The IMF are the good guys

by heehorse on March 30th, 2003
Comments (2) >>

The following was a response to a news article I was forward by one of my more left-leaning friends entitled "Yahoo! News Story - Bolivia Tax Riot Shows Latin Discontent", in order to demonstrate the evilness of the IMF. Attached to the article, she commented, "has the IMF ever instituted a policy where people didn't end up rioting?!". Her response is understandable and rational, however, I disagree with her conclusion. What follows is my response to her:

I?m not too familiar with the Bolivian case specifically, but if the crisis that precipitated the IMF getting involved was like any of the other Latin-American or Asian currency crises of the last 5 years, I do have a response:

Countries involved in these crises, are so because they run huge current account deficits (i.e. they import more than they export) financed by foreign borrowing (i.e. capital inflows). This doesn?t necessarily have to be a bad thing, if the excess imports are being used to finance viable investment projects (i.e. providing returns which will enable the payback of the foreign borrowing), but in the Latin-American countries, the current account deficits i.e. foreign borrowing was used to fund public work projects, i.e. investments that weren?t necessarily viable. What causes the crisis is that for one reason or another, foreign investors lose faith in the country, and pull out of the country en-mass. Because these countries have some kind of fixed exchange rate regime, the capital flight causes them to sell off their foreign exchange rate reserves in order to defend the exchange rate peg. Once they start running out of foreign exchange reserves, they are in a crisis situation and must ask the IMF lend them money to help them retain the exchange rate peg, or at least to help them pay off their short-term foreign debt. In the absence of foreign captial in the short-run, the country must reduce it?s current account imbalance (i.e. they have to stop importing more than they export, because they have no more access to foreign currency to pay for the difference). This is achieved by 1) devaluing your currency, and 2) reducing your consumption (i.e. reducing fiscal deficit). These are the usual requirements that the IMF ask before they lend money. Why do they apply these conditions? Because if not, then the country will continue on this ?deficit spending? path and thus ?waste? the money the IMF lends it (by spending it on more imports rather than servicing its debt or defending it?s exchange rate regime).

Here?s a simplifying analogy:
Your mom (foreign investors) lends you $100 a month. She expects to get paid back because she thinks that you?re investing the money in such a way that you?ll eventually be able to get it back. You spend the $100/mo. instead on buying Cheeto?s, because you really like eating Cheetos. Suddenly, your mom loses faith in you and demands that you repay everything that she?s loaned you (say, $2000). You have no way of getting this money because you?ve spent it all on Cheetos which you?ve already eaten. So you give your dad (the IMF) a call and ask to borrow $2000 in order to pay your mom back. He agrees, but only if you get therapy and stop your Cheeto-eating habit, because he?s afraid that you?ll spend his bailout money buying more Cheetos.

Here?s why I don?t think the IMF is the bad guy:
The suggestions they?re making are things that are necessary in order to fix the fundamental problems that got the country into the crisis situation in the first place.
It?s the countries that call the IMF up to ask for assistance. The IMF does not intervene and coerce uninvited.
The countries are not entitled, for the most part, to IMF money. By attaching conditions to the loans, the IMF is not ?cheating? the country out of money.
The country asks the IMF for loans because they are unable to get the money from anybody else. In other words, the IMF is doing what is in the country?s interest (giving it something they?re unable to get otherwise).

Here?s who I think the bad guys are / where the problems lie:
Extremely tight capital markets, irresponsible investors and huge speculation: This combination allows money to easily flow into a country, make bad, uninformed investments/loans, and make it easy to quickly reverse the flow of money.
Bad governmental policy: While the above allows governments (and private firms, too) to have easy access to money, the governments must be held responsible for making bad investments / wasting money.

Anyways, that?s my two cents on the IMF.


On 2/18/03 11:35 PM, "IRENE LIN" wrote:

oh yeah, the rest of the world is still going to hell...not that CNN will ever report it...

has the IMF ever instituted a policy where people didn't end up rioting?!