It's a quiet anniversary, the 60th year of the International Monetary Fund and its sister institution, the World Bank. It seems only the protestors who will gather in Washington D.C. for the organizations' annual spring meetings will be calling attention to the birthday of the most powerful financial institutions in the world.
For the IMF especially, this is in keeping
with tradition. Until the Asian economic crisis
began in 1996, the Fund was pretty much able to
stay out of the news. But that crisis shook world
financial markets and brought, for the first time,
censure that couldn't be ignored. Joseph Stiglitz,
then Chief Economist of the World Bank and soon
to win the Nobel Prize in his field, publicly
criticized the IMF for worsening the situation of
Indonesia, South Korea, Thailand, and the
It seemed that the Fund, together with its
main supervisor -- the U.S. Treasury Department --
had helped cause the crisis by encouraging these
countries to open up their financial markets to "hot
money" that flowed out just as easily as it had
flowed in. Treasury then intervened to block a plan
by Japan to resolve the crisis without the IMF. The
Fund proceeded to pour gasoline on the flames by
insisting that these countries raise interest rates (as
high as 80 percent in Indonesia) and cut spending
while their economies were shrinking.
The crisis then spread to Russia, Brazil, and
Argentina, and the IMF chased after it with more
wrong advice and tens of billions of dollars in loans.
The repetition was remarkable. Each country had a
fixed exchange rate -- their currency was tied to the
dollar -- and in each case the domestic currency was overvalued. In each case this was hurting the country by making its imports artificially cheap and its exports too expensive. And when the crisis hit, both Russia and Brazil had to raise interest rates through the roof -- in order to keep money in the country -- and borrow enormously in order to keep the fixed, overvalued exchange rate.
The alternative would have been to let their
currencies fall, but the Fund said this might cause hyper-inflation, and it provided the loans to maintain the fixed exchange rates. The result: in all three countries, the currency collapsed anyway, there was no hyperinflation (or even sustained high inflation), and the devaluation helped each economy recover. The IMF could hardly have been more wrong if it had tried to be.
Of course this was just one high-profile
string of failures, and not necessarily the worst.
Russia during the 1990s lost nearly half of its
national income while following IMF programs and
advice for its transition to a market economy, an
economic collapse not previously seen in the
absence of war or natural disaster. And the Latin
American experiment with IMF reforms has also
gone belly-up: for the whole five years 2000-2004,
we are looking at almost no growth (about 1 percent
total) in income per person. This follows a
miserable 11 percent for the two decades 1980-
1999, as compared to 80 percent for the pre-reform
era of 1960-1979.
Of course the IMF is not always wrong.
There are times when a country is truly living
beyond its means -- borrowing too much either at
home or from abroad -- and there is a need for
"adjustment." But the Fund's decades-long losing
streak has prompted calls for reform of this
unaccountable institution -- along with its larger but subordinate partner, the World Bank.
Washington has the predominant voice at
the IMF, since Europe and Japan almost never
oppose the U.S. there. This puts the U.S. Treasury
Department at the top of a creditors' cartel with
enormous power, since those who refuse the IMF's
prescriptions are generally denied credit from other
That power is beginning to break down. For
example, Argentina has stood up to the IMF several
times since the Fund offered no help to its collapsed
economy two and a half years ago. Argentina's
courage has paid off: the economy grew at a rapid
8.7 percent last year, and is expected to grow 7.1
percent this year.
But reform of the IMF remains a distant
dream. For the foreseeable future, at least, the Fund
will remain one of the few economic consultants
that has to pay its clients to take its advice.
Mark Weisbrot is Co-Director of the Center for
Economic and Policy Research (www.cepr.net), in