Charles Wolf Jr. creates strange bedfellows in defining two schools of thought on international financial issues (“Markets, Not Architects, Will Solve Economic Crises”). Not often is the IMF lumped together with Malaysian Prime Minister Mahathir Mohamad, financier George Soros and MIT economist Paul Krugman. Trying to paint so many different viewpoints into the corner of “interventionists” who supposedly seek non-market solutions to economic crises is a bit like lumping together free-traders and protectionists.
It also seems a bit odd that Mr. Wolf would praise Thailand, South Korea and Brazil for taking the policy steps that have permitted them and others to start on the road to recovery–yet at the same time ignore the IMF support that has assisted these countries down that path. The IMF firmly supports market-based solutions to economic crises, and as Mr. Wolf correctly notes, the reforms put in place under Fund-supported programs have had the effect of encouraging “market-oriented policies.”
The same approach is at the core of the new Contingent Credit Line Facility, established by the IMF’s 182 member countries to support nations that have put in place market-friendly policies. The crucial point about the CCL is that it is aimed at warding off market contagion, the unexpected ferocity of which threatened growth and stability during the recent crises. Qualifying for the CCL will entail emphasizing preventative, as opposed to curative, medicine. And the steps countries will be called on to take–adopting international standards that emphasize transparency and common ground rules; maintaining sound fiscal and monetary policies; establishing constructive relationships with private creditors; and satisfactorily managing external debts and reserves–should meet with the approval of the markets. Such tough policy terms, along with the higher rates attached to the CCL, hardly suggest “subsidized funding,” as Mr. Wolf describes the facility.
Mr. Wolf suggests that contingent financing would encourage risky behavior on the part of borrowers, and even “precipitate” a crisis. One can just as easily suggest the opposite outcome: that the markets would be reassured and countries would not even have to draw on the credit lines. The fact that private sector creditors have also established such contingent facilities with governments in recent years suggests that the IMF’s approach hardly represents “intervention” in the marketplace.