Has the International Monetary Fund Outlived Its Usefulness?

October 25, 2013

In the weeks leading to the Annual Meetings of the International Monetary Fund (IMF) and the World Bank, Christine Lagarde, the managing director of the Fund, made a lot of headlines. She announced that the IMF would push for more gender equality in labor markets around the world, suggested that the IMF could help protect the planet from environmental damage by promoting reforms of energy subsidies, and urged European countries to move toward a fiscal union in order to help eurozone limit the severity of future financial crises, says Dalibor Rohac, a policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute.

  • The original purpose of the IMF was relatively narrow -- to assist in the post-war reconstruction of the international system of fixed exchange rates agreed on at the Bretton Woods conference in 1944.
  • Specifically, the IMF was to provide a pool of liquidity for countries suffering from temporary payment imbalances.
  • Since then, the IMF has tried to reinvent itself as an organization doing everything from fostering global monetary co-operation, trade, high employment and growth, to poverty reduction around the world.
  • Alas, the evidence that it has made a difference is rather thin.

The central problem with IMF's lending is that it ignores moral hazard problems. If governments know that they can access IMF loans, they will tend to behave more recklessly both in good and bad economic times.

  • The latest idea from the Fund -- a European Fiscal Union -- is a case in point.
  • In a perfect world, the idea of pooling resources to help European countries deal with potential unexpected economic shocks would be an appealing one.
  • However, in reality, that would act as an invitation for the less well-governed members of the EU to spend like there is no tomorrow.
  • To avoid future financial crises, the exact opposite of the Fund's proposal is necessary -- namely that national governments in Europe and large financial institutions face the full costs of their decisions, for good or ill.

The debt crisis in Europe, as well as the lingering effects of the global financial crisis of 2008, is an opportunity to rethink the role international organizations, and their lending, have in fostering sound policies and financial stability. In other words, it may be time to start seeing the IMF's expansive mission as part of the problem, rather than the solution, to the world's economic woes.

Source: Dalibor Rohac, "Has the IMF Outlived Its Usefulness?" Cato Institute, October 17, 2013.

 

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