IMF? Who Needs It.

Some good news today. An interesting article in the Economist (via Colby Cosh) on the International Monetary Fund (IMF) and how the IMF is losing money because it is running short on customers.

This is good news because IMF customers are countries which have suffered some sort of financial crisis and are in need of emergency financial assistance. Doubly good news because the IMF has a long track record of imposing harsh punitive conditions (of dubious utility) on recipient governments. The excellent book "Globalization and its Discontents" by former World Bank chief economist Joseph Stiglitz does a good job detailing the IMF's many flaws.

Even the Economist takes the opportunity to make a cheap shot against the IMF, saying,

"By its own projections, the IMF will live beyond its means by almost $300m in 2009-10. The belt-tightening this implies has not gone down well with staff, who show little taste for the austerity they are notorious for prescribing to others."

The Economist then wanders into territory normally occupied by 'anti-globalization' protestors, asking,

"If the IMF were to wither away - its money untapped, its advice unheeded - should anyone care?"

Unsurprisingly, the Economist is unwilling to write off the IMF quite yet. Discussing how some countries (particularly in East Asia) have built up their own financial reserves so that they don't need the IMF's help in case of crisis, the Economist notes,

"Alas, their self-reliance is expensive and inefficient - as if every home had its own fire-engine. Emerging economies are, in effect, lending to foreigners (by piling up treasury bonds paying miserable rates of interest) in order to underwrite borrowing from them (at higher rates of interest). According to Dani Rodrik, of Harvard University, the developing world's reserves carry an opportunity cost of nearly 1% of GDP."

Of course inefficiency is often in the eye of the beholder. If the local fire station is unreliable, and after responding to a fire at your home, takes over your life at a cost of great suffering in order to prevent another fire, the extra expense of having your own firefighting equipment may not seem so inefficient.

"Larry Summers, Harvard's departing president and a former treasury secretary, thinks the IMF could offer its services as an international fund manager, pooling official reserves in a more rewarding portfolio of assets. But this idea may mistake the origins of the problem. The build-up in reserves reflects a lasting anxiety about financial markets, but also a lingering distrust of the IMF. Mr Summers assumes that countries will be willing to entrust their dollars to the IMF. But if they had that much confidence in the fund, they might not feel the need to accumulate quite so many reserves in the first place."

The big question going forward is whether the crisis-free nature of the last few years will be the new norm, or whether we are just in calm between storms. I haven't really heard any explanation of why we might have put financial crises behind us (if you know any good ones, comment away), plus I'm a pessimist (realist?) about these things so I'd bet its just a calm between storms - and it seems like the Economist agrees,

"If China slows, America starts saving again or interest rates spike, indebted or illiquid economies will struggle once again. Firemen with no blazes to put out are easily bored. Sadly, the fund's morale will not be this low for ever."