September 23, 2005
Sometimes historic changes take place quietly, while no one is looking. Great institutions lose power with a whimper rather than a bang. Such is the case of the International Monetary Fund (IMF), which will hold its annual fall meetings with the World Bank next week in Washington D.C.
Just a few years ago, the IMF was the most powerful financial institution in the world. When financial and economic crises swept across East Asia in 1997, it was the IMF that laid down the painful conditions that governments had to meet in order to access more than $120 billion in foreign funds. When the financial contagion spread to Russia and Brazil, the IMF followed, brokering the multi-billion dollar loans that — however unsuccessfully — were intended to prop up overvalued currencies on the brink of collapse.
Those days are over. The Asian countries began, after their nightmarish experience with the Fund in 1997-1998, to pile up huge international foreign exchange reserves — partly so they would never have to go begging to the IMF again. But the final blow to the Fund came from the country that IMF First Deputy Managing Director Anne Krueger reportedly calls “the A-word”: Argentina.
Argentina suffered through a terrible four-year depression, beginning in 1998. A country that had recently ranked among the highest for living standards in Latin America soon had the majority of the country falling below the poverty line. Many Argentines blamed the IMF, which had played a major role in designing the policies that led to the collapse, and seemed to prescribe just the wrong medicine during the crisis: high interest rates, budget tightening, and maintaining the Argentine peso’s unsustainable link to the U.S. dollar.
In December of 2001 the government defaulted on $100 billion of debt, the largest sovereign debt default in history. The currency and the banking system collapsed, and the country sank further into depression. But only for about three more months. Then, to most people’s surprise, the economy began to recover.
The recovery began and continued without any help from the IMF. On the contrary: in 2002, the Fund and other official creditors (including the World Bank), actually took a net $4.1 billion — more than 4 percent of GDP — out of Argentina. But the government was able to chart more of its own economic course, rejecting IMF demands for higher interest rates, increased budget austerity, and utility price increases. Argentina also took a hard line with foreign creditors holding defaulted debt, despite repeated threats from the Fund. When push came to shove in September 2003, Argentina did the unthinkable: a temporary default to the IMF itself, until the Fund backed down.
The result: a rapid and robust economic recovery, with a remarkable 8.8 percent growth in GDP for 2003 and 9 percent for 2004. With a projected 7.3 percent GDP gain for 2005, Argentina is still the fastest growing economy in Latin America.
Prior to Argentina’s 2003 showdown with the Fund, only failed or “pariah” states with nothing left to lose — e.g. Congo, Iraq — had defaulted to the IMF. That’s because of the IMF’s power to cut off not only its own credit but also most loans from the larger World Bank, other multilateral lenders, the rich country governments, and even much of the private sector. This has been the source of the IMF’s enormous influence over economic policy in developing countries: in effect, a creditors’ cartel led by the Fund, which is answerable primarily to the U.S. Treasury Department.
But Argentina showed that a country that was flat on its back could stand up to the IMF, and not only live to tell about it, but even launch a solid economic recovery. This changed the world. Although the IMF still carries a lot of weight in poorer countries (for example, in Sub-Saharan Africa), its influence in the middle-income countries has plummeted. The Fund is now a shadow of its former self.
Reformers over the last 15 years debated whether change would come about through the IMF altering its policies, or through the Fund losing influence. That debate has now been settled by history. The IMF has not been reformed, but its power to shape economic policy in developing countries has been enormously reduced.
Mark Weisbrot is co-director the Center for Economic and Policy Research.