Roland Vaubel

This selection was excerpted from "The Political Economy of the IMF: A Public Choice Analysis," published in Perpetuating Poverty: The World Bank, the IMF, and the Developing World, edited by Doug Bandow and Ian Vasquez (1994). Roland Vaubel is a professor of economics at the University of Mannheim in Germany.

Even with today's flexible exchange rates, eligibility for IMF credits continues to depend on the state of the balance of payments. Article V, Section 3.b.ii, of the IMF's Articles of Agreement states the following:

A member shall be entitled to purchase the currencies of other members from the fund . . . subject to the condition [that] it has a need to make the purchase because of its balance of payments or its reserve position or development of its reserves.

That condition is regarded as fulfilled if, for example, the country's gross hard currency reserves have declined. But a drop in foreign exchange reserves can be deliberately induced--in the case of fixed exchange rates, by increasing the domestic component of the monetary base, and in the case of adjustable parities, by revaluing the domestic currency. Neither choice of economic policy indicates an emergency situation.

In fact, there is considerable evidence that IMF borrowers are largely responsible for their own balance of payments problems. Sebastian Edwards's study of twenty-three developing countries under fixed exchange rates in 1965-72 confirms that excess supply of money tended "to result in international reserves dropping below desired levels." An unpublished IMF study conducted in 1981 even concluded that, in 1964-73, overexpansionary demand policies were the principal cause of balance of payments problems in borrowing countries, while exogenous factors were least important. A study by Thomas Reichmann shows that overexpansionary demand policies were the major factors in fifteen of twenty-one developing countries that had standby arrangements with the IMF during 1973-75.

An analysis by Mohsin Khan and Malcolm Knight concluded that over the whole period of 1973-80, the budget deficit (relative to gross domestic product) was the second most important factor, after their terms of trade, in explaining developing countries' current account balances. An internal IMF working paper by Donal Donovan demonstrated that overexpansionary monetary and fiscal policies also contributed to a country's debt-servicing problems. In the five years before the debt crisis of the 1980s, the rescheduling countries shared the following characteristics:

• Considerably higher rates of net credit expansion to government (13.4 percent annually) than the nonrescheduling countries (5.9 percent annually)
• Considerably higher rates of M2 monetary expansion (31.9 percent annually) than the nonrescheduling countries (22.8 percent annually)
• Not surprisingly, considerably higher consumer price inflation (23.8 percent annually) than the nonrescheduling countries (14.3 percent annually)

If it is true that the IMF wants to maximize its lending and supervision, it cannot be interested in legal restrictions on eligibility that might effectively bar potential borrowers. The criterion of balance of payments need is not an effective barrier. The IMF admits that "the requirement of need is in the nature of a portmanteau concept. It is a term of art rather than of law. . . . Reliance on judgmental factors is unavoidable." The governments of the typical borrower countries obviously share an interest in lending conditions that are as easy as possible to meet. But that arrangement is also advantageous for the influential creditor countries since it permits them to use IMF lending in pursuit of their own foreign policy objectives, as the United States did in 1982 when the debt crisis caused the Reagan administration to reverse its opposition to an IMF quota increase.