The purpose of this article is to correct the misconceptions expressed in public response to IMF programs. Managing Director de Larosière seeks to clarify issues relating to the Fund’s role in imposing austerity, their relation to the rest of the financial market, and the importance of the role of “surveillance” mechanisms in their policies.
The purpose of IMF resources is to serve as a revolving pool of funds that can be made available to member countries that are experiencing balance of payment difficulties. They are intended to strengthen a country’s own economy as well as the economic well being of their trading and financial partners. This is the justification offered for the conditionality underlying the IMF’s lending procedures. In the past people have accused the Fund of “imposing” conditions on countries receiving aid. According to the IMF the reality is that countries work hand in hand with the IMF in constructing the most rational set of economic objectives that would be most conducive to its sustained development. These negotiations, though difficult are conducted in an atmosphere of mutual understanding and trust, this despite evidence to suggest that concessions to the third world often bring about more economic hardship than good. The toughness of this conditionality rests on a series of factors.
The effects of conditional lending de Larosière attributes to the fact that most countries receiving IMF aid had experienced a decline in their growth rates before receiving the Fund’s support. Since then the provisions of the Fund have had a magical catalytic effect, which somehow “by its own definition” has created higher levels of imports and hence higher levels of activity than before IMF support. The article goes on to say that though in the short run adjustment policy can result in immediate losses while the benefits take more time to come to pass.
Finally, what of the combined effects of the adjustment efforts taking place simultaneously by a number of larger debtor countries? Some have worried that these combined effects could throw recessionary impulses into the world market thereby slowing the recovery. According to de Larosière, recovery could in fact be a slow and difficult process and argues that the solution to this problem is in fact the strengthening of the conditions that underlie the Fund’s policies to reflect the magnitude of the adjustment that is needed as well as the limits to financing.
We start with two observations. First, because Fund financing is liked to adjustment it can never be expected to form part of the resource transfers to the developing world. Second, because it is linked to a reorientation of policy aimed at strengthening the economies of the borrowing countries, the provision of fund financing can be modest in relation to a payments gap. This latter point is based on the magical catalyst effect wherein the Fund helps to unlock additional finance from other creditors. The article states that the recent debt crises posed a very serious threat to the international financial system. To support adjustment efforts it was essential to ensure that adequate financing flows be maintained. Critics had accused the IMF of “bailing out” the banking sector but de Larosière defends this by stating that had there been a dramatic curtailment of financial flows the problems for debtor countries and the financial sector as a whole would have been unmanageable. A key factor to this sustaining of financial flow was a confidence on the part of commercial lenders in the ability of the IMF’s adjustment policy to ensure the safety of their investments.
The final point of the article focuses on the Fund’s role concerning the policies that were needed on the part of the industrial nations to consolidate and extend the emerging recovery. This comes in response to attacks on the IMF saying that its adjustment policies and financing are used only towards poorer third world nations. But de Larosière wants to stress that the Fund plays a considerable surveillance role whereby it is required to observe the exchange and related policies of all member nations in order to ensure that they are most conducive to stable conditions and continued economic growth. The world recession in particular made the Fund’s surveillance role even more important to monitor member’s policies and make them more effective. Two elements are employed in this surveillance strategy.
Summary by Cristopher B. Sapstead