Sebastian Edwards

This selection was excerpted from "The International Monetary Fund and the Developing Countries: A Critical Evaluation," published in IMF Policy Advice, Market Volatility, Commodity Price Rules, and Other Essays, edited by Karl Brunner and Allan Meltzer (1989). Sebastian Edwards, formerly World Bank chief economist for Latin America and the Caribbean, is the Henry Ford II Professor of International Economics at the Anderson Graduate School of Management, University of California at Los Angeles.

In many cases, by approving standby programs whose targets everyone knows will not be met, the IMF is participating in a big charade; it is implicitly saying that, according to the Articles of Agreement, the resources have been provided on a temporary basis, and that there is a high probability that the country will attain balance of payment viability in the near future. For many countries this is not the case, and everybody knows it. The issue, of course, is not whether these countries should undertake reforms and prudent macroeconomic policies--they certainly should--but whether these policies will suffice for solving the crisis.

The fund has not participated in this delusion willingly. In many cases its participation was the result of political decisions made by the largest members, in particular by the United States. For political reasons--dictated by geopolitical or other considerations--and many times against the judgment of the staff, the United States and other industrialized countries saw fit to request (force?) the fund to approve unrealistic programs for Egypt, the Sudan, Nicaragua, Argentina, and Brazil. What has happened is that concessionary development funds have been given through the IMF. Of course, there is per se nothing wrong with providing aid. Quite the contrary, given these countries' positions, aid is a good step. What is questionable is the wisdom of using a financial institution such as the fund for this purpose. David Finch, the former director of the Exchange and Trade Restrictions Department at the fund, has strongly argued against the use of the fund for political purposes. He rightly points out that the fund, by approving programs that everyone knows are destined to fail, will not only lose credibility but also will see its own resources imperiled, in the not so unlikely event that some of these countries default on the fund. He asks politicians that they "let the IMF be the IMF."

Of course, it is naive to ask that the large members do not try to influence IMF policy in ways that favor their global interests, as it would be naive to ask the staff not to oppose measures that reduce its own power. It is not clear, however, whether long-term interests of the major countries are indeed enhanced by these policies. Why do they risk damaging the fund in this process?