The Washington Consensus

I. The International Monetary Fund (IMF)

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Written June 2002

Updated April 2005, June 2011

In an interview he granted on April 14, 2005 to the Washington File, produced by the Bureau of International Information Programs, U.S. Department of State, John Taylor, outgoing Under Secretary of the Treasury outlined the Bush administration's vision for the International Monetary Fund (IMF).

The IMF, he said, "(should) assess the economic policies of countries that do not need the fund’s resources ... (This) would allow the IMF to signal its approval or disapproval of, and provide markets with a clearer view of a country’s economic policies ... (Other reforms would be) the inclusion of collective action clauses in sovereign bond issues and 100 percent debt forgiveness for the most impoverished countries ..."

I. The Organization

A typical week at the IMF in June 2002.

Franek Rozwadowki, the new Chief of Mission for Macedonia implored the government to "implement prudent fiscal and monetary policies, particularly on wages (which impact) the budget, employment, and growth." The government - facing elections in September that year - and the IMF failed to conclude a standby agreement for 2002-2003.

In another fragile corner of the globe, the Senate of Argentina, at the behest of the IMF, scrapped the 1974 Law of Economic Subversion often applied to foreign investors by the military junta and, more recently, by the courts. It was one of numerous conditions posed by the IMF in its negotiations with the embattled government. Later, Argentina defaulted on its obligations to the IMF and to other creditors and bondholders.

The Malawian authorities accused the IMF of "encouraging" the country to sell its strategic maize reserves at a 50 percent loss on the eve of crippling and famine-inducing crop shortages. The proceeds were to be used to pay off foreign commercial debts - claimed the Minister of Agriculture. The IMF denied any involvement and pointed the finger at both a food expert of the European Union - and the Malawi government.

In Uruguay - the hapless victim of Argentina's meltdown - the Fund supported a tripling of an existing loan to $2.2 billion. The IMF praised the government's unpopular hiking of taxes on salaries and pensions in the midst of a severe recession. It was the only way Uruguay could comply with its fiscal targets, it said.

The IMF was founded in 1944 by the nearly victorious allies. It reflects the lessons derived from the global depression that preceded and precipitated the conflagration. Its limited and crystal clear charter reads:

"The IMF was created to promote international monetary co-operation ; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members."

Like other Cold War structures - the IMF is an organization in search of a mission. It is more powerful, more controversial, more intrusive, more paternal, more coercive, more ubiquitous and more integrated with the US administration and other multilateral agencies and institutions than it has ever been. It has "invaded" the turf of other agencies and NGO's and appropriated some private sector functions as well.

In the process, it has exceeded its charter and its mandate by far and has transformed itself into a combination gigantic research institute, consultancy house, technical training facility, university, rating agency, supervisory authority, development bank, investment bank, and executive with sharply increased powers. Many resent this mission creep or feel threatened by it.

Others question the wisdom of such functional imperialism and its impact on the IMF and on its "clients" and shareholders - the nation-states. Doubts are voiced: is the IMF, this Byzantine bureaucracy, truly necessary? Can't the private sector take over many of its roles? The IMF's lack of transparency and accountability do not help.

It had to pass a special "transparency decision" in January 2001, calling for more thorough disclosure of its deliberations with member countries. Responding to the indignant outcry of NGO's and the private sector - the IMF has formed in 2002 an Internal Evaluation Unit. Yet, its inner processes, its finances, the inflated wages, perks and perquisites of its much feted and bloated bureaucracy - all remain alarmingly opaque.

As an example of the IMF's unexpected mutation, consider, for instance, its growing role in the regulation and surveillance of capital and financial markets throughout the world.

in May 2002, at the First Annual Forum of APEC's Finance and Development Program held in Beijing, the IMF's affable Deputy Managing Director, Shigemitsu Sugisaki, summed up the current philosophy of the lending agency:

"Our main priorities at the IMF have been on strengthening surveillance and crisis prevention. We cannot expect to eliminate all future crises, nor can we expect to be able to fully anticipate them. However, we can do a better job of reducing the risks of crises by promoting sound policies and the development of strong institutions by our member countries, as well as better risk assessments and investment decisions by market participants."

A new International Capital Markets Department keeps track of private capital flows, collaborates with other departments on assessment of vulnerabilities, on the monitoring of markets, forecasting, and the development of early warning systems. Sugisaki is unabashed about the IMF's role in providing investors with "a stronger basis to make judgments about the allocation of private capital" - hitherto the reserve of private sector rating agencies and global investment banks.

The IMF regularly issues Reports on the Observance of Standards and Codes (ROSC's) which cover "institutional issues, in particular on data dissemination, fiscal transparency, monetary and financial policy transparency, and financial sector issues". The IMF is collaborating with the OECD's FATF (Financial Action Task Force) on an anti-money laundering module.

This is only one of the Fund's institutional reform initiatives - hitherto tackled by the World Bank, NGO's, multilateral organizations (such as the UN), and bilaterally, between governments.

The Fund - jointly with the World Bank and other multilateral institutions - provides its members with a "Financial Sector Assessment Program" (FSAP) - a review of financial institutions, legislation, regulation, and supervision coupled with prescriptive measures to counter detected vulnerabilities. This review process covers also off shore money centers.

But the IMF is now competing head on not only with rating agencies and investment bankers - but also with regional development lenders and with its Bretton-Woods twin, the World Bank. IMF officials, rendered cynical by decades of friction with crime gangs thinly disguised as governments - consistently disparaged and mocked the feely-touchy, less than rigorous approach to lending of their World Bank counterparts.

To the citizens of many impoverished countries, who bear the brunt of its dogmatic austerity measures, the IMF is a repository of privileged and confidential information about their countries. It is unelected, unsupervised, misunderstood - yet, seemingly omnipotent and forever encroaching on often hard-earned sovereignty, like some sinister Medieval order.

In a dialog with Tom Rodwell, an Australian journalist, I wrote:

"The IMF has yet to adopt the "client-orientated" approach. It harbors deep (and oft-justified) distrust of the willingness of governments to blindly follow its dictates. It is a paranoid organization, based on authoritarian techniques of 'negotiations' and 'agreement'. Euphemisms rule. Normally, the IMF holds 'consultations' with the host governments. These are rather one-sided affairs. The governments are needy and impoverished ones. They lack the cadre of educated people needed in order to truly engage the IMF in constructive discourse. They are intimidated by the bullying tactics of the IMF and of its emissaries. The tone is imperial and impatient."

I was, therefore, startled to learn that the IMF's hallowed Executive Board has approved, on May 10, 2002 the Africa Capacity Building Initiative "in response to the urgent call by African leaders ... to strengthen economic governance and domestic capacity ... to carry out sound economic poverty-reducing policies."

Though presented as part of the IMF's ongoing technical assistance program - it is clearly and closely linked to political initiatives in Africa by the American administration - and to the New Partnership for Africa's Development, South Africa's pet project.

The World Bank and assorted donors - as well as the atrociously run African Development Bank - are supposed to act as equal partners. Still, the Initiative is clearly "owned" by the IMF. Its resident experts are slated to do the bulk of the arduous work. The IMF has, thus, firmly established itself in the hitherto excluded bureaucratic turf of development financing.

The argument against the IMF often revolves around two axes:

That it is a neo-colonialist institution, out to perpetuate the hegemony of rich countries over poorer ones - and that it is an impregnable fortress of outdated, inappropriate, even detrimental economic policies, collectively known as "The Washington Consensus".

The IMF is undoubtedly under undue political influence by the USA - which underwrites a quarter of its budget and hosts its headquarters. The recent spate of lending to Turkey and past excesses in Yeltsin's venal and mismanaged Russia are attributable to such American arm-twisting. The appointment, in early 2005, of a neo-conservative stalwart, Paul Wolfowitz, to head the IMF, is likely to exacerbate this incestuous relationship.

It is also true that the IMF is greatly concerned with its members' ability to service their external debt and, therefore, with the debt's size, sustainability, and sensitivity to fiscal and monetary policies. In this sense, the IMF is, indeed, the guardian of foreign creditors and their representative and enforcer. It so happens that most creditors are rich countries or banks and investors from the West.

But it would be nothing short of paranoid to postulate some kind of conspiracy, or colonial-mercantilist designs, or to claim, as the Canadian Prof. Michel Chussodowski does, that the IMF is a willing and cognizant instrument in the destruction of certain nations (e.g., Yugoslavia), or, generally, accuse it of other geopolitical machinations.

Few of the IMF's vocal anti-globalization opponents know that it deals as regularly and as strictly with its richer members - even those which do not require its assistance, advice, or intervention. On May 8, 2002, for instance, it concluded the mandatory Article IV consultation with Denmark.

The IMF explains Article IV thus:

"Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities."

The IMF sounded these cautionary notes about Denmark's generally much-praised economic policies:

"It will be important to avoid public spending overruns while allowing for the operation of automatic stabilizers ... Some wage moderation is needed to stem losses in market shares in continental Europe ... Improving public expenditure discipline, particularly at the lower levels of the government, should be a priority ... (We) encourage the authorities to pursue intentions to strengthen public management and outsource services where appropriate ... recommend that the long-term viability of the present welfare system should be kept under close review by the Danish authorities." And so on.

A recent (April 2005) report castigated America's profligacy and the globally destabilizing effects of its alarming and ever-mushrooming twin (the trade and the budget) deficits.

While the conspiracy theories can be safely and off-handedly discarded - it is a lot more difficult to defend the IMF's policies. These consist of a universally-applied prescription of fiscal and monetary discipline, balanced budgets, a sustainable public debt, avoidance of moral hazard, restrained wage and expenditure policies, preference for the private sector, enhancement of the financial sector, structural reform, and exchange rate stability.

The IMF still sticks to the doctrine of a "nominal anchor": if not the exchange rate - than inflation targeting. The IMF concedes that the consensus is shifting towards more flexible exchange rate regimes in countries exposed to the global capital markets - but this is not supported by its policy advice.

The IMF's Deputy Managing Director, Shigemitsu Sugisaki hastened to stamp out this heresy in his address to the First Annual Forum of APEC's Finance and Development Program held in Beijing on May 26, 2002:

"Of course, this is not to say that, for certain economies, a pegged exchange rate regime, buttressed by the requisite supporting policies and institutions, cannot be a viable alternative. For such economies, in general, the harder and more rigid the peg, the better ... (Floating exchange rate regimes) do not imply a policy of benign neglect toward the exchange rate."

"For emerging market countries, with their high degree of involvement with global trade and finance, movements in exchange rates have important economic consequences, and economic policies, including monetary policy and exchange market intervention, need to take account of these movements." This is the oxymoron of "managed float".

The principles are commendable - their blind and doctrinarian implementation in the form of micromanaged conditionality - are not. The IMF - aware of its fast eroding public and political support, especially in the USA - has recently conjured up "country ownership" of agreed economic programs and "poverty reduction and growth facilities" - both intended to soothe jangling nerves. But these public relations exercises are auxiliary to its main thrust: fiscal rectitude, solvency, debt repayments.

Alas, many of these policies are ill-suited to the needs of failed or mismanaged states and the kleptocracies that rule them - the IMF's main clientele. While in "normal" countries macroeconomic stability is the prerequisite to long-term economic growth - this is not necessarily the case in the developing, emerging, and transition economies of sub-Saharan Africa, the Middle East, South Asia, East Europe, Central Asia, Latin America, or the Balkan.

Actually, too much stability may, in these benighted corners of the Earth, spell stagnation. Stability cannot translate to growth in the absence of functioning institutions, the rule of law, and properly rights. A dysfunctional banking system and rusted or clogged monetary transmission mechanisms render any monetary policy impotent.

A venal bureaucracy and graft-prone political class are likely to squander and misappropriate loans and grants - no matter how well intentioned and closely supervised. Finally, in the absence of a formal, entrepreneurial, and thriving private sector - only the state can provide a counter-cyclical impetus and the sole engine of growth is development-related and consumption-enhancing public spending. Public expenditures are the only functioning automatic stabilizer.

In this context, the classic argument of "public borrowing crowding out the private sector" is misplaced. Most of the private sector in these countries is informal. It does not compete in the credit markets with public borrowing - simply because there are no credit or capital markets to speak of. Interest rates are onerously high due to outlandish default rates - so, businesses borrow from each other, barter, and work in cash. Banks refuse to lend to businesses or households and thrive on arbitrage. Investment horizons are limited.

The IMF is obsessed with "exchange rate (and other nominal) anchors". It erroneously believes that - where all else is ominously fluid - only a predictable exchange rate (or inflation target) can guarantee stability. But this forces the government to adhere to constant policies of Procrustean fiscal contraction and thus exacerbate the anyhow depressed state of the economy. The alternative - fiscal expansion - would lead to pressure on the exchange rate peg and result in devaluation.

Yet, a pegged exchange rate in inflation-prone economies is tantamount to appreciation of the domestic currency - another form of instability. An overvalued currency coupled with deficient structural reforms and low productivity - adversely affect the country's terms of trade (i.e., its competitiveness in export markets).

This declining competitiveness, in turn, leads to trade deficits and a deteriorating balance of payment. Hence another IMF-inspired source of instability.  Thus, a regime of pegged exchange rates exacerbates both the duration and the degree of disequilibrium in the international balance of payments of the IMF's members.

The current account of a country that runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency - is only likely to deteriorate. Often, to protect the currency, the whole system is drained of liquidity (demonetized), interest rates are kept debilitatingly high, and the balance of payments deficit skyrockets, until the inevitable collapse.

Moreover, exchange (rate) stability inhibits the expansion and balanced growth of international trade - an explicit role of the IMF. Trade is based on dynamic exchange rate disparities which reflect the relative advantages of the countries involved. In a world of artificially fixed exchange rates - trade stagnates and price signals are distorted.

The IMF was never mandated to rate the creditworthiness of its members and shareholders. In providing clean or soiled bills of financial health it is manifestly acting ultra vires. Its ability to strangle a country financially if it does not comply with its programs - no matter what the social or economic costs are - is very worrying.

The IMF refuses to acknowledge that, far from being an exact science, economics is a branch of mass psychology and a form of social engineering. Not unlike previous central planning agencies, it neglects the social, political, and environmental costs of its policies. Yet, these sometimes outweigh the purely economic outcomes.

High interest rates stifle growth. An unrealistic exchange rate dampens exports. These effects are accounted for in the IMF's models. But there are other pernicious policy outcomes which the IMF consistently ignores - at the peril of the member countries:

Persistent unemployment breeds crime. Poverty results in civil strife. Taxes drive a growing part of the economy underground. Low wages in the public sector lead to venality and graft. Growing income inequalities foster discontent and brain drain. Different cultures possess different priorities, preferences, and values.

The IMF is indispensable. It  imposes monetary and fiscal discipline on unruly governments, forces them to plan ahead, and introduces painful adjustments and reforms as well as better governance. It serves as a convenient scapegoat: politicians blame it for their own shortcomings and misguided policies and claim that negotiations with the IMF and follow-up consume the bulk of their management time to little effect.

Finally, there is the Damocles sword of moral hazard. IMF lending of last resort is a safety net made available to countries "too big or too important to fail". It encourages politicians, creditors, and investors to assume risks they would not have otherwise, convinced of an ultimate bailout in case of failure. This certainty has been dented when the IMF refused to salvage Russia in 1998 and Argentina four years later - but it is still largely intact.

But there is a second type of moral hazard. When IMF-mandated policies succeed, local politicians hasten to take credit. When they fail - the IMF is universally derided. Thus, stakeholders - decision makers, reckless lenders, loss-prone investors, friendly governments, the citizenry - conveniently shift to Washington the blame for their own misdeeds and misbehavior.

This kind of buck passing is known in psychology as "alloplastic defenses" and is considered an integral part of some pathologies. Here, too, increased transparency and accessibility can help. The IMF needs to assertively point the finger and allocate blame when wrongly accused.

The IMF is lucky to be attacked either by anti-market fundamentalists, or by anti-IMF fanatics. Passionate emotions frequently produce ill-thought and unfounded arguments. Consider this exchange:

In a press briefing on May 16, 2002, Thomas Dawson, the Fund's Director of External Relations Department was asked by one of the journalists:

"I'd like to get your reaction to a prominent Nobel prize- winning economist (Joseph Stiglitz), who laid out an opinion last weekend, saying that the IMF's insistence on fiscal tightening in Argentina made things worse, and that the high rates of interest in Argentina were largely a function of external factors, such as the Asian financial crisis, and that the IMF's approach and the approach of others have amounted to blaming the victim."

He responded, thrashing the poor arguments of the distinguished - but biased - critic:

"With regard to the fiscal tightening point ... in the course of the year 2001 when the authorities, without consulting with us, instituted the zero-deficit law ... We indicated to them that we thought this was excessive fiscal tightening ... He (Stiglitz) ... focuses on federal spending levels, barely mentioning provincial levels. As the authorities themselves indicate in the April 24th 14-point agreement, having an arrangement on the provincial level is very, very important ..."

"He also indicates that corruption is not much of a problem. The authorities ... indicate that corruption issues are very important. He also, I think, fails to understand or recognize the sovereignty of the Argentine people. The Currency Board was adopted by the Argentine Government in the early 1990s, enjoyed for a number of years a great deal of popular support, and it seems as if Professor Stiglitz is trying to say that what we should have done is gone to the Argentines and dictate to them to change their currency regime. That's what we are usually accused of by Professor Stiglitz, but he seems to be taking that sort of approach himself. So, I have to say I am rather under whelmed with his arguments."

II. The Policies

Indonesia's Minister of Development Planning called in May-June 2002 on his country to sever its ties with the "colonial power", the IMF, come November 2002, when its agreement with the lending agency expires. He blamed its coercive policies for the country's alleged near insolvency and civil disorder. Local bigwigs hastened to concur.

Lenders and donors often condition credits, debt reduction, and aid upon the IMF's seal of approval, in the form of a standby arrangement. Despite protestations to the contrary, cross-conditionality - including World Bank conditions in IMF programs and vice versa - is still rife.

Thus, inadvertently, the IMF has assumed in the last two decades the dual - and intimately related - roles of a sovereign credit risk rating agency and a lender of last resort - hitherto not among its core few and well-defined competencies.

Because other, non-IMF, financing is premised on its endorsement, the IMF carries disproportionate weight with governments and often leverages this stature to non-economic ends. From Moldova to Russia, the IMF has not been above meddling in domestic politics, though in the guise of "impartial advice" or "loan conditions to be met".

The IMF lends funds to countries in distress - e.g., to ameliorate a balance of payment or a capital account crisis (for instance, in Thailand in 1997), or a meltdown of the financial system (in Turkey last year). Such lending is predicated on a program ostensibly negotiated with the authorities - but, in practice, dictated by the IMF. The program provides detailed policy guidelines and performance evaluation benchmarks.

Yet, how reliable and realistic are these programs? Often produced in the throes of civil strife (Macedonia), currency collapse (Brazil), implosion of the banking system (Argentina), or natural and man-made disasters (Africa) - they tend to reflect mere wishful thinking and bureaucratic wrangles.

They are based on partial or fake figures provided by the kleptocracies that rule many of the IMF's most needy clients. Though mainly forward-looking (prospective) - IMF programs imply a modicum of certainty where there is none and are, thus, grossly misleading documents.

Rarely does the IMF admit that it is as much at a loss as its client government. In 2001 - as Albanians fought Macedonians in the outskirts of the capital, Skopje - The IMF suspended a previous program and placed Macedonia on "staff monitoring" - a euphemism for "let's wait and see how things turn out".

But these criticisms aside - the IMF is an important global center of scholarship and policy advice. It has made some contributions to the overhaul of the international financial architecture in train since 1998 - and is advocating controversial innovations such as national bankruptcy proceedings. Yet, is its advice sound and are its policies efficacious?

The IMF's prescriptive - and universally applied - policy mix displayed remarkable resilience in the face of global financial crises in the past decade. It includes: austerity measures, fiscal and monetary discipline, decreased inflation, balanced budgets, a sustainable public debt, avoidance of moral hazard, restrained wage and expenditure policies, preference for the private sector, the strengthening of the financial system, and structural reform.

In its recent past, the IMF advocated crippling competitive devaluations. This policy "recommendation" has now been replaced by either a pegged exchange rate - or a free floating rate coupled with an inflation target. These are known as "nominal anchors" and are supposed to guarantee economic stability and its inevitable outcome: economic growth.

The World Bank summarized the ten commandments of the Washington Consensus in its year 2000 Poverty Report thus:

  1. Fiscal discipline;
  2. Redirection of public expenditure toward education, health and infrastructure investment;
  3. Tax reform - broadening the tax base and cutting marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization - replacement of quantitative restrictions with low and uniform tariffs;
  7. Openness to foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation - abolition of regulations that impede entry or restrict competition, except or those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

The IMF is fairly dogmatic and ideological. It never praises - or learns from - countries - no matter how economically successful - if they diverged from its doctrines. Two prime examples are: Malaysia which introduced capital controls following the 1998 Asian crisis - and Ireland which pursued expansionary fiscal policies despite a decade of searing-hot economy. Both acted contrary to every vestige of IMF wisdom - and both prospered.

The IMF deviates from its catechism only when instructed to do so by its paymaster, the USA. Thus, Stratfor, the American strategic forecasting firm, noted the schizophrenic behaviour of the IMF. Under fairly similar circumstances, it chose to lend to Turkey, a crucial US ally - but not to Argentina. The IMF's new African poverty reduction initiative carries the fingerprints of the American administration as well.

Most strikingly, in line with the much proclaimed US positions, and contrary to everything the IMF has ever preached, it encourages Japan to slash its taxes even further while increasing its public spending, and, by implication, its crushing and unsustainable public debt and gaping budget deficit.

But these are aberrations. Moreover, even the orthodoxy of the "Washington Consensus" is not all wrong. The faults of the IMF's policies run deeper and can be traced to its modus operandi and raison d'etre.

First, though much reduced, some IMF "crisis" lending is concessionary - soft loans, at subsidized interest rates, with sizable grace periods. This fosters moral hazard and encourages imprudent behavior. Walter Bagehot, the legendary 19th editor of "The Economist", advised lenders of last resort to lend freely but at a penalty rate and against collateral.

Charles Calomiris and Allan Meltzer follow this sound advice in their Summer 1999 article published in "National Affairs" and titled "Fixing the IMF":

"A penalty rate encourages the borrower to negotiate with private creditors to seek (lower) market rates. The IMF would lend only when there is a liquidity crisis-that is, when private lenders are unwilling to lend. That is precisely the responsibility that a lender of last resort should fulfill."

The second fundamental problem is that IMF programs exclusively tackle national "balance sheets" - budget deficits, inflation, and public debt. The implicit assumption is that the smaller and more thrifty the state - the better off its citizenry. This principle invariably holds true in rich and well-governed countries.

Not so in developing, emerging, and transition economies. Here, the better the national accounts - the worst off the inhabitants. Unemployment, social tensions, and poverty grow as macroeconomic parameters "improve". Income and wealth inequalities soar and the middle class evaporates to the detriment of the country's political stability.

This inversion is due to arthritic monetary transmission mechanisms - and to the absence of a private sector. The economic engine in such destitute countries is the state. Public spending takes the place of capital formation and generates consumption. The savings level is largely immaterial because financial intermediaries fail to transform it into investments. Thus, the curbing of the state's involvement in the economy has an adverse and prolonged recessionary impact.

The third perverse trend is the crowding-out of private sector or bilateral capital flows by multilateral debt. The share of IMF and World Bank lending in the total public debt of developing countries has quintupled in the last two decades. The money is mostly used to repay creditors - multilateral, bilateral, and private sector (i.e., banks). Thus, the increase in the total indebtedness of borrowing countries serves to bail out stranded lenders - but does little to foster economic growth and development.

The IMF's biggest problem by far may be that it strayed way out of its - ostensible - competency. It is reasonably qualified to deal with fiscal matters, the financial system, and monetary issues with emphasis on the exchange rate regime. It is an absolute dilettante when it comes to reform - structural or otherwise.

"The Reality of Aid 2002", a report produced by a coalition of NGO's, charges that:

"Far from abandoning aid conditionality, international financial institutions and bilateral donors are collaborating in an unprecedented consensus to retool the aid regime under the rubric of 'ownership' and aid effectiveness."

The IMF itself admits, in its February 2001 report, "Structural Adjustment Conditionality in Fund-Supported Programs", to an average of 41 conditions per agreement concluded between 1995-2000. Independent scholars, such as Nancy Alexander, found 114 conditions in a typical program in sub-Saharan Africa in 1999.

The International Confederation of Free Trade Unions (ICFTU) cites the example of Romania's November 2001 standby  arrangement with the IMF. It included conditions pertaining to the liberalization of domestic energy prices, privatization, and the restructuring of state-owned enterprises. Macedonia was required by the IMF to sell or shut down its loss-making state enterprises as a condition for any agreement with the Fund.

This control freakery coupled with micromanagement of the minutest details of both the economic and social policies of recipient-countries is counter-productive. The IMF personnel are poorly qualified to dole out policy advice on these issues. They compensate for insecurity with haughtiness. As a result, the IMF's clients are alienated and angered by its conduct.

They regard the Fund's programs as external and sinister impositions and at best ignore parts of it. The dual concepts of "ownership" and "aid effectiveness" are rendered shams by this overweening attitude. What could have been a partnership between indigenous reformists and well-meaning, knowledgeable, foreigners - is frequently transformed into a xenophobic tug of war.

The tenets of the Washington Consensus are no longer confined to arcane provisos in IMF and World Bank programs. They are now the pillars of a new regime of international law. They are embedded in the charter of the World Trade Organization, for instance - a quasi-judiciary body as well as a regulator of international trade and much more besides.

In many respects, therefore, the IMF survived the 1997-8 crisis to prosper and become more potent than ever. Hence, perhaps, the backlash by well-meaning but often ignorant and impractical anti-globalizers and assorted self-appointed NGO's. To its credit, the IMF is not ignoring them. It is trying to maintain a meaningful dialog. But its survival is not premised on the success of such a discourse - as it was once thought to be.

Footnote - Ann Kruger's SDRM plan

The IMF is, in a way, a lender of last resort. When a country seeks IMF financing, its balance of payments is already ominously stretched, its debt shunned by investors, and its currency under pressure. Put differently, the IMF's active clients are effectively illiquid (though never insolvent in the strict sense of the word). Anne Krueger's November 2001 proposal to allow countries to go bankrupt makes, therefore, eminent sense.

Today, sovereign debt defaults result in years of haggling among bankers and bondholders. It is a costly process, injurious to the distressed country's future ability to borrow. The terms agreed are often onerous and, in many cases, lead to a second event of default. The experiences of Argentina, Ukraine, and Ecuador are instructive. Russia - another serial debt restructurer - would have been in a far worse pickle were it not for the serendipitous surge in oil prices.

A carefully thought-out international sovereign bankruptcy procedure is likely to yield two important results:

  1. It will relegate to the marketplace many tricky issues now tackled by a politically-compromised and bloated IMF.
  2. It will eliminate the ability of a single creditor to blackmail all the others - and the debtor - into an awkward deal (the "last man syndrome).

By streamlining and clarifying the outcomes of financial crises, an international bankruptcy court, or arbitration mechanism, will, probably, enhance the willingness of veteran creditors to lend to developing countries and even attract new funding. It is the murkiness and arm-twisting of the current non-system that deter capital flows to emerging economies.

Still, the analogy is partly misleading. What if a developing country abuses the bankruptcy procedures? As "The Economist" noted correctly "an international arbiter can hardly threaten to strip a country of its assets, or forcibly change its 'management'".

Yet, this is precisely where market discipline comes in. A rogue debtor can get away with legal shenanigans once - but it is likely to be shunned by lenders henceforth. Good macroeconomic policies are bound to be part and parcel of any package of debt rescheduling and restructuring in the framework of a sovereign bankruptcy process.

The Case of the Abused PCL

In January 2011, the Republic of Macedonia became the first country to benefit from the IMF’s PCL (Precautionary Credit Line): a contingent “insurance policy” of c. $650 million USD. At the time, the Executive Board of the IMF and the Fund’s Deputy Managing Director Naoyuki Shinohara made very clear that they expect Macedonia to not withdraw money from the facility. So did Wes McGrew, the IMF Mission Director to Macedonia and Petar Gosev, then Governor of the country’s Central Bank.

The PCL – formed in August 2010 – came with few strings attached. Its main aim was to signal to the markets that the recipient economy is soundly managed and that the Fund’s resources are fully behind it. This type of commitment, so went the received wisdom, would prevent contagion.

Not 70 days passed and on March 29, 2011, Macedonia withdrew almost half the credit line, c. 220 million euros. While clearly not in violation of the letter of the PCL, Macedonia’s conduct constitutes a gross violation of its spirit.

First, it is clearly stated that countries with PCL arrangements would be expected not to draw upon the available funds unless there is a “deterioration in external conditions.” This is not the case with Macedonia whose external conditions have actually gotten better this year. In October 2010, Fitch upgraded the outlook for Macedonia to “stable”, citing a “reduced reliance on financing from abroad”. In truth, Macedonia intends to use the PCL dough to plug gaping budget holes, the outcomes of its populist spending spree on the eve of early parliamentary elections.

The IMF also stipulates that '(c)ountries suffering any of the following problems (on approval) cannot access the PCL: (i) sustained inability to access international capital markets.' Yet, the country’s Minister of Finance, Zoran Stavreski, announced that Macedonia is tapping the PCL precisely because it cannot access international capital markets. Nor is it likely to be able to access them for a long time to come, what with the country’s largest investor, Greece (and the euro) falling to pieces On Macedonia’s doorstep.

According to our sources, these infarctions of the tacit understandings with the IMF and the haphazard manner in which the funds were withdrawn have angered the IMF and will be an important topic in the discussions during the forthcoming visit of the IMF delegation, immediately after the elections, in the second and third weeks of June. The IMF, we are told, would appreciate a repayment of the PCL credit as soon as practically possible. Macedonia may be taking advantage of the chaos in the Fund following Strauss-Kahn’s scandal-prompted premature departure to fend off the Fund’s insistent prompting.

Finally the PCL financing is not as cheap as the government had presented it. The IMF says: 'The cost of drawing under the PCL varies with the scale and duration of financing. Currently, the effective interest under the PCL (or an FCL or SBA) for access between 500 and 1000 percent of quota-ranges between 2.2-2.8 percent, and about 2.6-3.5 percent after 3 years. These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.'

In other words, the very fact that Macedonia had withdrawn half of the PCL in one go (the equivalent of almost 300 percent of its quota) is going to hike the effective interest rate on future credits from the Fund, though not up to commercial borrowing levels (Macedonia paid 4.2% on its last tranche of short-term Eurobonds and 9.8% on its 3-years Eurobond, issued in 2009). The IMF is also likely to tighten the conditions attached to the PCL for future applicants, such as Serbia.

The IMF’s Resident in Macedonia, Alexander Tieman, naturally, won’t confirm any of this directly. In a prompt and courteous response to our queries, he noted:

“First, the IMF has not asked the authorities to return the money they drew under the PCL arrangement (some 220 million euros) after the elections. Rather, when drawing, the authorities themselves committed to “… make their best efforts to repay the PCL drawing ahead of schedule, provided that financing conditions are favorable.” (see IMF Press release of March 23, 2011 at


Second, let me assure you that all rules and procedures were followed in the drawing. Under a PCL arrangement, in the baseline case there is no expectation of drawing – there should not be a balance of payment need. The PCL is an insurance mechanism, and with insurance one does not expect the insured event to occur in the baseline case. However, changes in circumstances can justify a drawing. If a large balance of payments need arises unexpectedly, a country that has a PCL arrangement in place can draw on it. In the case of Macedonia, the authorities informed the IMF that their decision to draw upon the PCL reflected the changed circumstances brought about by the early elections, including a delay in the planned Eurobond issuance. Under the structure of the PCL, the authorities may draw on the credit line without seeking agreement from the IMF. This right to draw without needing to go back and seek IMF approval is one of the key features of the PCL.


You also refer to the qualification criteria for the PCL (, where it says that countries with sustained inability to access international capital markets do not qualify for a PCL. The government informed us that, given the changed circumstances brought about by the early elections, a new Eurobond issuance had to be delayed, which in turn led to a request to draw on the PCL. However, in our judgment, Macedonia does not exhibit a sustained inability to access capital market, as evidenced by the 2005 and 2009 Eurobond issuances.

As to the cost of funds under the PCL arrangement, these are the standard IMF terms which also apply to our other main lending instruments. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate. The rate of charge is variable and stands at 1.52% as of May 30, 2011. This is the interest rate Macedonia currently pays on its PCL drawing. This interest rate excludes a flat one-off 50 bps service charge, which is applied to all Fund disbursements.

You are correct in stating that the cost of drawing under the PCL varies with the scale and duration of financing. Large loans, with credit outstanding above 300 percent of quota, carry a surcharge, which depends on the duration the loan remains outstanding. This, however, does not apply to the PCL drawing of Macedonia, which was in the amount of SDR 197 million, or 286 percent of quota (i.e., below the 300 percent of quota threshold).”

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