A week ago, I attended a talk by a Hungarian academic on Eastern European countries’ particular problems with the financial crisis. It was sponsored by the PNU EU Center and the Korea-EU Forum – good outfits both.
Ostensibly titled “A Hungarian Perspective on the Future of European Integration,” the talk quickly turned into a list of complaints about IMF conditionality during the current crisis. The audience was receptive; Korea went through an IMF bailout as well that turned the country upside down. The speaker heavily stressed that creditors must share with borrowers the costs of debt crises. She ended with a call for a ‘restructuring of the global financial architecture’ for this purpose. I heard Jeffrey Sachs once at Ohio State say basically the same thing. I am struck by how similar the left’s complaints have been about the global economy since the 70s. A couple of points are in order.
1. I’ve grown tired of the constant use of large-sounding IR jargon to obscure either unlikely leftist proposals (global taxes) or a lack of concrete ideas and notions (rich countries should be nicer). You sound a lot more important if you talk about the need for ‘paradigm shifts’ and ‘new global structures,’ than if you actually say rather mundane things like the IMF should ease up on its inflation targets or Obama should push for global cap-and-trade in carbon.
2. The IMF is world’s financial paramedic. You only call it when the wheels come off your economy, and you’re careening off the bridge. It is bad faith to criticize the Fund when you yourself have caused the crisis – in Hungary’s case by a consumer spending splurge financed by borrowing. Nobody ever calls the Fund when times are good. Nobody ever thanks it for providing resources when no one else will.
3. The IMF does not in fact insist on brutal, one-size-fits-all conditionality, and the Fund has given one program after another to many countries, creating in effect a long-term development relationship rather than a short-term patch. (Read the work of Randall Stone and Ngaire Woods on this generally.) Frequently states welch on the IMF conditions, back-sliding or cheating. The real determinant of the details of conditionality is the conflict between great power interest in the borrower and Fund technocracy.
4. Debt relief has been around for a long-time. and creditors, shareholders, and rich-country taxpayers have carried the costs of LDC profligacy and wasted investment. Institutionalizing or regularizing debt relief would be disastrous, as it would immediate be discounted by private borrowers and likely reduce available development financing and raise its interest rates. More generally, it strikes me as dangerous fantasy to argue against the sanctity of contract, especially in such a high-handed way. This bites the hand that feeds you. If a ‘new international financial architecture’ really means making it easier to get debt relief, than creditors won’t lend to begin with. The moral hazard problems are quite obvious; as much as possible contract must be maintained and borrowers must carry the costs.
5. IMF reforms are usually necessary. Economies don’t just explode overnight. Usually the IMF gets involved because you ran your country off the road yourself. Structural problems pile up and lead to an meltdown. Korea’s economy is dominated by a corporatist oligarchy who sought to unload their costs on taxpayers when the easy money dried up in the Asian crisis. The Fund had nothing to do with this, and the crisis was useful for partially cracking the corporatist-familial lock on the economy that is so common in emerging markets. The Fund’s medicine was good for Korea.
6. You don’t have to borrow from the Fund if you don’t want to. Again, it seems like the height of hubris to bite the hand that feeds you. Some states found dealing with the Fund so disagreeable, they simply won’t do it again. If that is what you want, fine. That’s exactly the right attitude. My own sense is that that is risky, but ultimately that is up to you.
7. Can we stop implying that somehow creditors force borrowers to borrow? If your parents give you a credit card and you buy a car with it inside of paying for your college classes, that is hardly their fault. We are seeing the same logic today about the financial crisis. The Chinese made it so easy to borrow, it was irresistible for Americans to splurge. Gimme a break. Show some basic responsibility. Countries dig their own holes, and lenders only become ‘predatory’ when the mistakes pile up.
And remember the inverse counterfactual. If rich countries and their banks did not lend, then they would be accused of racism, neo-imperialism, coldness to suffering and poverty, and ‘not seeing the people behind the statistics (the credit rating)’. (That last is my all time favorite anti-social science banality.) Recall that this was exactly the logic behind extending credit to the riskiest in the US, which then lead to the financial crisis. Red-lining was racism; cruel bankers saw only credit ratings, not the young under-privileged family struggling for a home. It turns out actually that those credit ratings did have meaning, and ignoring them with implicit government backing has resulted in taxpayers paying the cost of anti-credit rating ‘social justice lending.’ It is a great irony that the World Social Forum wants to eliminate subprime mortgages.
IN short, if you want developing financing, then accept the strings that come with it; if not, then accept international red-ling (as Cuba and NK do). You can’t have both; money isn’t free. And the poor record of official development assistance suggests that free money for LDCs is not a good idea anyway. If you borrow from international finance, expect an IMF stricture if you blow the cash. That is how the game is played. Contracts are contracts, and the IMF is the closest thing we have to insuring their international viability. Try to imagine for a moment how much development finance would disappear without its backstop role. That is a far scarier thought.