PRINCETON – Critics have long contended that the International Monetary Fund mainly serves the interests of its major shareholders. In fact, at its best, the Fund has helped crystalize global consensus on macroeconomic policy and coordination. But, since the start of the Great Recession in mid-2007, its actions have mostly confirmed the detractors’ critique.
Whether in assessing global risks, promoting international policy coordination, dealing with Europe’s intractable problems, or creating a viable regime for sovereign-debt restructuring, the Fund either played second fiddle or was swayed by European and US interests. When finance ministers and central bank governors meet in Washington, DC, next week for the IMF’s annual meeting, will they have the wisdom to make the Fund more independent and credible? Or will it be business as usual?
The IMF’s one shining moment in the last decade followed the collapse of Lehman Brothers in September 2008. As I later wrote, “At the end of 2008, when the scale of the impending economic destruction was not yet apparent, [IMF chief economist] Olivier Blanchard boldly called for a global fiscal stimulus,” repudiating the Fund’s usual emphasis on “fiscal retrenchment and public-debt reduction.”
Today, there is little doubt that the coordinated fiscal stimulus of 2009 played a crucial role in preventing the “deflation, liquidity traps, and increasingly pessimistic expectations” that Blanchard rightly feared would lead to a second Great Depression. Governments worldwide were panicking, and their interests were perfectly aligned: Everyone could see that failure to act would lead to catastrophe.