While talk of international monetary policy - foreign direct investment and capital flows - may seem complicated to some, over 50 people filled Cabot 206 last Thursday for a panel discussion debating the role and future of the International Monetary Fund (IMF). "The Current Debate About the IMF" attracted a standing-room-only crowd of undergraduates, Fletcher students, and professors.
All six panelists agreed that the Fund in its current state should be reformed. Created in 1944 to facilitate international trade and to stabilize currency exchange rates, the Fund has evolved into an organization that currently issues low-interest loans to financially troubled and less developed countries in an effort to aid in building their economies. Much of the current debate questions whether conditionalities - certain requirements that a country must meet if wants a loan - are actually hurting more than helping these ailing countries.
According to research conducted by panelist James Vreeland, a Yale scholar, IMF programs actually hurt recipient countries' economic growth. "Lending isn't hurting, it's conditionality that hurts growth," he said.
Vreeland said that forcing a country to enact certain policies such as cutting government spending or privatizing state-owned industries has the worst effect on middle-class and low-income citizens.
Another well-accepted criticism asserts that forcing a government to implement particular policies infringes on the country's sovereignty. One of the guest panelists criticized the Fund for forcing economically distressed countries to enact stringent changes in their economies. Devesh Kapur, a Harvard professor, denounced the relatively small voice that less wealthy countries have in creating the Fund's policies.
Small and less developed countries are most affected by these policies, since they receive the bulk of the IMF's loans. But a country's voting power is based on the amount of money it contributes to the Fund every year, so influence is concentrated in the hands of a few, more developed countries.
"Developed countries know they probably wouldn't have to borrow money [from the IMF], so they have no qualms with expanding its role and conditionalitites," Kapur said.
The panel's only representative from the IMF defended the organizations' policies, but admitted that reform is needed. According to representative Peter Clark, the Fund has begun to cut back on the number and scope of conditions that must be met to secure a loan. However, he defended the notion of enforcing certain requirements, saying that they are justified since all countries must adhere to these conditions.
Despite the panelists' overwhelming criticism of the Fund, most asserted that it does ultimately serve a useful purpose. One of its most effective roles is being a "lender of last resort," an institution that will always be willing to lend money and advice when other resources are not available.
Former Wellesley College professor Joseph Joyce likened the Fund to St. Paul, saying that it is "spreading the word" about economic development, citing the example of Russia in 1991. When Western countries (including the US) did not offer help, only IMF officials took the time to advise Russian officials during the country's transition from a socialist to capitalist market.
Several panelists said that the presence of the IMF has a stabilizing effect on the international economy. "It's difficult to imagine a world where we would pluck these agencies out with no clear replacement," Joyce said. Clark added that a country receiving an IMF loan is tantamount to it earning a "Good Housekeeping seal of approval" in the eyes of foreign investors.
When the IMF deems a country worthy of a loan, it signals investors that the country's economy will be in competent, stabilizing hands, making it a less risky investment. "The seal of approval is more important than the actual loan," Clark said.
But Fletcher professor Graham Bird raised the question of whether the availability of IMF loans creates moral hazard, encouraging investors and governments to make risky investments knowing that the Fund will ultimately bail, should the investments fail. Bird pointed to the 1998 Asian financial crisis, which he said was partially driven by Asian banks making unsound loans because they assumed that their governments - and eventually the Fund - would pay off their debts should the loans go bad.
On the question of moral hazard, Kapur asserted that "I think that there is moral hazard on the part of the developed countries... it costs the US more for more power, but comparatively it costs the US zero," since its annual contribution to the Fund does not put a substantial financial strain on the country.
According to Kapur, this leads to wealthy nations haphazardly formulating policies that are not necessarily to the borrower's benefit. "Risks are born mostly on the borrowers' side; bail-outs don't hurt developed countries," he said.
