by Joseph Joyce
A global threat such as the coronavirus should be met with a global response. National governments, however, have generally not coordinated their efforts, with the exception of those that belong to the European Union, and even there the distribution of vaccines has not gone smoothly. International agencies, on the other hand, such as the International Monetary Fund have responded more quickly. Moreover, the IMF has shown a willingness to play an active role in preparing for the post-pandemic world and to take on issues outside its usual remit.
The IMF’s past attempts to resolve financial crises have not always been successful (for an account see here). The IMF’s policy prescriptions at the outset of the East Asian crisis of 1997-98 included contractionary fiscal policy conditions for the governments that adopted IMF programs, as well as higher interest rates. There were also structural conditions that dealt with the privatization of government-owned enterprises. While such policies may have been appropriate for a crisis that was due to expansionary macroeconomic policies, fiscal and monetary measures did not precipitate the East Asian crisis. Capital inflows had fueled bank lending and asset prices had soared, while central banks were committed to fixed exchange rates. Once foreign investors became alarmed about the exposure of private borrowers to currency and maturity mismatches, they began to exit, provoking a “sudden stop” of capital and currency devaluations.
The IMF faced criticism not only from the East Asian governments but from economists outside Asia. The macroeconomic policy conditions were inappropriate for a crisis that originated in private capital flows, and were based on overly optimistic projections of growth. Structural conditions were viewed as unnecessary and diverted attention from the measures that need to be undertaken. The IMF was also blamed for indirectly provoking the crisis through its advocacy of the removal of capital controls before the crisis. The IMF subsequently relaxed many of its program conditions as the nature of the crisis became more clear, but the damage to its reputation was enormous.
A decade later the IMF again faced a widespread financial crisis, and this time its response was very different. The global financial crisis of 2008-09 showed some similarities in its background with the Asian crisis. Inflows of capital to the U.S. and several European countries had fueled increases in asset prices and distorted expenditures. Once the bubbles in housing prices burst, financial institutions sought to unload mortgage-backed securities, forcing their prices down further. The rapid nature of the collapse in asset values and the lack of liquidity in financial markets exposed the fragility of the financial sector.
While the central banks of the advanced economies coordinated their responses, the IMF assisted emerging market economies that were caught up in the economic downturn precipitated by the financial collapse. The Fund lent to 17 countries, with the largest amounts of credit going to Hungary, Pakistan, Romania, and the Ukraine. Moreover, the policy conditions attached to the programs reflected an awareness of the origin and severity of the global contraction. Fiscal policy in the program countries was utilized to respond to falling private demand, although their governments avoided the large deficits that occurred in the advanced economies. Interest rate increases designed to prevent runs on currencies were limited and exchange rates did stabilize. Moreover, the IMF allowed the use of capital controls. Overall, the IMF received high marks for its initiatives during the global financial crisis.
In retrospect, the post-crisis recovery did not go as smoothly as it should have. Many countries felt compelled to reverse the expansionary policies of the crisis period because of fears of excessive debt. This contractionary trend was exacerbated by a sovereign debt crisis in Greece. Other European governments sought the inclusion of the IMF in addressing the crisis, and for the first time the Fund had partners: the European Central Bank and the European Commission. The initial macro policy changes imposed by this “troika” sought to restore fiscal balance, but their contractionary effects kept tax revenues below their anticipated levels, which led to further cutbacks. The IMF differed with the European governments over the sustainability of Greece’s debt burden and the need for debt forgiveness. Eventually the Greek economy began a recovery, but in retrospect the austerity policies there and elsewhere led to a slower recovery that there could have been.
The IMF has drawn upon these past experiences in formulating its response to the pandemic. The Fund has again responded quickly to assist its members, approving emergency financing through its Rapid Credit Facility and its Rapid Financing Instrument to 80 countries and assistance under other arrangements to another five nations. It has extended debt service relief to 29 of its poorest members that have obligations to the IMF. The Fund and the World Bank have called on bilateral lenders to suspend debt service payments from the poorest countries, and the governments of the Group of 20 agreed to do so for official debt. The agencies have called for private lenders to implement similar measures.
The IMF has also sought to prepare countries for the post-pandemic world. Kristalina Georgieva, the current Managing Director of the IMF and the first from a East European country (Bulgaria), has supported policy initiatives in areas that traditionally do not fall under the IMF’s purview. She has supported national policies that seek to address different forms of inequality, including income and wealth inequality as well as gender and generational inequality. She has also called for including climate related risk in the IMF’s economic and financial assessments , and using fiscal expenditures to target “…climate-resilient infrastructure and expanding green public transportation, renewable energy, and smart electricity grids.”
Will the IMF be able to engineer such broad changes? The IMF is an agent responsible to 190 principals, the sovereign governments that are the IMF’s members and oversee its activities. Some of these may feel that Georgieva’s policy agenda is too ambitious and/or expensive. There are also disagreements over how to finance the IMF’s assistance to its poorest members. Proposals to issue more Special Drawing Rights (SDRS) have faced opposition from the U.S. On the other hand, differences amongst its principals may allow the IMF more freedom to expand the scope of its mandate. There is also the danger that a wave of debt crises following the wave of public borrowing by emerging maket governments may force the IMF to focus on debt restructuring.
The IMF, and Georgieva in particular, deserve credit for bringing forward issues that traditionally have not been addressed in discussions of international macroeconomic concerns. Monetary and fiscal policies, for example, have impacts on racial and gender inequality that have been overlooked. Climate change will constrain the actions of the governments of the most vulnerable countries. Whether the IMF is successful in actually steering governmental actions towards these areas will depend on the willingness of its members to adopt wider and inclusive approaches in their responses to the coronavirus
[I had the opportunity of interviewing Ms. Georgieva for the Madeleine Korbel Albright Institute of Wellesley College. The transcript of the interview can be found here.]