An IMF Report Card

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From bailouts to bankruptcy The bailouts of the Latin American debt crisis in the 1980s and the East Asian crises of the 1990s were severely criticized. They helped Western banks get repaid but left developing countries with bigger debt burdens. Indeed, the bailouts may even have contributed to the problem of debt crises, by inducing bad lending practices. The failure in the last six years of the mega-bailouts — in Thailand, Indonesia, Korea, Russia, Brazil, Argentina — made it apparent that an alternative is needed. Since the '80s, alternatives have been proposed — allowing nations to declare bankruptcy and standstills in the same way that individual debtors who cannot meet their obligations are permitted to have a fresh start, or at least reschedule payments. But these were long rejected by the IMF, which felt they were an abrogation of the sanctity of the debt contract. In November 2001, with the impending failure in Argentina, the IMF recognized the need for a systematic procedure for debt restructurings. Unfortunately, U.S. opposition and some major political mismanagement by the IMF put this reform on ice. But the fact that there were "official" discussions on the topic was a major step forward.

Debt Forgiveness It has long been widely accepted, even by the developed countries holding the IOUs, that some form of debt forgiveness was needed for highly indebted poor countries. Debt overhang was stifling their growth; and without growth, they would not in any case be able to repay what they owed. In 1996, the IMF and World Bank, together with the G-7, initiated a program of debt forgiveness, but in order to have their debts forgiven, countries had to meet a series of hurdles set by the IMF.

In its policies in East Asia, even the Fund recognized that it had pushed fiscal austerity too far

At the same time, since a considerable portion of the total debt was owed to the IMF, it was hardly enthusiastic about what debt forgiveness would do to its balance sheet. Given all this, it was not too surprising that only three countries — Uganda, Bolivia and Guyana — met the hurdles and received debt relief. Those concerned with the plight of the poor in developing countries were frustrated by the slow pace of debt forgiveness. In 2000, the Jubilee movement mobilized sufficient public opinion to the point where debt forgiveness was greatly extended and the hurdles adjusted to a more reasonable level. So it now appears that many more countries will get debt relief.

Excessive austerity For more than 70 years, economists have recognized that, when an economy faces a downturn, there is a need for expansionary fiscal and monetary policies. The great economist John Maynard Keynes saw that a downturn in one country could have adverse effects on others. He was the intellectual godfather of the IMF — founded, he thought, to provide the funds and pressure for expansionary fiscal policies for countries facing imminent recessions.

Yet, over the years, the IMF began to push policies that were diametrically opposed to those that Keynes advocated, and which formed the rationale for its creation. Ironically, the IMF has helped provide some of the most convincing evidence that Keynes was right: its austerity policies have worsened economic downturns. In its review of its policies in East Asia, even the Fund recognized that it had pushed fiscal austerity too far. Yet it went on to make the same mistake again in Argentina (which last week reached a deal with the IMF to refinance some $21 billion in loans). On the positive side, in Brazil, it pursued more reasonable stances.

Improved transparency of financial markets In the aftermath of the East Asia crisis, there were demands for increased transparency on the part of developing countries. Although the crisis stemmed more from imprudent financial and capital market liberalization than from a lack of transparency, the call for greater transparency struck a chord — until it became apparent that greater transparency could apply also to the advanced industrial countries' offshore bank accounts and hedge funds. At that point, some in the U.S. Treasury became decidedly less enthusiastic. Nonetheless, the OECD developed an agreement restricting bank secrecy — an initiative vetoed by the Bush Administration shortly before Sept. 11. In the aftermath of the attacks, the role of these secret bank accounts in financing terrorism was at last recognized, and thus there has been progress in loosening bank secrecy.

Capital market liberalization Perhaps the biggest — and least celebrated — change has been in perspectives on capital market liberalization. Six years ago, the IMF proposed changing its charter to include a requirement that member countries liberalize their capital markets. I, and others, had criticized the proposal because there was no evidence that such a change would promote economic growth or stability. We argued that such a major change to the global financial architecture needed evidence showing it would help those in the developing world.

In fact, studies at the World Bank showed that capital market liberalization was systematically associated with instability, which increased poverty and economic insecurity and was bad for growth. The IMF had tried to argue that, without capital market liberalization, one could not entice foreign investors. Yet China had attracted more foreign direct investment than any other developing country, and it has still not fully liberalized its capital market.

By the end of the 1990s, it was hard to resist the mounting evidence. Every major emerging market that had liberalized its capital market had had a crisis; the two major countries that had not, China and India, had not only avoided the East Asian crisis, but managed to grow steadily throughout the period. Finally, to its credit, the IMF took note of what had long been obvious: capital market liberalization does not enhance growth, and it does increase instability. In March, its soon-to-be-departing chief economist and three co-authors released a survey of the evidence, confirming what the critics had been saying all along.