Leave the IMF alone!

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I’m currently reading Globalization and Austerity Politics in Latin America by Stephen Kaplan, which deals with the way globalized and decentralized financial markets have affected economic policy in Latin America. I will do a full review of it later this week or next when I finish it, but in the meantime wanted to touch on the role of the International Monetary Fund (IMF) in the debt crises of the 1980s.

The conventional story is that, when the debt crises started following Mexico’s 90 day moratorium on debt repayment in 1982, the IMF came into the region, and in exchange for emergency loans to the affected countries, forced them to adopt harsh and unpopular cuts as conditionality. To a large degree this I true; the IMF did require countries to sign agreements to implement certain reforms in exchange for releasing funds. The problem with the traditional narrative is that the countries rarely actually implemented the reforms. As Kaplan documents in various case studies, a diverse array of Latin American countries would promise reforms, half implement them for a couple of years and then renege on them when it came time to get reelected.

Kaplan argues persuasively that governments could behave this way because most of the debt Latin American countries had accumulated was in the form of bank loans from just a handful of financial institutions. This dynamic meant that the banks had a strong incentive to ensure that the debtor countries remained solvent so that they could eventually be paid back. As a result, Latin American governments could count on receiving more loans even if they failed to implement reforms because the lenders did not want to write down the losses on the huge exposures they had to Latin America since doing so would have cost them billions of dollars in losses. Throughout the 1980s Latin American governments were therefore able to continually secure new loans even as they failed to live up to the conditionality of the previous ones.

Certainly, many agreed upon reforms were implemented, but often only partially. This was in many ways far worse than the reforms themselves. For instance, a state owned enterprise (SOE) might be privatized, but without an accompanying regulatory framework, resulting in continued poor quality yet higher prices. Or price hikes and wage freezes would not be accompanied by measures to improve productivity, making the reform just a sudden reduction in living standards. However, it is unfair to blame this on the IMF the way that many do since it really lacked significant leverage over these countries. While there are certainly reasons to criticize the IMF for how it’s handled developing world crises (i.e. the Asian Financial Crisis), this is not one of those instances. Even when Latin America did begin to embrace orthodox policies more seriously, it was driven by factors related more to the shifting nature of the international financial system than by the IMF, though the IMF was supportive of many of those policies

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