The IMF, Now More than Ever: The Case for Financial Peacekeeping

Would the world need an International Monetary Fund today if it did not already exist? As the outlook for the world economy becomes increasingly gloomy, the answer is an urgent yes. After Russia defaulted on its debt in mid-August, interest rates in emerging markets have skyrocketed so high that half of the world economy is courting recession next year. But precisely this turbulence in global financial markets demonstrates why the world needs the IMF: no other organization can serve as lender of last resort to buffer extreme economic turmoil during market stress.

The IMF failed to stem the Russian collapse not because its reform package was flawed but because Russia's domestic woes -- combined with its sensitivity to the global slump in oil and commodity prices -- were too severe to prevent market panic. Had the $22 billion IMF package for Russia been as large as its $40 billion bailout of Mexico in 1995, investors would probably not have fled. Instead, Russia's fiscal position was so delicate that investors decided $22 billion was not enough to guarantee success.

Beyond Russia, however, the IMF has successfully tempered the Asian financial crisis. Indeed, the fund's performance in Asia has highlighted the three roles it needs to play in today's economy. First, the IMF offers macroeconomic policy advice that politicians can sell to voters as their own; although the fund remains heavily influenced by the United States and other G-7 countries, it still offers a semblance of autonomy that makes its policy proposals more politically acceptable for borrowers. Second, the IMF acts as a global lender of last resort during a liquidity crunch, similar to the role played by national central banks during domestic banking crises. In this capacity, the fund can step in when market panic prevents a troubled economy from receiving necessary credit. Third, the IMF promotes microeconomic reforms that might otherwise be politically unacceptable. Such reforms have generally helped promote noninflationary economic growth.

RUSSIAN ROULETTE