SKOPJE, Macedonia, June 4 (UPI) -- The argument against the International Monetary Fund often revolves around two axes:
-- That it is a neo-colonialist institution, out to perpetuate the hegemony of rich countries over poorer ones, and;
-- That it is an impregnable fortress of outdated, inappropriate, even detrimental economic policies, collectively known as "The Washington Consensus."
The IMF is undoubtedly under strong political influence by the United States, which underwrites a one-fourth of its budget and hosts its headquarters. The recent spate of lending to Turkey and past excesses in Yeltsin's venal and mismanaged Russia are attributable to such American arm-twisting.
It is also true that the IMF is greatly concerned with its members' ability to service their external debt and, therefore, with the debt's size, sustainability, and sensitivity to fiscal and monetary policies. In this sense, the IMF is, indeed, the guardian of foreign creditors and their representative and enforcer. It so happens that most creditors are rich countries or banks and investors from the West.
But it would be nothing short of paranoid to postulate some kind of conspiracy, or colonial-mercantilist designs, or to claim, as the Canadian Professor Michel Chussodowski does, that the IMF is a willing and cognizant instrument in the destruction of certain nations, such as Yugoslavia, or, generally, accuse it of other geopolitical machinations.
Few of the IMF's vocal anti-globalization opponents know that it deals as regularly and as strictly with its richer members -- even those that do not require its assistance, advice, or intervention. On May 8 it concluded the mandatory Article IV consultation with Denmark.
The IMF explains Article IV thus: "Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the executive board. At the conclusion of the discussion, the managing director, as chairman of the board, summarizes the views of executive dDirectors, and this summary is transmitted to the country's authorities."
The IMF sounded these cautionary notes about Denmark's generally much-praised economic policies: "It will be important to avoid public spending overruns while allowing for the operation of automatic stabilizers. ... Some wage moderation is needed to stem losses in market shares in continental Europe. ... Improving public expenditure discipline, particularly at the lower levels of the government, should be a priority. ... (We) encourage the authorities to pursue intentions to strengthen public management and outsource services where appropriate. ... (We) recommend that the long-term viability of the present welfare system should be kept under close review by the Danish authorities." And so on.
While the conspiracy theories can be safely and off-handedly discarded, it is a lot more difficult to defend the IMF's policies. These consist of a universally applied prescription of fiscal and monetary discipline, balanced budgets, a sustainable public debt, avoidance of moral hazard, restrained wage and expenditure policies, preference for the private sector, enhancement of the financial sector, structural reform, and exchange rate stability.
The IMF still sticks to the doctrine of a "nominal anchor" -- if not the exchange rate, then inflation targeting. The IMF concedes that the consensus is shifting towards more flexible exchange rate regimes in countries exposed to the global capital markets -- but this is not supported by its policy advice.
IMF Deputy Managing Director Shigemitsu Sugisaki hastened to stamp out this heresy in his address to the first annual forum of the Asian Pacific Economic Cooperation group's Finance and Development Program held in Beijing on May 26: "Of course, this is not to say that, for certain economies, a pegged exchange rate regime, buttressed by the requisite supporting policies and institutions, cannot be a viable alternative. For such economies, in general, the harder and more rigid the peg, the better. ... (Floating exchange rate regimes) do not imply a policy of benign neglect toward the exchange rate. For emerging market countries, with their high degree of involvement with global trade and finance, movements in exchange rates have important economic consequences, and economic policies, including monetary policy and exchange market intervention, need to take account of these movements."
This is the oxymoron of "managed float."
The principles are commendable -- their blind and doctrinarian implementation in the form of micromanaged conditionality are not. The IMF -- aware of its fast eroding public and political support, especially in the United States -- has recently conjured up "country ownership" of agreed economic programs and "poverty reduction and growth facilities" -- both intended to soothe jangling nerves. But these public relations exercises are auxiliary to its main thrust -- fiscal rectitude, solvency, and debt repayments.
Alas, many of these policies are ill-suited to the needs of failed or mismanaged states and the kleptocracies that rule them -- much of the IMF's clientele. While in "normal" countries macroeconomic stability is the prerequisite to long-term economic growth, this is not necessarily the case in the developing, emerging, and transition economies of sub-Saharan Africa, the Middle East, South Asia, East Europe, Central Asia, Latin America, or the Balkans.
Actually, too much stability may, in these benighted corners of the Earth, spell stagnation. Stability cannot translate to growth in the absence of functioning institutions, the rule of law, and properly rights. A dysfunctional banking system and rusted or clogged monetary transmission mechanisms render any monetary policy impotent.
A venal bureaucracy and graft-prone political class are likely to squander and misappropriate loans and grants, no matter how well-intentioned and closely supervised. Finally, in the absence of a formal, entrepreneurial, and thriving private sector, only the state can provide a counter-cyclical impetus and the sole engine of growth is development-related and consumption-enhancing public spending. Public expenditures are the only functioning automatic stabilizer.
In this context, the classic argument of "public borrowing crowding out the private sector" is misplaced. Most of the private sector in these countries is informal. It does not compete in the credit markets with public borrowing -- simply because there are no credit or capital markets to speak of. Interest rates are onerously high due to outlandish default rates -- so, businesses borrow from each other, barter, and work in cash. Banks refuse to lend to businesses or households and thrive on arbitrage. Investment horizons are limited.
(NOTE: Sam Vaknin advises governments in their negotiations with the IMF)
