IMF program over the past 50 years, from Peru in 1954 to South Korea in 1997 to Argentina today, could be described in this fashion. Policymakers in distressed economies know the fund will intervene where no private creditor dares tread and will make loans at rates their countries could only dream of even in the best of times. They understand that, in the short term, IMF loans allow a distressed debtor nation to tighten its belt less than it would have to otherwise. The economic policy conditions that the fund attaches to its loans are in lieu of the stricter discipline that market forces would impose in the IMF's absence. Both South Korea and Thailand, for example, were facing either outright default or a prolonged free fall in the value of their currencies in 1997—a far more damaging outcome than what actually took place. Nevertheless, the institution provides a convenient whipping boy
when politicians confront their populations with a less profligate budget. "The IMF forced us to do it! "is the familiar refrain when governments cut spending and subsidies. Never mind that the country's government-whose macroeconomic mismanagement often had more than a little to do with the crisis in the first place--general retains considerable discretion over its range of policy options, not least in determining where budget cuts must take place At its heart, the austerity critique confuses correlation with causation Blaming the IMf for the reality that every country must confront its budget constraints is like blaming the fund for gravity Admittedly, the imf does insist on being repaid, so eventually borrowing countries must part with foreign exchange resources that otherwise might have gone into domestic programs. Yet repayments to the fund normally spike only after the crisis has passed, making payments more manageable for borrowing governments. The IMF shareholders---its 184 member countries--could collectively decide to convert all the fund's loans to grants, and then recipient countries would face no costs at all. However, if IMF loans are never repaid industrialized countries must be willing to replenish continually th organizations lending resources, or eventually no funds would be available to help deal with the next debt crisis in the developing A Hazardous Critique Of course, in so many IMF programs, borrowing countries must pay back their private creditors in addition to repaying the fund. Yet wouldn,'t fiscal austerity be a bit more palatable if troubled debtor nations could compel foreign private lenders to bear part of the burden? Why should taxpayers in developing countries absorb the entire blow? That is a completely legitimate question, but let's start by getting a few facts straight. First, private investors can hardly breathe a sigh of relief when the fund becomes involved in an emerging-market financial crisis. According to the Institute of International Finance private investors lost some $225 billion during the Asian financial crisis of the late 1990s and some $100 billion as a result of the 1998 Russian debt default. And what of the Latin american debt crisis of the 1980s, during which the IMf helped jawbone foreign banks into rolling over a substantial fraction of Latin American debts for almost five years and ultimately forced banks to accept large write-downs of 30 percent or more? Certainly, if foreign private lenders consistently to developing countries, will cease. Indeed flows into much of Latin America--again the current locus of debt problems-have been sharply down during the
when politicians confront their populations with a less profligate budget. "The IMF forced us to do it!" is the familiar refrain when governments cut spending and subsidies. Never mind that the country's government—whose macroeconomic mismanagement often had more than a little to do with the crisis in the first place—generally retains considerable discretion over its range of policy options, not least in determining where budget cuts must take place. At its heart, the austerity critique confuses correlation with causation. Blaming the IMF for the reality that every country must confront its budget constraints is like blaming the fund for gravity. Admittedly, the IMF does insist on being repaid, so eventually borrowing countries must part with foreign exchange resources that otherwise might have gone into domestic programs. Yet repayments to the fund normally spike only after the crisis has passed, making payments more manageable for borrowing governments. The IMF's shareholders—its 184 member countries—could collectively decide to convert all the fund's loans to grants, and then recipient countries would face no costs at all. However, if IMF loans are never repaid, industrialized countries must be willing to replenish continually the organization's lending resources, or eventually no funds would be available to help deal with the next debt crisis in the developing world. A Hazardous Critique Of course, in so many IMF programs, borrowing countries must pay back their private creditors in addition to repaying the fund. Yet wouldn't fiscal austerity be a bit more palatable if troubled debtor nations could compel foreign private lenders to bear part of the burden? Why should taxpayers in developing countries absorb the entire blow? That is a completely legitimate question, but let's start by getting a few facts straight. First, private investors can hardly breathe a sigh of relief when the fund becomes involved in an emerging-market financial crisis. According to the Institute of International Finance, private investors lost some $225 billion during the Asian financial crisis of the late 1990s and some $100 billion as a result of the 1998 Russian debt default. And what of the Latin American debt crisis of the 1980s, during which the IMF helped jawbone foreign banks into rolling over a substantial fraction of Latin American debts for almost five years and ultimately forced banks to accept large write-downs of 30 percent or more? Certainly, if foreign private lenders consistently lose money on loans to developing countries, flows of new money will cease. Indeed, flows into much of Latin America—again the current locus of debt problems—have been sharply down during the
past couple of years Private creditors ought to be willing to take large write-downs of their debts in some instances, particularly when a country is so deeply in hock that it is effectively insolvent. In such circumstances, trying to force the debtor to repay in full can often be counterproductive. Not only do citizens of the debtor country suffer, but creditors often receive less than they might have if they had lessened the countrys debt burden and thus given the nation the will and means to increase investment and growth. Sometimes debt restructuring does happen, as in Ecuador(1999), Pakistan(1999), and Ukraine(2000). However such cases are the exception rather than the rule, as current international law makes bankruptcies by sovereign states extraordinarily messy and chaotic. As a result, the official lending community, typically led by the IMF, is often unwilling to force the issue and sometimes finds itself trying to keep a country afloat far beyond the point of no return. In Russia in 1998, for example, the fficial community threw money behind a fixed exchange-rate regime that was patently doomed. Eventually, the fund cut the cord and allowed a default, proving wrong those many private investors who thought russia was"too nuclear to fail. But if the fund had allowed the default to take place at an earlier stage, Russia might well have come out of its subsequent downturn at least as quickly and with less official debt Since restructuring of debt to private creditors is relatively rare, many critics reasonably worry that IMF financing often serves as a blanket believe they will be bailed out by the IMF, they have reason to len o insurance policy for private lenders. Moreover, when private creditors more-and at lower interest rates-than is appropriate. The debtor country, in turn, is seduced into borrowing too much, resulting in more frequent and severe crises, of exactly the sort the IMF was designed to alleviate. i will be the first to admit the "moral hazard theory of IMF lending is clever(having introduced the theory in the 1980s), and I think it is surely important in some instances. But the empirical evidence is mixed. One strike against the moral hazard argument is that most countries generally do repay the IMf, if not ol time, then late but with full interest. If the IMF is consistently paid then private lenders receive no subsidy, so there is no bailout in any simplistic sense. Of course, despite the IMF's strong repayment record in major emerging-market loan packages, there is no guarantee about the future, and it would certainly be wrong to dismiss moral hazard as unimportant Fiscal follies Even if IMf policies are not to blame for budget cutbacks in poor economies, might the funds programs still be so poorly designed that
past couple of years. Private creditors ought to be willing to take large write-downs of their debts in some instances, particularly when a country is so deeply in hock that it is effectively insolvent. In such circumstances, trying to force the debtor to repay in full can often be counterproductive. Not only do citizens of the debtor country suffer, but creditors often receive less than they might have if they had lessened the country's debt burden and thus given the nation the will and means to increase investment and growth. Sometimes debt restructuring does happen, as in Ecuador (1999), Pakistan (1999), and Ukraine (2000). However, such cases are the exception rather than the rule, as current international law makes bankruptcies by sovereign states extraordinarily messy and chaotic. As a result, the official lending community, typically led by the IMF, is often unwilling to force the issue and sometimes finds itself trying to keep a country afloat far beyond the point of no return. In Russia in 1998, for example, the official community threw money behind a fixed exchange-rate regime that was patently doomed. Eventually, the fund cut the cord and allowed a default, proving wrong those many private investors who thought Russia was "too nuclear to fail." But if the fund had allowed the default to take place at an earlier stage, Russia might well have come out of its subsequent downturn at least as quickly and with less official debt. Since restructuring of debt to private creditors is relatively rare, many critics reasonably worry that IMF financing often serves as a blanket insurance policy for private lenders. Moreover, when private creditors believe they will be bailed out by the IMF, they have reason to lend more—and at lower interest rates—than is appropriate. The debtor country, in turn, is seduced into borrowing too much, resulting in more frequent and severe crises, of exactly the sort the IMF was designed to alleviate. I will be the first to admit the "moral hazard" theory of IMF lending is clever (having introduced the theory in the 1980s), and I think it is surely important in some instances. But the empirical evidence is mixed. One strike against the moral hazard argument is that most countries generally do repay the IMF, if not on time, then late but with full interest. If the IMF is consistently paid, then private lenders receive no subsidy, so there is no bailout in any simplistic sense. Of course, despite the IMF's strong repayment record in major emerging-market loan packages, there is no guarantee about the future, and it would certainly be wrong to dismiss moral hazard as unimportant. Fiscal Follies Even if IMF policies are not to blame for budget cutbacks in poor economies, might the fund's programs still be so poorly designed that
their ill-advised conditions more than cancel out any good the international lender's resources could bring? In particular, critics charge that the IMf pushes countries to increase domestic interest rates when cuts would better serve to stimulate the economy. The IMF also stands accused of forcing crisis economies to tighten their budgets in the midst of recessions. Like the austerity argument, these critiques of basic IMF policy advice appear rather damning, especially when wrapped in rhetoric about how all economists at the IMF are third-rate thinkers so immune from outside advice that they wouldn't listen if John Maynard Keynes himself dialed them up from Of course, it would be wonderful if governments in emerging markets could follow Keynesian"countercyclical policies"that is, if they could stimulate their economies with lower interest rates, new public spending, or tax cuts during a recession. In its September 2002 World Economic Outlook"report, the IMF encourages exactly such policies where feasible. (For example, the IMF has strongly urged Germany to be flexible in observing the budget constraints of the European Stability and Growth Pact, lest the government aggravate Germany's already severe economic slowdown. )Unfortunately, most emerging markets have an extremely difficult time borrowing during a downturn, and they often must tighten their belts precisely when a looser fiscal policy might otherwise be desirable. And the IMF,or anyone else for that matter, can only do so much for countries that don't pay attention to the commonsense advice of building up surpluses during boom times--such as Argentina in the 1990s-to leave room for deficits during downturns According to some critics, though, a simple solution is staring the IMF in the face. If those stubborn fund economists would onl appreciate how successful expansionary fiscal policy can be in boosting output, they would realize countries can simply wave off a debt crisis by borrowing even more. Remember former U.S. President Ronald Reagan,s economic guru, Arthur Laffer, who theorized that by cutting tax rates, the United States would enjoy so much extra growth that tax revenues would actually rise? In much the same way, some IMF critics--ranging from Nobel Prize-winning economist Joseph Stiglitz to the relief agency Oxfam--claim that by running a fiscal deficit into a debt storm, a country can grow so much that it will be able to sustain those higher debt levels. Creditors would understand this logic and happily fork over the requisite extra funds. Problem solved, case closed. Indeed why should austerity ever be necessary? Needless to say, Reagan' s tax cuts during the 1980s did not lead to higher tax revenues but instead resulted in massive deficits. By the same token, there is no magic potion for troubled debtor countries Lenders simply will not buy into this story
their ill-advised conditions more than cancel out any good the international lender's resources could bring? In particular, critics charge that the IMF pushes countries to increase domestic interest rates when cuts would better serve to stimulate the economy. The IMF also stands accused of forcing crisis economies to tighten their budgets in the midst of recessions. Like the austerity argument, these critiques of basic IMF policy advice appear rather damning, especially when wrapped in rhetoric about how all economists at the IMF are third-rate thinkers so immune from outside advice that they wouldn't listen if John Maynard Keynes himself dialed them up from heaven. Of course, it would be wonderful if governments in emerging markets could follow Keynesian "countercyclical policies"—that is, if they could stimulate their economies with lower interest rates, new public spending, or tax cuts during a recession. In its September 2002 "World Economic Outlook" report, the IMF encourages exactly such policies where feasible. (For example, the IMF has strongly urged Germany to be flexible in observing the budget constraints of the European Stability and Growth Pact, lest the government aggravate Germany's already severe economic slowdown.) Unfortunately, most emerging markets have an extremely difficult time borrowing during a downturn, and they often must tighten their belts precisely when a looser fiscal policy might otherwise be desirable. And the IMF, or anyone else for that matter, can only do so much for countries that don't pay attention to the commonsense advice of building up surpluses during boom times—such as Argentina in the 1990s—to leave room for deficits during downturns. According to some critics, though, a simple solution is staring the IMF in the face: If those stubborn fund economists would only appreciate how successful expansionary fiscal policy can be in boosting output, they would realize countries can simply wave off a debt crisis by borrowing even more. Remember former U.S. President Ronald Reagan's economic guru, Arthur Laffer, who theorized that by cutting tax rates, the United States would enjoy so much extra growth that tax revenues would actually rise? In much the same way, some IMF critics—ranging from Nobel Prize—winning economist Joseph Stiglitz to the relief agency Oxfam—claim that by running a fiscal deficit into a debt storm, a country can grow so much that it will be able to sustain those higher debt levels. Creditors would understand this logic and happily fork over the requisite extra funds. Problem solved, case closed. Indeed, why should austerity ever be necessary? Needless to say, Reagan's tax cuts during the 1980s did not lead to higher tax revenues but instead resulted in massive deficits. By the same token, there is no magic potion for troubled debtor countries. Lenders simply will not buy into this story