For others, it is both a forum and instrument of international co-operation, and is no more responsible for recent crises than is the fireman for the fire.
In this very readable short book, rich with information, Patrick Lenain, now at the OECD and a former IMF staffer, provides an insider’s guide to the history and structure of the Fund, and to some of the heated debates, to which it has been central. Succinctly, but carefully, he shows how changing perceptions and economic conditions have interacted to influence the development of the institution.
At the founding Bretton Woods conference in 1944, the overriding concern was to create a financial system which would guard against the competitive devaluations of the 1930s. Thirty years later, as markets expanded and capital became increasingly mobile, the focus of the Fund’s attention moved from the developed to the developing world.
Mr Lenain devotes a quarter of the book to the financial crises which, over the last two decades, have marked the growth of a number of developing regions and countries – Latin America as a whole in 1982, Mexico in 1994, south east Asia in 1997, Russia in 1998, Brazil, Turkey and Argentina since then. It is indeed the actions of the IMF before, during and after these later crises that the current debate is about.
The IMF has played a forefront role in some notable successes, in particular, two US-led packages: first, Treasury Secretary Nicholas Brady’s plan that helped resolve Latin America’s debt problems, and then Secretary Robert Rubin’s plan to arrest Mexico’s plummeting peso. But the jury is still out on the IMF’s role in the crises since 1997.
In east Asia, the Fund was criticised, first, for not spotting the risks inherent in the foreign indebtedness of the private sector early enough, then for tactical errors in the manner in which it responded to the heat of events, and finally (and somewhat unjustly) for pressuring the affected governments into adopting excessively tight fiscal and monetary policies. Mr Lenain discusses these criticisms, but does not give due importance to what is perhaps the most important question.
Could the Asian crises, and some of the subsequent episodes, have happened if international capital had not been as mobile as it was in the 1990s? Probably not. If it had not been so easy for western banks to lend to Thai financial institutions, for instance, these could not have taken the untenable currency risks they did. Yet, the IMF had helped promote short-term capital mobility, and had urged borrowing governments to make their currencies convertible on capital as well as current account. Since the crises, international opinion, and the IMF itself, have tended towards the view that further short-term capital liberalisation should be conditioned on strengthening regulatory structures.
Whether the Fund encourages it or not, increasing capital mobility will, nonetheless, likely remain a central feature of international development. The tendency of private investors to seek higher returns regardless of borders will enhance the long-term growth prospects of many developing countries. But this may also mean some financial instability in emerging markets. In this increasingly international world, Mr Lenain asks what the role of the IMF should be.
He quietly sides with the IMF’s advocates, though emphasises tighter supervision, with additional and more flexible lending facilities. He goes on to describe what for this reviewer were perhaps the most innovative institutional proposals to have emerged in recent years.
After the Asian crises, Jeffrey Sachs and others had pushed for the international equivalent of national bankruptcy courts. This “Super Chapter 11” proposal was, for a while, advocated by Anne Krueger, the first deputy managing director of the IMF. The argument was that if an international authority could give temporary protection to sovereign creditors who were in default, this would facilitate the process of restructuring and recovery. The institution would have substantial authority to intervene in private market contracts between creditors and debtors. Governments and financiers were not ready, and the proposal was shelved.
It may well return, however. Critics should certainly not be too quick to reject the idea, particularly those that point to the potential conflict that might arise if the IMF, itself a creditor, became an international bankruptcy judge. Surely this conflict could be avoided by having the bankruptcy judge as an independent, quasi-judicial body?
Despite this reviewer’s disagreement with one or two issues, and apart from a slightly confusing chapter on economic models, one would be hard pressed to find a better introduction to the IMF, its structure and its battles, than this one.
It should be translated into English, and be read by everyone looking for a quick guide
into the history, the workings and the role of this important institution.
Le FMI, by Patrick Lenain, Collection Repères, Editions La Découverte, fourth edition, Paris, 2004.
*Georges de Menil is professor of economics, Advanced Institute for the Study of Social Sciences (EHESS – Paris-Jourdan Sciences Économiques campus), and Adjunct Professor, New York University, Stern School of Business. Mr de Menil is also founder of the review, Economic Policy.
©OECD Observer April 2005