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Just finished reading this book by JosephStiglitz which documents the failures of IMF policies towards developing countries. Very good explanation of how it all works.

Longer summary coming soon ... executive summary : IMF more concerned with protecting repayments to foreign lenders than economic health of client states.

Well, if the loans don't get paid back, then the borrowers won't get any more loans. So there's a feedback-cycle issue here. A couple bigger questions include:

  • 1) do IMF policies maximize the sustainable health of the borrower economies, so they can pay back loans?
  • 2) do borrowers spend the money on stuff that will lead to repayment?
  • 3) how does this relate to opening up trade barriers with the rest of the world?


According to Stiglitz the answers are :

1) Absolutely not. One of the main threads of his book consists of examples of the IMF advice not working in the interest of the country, and the successes of going against IMF advice.

Example : Thailand and Malaysia during the Asian crisis. IMF told both to choose the "begger thyself" option of raising interest rates in order to encourage savings and inward investment, and discouraged any controls on capital leaving the country. Thailand aquiesed. Malaysia simply slapped on a ban. Malaysia then worked with the world bank to turn that ban into a tax. And later, after the crisis, dropped the control again.

Result : In Thailand, high-interest rates drove many indebted local companies bankrupt and destroyed a considerable portion of the economy. Malaysia's companies and economy survived in better shape. After the crisis, foreign investors are returning to Malaysia more rapidly because the healthier economy is creating more wealth. Whereas Thailand was still in a deep recession. (At time of writing the book, around 2000 - 2001)

2) The point to remember is that a crisis like the Asian crisis starts when foreign holders of a currency start to dump it. For example, in Thailand, foreign banks had lent huge amounts of money for a real-estate bubble. When that bubble collapsed so did the currency. At this point the government of Thailand was encouraged by the IMF to maintain the value of the currency. This is in the interest of foreign lenders, because it enabled more of the money to be repaid. However, the cost of defending the currency is borne by the country as a whole : spending it's reserves, cutting government services, and borrowing from the IMF to buy back it's own currency.

So governments borrow from the IMF to hold up currencies which have fallen because foreign banks realize that the've lent too much money to private borrowers.

Or as Stiglitz puts it : governments are told to nationalize the debt incurred by private borrowers in their country rather than let those private borrowers go bankrupt and the lenders go unpaid. It's stright CorporateWelfare. Stiglitz also suggests it's MoralHazard because, foreign banks are less careful lending to developing countries when they know that if the borrowing country get's into trouble, the IMF will squeeze the whole country to ensure the debt gets repaid.

3) It relates mainly through sleight-of-hand. FreeTrade in goods and services and freedom of capital flows are separable things. You can have one without the other. And every wealthy, succesful country today has historically protected it's financial institutions against global competition. Even the US and Europe only started liberalizing capital flows since the 1970s. (And arguably have been suffering for this ever since.) None of them have had to accept, or try to survive and grow during, the freedom of capital flow that they now expect developing countries to live with. It's really worth reading the DanielDavies piece on Cancun which explains very well.

Stiglitz, of course, is hardly a radical left-winger. He's an economist who believes in free-trade. His main message is basically that "timing is everything" and that advice should be tailored to suit the details of local business cycle and circumstances. In contrast, he finds the IMF an ideologically driven organization with a "one size fits all" mentality which usually hurts more than it helps.


This is a good review article on this book and GeorgeSoros's from Reason magazine :

I don't agree with it, of course. But it's a good framing of an argument that needs to be had. And needs some thinking about.

See also :

What happened was that when First World interest rates fell, money would flood into a developing country which had become fashionable, vastly in excess of any realistic assessment of the productive investment opportunities there. Because it couldn’t be credibly invested, this surplus money would usually finance a consumption boom, a current account deficit and an appreciation of the exchange rate. After a while, the country would become “uncompetitive” and the money would flood back out again, leaving the economy to deal with a now-unsustainable current account deficit. The only way to deal with this would be to push up the domestic interest rate, which usually had the effect of causing a serious recession. If the country was unlucky, this recession could easily lead to a bank collapse, the proposed solution to which was to “open up the banking sector to foreign capital”. Lather, rinse, repeat.

: and the trouble with Oligarchs :

Malaysia's former Prime Minister showed his discontent with the particular winner-takes-all form globalization is taking, at a World Bank/IMF meeting:

"Malaysia has become one of the so-called tiger economies not by listening to the media or the great financial wizards. We have in fact developed ourselves by actually doing the opposite of what the wizards told us we should do. And we think, outrageously and impudently that the same formula can help develop other countries as well."

"Great countries tell us that we must accept being impoverished because that is what international finance is all about. Obviously we are not sophisticated enough to accept losing money so that the manipulators become richer."

"We are also warned that these are powerful people. If we make a noise or we act in any way to frustrate them they would be annoyed. And when they are annoyed they can destroy us altogether, they can reduce us to basket cases. We have to accept that they are around, that they will always be around and that there really is nothing we can do about it. They will determine whether we prosper or we don't."