Feldstein: Refocusing the IMF

Feldstein, M. 1998. Refocusing the IMF. Foreign Affairs 77, no. 2: 20-33.

"The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits" (20).

"Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed system collapsed completely in 1971, the IMF was forced to find a new raison d'être" (20).

Their new motivation can be seen as building from the Mexico financial crisis. Mexico indicated that it would be unable to satisfy its international commitments. If they were to default on this loan, that had the potential to push many US banks into insolvency, as it would have wiped out a substantial chunk of credit. The US provided a bridge loan to Mexico so that they would be able to pay back these loans eventually. Many of the loans that were about to be defaulted upon were restructured. This was not only accomplished in Mexico, but in Central and South America more generally.

In order to meet these restructured loans, countries embarked on a process of increasing exports and decreasing imports in order to earn foreign exchange. The IMF was a part of overseeing that restructuring of these economies towards a goal of accruing more international capital was proceeding smoothly.

The next step in IMF development involved country restructuring after the fall of the Soviet Union. The IMF brought much experience to countries that had little experience with market based economic decisions. It also did not hurt that their advice came with substantial financial incentives to adopt these market orientated policies.

"The IMF is now acting in Southeast Asia and Korea in much the same way that it did in Eastern Europe and the former Soviet Union: insisting on fundamental changes in economic and institutional structures as a condition for receiving IMF funds. It is doing so even though the situations of the Asian countries are very different from that of the former Soviet Union and Eastern Europe. In addition, the IMF is applying its traditional mix of fiscal policies...and credit tightening...that were successful in Latin America" (22).

There is then an exploration of the SE Asian currency crisis:

"The Southeast Asian currency collapse that began in Thailand was an inevitable consequence of persistent large current account deficits and of the misguided attempt of Thailand, Indonesia, Malaysia, and the Philippines to maintain fixed exchange rates relative to the dollar" (22).

Thailand had a current account deficit that was quite large, and a currency pegged to the dollar. This meant that Thailand had to attract much foreign capital to service its debt. However, there were also pressures that kept investors coming back: the government ran a budget surplus, the population saved heavily. This was an untenable situation, especially with the baht tied to the dollar: when the yen fell relative to the dollar, Japanese investments in Thailand were discounted substantively. This caused a massive selling off of the baht. "At that point the IMF stepped in with a multibillion dollar rescue plan" (23).

This spread to the Philippines, Malaysia and Indonesia, as all had fixed currencies and current account deficits.

The author believes that a similar role to the one played by the IMF in Latin America would have been appropriate, but that the Fund went well beyond that measure. The structural adjustment programs were extensive and excessively detailed.

"In deciding whether to insist on any particular reform, the IMF should ask three questions: Is this reform really needed to restore the country's access to international capital markets? Is this a technical matter that does not interfere unnecessarily with the proper jurisdiction of a sovereign government? If the policies to be changed are also practiced in the major industrial economies of Europe, would the IMF think it appropriate to force similar changes in those countries if they were subject to a fund program? (27).