TCS Daily

Do We Need the IMF?

By Desmond Lachman - January 18, 2006 12:00 AM

One of the striking features of today's discourse on the international economy is the increased frequency with which existential questions are asked about the International Monetary Fund (IMF). Even at the highest official levels in the most developed countries, the question is seriously raised as to whether we really need an IMF. After all, the industrialized countries have not borrowed from the IMF since the early 1980s and they are highly unlikely to do so in the future.

And in the emerging market economies, especially in Latin America, which has been the IMF's bread and butter over the past two decades, the question is now asked whether the IMF still has a real role to play in the world's middle-income countries. Following the recent prepayment by Argentina and Brazil of the entire US$25 billion of their outstanding IMF loans to free themselves of the IMF's tutelage, one must now expect this question to be asked even more frequently.

That serious questions should be asked today about the relevance of the IMF, at a time of enormous global economic imbalances, suggests how long forgotten are the distant lessons of the inter-war period that were the very reasons for the IMF's original founding.

Was not the IMF set up in 1944 with the explicit mandate to prevent the beggar-thy neighbor and protectionist policies of the 1930s? And do today's unprecedented large and growing global payment imbalances not carry with them the risk of a disorderly unwinding of those imbalances, which might intensify the protectionist policies that are-all-too-much in evidence?

If one needed reminding of those protectionist risks, one only need look to the strong support Sen .Chuck Schumer receives in the US Senate for his proposed bill to impose a 27.5 percent across-the-board tariff on Chinese imports.

Doubts about the IMF's relevance at the very time when the IMF could be most useful to the global economy also reflect the IMF's less than stellar execution of its basic mandate of promoting international monetary co-operation. Timothy Adams, the US Undersecretary for International Affairs, recently put the matter well when he suggested that the IMF has been asleep at the wheel in the exercise of its surveillance role over the world's exchange rates. In particular, he singled out that over the past 25 years there have been as few as two occasions upon which the IMF exercised its special consultation procedures for countries suspected of manipulating their currencies despite the very many instances of such practices.

Timothy Adams clearly had in mind the IMF's passivity in dealing with China's very large and growing external current account surpluses. By artificially keeping the Chinese currency cheap through exchange market manipulation, China's external current account surplus is now set to become the largest in the world, while its international reserves have already ballooned to over US$800 billion. Yet the IMF maintains its virtual silence on the Chinese exchange rate issue and certainly shrinks from making any statements that could be suggestive of China manipulating its currency despite the overwhelming evidence to the contrary.

More serious still is the IMF's virtual silence on today's unprecedented global payment imbalances. And this despite the fact that the US current account deficit has now ballooned to an all-time high of $750 billion, or 6.5 percent of GDP, and shows every sign of widening further in the years ahead.

If the IMF had any relevance in exercising its supposed role as guardian of the international financial system, shouldn't the IMF be coming up with serious ideas as to how to deal with today's global payment imbalances? Or should it not be providing the leadership so sorely needed to ensure these problems are dealt with in a co-operative manner -- one that might have the greatest chance of their successful resolution?

Instead the IMF now seems to be fretting that its loans to the middle income countries are being prepaid and that it has no new clients knocking at its door. It does so despite the fact that history would suggest that today's unusually favorable economic conditions for the emerging market economies are unlikely to persist. It also does so despite the fact that these countries have not grasped the opportunity afforded by the good times to adequately fortify themselves against the bad times that will surely follow.

If ever over the past sixty years the global economy needed an IMF, it has to be now at a time of such large global economic imbalances. However, on examining the IMF's woeful record of late, it is far from clear that we have in place the type of IMF that might be needed to do the job.

Desmond Lachman is Resident Fellow and Financial Consultant for the American Enterprise Institute (AEI).


Of course not
Bureaucracies usually outlive there usefulness.

Eliminating them is the hard part.

fan of gov't intervention
The author chatters on about whether the IMF is needed (or ever was), leading one to believe that he is an anti-interventionist. However, his closing remarks dash any such notion. He belongs to the school of thought that if a government bureaucracy is not doing its job then it needs to be fixed. The problem is not that anything needs to be fixed; the problem is the entire structure of government bureaucracy.

No bureaucracy, or an entire government for that matter, does its job competently or efficiently and survives only by way of it's monopoly over legal force, coercion and violence. Whenever a sufficient ground swell exists against an agency--as is the case with the IMF--it should be categorically shut down and taxes reduced equal to its budget.

The IMF never had a reason for existence.
There is nothing that the IMF can do that any country can do on its own. There is noting any country can do that a privately owned bank can not do on its own. Only the bank has owners who care if the bank issues loans that the debtors can not repay.

The answer given this is quite easy and obvious. Stop the IMF, Stop countries giving loans. Force the other countries of the world to get their loans the same way as I do; that is prove my credit risk and pay an interest rate comensurate with that risk.

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