Much like the US Federal Reserve, the International Monetary Fund has subtly expanded its own remit even as it has failed to adjust to changing economic circumstances. And, as with the Fed, higher inflation could deliver a blow to the IMF's reputation – and to the economies the Fund is meant to help.
CAMBRIDGE – Who is going to clean up the inevitable financial mess in emerging markets if persistent inflation forces the US Federal Reserve to start raising interest rates significantly? The International Monetary Fund, normally tasked with pulling countries back from the brink, seems disenchanted with the job. Rather than embracing its traditional role of helping troubled debtor countries help themselves, the IMF has been attempting to morph into an aid agency.
Of course, it is more fun to be Santa than Scrooge, and rich countries give far too little in foreign aid. I have long advocated establishing a world carbon bank to channel grants and technology. Likewise, the case for funding a restructured World Health Organization to fight pandemics is compelling. But in a world where private capital flows far outweigh official lending, traditional IMF programs still have a critical role to play in mitigating and managing financial crises.
That role has been abandoned during the pandemic, and re-establishing it will be difficult. Handing out funding with few strings attached made sense in the initial phase of the COVID-19 crisis. But because the IMF is still very much structured as a lending agency, it eventually will have to be repaid or go bankrupt itself. To get a sense of what that might look like, consider the tensions with Argentina, which received a massive $57 billion loan in 2018 with uncharacteristically weak IMF conditions attached and is now balking at repaying.
CAMBRIDGE – Who is going to clean up the inevitable financial mess in emerging markets if persistent inflation forces the US Federal Reserve to start raising interest rates significantly? The International Monetary Fund, normally tasked with pulling countries back from the brink, seems disenchanted with the job. Rather than embracing its traditional role of helping troubled debtor countries help themselves, the IMF has been attempting to morph into an aid agency.
Of course, it is more fun to be Santa than Scrooge, and rich countries give far too little in foreign aid. I have long advocated establishing a world carbon bank to channel grants and technology. Likewise, the case for funding a restructured World Health Organization to fight pandemics is compelling. But in a world where private capital flows far outweigh official lending, traditional IMF programs still have a critical role to play in mitigating and managing financial crises.
That role has been abandoned during the pandemic, and re-establishing it will be difficult. Handing out funding with few strings attached made sense in the initial phase of the COVID-19 crisis. But because the IMF is still very much structured as a lending agency, it eventually will have to be repaid or go bankrupt itself. To get a sense of what that might look like, consider the tensions with Argentina, which received a massive $57 billion loan in 2018 with uncharacteristically weak IMF conditions attached and is now balking at repaying.