The International Monetary Fund (IMF) has played a prominent role in world financial affairs in the post-Second World War period. In the 1950s and 1960s, its main purpose was to support the system of fixed exchange rates. Since then, its activities have evolved to embrace developing economies and both banking and sovereign debt crises.
The top ranked mainstream Journal of Economic Perspectives is hardly the place we would expect to read a strong criticism of the IMF. But in the latest issue, this is exactly what Barry Eichengreen of Berkeley and Ngaire Woods of Oxford have done.
They argue that the effectiveness of the IMF has many similarities with that of a football referee. A great deal depends upon whether the players and spectators perceive the referee as being competent and impartial. With this in mind, Eichengreen and Woods level charges against the IMF on several counts.
Perhaps the most serious is its track record in monitoring the world economy and warning of potential crises. Keynes, who was a great enthusiast for creating the IMF, envisaged that a key role would be as a “blunt truth teller”. Elected politicians may try to fudge and obfuscate, but the IMF should tell things how they really are.
It would be unrealistic to expect anyone to have anticipated and warned of the US sub-prime crisis, the global financial crisis and the Greek sovereign debt crisis. But as Eichengreen and Woods put it, “the IMF batted zero for three on these three events, which suggests that its capacity to highlight risks to stability leaves something to be desired”. Using a different analogy, if a doctor fails to spot the symptoms of a disease, why should we trust his proposed cure?
The IMF’s track record on cures for sovereign debt crises is the second point of criticism. Judging whether a debt burden is sustainable is another tricky problem. But the IMF has in general erred on the side of lending for too long and postponing the inevitable restructuring. This allows private investors to cut their losses, creating the infamous “moral hazard” problem. If you think the IMF will allow private lenders to escape, you will be more inclined to make a loan which is otherwise too risky. The Fund’s decision not to insist on Greek debt restructuring in 2010, allowing French and German banks to bail out, is a case in point. The overall effect is that, when the restructuring does come, it is more expensive and disruptive for the economy which the IMF is trying to save.
The authors’ criticism of the governance structure of the IMF is much less effective, however. For example, major decisions require an 85 per cent vote. America has 16 per cent of the votes and so has a veto, which they argue reduces the Fund’s legitimacy. But the problem with widening the franchise is that standards of behaviour vary enormously across the world, and Fifa is the example of what is likely to happen if every country has one vote. So on this charge, at least, things are better left as they are.