In the driest chapter of the book, Easterly discusses everyone’s favorite global money pot: the International Monetary Fund (IMF). It’s one of the Bretton Woods organizations (along with the World Bank and International Trade Organization), and it receives contributions from member organizations, then distributes funds to countries it decides are in need.
This brings up an obvious question: which countries are “in need”? The first group is composed of those countries that need short-term “bailout” money; in the recent past, a few were South Korea, Thailand, and Mexico.
More ambitiously, the IMF provides conditional loans to countries for large-scale projects. Many countries have received this type of development loan (the next is likely Egypt). Often, the loan is a “standby arrangement,” which makes it “conditional on the government’s getting its finances in order so it can pay the loan back quickly.”
Easterly holds that the IMF does a better job with the former group than the latter:
“on balance, the IMF has done useful short-term bailouts of poor countries experiencing financial crises, but it has done worse at promoting long-term development.”
Which makes sense conceptually, right? The countries that are in financial crisis are probably slightly less likely to be “broken,” so a short-term injection of emergency cash could right them up and set them on their way. For poor countries that are more likely to be corrupt? Not so much.
The IMF also plays the heavy for many countries,
“often [forcing] the government to do unpopular things, such as cut subsidies for bread or cooking oil.”
This is because subsidies are direct cash transfers to citizens, who enjoy the extra cash in their pockets. Unfortunately, they’re extremely expensive for governments, and distort markets.
As a consultant, I can empathize with the role of the heavy: it’s often (implicitly) a big reason clients hire us, so I’m used to it. Of course, citizens don’t like it when prices for basic goods double, so a certain amount of rioting often occurs (as it currently the case in Jordan – though that wasn’t part of IMF cost-cutting).
Part of Easterly’s argument against the IMF it that
“statistically, spending a lot of time under an IMF program is associated with a higher risk of state collapse.”
But, of course, countries that accept IMF loans are also countries that are probably more likely to collapse anyway, and Easterly only shows correlation of the two, not causation.
He recommends that the IMF stay away from countries that seem to be unable to appropriately use the loans it doles out.
In a way, the IMF acts as an enabler to poor countries looking to get another quick hit of money: when they can’t repay their first IMF loan, it’ll often provide another loan – even without adhering to the initial conditions by which the loan was granted. In other words, the IMF is like the parent that keeps paying the kid allowance even when he/she isn’t doing the chores.
Poor coordination makes the situation worse, as Western governments and other agencies kick in more debt to pay off old debt; this spiral continues until all parties admit the obvious: the country won’t be able to repay the loans. This led to the creation of a new acronym: HIPC (Heavily Indebted Poor Countries), and in 1996 “the IMF and the World Bank, for the first time in their history, forgave part of their own loan.”
Anyone who remembers the 2008 financial meltdown in America will recognize the issue with this: moral hazard – or, in plain human speak, “countries will stop repaying loans because they know they’ll just be forgiven anyway.”
Easterly’s solution is to look back to the 1944 Bretton Woods conference and true-up the mission of the IMF and World Bank:
“The World Bank, which is an aid agency, should just give the poorest countries grants, not loans… The IMF, which is not supposed to be an aid agency, should get out of the business of loaning money to the poorest, least creditworthy countries altogether.”
This doesn’t strike me as a solution that fixes the problem. Treating all poor-country funding as essentially “pre-forgiven” (which is basically what the grant would be, right?) isn’t likely to fix the underlying issue: that the money isn’t being put to productive use.
Off-the-cuff, another solution might be to accept the underlying reality (i.e., don’t bother with the pre-conditions), then provide grant money for specific infrastructure projects: roads, dams, etc. Money’s fungible – a dollar is a dollar is a dollar – but at least something would come of it (although there is evidence that giving money for health will cause the recipient government to partially reduce its own funding of health care services). This seems to be what Easterly is getting at but doesn’t explicate.
In Easterly’s view, the IMF is sitting on a giant pile of money that it should be lending to emerging markets (not the too-likely-to-fail countries) and doling out on an emergency basis; its role should be a stabilizer, not a fixer. With its recent funding of the Eurozone bailout, it seems to be heading in that direction. If that’s the case, the question is what the IMF should do with all of the additional contributions: give to the World Bank for development work? Rebate back to member countries?