Disengaging from the Fund: possible and worthwhile?

5 April 2004

It is often argued that it is impossible to escape from the clutches of the IMF or that countries will suffer very serious consequences if they do. Yet some countries have clearly benefited from defying the Fund. As the Fund is clearly often wrong it should have competitors, such as regional monetary funds, which can provide alternative advice and funding.

Martin Khor of Third World Network argues that “the failure of the IMF to prevent the global financial system from going down the road of such rapid deregulation and liberalisation (with the consequences of currency instability, volatility of capital flows and financial speculation), and instead presiding over this road is a major mistake. It goes against the original role of the IMF to establish and maintain a stable financial order”. He says “we can weaken the IFIs and make them irrelevant by not using them” and building up alternative institutions.

Thailand has prepaid and got out. In 2003 the Thai government decided it no longer needed IMF finance. But rather than just dismiss the IMF it decided to list the laws it had introduced because of IMF conditionality and revoked them all. After initially following IMF advice following the Asia crisis, the Malaysian government abandoned it and introduced capital controls and fixed exchange rates with great success.

Now is the right time to start an Asian Monetary Fund.

An example of Malaysian policy which put it in a better position than many other countries in the region was that local companies were allowed to borrow in foreign currency only to the extent that they were to earn foreign exchange to repay the debt. This helped Malaysia avoid falling into the kind of debt trap that Thailand, Indonesia and South Korea got into, because of heavy private sector borrowing in foreign currency denominated loans.

Argentina has followed Russia’s example of the mid-1990s in refusing to repay bondholders on time and in full. The IMF issued dire warnings of Russia’s fate at that time and has done so for Argentina. But a bold governmental negotiating approach can pay dividends.

IMF borrowers IMF creditors
No bail outs for local firms and banks Bail outs for investors and domestic banks
Contractionary economic policies Keynesian counter-recessionary policies
No restrictions on foreign ownership of banks Ownership limitations on banks

The challenges of disengagement are substantial, however. Even if countries feel they do not need the IMF’s resources, they may be forced to continue following its policy dictates. The Philippines, for example has not used IMF credit for three years but still follows their discipline because of fear of rating agencies and other markets.

A healthy international financial system should have a diversity of institutions and an interest in supporting diverse policy proposals. Kavaljit Singh, an Indian researcher and author of A Citizens’ Guide to Global Finance argued in January “contagion is more regional and countries need a choice of where to borrow. Now is the right time to start an Asian Monetary Fund. Every country has current account surpluses, huge piles of foreign exchange reserves. China alone has $400 billion. If a few countries provide $4-5 billion, the Fund could start with $20 billion”.

It remains to be seen whether other regional blocks will follow the EU’s lead and develop systems of mutual financial support and advice which would reduce the power of the IMF.