Is the IMF Really Changing? Jayati Ghosh

For a while now, the IMF has been caught wrong-footed during almost every major global economic event. In the years just before the Great Recession of 2008, it was an international institution on life-support: ignored by most developing countries; derided for its failure to predict most crises and then for its counterproductive responses; even called to book by its own auditors for poor management of its own funds!

It encouraged financial liberalisation that pushed many countries to crisis, and became famous for congratulating bubble economies for their healthy and sound financial management (Thailand in 1997; Argentina in 1999; most recently Ireland and Iceland in 2008) often just a few months before their spectacular financial crashes. Its policy prescriptions were widely perceived to be rigid and unimaginative, applying a uniform approach to very different economies and contexts.

In this sorry situation, the global financial and economic crisis came as real manna from heaven for the organisation. It was back in the forefront as G20 largesse in early 2009 once again made it potentially relevant, providing it with large resources to enable it to expand less conditional lending to developing countries hit by the crisis. So how has the IMF dealt with this recovery in its fortunes? Has it actually changed, as it claims, to become more flexible and less orthodox in its approach to economic distress?

Unfortunately, so far the signs are not that good, despite protestations of internal change at the IMF. According to the IMF’s own Financial Statistics, over 2009 and 2010 it disbursed credit of only $93 billion out of total available resources of $595 billion. In other words, it lent out less than 16 per cent of the money it could have lent, even though there were many developing and least developed countries in dire need of such resources.

Even these little dribs and drabs of loans were accompanied by the usual heavy doses of conditions that have made economic contraction much worse in recipient countries, destroyed wages and employment opportunities and meant reduced living standards for ordinary people. The claim that recent IMF programmes have prevented cuts in social spending has also been to be false by independent studies.

This is hardly a stellar performance for an organisation charged with ensuring that developing countries did not suffer unduly from the collapse of capital flows from private sources.

The most recent evidence of change in the IMF is being presented as the new attitude towards capital controls, which are restrictions that governments can place on the free movement of various kinds of financial flows across borders. For several decades, the IMF actively promoted the reduction of all such controls, even when it was obvious that volatile capital flows across borders were subjecting developing countries to the caprices of international financial players and creating domestic economic havoc.

So when the IMF recently published a set of papers noting that such capital controls (or what they chose to call ”capital account management techniques”) could usefully be employed in certain conditions, this was widely welcomed. The IMF finally admitted that capital flows can be destabilising! Progressive economists like Kevin Gallagher and Jose Antonio Ocampo have noted in this newspaper that these amounted to ”yet another big step forward for the IMF – though there is still a long way to go”.

Of course, where the IMF is concerned, we have learned to be grateful for small mercies. But is this really something worth celebrating? The papers published by the IMF provide at best lukewarm form of support for any kinds of capital controls. They insist that some conditions must be fulfilled before the country concerned should think about employing them: the exchange rate is getting overvalued because of capital inflows: that this is affecting economic activity: and that the country has more than sufficient foreign exchange reserves so it does not need to use the capital inflows to add to these reserves.

The IMF also notes that such controls are always distorting, and so should be used only temporarily. They argue that capital controls should not substitute for macroeconomic policy instruments like fiscal policy and the interest rate. This is more than a little strange, since once a country has allowed free capital flows, it is almost impossible to have independent macroeconomic policies anyway!

Most notable are the silences. The IMF focuses entirely on controls on capital inflows – such as having different tax rates for some kinds of foreign investment, or higher reserve requirements or lock-in periods for minimum stay in the country. It does not even talk about controls on outflows, which are still presumably beyond the pale and should not even be considered.

You could say that this is an advance from its previous rigidly anti-control position. But hang on a minute, which are the countries that can apply such controls on capital inflows? Those that are getting large inflows of capital, of course. But these are precisely the countries that do not need to consult the IMF at all, because they are being favoured by private capital and so have no balance of payments constraint.

So this policy advice is being provided to those countries that do not need to listen. In fact, it is very clear that they have not been listening, because many of them (Chile, Brazil, Thailand, etc) have gone ahead and instituted such controls on inflows well before the IMF decided it could be acceptable. So once again the IMF is behind the policy curve, struggling to remain relevant by belatedly justifying policies that have already been put in place in many emerging markets.

The countries that do need to go to the IMF are the ones with balance of payments difficulties. You might think that the IMF would be equally accepting of their need to put in some controls on capital outflows to stave off further crisis. No such luck: in these cases the IMF insists that they countries must maintain their open capital accounts, and even indulge in further financial liberalisation, so as to ensure ”investor confidence”.

So where the IMF actually has policy teeth, it still uses them to bite the recipient countries in the usual way, without any evidence of ”rethinking” its already discredited positions.

Even so, the IMF could still be genuinely useful to developing countries that are being battered by high food and fuel prices. The G20 meeting did note the need to regulate financial activity in commodity futures markets, but so far the IMF has been silent on this. But the IMF could also provide direct assistance, by using its Compensatory Financing Facility to provide resources without conditions to economies being battered by these price hikes. Surprisingly, this has not even been suggested in the organisation, despite calls from economists like Kunibert Raffer.

So far, then, there is little to celebrate in terms of real change at the IMF. Will change of leadership at the helm make much difference? It’s hard to say, but if the next IMF chief turns out to be yet another person who only ”understands the dangers of excessive debt, excessive deficit” – as the current British Prime Minister apparently wants – without recognising the crucial role of state spending in maintaining incomes and employment, then things can only get worse.

(A version of the piece has been published in The Guardian, April 20,2011.)