A dismal reality worth facing

James Boughton asks why extreme financial policies are counterproductive.

The International Monetary Fund is the Starbucks of international finance.

Successful and seemingly ubiquitous, it has become a symbol of globalisation and a lightning rod for those who long for a more localised and diversified economic community. The IMF has loans outstanding and conditional on policy implementation in more than 50 countries; hundreds of newspaper articles are written about it every day; and a Google web search throws up nearly 3 million results for IMF (compared with just 2.4 million for Starbucks).

The economic and political importance of the IMF makes rational discourse difficult. Even scholarly treatises often reveal more about the political bias of the author than the fund. One example from the left is Globalization and its Discontents , a factually distorted diatribe against the IMF by Joseph Stiglitz, a Nobel laureate in economics who is capable of more careful thought. Then there are luminaries such as George Shultz (US secretary of state under President Ronald Reagan) who called for the abolition of the IMF on the grounds that private financial markets were perfectly capable of allocating international capital efficiently if governments would just get out of their way.

In this overheated environment, a balanced analysis is a welcome treat.

Graham Bird, professor of economics at the University of Surrey, sets a high standard for clarity of both thought and expression. His view is that the fund is a worthy and necessary institution that does a difficult job pretty well but could and should do better. Markets are not perfect, and an unfettered allocation of capital will be maldistributed and volatile.

National governments are not perfect, and economic policy-making is often short-sighted and serves narrow interests. The IMF helps offset these failings, but it is not perfect either. These ideas are far from radical, but they lack "sex appeal" and are all too often ignored in public discussion. Bird covers the full range of issues that concern the IMF as it approaches its 60th year. In each case he finds answers that occupy the middle ground of contentious debates.

How much money should the IMF lend to a country in trouble? If it lends too much, it may weaken the incentive to adjust policies. If too little, the country will be unable to afford to take tough measures. How should the fund interact with private financial markets? If it tries to force creditors to maintain their exposure in a country as a condition for a "bailout", it may scare them off lending to other countries in similar circumstances. If it stays at arms' length, private creditors may bail out and leave the IMF as the main creditor. Should the fund provide long-term, low-interest loans to very poor countries? If it does, it encroaches on and overlaps with some of the responsibilities of the World Bank, and takes resources from its own work in the emerging market countries. If it does not, the IMF role in helping the poor will be marginalised and ineffective, and may leave the poorest countries isolated from external financial support.

Should the fund be more politically accountable? Political oversight is essential for legitimacy but may weaken the IMF's ability to take rational, even-handed and effective decisions. On these and other real issues, Bird explains clearly why extremes should be avoided.

The IMF and the Future will interest anyone who seeks to understand the complexities of the IMF role in the world economy and is prepared to live with the dismalness of economic science. No matter how true it may be, for a reader to be told repeatedly that problems are complex and solutions ambiguous can be dispiriting. A deeper problem is that most of the essays were written in the late 1990s and do not reflect the substantial changes that have taken place at the IMF since. The financial crisis that hit East Asia in 1997 had a profound impact on the IMF and induced a greater willingness to seek fresh approaches. As a result, surveillance has been revamped to focus more directly on the root causes of potential crises, and policy conditionality has been refocused to enhance the effectiveness of IMF-supported programmes. But even if this book is behind that curve, it is an excellent survey of the policy choices and problems that pushed the IMF in the direction it is moving today.

James M. Boughton is assistant director of the policy development and review department, International Monetary Fund. This review is a personal view and does not represent the view of the institution.