The International Monetary Fund (IMF) is easy to attack. Why would one like the people who hold capital and have requirements to release it to countries desperately in need? But perhaps countries should be very grateful that it exists at all.
In a world becoming more interconnected and with the growth of systemic risk (think of that scary weekend in September 2008), these institutions become more important by the day.
The Fund’s mandate
The primary focus of most economic visceral is towards the IMF and its structural conditions. Listening to people like Nobel Prize winning economist Joseph Stiglitz to celebrity economist Jeffery Sachs, one would assume the IMF is single handily conspiring to keep Africans/Asians poor.
The first problem with this argument is obvious; IMF economists are not trying to keep people poor. But the underlying problem is a lack of understanding the mandate of the IMF.
Simplified; the IMF is responsible with maintain macroeconomic stability around the world. That is to say, the vast majority of the work done by the IMF is helping countries in distress.
To blame the IMF for the fact that the countries they work with are having economic problems is akin to pointing out people who have lots of cavities in dentist offices and blaming the dentist.
Social services fallacy
It is important to note that the IMF can’t impose its will omnipotently on nations. Most central bankers will tell you that if they suffer from issues, they would turn to the IMF. Many people, including perhaps the smartest economist alive Larry Summers argue that the austerity schemes imposed by the IMF don’t work.
But one should note that often austerity is a misnomer because it implies a pulling back of spending at the expense of social programmes. But what that neglects to question is where the capital for this ‘spending’ was coming from.
Many times, as was the case with Greece and Spain, the spending cuts were from capital incurred from the nation’s raising debt in capital markets. A good analogy would be being terribly in credit card debit and then complaining when your banker tells you to stop shopping for new shoes.
The benefit and risks of capital markets
Any nation willing to open its markets and go out to raise funding from capital markets is looking to develop, and fast. The magic of the market is that it moves capital faster than Adam Smith could have possibly imagined.
In one day, Rwanda was able to raise over $400 million (the demand for that bond suggests it could have raised significantly more). But there is a scary side as well; Mr. Summers put it succinctly, “Global capital markets pose the same kinds of problems that jet planes do.
“They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.”
If we have learned anything in recent years it is how quickly everything can unravel. We have also learned that we can’t predict what is going to happen. While economics masquerades as a science, it really is an investigation of human behaviour based on observable parameters.
But any economist that is sure of what is going to happen is either a fool or, maybe worse, a politician.
A trader in London can nearly bring down a bank like JP Morgan Chase which would have catastrophic consequences for everyone. A dictator in the Middle East can say something strange and cause huge increases in oil prices for everyone.
To say one wouldn’t want some international oversight, even if it misses the target sometimes, would be a person with a strong faith in human reason.
It’s not perfect but it’s better than nothing
Stepping back, there are far too many people in poverty around the world, far too many people who die from preventable diseases, and far too many politicians that risk the livelihoods of their people based on whimsical economic decisions.
The power centres of Washington, London, Paris and Beijing have an unsustainable level of control over economic discussion.
But blaming the IMF is unfair. For such a large organisation it seems to go out of its way to point out when it has made a mistake (such as the Asian financial crisis of 1997-98).
The entire economic profession could do better at listening to more outside perspectives, but the IMF is working hard to do right for its shareholders, that being you.
The writer is an economist based in Copenhagen