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IMF REFORM

Dear IMF Survey:

Your article “New Rules of Engagement for IMF Loans” (April 13, 2009) is good and informative.

The IMF’s move toward more flexibility is certainly welcome and necessary if the institution wants to continue being a significant player on the world scene.

As a practical economist, I have six observations:

1) The word conditionality is not fashionable anymore. But for an international public agency, it is the only raison d’être of a loan (or a grant) to a country. The tradeoff between the loan (or the grant) is a change in macro and/or microeconomic policy of the country that is asking for financial assistance. If the country does not wish to comply with conditionality, it can go to a private bank or accumulate international reserves (which is the case with some emerging countries).

2) From a macroeconomic policy point of view, whether we like it or not, one of the best indicators for measuring conditionality is the ratio of the budget deficit to GDP (and public expenditure to GDP). Now we are run by born-again Keynesians, I hope that this indicator will not be “gone with the wind.”

3) Since some donors do not want to use conditionality, they replace it by fine-tuning quantitative indicators, which are irrelevant most of the time because they don’t address the economic policy issues. Microeconomic policy change is, in essence, a qualitative change that is very difficult to measure by quantitative indicators.

4) I am amazed by the wide-ranging, fine-tuning policy changes required by some donors—it gives the impression that international civil servants are paid according to the number of conditionalities they impose on poor countries (the poorer the country, the greater the number!). My feeling is that a government can solve one problem at a time and that trying to solve 1,000 problems is a good excuse for solving none.

5) What should not be acceptable is shifting conditionalities. Too often we see the IMF staff changing its mood over time and modifying conditions slightly with changing circumstances—or worse, with changing mood. I have seen this behavior, but most of the time it goes unnoticed, or is only seen by a limited number of insiders.

6) I know that equal treatment for all countries is very difficult to measure. But in part, equal treatment means imposing conditionality consistent with the amount of money given—you cannot require the same level of conditionality from a country to which you loan $150 million as from a country to which you loan $3 billion. I have the impression that you ask much more in terms of conditionality of poor countries in Africa than of emerging countries. And this tendency will not go away anytime soon, since the IMF needs to increase its portfolio with middle-income countries.

Jean-Pierre Dumas
International Consultant
Paris, France