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Has the IMF Outlived Its Usefulness?

October 17, 2013 in Economics

By Dalibor Rohac

Dalibor Rohac

In the weeks leading to the Annual Meetings of the International Monetary Fund (IMF) and the World Bank last weekend, Christine Lagarde, the managing director of the Fund, has been making a lot of headlines. She announced that the IMF would push for more gender equality in labour markets around the world, suggested that the IMF could help protect the planet from environmental damage by promoting reforms of energy subsidies, and urged European countries to move towards a fiscal union in order to help eurozone limit the severity of future financial crises.

That is a lot of ground to cover. While each of these proposals should be discussed on its own merit, jointly they are symptomatic of the spectacular mission creep that characterises the past 40 years of the organisation’s existence.

The original purpose of the IMF was relatively narrow — to assist in the post-war reconstruction of the international system of fixed exchange rates agreed on at the Bretton Woods conference in 1944. Specifically, the IMF was to provide a pool of liquidity for countries suffering from temporary payment imbalances.

The Bretton Woods system ceased to exist in the early 1970s. Since then, the IMF has tried to reinvent itself as an organisation doing everything from fostering global monetary co-operation, trade, high employment and growth, to poverty reduction around the world. Alas, the evidence that it has made a difference is rather thin.

Some economies standing at important economic and political crossroads — like Egypt — have chosen to simply ignore IMF’s advice and not to tap to its sources of liquidity. Since the events of the Arab Spring, the talks about an IMF loan have led nowhere; similarly, the country is making very little progress on the reform of its unsustainable system of subsidies — in spite of the subsidy reform initiative spearheaded by the Fund worldwide.

Even those countries that have navigated their way through these turbulent economic years have done so with very little help from the IMF. The Baltic countries, which had been hit the hardest by the financial crisis, received no IMF funding other than a small loan for Latvia, worth €1.16bn, which the government repaid ahead of schedule. The reason these economies got out of their troubles quickly was that their governments pursued bold economic reforms, including massive cuts to public spending and wholesale liberalisation of the economy. In 2009 alone, the fiscal adjustment …read more

Source: OP-EDS

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