The IMF fails again

Joseph E. Stiglitz, Professor of Economics, Columbia University, Project Syndicate

It is six years since the IMF's fateful meeting in Hong Kong, just before the global financial crisis. I was there. What a peculiar meeting it was. To those paying attention, it was clear that a crisis loomed. Capital market liberalization was the culprit, exposing countries to the vagaries of international capital flows -- to both irrational pessimism and optimism, not to mention the manipulation of speculators.

Yet the IMF was still lobbying to change its charter in order to force countries to liberalize their capital markets, ignoring the evidence that this did not lead to enhanced growth or more investment, but only to more instability. The crises that erupted later that year undermined confidence in the IMF and led to discussions about "reforming the global financial architecture."

Now six years later, we can say that those discussions did not lead to much real change. Some suggest that the fancy term "reforming the global financial architecture" was a dead giveaway. The U.S. Treasury and the IMF knew, or at least hoped, that with the passing of the crisis, global attention would turn elsewhere. While wrong about what to do in the crisis, on this point they were right.

But change has occurred, though sometimes more in rhetoric than reality. Today the IMF is more aware of the impact its programs have on poverty -- though it still does not produce a "poverty and unemployment impact" statement when it presents a program. The Fund has recognized the importance of participation and ownership. No longer are programs simply a matter between the IMF, central bank governors, and finance ministers. The IMF has recognized that there was excessive conditionality, and that these conditions led to a lack of focus.

The IMF has not, however, fully grasped that the conditions were often dangerously misguided, and often dealt with political issues that were beyond its mission. After criticizing the East Asian countries for a lack of transparency, the IMF acknowledged that it, too, was insufficiently transparent, and made reforms -- though sometimes it seems that it thinks that a better Web site is a substitute for real transparency. Unfortunately, it still has not recognized a basic principle underlying modern democracy: Citizens' right to know.

After the failure of the Argentina bail out, the IMF recognized the need for an alternative approach. Earlier, it ignored calls for standstills and bankruptcy, saying that would entail the abrogation of the debt contract. Finally, the IMF recognized that just as individuals need the right to a fresh start, so do governments. Unfortunately, it did not recognize that as a major creditor it could never be viewed as an impartial judge, and so could not have a pivotal role. It never fully grasped the political and economic issues underlying the design of bankruptcy laws.

Under pressure from global civil society, the IMF finally did agree to an enhanced debt forgiveness program for the poorest countries. Regrettably, it set standards and procedures such that few countries achieve the debt relief they need. At least in East Asia, the IMF recognized that excessive fiscal stringency contributed to the downturn, though it still pushed excessive fiscal stringency in Argentina when that country went into crisis, with predictably disastrous results.

It is good news that the IMF has recognized the limits of its policies and positions. But we should expect more of the IMF than just doing less harm than in the past. Even without capital market liberalization, the world will continue to face enormous volatility. Crises will not be things of the past.

Those who expected major reforms in the global financial architecture may well be sorely disappointed by what has happened in the past six years. For any fundamental reforms must address not only the difficult problems posed by the global reserve system and the burdens of risk borne by the developing countries, but also global governance. But there are strong vested interests in upholding the status quo. It is one thing to rearrange the chairs around the table, and quite another to change the table itself or those who have a seat at it.

So it is no surprise that another annual meeting of the IMF passed without any major steps forward in "reforming the global financial architecture." Instead, there was much discussion of another one of the symptoms that something is wrong. The issue of the day was whether China's exchange rate is overvalued, and if so, what should be done about it. Developing countries were told, once again, to get their houses in order, to address issues of governance, and to undertake "painful" structural reforms.

It is, of course, always much easier to encourage others to undertake painful reforms than to look inward. The failed WTO meeting in Cancun of two weeks ago should serve as a warning: Something is fundamentally wrong with how the global trading system is managed. So, too, is something fundamentally wrong with the global financial system. How many more meetings of the IMF will pass, how many more crises will occur, before this harsh truth sinks in?