Refocusing the IMF

OVERDOING IT IN EAST ASIA

In the Asian currency crisis, the International Monetary Fund is risking its effectiveness by the way it now defines its role as well as by its handling of the problems of the affected countries. The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits.

Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed-rate system collapsed completely in 1971, the IMF was forced to find a new raison d'etre.

The fund found a new and important role, which is still appropriate for the current crisis, in the 1980s. Changes in economic conditions led Mexico and other Latin American countries to announce they could not meet the interest and principal payments on their large borrowings from overseas commercial banks. A default on those obligations would have wiped out the capital of many leading banks in the United States, Europe, and Japan, so the U.S. government provided a temporary bridge loan that allowed Mexico to meet its imminent payments. Negotiations then began between the Mexican government and representatives of the lending banks, who agreed to restructure the debts, lengthening maturities and lending additional money with which the borrowers could meet part of their interest obligations. Similar negotiations were later conducted with the other Latin American debtors.