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Policy Debate: What are the pros and cons of International Monetary Fund (IMF) involvement with global economies?

Issues and Background

The legitimate political institutions of the country should determine the nation's economic structure and the nature of its institutions. A nation's desperate need for short-term financial help does not give the IMF the moral right to substitute its technical judgments for the outcomes of the nation's political process.
~ Martin Feldstein

There in neither point nor excuse for the international community to provide financial assistance to a country unless that country takes measures to prevent future such crises.
~ Stanley Fischer

Until the Great Depression, international exchange relied on a gold standard in which each country's currency exchanged for a fixed quantity of gold. During the Great Depression, however, many nations abandoned the gold standard. With the elimination of the gold standard, the system of fixed exchange rates broke down. Many countries tried to stimulate their domestic economies by engaging in competitive devaluations of their currencies. This was not a very successful strategy since their trading partners generally engaged in retaliatory devaluations of their own currencies. The increased uncertainty over exchange rates, however, discouraged international trade, and the volume of international trade declined rather dramatically during this period.

A new international monetary system was adopted as a result of the Bretton Woods conference of 1944. Under this new monetary system, the value of the U.S. dollar was fixed in terms of gold and all other currencies were assigned exchange values in terms of either gold or the U.S. dollar. The U.S. agreed to maintain the value of the dollar at $35 per ounce of gold; other countries agreed to maintain the exchange value of their currencies within one percent of the target exchange rates. Under this system, countries could alter their exchange rates only with the consent of the other IMF members.

The IMF was created as part of the Bretton Woods conference. Each of the 182 member nations contributes an annual payment, called a "quota subscription," to the IMF. These quota subscriptions are used to provide a source of funds for loans to member nations experiencing financial difficulty. Voting rights in the IMF are allocated on the basis of the size of the quota subscription. The U.S. has the largest quota subscription and contributes approximately 18% of total IMF quotas. Currently, a proposal to increase IMF funding is awaiting approval in most member nations (including the U.S.).

The IMF was originally charged with maintaining stable and predictable exchange rates under the fixed exchange rate system that grew out of the Bretton Woods conference. By the early 1970s, however, the fixed exchange rate system was replaced with a system of flexible exchange rates after the U.S. decided to allow the value of the dollar to fluctuate relative to gold. Under the current system, countries may allow their currency to float freely, may tie its value to that of some other currency, or may attempt to maintain stable exchange rates relative to their trading partners (a "managed float").

Today, the IMF conducts "surveillance" of the exchange-rate policies of member nations. It collects information on the state of the nation's economy and recommends changes when a nation engages in practices that are expected to result in difficulties in meeting future international payments. The IMF also encourages member nations to abandon any restrictions that are placed on the convertibility among national currencies.

When member nations experience difficulties in meeting international payments, the IMF provides loans to these countries. Each member nation can withdraw 25% of the quota that it paid in the form of gold or a convertible currency. Larger amounts can be borrowed from the IMF, however, only if the country provides an acceptable plan for eliminating the problems that resulted in the payment problem. These reform plans generally include a reduction in government spending, a more stringent monetary policy, the privatization of inefficient public enterprises, and related "market-oriented" reforms.

During the last few years, the "Asian crisis" and the large IMF loans to Russia have resulted in a substantial debate over the usefulness of the IMF. Supporters of the IMF argue that IMF actions prevented these problems from becoming more severe crises. Critics of the IMF argue that the stringent reforms demanded by the IMF as a condition for loans involves an infringement of national autonomy. When faced with the prospect of such IMF restrictions, countries will only accept IMF loans when a crisis becomes severe. It is argued that this results in more serious crises than would otherwise have occurred.


Primary Resources and Data

  • International Monetary Fund
    The web site of the International Monetary Fund contains a wealth of information concerning the history and operations of the IMF. Some of the most relevant resources at this site include:

  • International Monetary Fund, "The IMF's Response to the Asian Crisis"
    This World Bank article provides a detailed discussion of the IMF's response to the Asian crisis.

  • Carolyn Lochhead, "IMF Formulas Come with a High Cost"
    Carolyn Lochhead discusses the IMF's role in the Asian and Russian financial crises in this July 28, 1998 San Francisco Chronicle article. This article provides a good summary of many of the arguments in the debate.

  • The Central Bank of the Russian Federation
    The web page of the Central Bank of the Russian Federation contains information on exchange rates, monetary policy, and general economic conditions in Russia.

  • Marshall I. Goldman, "The Russian Ruble and Why It Turned Into Rubble"
    In this document, Marshall I. Goldman discusses the causes of the breakdown of the Russian financial system. He suggests that one of the problems facing Russia is that Russian citizens have no experience in working in a market environment. Goldman suggests that a slow process of transition is necessary to allow market institutions to evolve.

  • Brookings Institution, "Russia and Eurasia"
    This Brookings Institution web page contains a collection of links to articles, testimony, and opinion pieces dealing with Russia.

  • IMF, "Russian Federation: Selected Issues and Statistical Appendix"
    This April 2002 IMF country report provides an overview of the status of the Russian economy. This report describes a recovery in the Russian economy from the problems experienced in 1998. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)


Different Perspectives in the Debate

  • Martin Feldstein, "Refocusing the IMF"
    In this March / April 1998 Foreign Affairs article, Martin Feldstein argues that the severe restrictions imposed on the Asian economies as a condition of IMF loans has made the financial crisis more severe. In particular, he suggests that the IMF required excessively large reductions in government deficits and restrictions on monetary policy. These restrictions resulted in substantial increases in tax rates and interest rates. Feldstein argues that Asian economies have experienced a recession that worsened their economic problems as a result of these policy changes. He also suggests that announcements by the IMF about the state of the Indonesian and Korean economies helped to exacerbate the financial panic that resulted from the problems in these countries. Feldstein argues that many of the mandated reforms involve unjustified interference with national autonomy and have little or no relationship to the goal of resolving the payment problem. Stringent reform requirements may result in economies postponing requests for IMF assistance until the problem becomes severe.

    Feldstein also suggests that IMF intervention results in a moral hazard problem since financial investors have little incentive to exercise caution in making loans to foreign countries or companies if they believe that the IMF will effectively insure these loans against default risk. He notes that it would have been better to allow more time for negotiations between borrowers and lenders before providing IMF loans to a country experiencing payment problems.

  • Martin and Kathleen Feldstein, "To IMF: First do no harm"
    In this April 28, 1998 Boston Globe article, Martin and Kathleen Feldstein provide a succinct critique of the IMF's actions in the Asian crisis. They argue that IMF policies have exacerbated the Asian crisis and imposed unnecessary restrictions on the affected economies (particularly South Korea).

  • Martin Feldstein, "What the IMF Should Do"
    In this October 6, 1998 Wall Street Journal article, Martin Feldstein argues that the IMF has made three mistakes in dealing with Asian and Russian economies during the past year: undermining the confidence of lenders, requiring unnecessary and excessive reforms, and requiring excessively contractionary fiscal and monetary policies. He suggests that the IMF should focus its efforts on negotiating repayment schedules between creditors and debtors when payment problems occur. Feldstein argues that reform policies should be designed to encourage economic growth in the troubled economies and should focus on the specific liquidity problems rather than requiring radical changes in the structure of the economy.

  • Stanley Fischer, "The IMF and the Asian Crisis"
    Stanley Fischer, the deputy managing director of the IMF, responds to Martin Feldstein's critiques in this March 20, 1998 speech. Fischer argues that, while the IMF's reform requirements may impose short-term costs, they provide a framework for sustainable future growth. He indicates that the primary problem in the affected Asian economies was the existence of structural problems in their financial sectors. Fischer suggests that fundamental reform of the financial sector of these economies is necessary for the return of economic prosperity.

  • Ian Vásquez, Testimony Before the U.S. House of Representatives Committee on Banking and Financial Services General Oversight and Investigations Subcommittee
    In his April 21, 1998 testimony, Ian Vásquez, of the Cato Institute, argues that IMF policies have made the crisis in Asia more severe. He argues that IMF intervention has not facilitated long-term growth in countries that have received IMF assistance in the past. Vásquez suggests that IMF policies tend to create long-term dependency on IMF loans. He argues that this long-term dependence is partly due to the moral hazard problem inherent in such a loan program. Vásquez suggests that IMF loan programs are inequitable in that they benefit lenders who made bad loans while harming citizens in the troubled economies who will have to pay higher taxes to repay the IMF loans. He concludes that a more equitable and efficient solution would occur if international financial markets were allowed to function without IMF intervention.

  • Robert Wade and Frank Veneroso, "The Asian Crisis: The High Debt Model vs. the Wall Street-Treasury-IMF Complex"
    Robert Wade and Frank Veneroso argue that it is inappropriate to apply policies that work well in the U.S. in economies that have very different institutional and economic structures. The Asian countries experiencing economic difficulties have substantially higher levels of savings, investment, and debt than in traditional industrialized economies. They suggest that attempts to impose a U.S. model on an economy with a very different financial structure results in substantial social and economic costs.

  • Doug Bardow, "IMF Failure Redux"
    In this CATO Commentary, Doug Bandow argues that the existence of IMF bailouts creates a moral hazard problem that encourages countries to not solve their fundamental problems. He suggests that all nations would benefit if healthy economies "quarantined" sick economies instead of providing economic assistance. Bandow argues that IMF assistance programs increase risk for healthy economies and do not provide long-term benefits for troubled economies. He notes that most IMF borrowers have received aid for a decade or more.

  • Ariel Cohen, "The IMF and the Russian Economic bailout"
    In this September 8, 1998 testimony before the House Subcommittee on General Oversight and Investigation, Ariel Cohen of the Heritage Foundation discusses the current crisis in the Russian economy. He argues that IMF policies in Russia have helped to delay necessary economic reforms, resulting in a more serious economic crisis. Cohen recommends that Russia be required to introduce a variety of market-oriented reforms before any additional IMF loans are provided.

  • Clifford G. Gaddy and Barry W. Ickes, "Beyond a Bailout: Time to Face Reality About Russia's Virtual Economy"
    In this Brookings Institution working paper, Clifford G. Gaddy and Barry W. Ickes examine the structural problems in the Russian economy that lead to the requests for additional IMF loans. They argue that previous loans have allowed the Russian economy to avoid substantial reform. Gaddy and Ickes argue that a denial of additional IMF loans would result in only limited short-term costs and may provide an impetus for reforms that would provide long-term benefits.

  • Stanley Fischer, "Russian Economic Policy at the Start of the New Administration"
    Stanley Fischer discusses the state of the Russian economy in this April 6, 2000 speech. He argues that, despite some setbacks, IMF mandated reforms have been improving the Russian economy. Fischer summarizes empirical studies that suggest indicate that market-oriented reforms have stimulated growth in transition economies. He argues that, in recent years, the Russian government has introduced less inflationary monetary and fiscal policies. Fischer suggests that current Russian economic problems are, in part, the result of some deep-rooted structural problems that should be resolved. He suggests that economic growth in Russia is likely to occur if there is a greater emphasis on:
    • industrial restructuring and privatization,
    • the elimination of barter and nonpayments problems,
    • banking reform,
    • tax and expenditure reform,
    • the creation of improved social safety net, and
    • agricultural and land ownership reform.

  • Joseph Stiglitz, "The Ruin of Russia"
    In this April 9, 2003 article appearing in The Guardian, Joseph Stiglitz critiques the policies imposed on Russia by the IMF. He notes that, during the ruble crisis of 1998, the proportion of people living in poverty had risen from 2% at the time of the collapse of the Soviet Union to 40% of the population. Stiglitz faults the IMF for focusing on loans and arguing against the devaluation of the ruble.

  • International Monetary Fund, "Russian Federation and the IMF"
    This page contains links to IMF speeches, reports, and briefings dealing with issues related to IMF loan programs to the Russian Federation.

  • Jeffrey Sachs, "The IMF and the Asian Flu"
    Jeffrey Sachs critiques the role of the IMF in the March-April 1998 issue of The American Prospect. He suggests that IMF pronouncements increased the magnitude of the financial panic, turning a manageable situation into a more serious crisis. Sachs also argues that the IMF is often used as an instrument of U.S. policymakers to force countries to adopt policies that would not be acceptable to them under other circumstances. He suggests that IMF recommendations often worsen the economic conditions in the countries receiving loans. Sachs recommends that the IMF provide more public information about its operations and allow developing nations a larger role in formulating IMF policy.

  • Edwin J. Feulner, Jr., "The IMF Needs Real Reforms, Not More Money"
    In his April 21, 1998 testimony before Congress, Edwin J. Feulner, Jr., argues that:
    • IMF intervention often causes financial crises,
    • the IMF should provide more information on its policies,
    • IMF loans provide inordinately large subsidies to borrowing countries,
    • IMF policies lead to economic stagnation and encourage dependence on foreign aid,
    • the IMF is serving as a "lender of first resort" and not as a "lender of last resort,"
    • the IMF does not provide benefits to the citizens of the troubled economies, and
    • IMF policies promote political instability.

  • Boris Kagarlitsky, "Testimony Before the House Committee on Banking and Financial Services"
    Boris Kagarlitsky, in his September 10, 1998 testimony, argues that IMF policies have harmed, rather than helped, Russia. He suggests that the IMF appears to have been more concerned with protecting the Western financial community than in improving the state of the Russian economy.

  • American Foreign Policy Council, "Foreign Aid Advisory, No. 25"
    The American Foreign Policy Council argues that IMF loans assist the Russian government in increasing military spending. This page provides a list of military spending and activities that they find troubling.

  • Michel Camdessus, "Russia and the IMF: Meeting the Challenge of an Emerging Market and Transition Economy"
    In this April 1, 1998 address to the U.S.-Russia Business Council, Michel Camdessus, the Managing Director of the International Monetary Fund, discusses the need for reform in the Russian economy. He argues that IMF loans will only be helpful if the agreed upon reforms are actually implemented.

  • Michel Camdessus, "Achievements and Prospects after Ten Years of Transition"
    Michel Camdessus summarizes the experience of the transition economies during the 1990s in this December 10, 1999 speech at The Warsaw School of Economics. He notes that the transition to a market economy has resulted in substantial income gains for Polish citizens. Camdessus notes that their is a widening diversity in the outcomes and in the structure and institutions of transitional economies. He reaffirms the IMF's commitment to assist Russia and other transitional economies as long as they remain committed to structural reforms. Camdessus argues that the lack of a stable financial system has hindered progress is several transitional economies.

  • Janet Yellen, "Lessons from the Asian Crisis"
    In this April 15, 1998 speech at the Council on Foreign Relations, Janet Yellen, discusses the causes of the Asian crisis and examines the role of IMF policy. She argues that IMF mandated reforms eliminated problems that were inconsistent with continued long-term economic growth. Yellen argues that, to help prevent similar problems in the future, the IMF should develop more timely and reliable sources of economic data on member countries.

  • Stanley Fischer, "Reforming World Finance: Lessons from a Crisis"
    The deputy managing director of the IMF, Stanley Fischer, discusses the recent financial crises in Asia and Russia in this article that appeared in the October 3-9, 1998 issue of The Economist. He argues that IMF programs in Asia and Russia experienced difficulties due to external economic circumstances (such as the recession in Japan) and an unwillingness on the part of the governments to fully implement reform proposals in the affected countries.

  • Stanley Fischer, "The Russian Economy: Prospects and Retrospect"
    Stanley Fischer, the First Deputy Managing Director of the IMF (and a prominent macroeconomist), discusses recent economic performance in Russia in this June 19, 2001 speech. He argues that IMF assistance helped create a reform process in Russia that is allowing the Russian economy to improve its performance rather substantially during the past few years.

  • The Bretton Woods Committee
    The Bretton Woods Committee is a bipartisan non-profit group that attempts to increase public understanding and support for the IMF and World Bank. This site contains a discussion of the arguments in favor of increasing IMF funding. They note that IMF loans have never resulted in any costs to U.S. taxpayers.

  • Robert E. Rubin, Statement before the House Committee on Banking and Financial Services, September 16, 1998
    Treasury Secretary Robert E. Rubin discusses the potential impact of the Asian crisis on the United States in his testimony before the House Committee on Banking and Financial Services. He argues that IMF programs have improved the economic conditions of countries that have adhered to their reform programs. The problems in Indonesia and Russia, he suggests, is due to political situations that have made them reluctant to accept necessary reforms.

  • Alan S. Blinder, "Statement Before the House Committee on Banking and Financial Services, September 14, 1998"
    In his testimony, Alan Blinder discusses the potential impact of foreign financial crises on the U.S. economy. He argues that there is an urgent need for additional IMF funding to prevent these problems from spreading throughout the global economy. While he agrees with some criticisms of the IMF, Blinder argues that IMF reform should have a lower priority than dealing with current crises.

  • Joseph Stiglitz, "Dealing with Debt: How to Reform the Global Financial System"
    Joseph Stiglitz raises a number of concerns with IMF policies in this Spring, 2003 Harvard International Review article. He argues that the IMF has strayed from it's original mission of encouraging the shift of financial capital from wealthy nations to poor nations. In Stiglitz's words: "Rather than enabling countries to pursue expansionary policies to resolve economic crises, the IMF has instead forced countries into contractionary policies, which has only exacerbated economic downturns, just as economic theory predicted predictions which have been confirmed by the cases of East Asia and Argentina."

  • Ann Krueger, "A Remarkable Prospect: Opportunities and Challenges for the Modern Global Economy"
    In this May 2, 2006 speech, Ann Krueger (the First Deputy Managing Director of the IMF) argues that the IMF has been effective in assisting developing countries in increasing the standard of living for their citizens. She argues that trade liberalization, combined with the international financial stability encouraged by the IMF, have allowed economies to improve literacy rates and health outcomes, reduce poverty, and achieve higher rates of growth than would have been otherwise possible.

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