The International Monetary Fund wins big at the G-20
But what are the countries he allegedly seeks to help?
As last week’s meeting of G-20 finance ministers in Venice, Italy came to an end, there was one big winner: the International Monetary Fund (IMF). Under the guise of helping countries in their efforts to finance COVID efforts, the IMF will issue $ 650 billion in Special Drawing Rights (SDRs). That’s a huge 120% increase in the stock of SDRs in circulation. These will be distributed to the 190 IMF member countries in proportion to their quotas.
SDRs are a reserve asset – a kind of “paper gold,” to use a self-contradictory description – created out of thin air by the IMF. They were first issued in 1969, when IMF experts feared a shortage of international reserves and tight liquidity that would lead to global deflation. As is often the case, however, the experts got it wrong. Since 1969, there has been an explosion in world reserves through the accumulation of US dollars by foreign countries. Contrary to the expectations of experts, the SDRs proved to be of little importance in this regard.
But that hasn’t stopped IMF bureaucrats from trying to find ways to make SDRs “useful,” so that the fund can produce more and expand the scope and scale of its operations. Never one to let a crisis go to waste, the IMF has used the COVID pandemic to find gold.
How do SDRs work? It is a basket of five currencies – the Chinese renminbi, the US dollar, the euro, the yen and the pound sterling – which are used as the unit of account by the IMF. In addition, SDRs are interest-bearing assets that can be exchanged for cash, with the IMF facilitating the exchange of SDRs for cash among member countries. Thus, holders of SDRs can potentially turn them into cash if they find partners willing to engage in the exchange.
The significance of the $ 650 billion free money “gift” to IMF member countries that was blessed in Venice is that a whole new logic was used to bring the IMF’s Special Drawing Rights to life – an asset which has been referred to in the past as a “magnificent failure”.
This is not the first time that the IMF has reinvented itself and snatched victory from the clutches of defeat. The IMF, which was born in 1944, was designed to provide cheap, short-term aid to countries whose currencies were linked to the US dollar through the Bretton Woods agreement. When these countries found themselves short of foreign exchange (ie US dollars), they could obtain balance of payments assistance from the IMF. This was the initial, rather narrow mandate of the IMF.
But, in 1971, when President Richard Nixon shut the window on gold, the Bretton Woods exchange rate system collapsed – and with it, the IMF’s original purpose was swept away. Since then, the IMF has used every justification under the sun to reinvent itself and expand its reach and scale. Unlike the old soldiers, the IMF has not disappeared. He got even bigger and even more powerful. In doing so, he also became more political.
First, there were the oil crises of the 1970s, which allowed the IMF to quickly reinvent itself. These shocks, it was argued, “required” more IMF lending to facilitate, yes, balance of payments adjustments. And there were more loans. In real terms, adjusted for inflation, IMF lending more than doubled from 1970 to 1975 and increased by 58% from 1975 to 1982.
With the election of Ronald Reagan in 1980, it seemed that the opportunism induced by the IMF crisis would finally be brought under control. Yet with the onset of the Mexican debt crisis, political elites argued that more IMF lending was needed “to prevent contagion, more widespread debt crises and bank failures. Surprisingly, President Reagan took this same reasoning and personally pressured 400 of 435 members of Congress to get approval for an increase in the US quota (capital contribution) for the IMF. IMF lending rose further, increasing 27% in real terms during Reagan’s first four years in office.
And then came the 1990s, a decade of explosive growth for the IMF. The collapse of communism provided an opportunity too good to be true. Currency crises in Mexico, Russia, Turkey, Brazil, Argentina and Asia fueled the blaze that allowed IMF firefighters to expand their balance sheets and create even more jobs for boys. And as they say, the show goes on and on, with the IMF playing the role of a hydra.
While the IMF’s ability to survive near-death experiences and thrive would not have surprised British historian C. Northcote Parkinson, author of the 1957 classic Parkinson’s law, this is quite remarkable in view of the real performance of the IMF. As Robert Barro of Harvard University said, IMF reminds him of Ray Bradbury’s project Fahrenheit 451 “In which the mission of the fire department is to start fires.” Barro’s basis for this conclusion is his own extensive research. Its overwhelming evidence reveals that
- a higher participation rate in IMF loans reduces economic growth;
- IMF loans reduce investment; and
- greater involvement in IMF programs lowers the level of rule of law and democracy.
And if that’s not enough, countries that participate in IMF programs tend to be repeat offenders. In short, IMF programs do not cure, they create drug addicts.
For a clear picture of the extent of this problem, see the table below. It lists the number of IMF programs in which 156 countries have participated. Haiti leads the pack with 29 programs. Since joining the IMF in 1953, the country has passed an average of 2.3 years between new IMF programs. Argentina is another big hitter. He joined the IMF in 1956 and is now addicted to his 22nd IMF program. This is a new program every 2.9 years on average. More broadly, the list of countries with the greatest number of loan programs (including links) consists of 24 countries. These countries account for 36 percent of the total number of IMF loans, indicating a worrying trend of recurrence.
The IMF should have been shelved and put in a museum long ago. After all, its original function was discontinued in 1971, and its performance in its new ventures has been less than stellar. But, a museum for the IMF is not in the cards. Even reform is hard to imagine. Indeed, all attempts to reform and downsize the IMF have ended up broadening its scope and scale. Just look at what has been accomplished since 2000, when the Blue Ribbon International Financial Advisory Commission – chaired by my good friend, the late Alan Meltzer – recommended that the IMF be put on the brakes.
About all we can do is realize that the IMF is a political hydra with a program to satisfy the bureaucrats it employs and to serve the wishes of the political elites that allow it to grow new faces.