Chapter 22. Is the IMF Pathetic?

Chapter 22 HEADLINE: Is the IMF “Pathetic”?

The IMF is the closest thing to a global lender of last resort. When times are calm, it may be tempting to think of abolishing the institution. As this precrisis column pointed out, to have done so would have been a remarkably complacent idea.

Meral Karasulu did what any seasoned International Monetary Fund staffer would do: She grinned and, for the umpteenth time, listened to suggestions that the institution was to blame for the 1997 Asian financial crisis.

“Thank you for your question,” she replied to an audience member at a May 14 EuroMoney conference in Seoul. Then, she launched into a defense of the IMF’s actions.

As the IMF’s representative in South Korea, Karasulu is used to the drill. After all, many Koreans routinely refer to the “IMF crisis.” It’s a reminder that a decade after Asia’s turmoil, the IMF is still explaining itself wherever it goes.

Three weeks after the Seoul conference, there was similar griping at an event I attended in Buenos Aires. The mood had barely changed since March 2005, when President Nestor Kirchner scored points with many of Argentina’s 40 million people by calling the IMF “pathetic.” He has been demanding that the institution stop criticizing the Latin American country.

Korea and Argentina have little in common. Yet Korea is among the nations stockpiling currency reserves to avoid having to go to the IMF for a bailout ever again. Argentina, meanwhile, continues to tout the end of its IMF-backed program last year as an economic victory.

This column isn’t a defense of the IMF’s actions during the Asian crisis or Argentina’s in the early 2000s. The Washington-based fund has a small army of well-compensated people to do that. And the IMF has had its fair share of blunders, including telling Asian countries to tighten fiscal policy during a crisis.

Yet all this talk of IMF irrelevance is overdone. What’s more, the chatter suggests the creation of a new bubble called complacency.

“It’s ironic to my mind that people say the fund isn’t needed anymore because nothing in the global financial system is broken at the moment,” John Lipsky, the IMF’s first deputy managing director, said in an interview last month in Tokyo. “It strikes me we are trying to anticipate and prepare for when things may go wrong again.”…

Sure, Asia has insulated itself from markets with trillions of dollars of currency reserves. The IMF’s phones may be ringing off the hook if China’s economy hits a wall, the U.S. dollar plunges, the so-called yen-carry trade blows up, a major terrorist attack occurs, oil prices approach $100 a barrel or some unexpected event roils world markets.

The thing is, the IMF and its Bretton Woods sister institution, the World Bank, have scarcely been more necessary. How efficient and cost-effective they are is debatable; what’s not is that today’s global economy needs the buffering role that both of them play… .

The IMF was never set up to play the role it did during crises in Mexico, Asia and Russia in the 1990s and turmoil in Latin America since then. Even so, it will be called upon the instant a crisis in one country spreads to another. As imperfect as the IMF is, the world needs the economic equivalent of a fire brigade when markets plunge.

There’s much chatter about how global prosperity is reducing the need for billion-dollar IMF bailouts. As of March, IMF lending had shriveled to $11.8 billion from a peak of $81 billion in 2004. A single nation, Turkey, accounted for about 75 percent of the IMF’s portfolio.

Isn’t that a good thing? The IMF is like a paramedic: You hope you won’t need one, but it’s great that one is just a phone call away. Plenty of things could still go awry and necessitate a call to the IMF.… .

Complacency looms large in today’s world. All too many investors think the good times are here to stay and all too many governments are ignoring their imbalances for similar reasons. …

All this means that, far from being irrelevant, the IMF may be in for a very busy couple of years.

Source: Extract from William Pesek, “Is IMF ‘Pathetic’ or Just Awaiting Next Crisis?” bloomberg.net, June 12, 2007. Used with permission of Bloomberg L.P. Copyright © 2013. All rights reserved.

Question 1

Question

Why do Koreans blame the IMF for the Asian financial crisis?

Question 2

Question

How has the Global Financial Crisis of 2007 changed your view of a global lender of last resort? Would you rather have independent central banks act as a global lender of last resort or an international agency similar to the IMF?

Question 3

Question

What role did the IMF play in aiding countries during the recent Global Financial Crisis? It may help to read the “IMF’s Response to the Global Economic Crisis.”