Global Policy Forum

By Kenneth Rogoff

Brazil's current presidential election campaign has again brought the IMF to the center of international debate. Are IMF cures worse than the disease, as critics such as Nobel laureate Joseph Stiglitz allege? Kenneth Rogoff, the IMF's chief economist, speaks for the defense.

Throughout much of the world, the IMF is caricatured as a demon of austerity. Wherever the IMF appears on the scene to provide financial assistance, painful government budget cuts seem certain to follow. This image of austerity appeals to the emotional need for stories with villains. After all, good villains sell books--including books about globalization that demonize the IMF.

But does the image reflect reality? Is the IMF, the member of the UN family charged to maintain global financial stability, really so evil or misguided that it can only propose policies that inflict economic pain instead of alleviating it?

I admit that the IMF has its faults, and I don't aim to gloss over them. Until a year ago, when I left a professorship at Harvard University to become the Fund's chief economist, I was a vocal, if perhaps not vitriolic, critic of the IMF's management of the international monetary system.

Although the IMF has changed a lot in recent years, there is no denying that there are still major holes in the international system--not least the lack of a fair and orderly procedure for dealing with highly indebted countries that become insolvent. The IMF is working to fill that gap now. But the austerity charge is misconceived.

Troubled countries knock on the Fund's door for financial assistance only when all other creditors have turned their backs. In most cases, a country is already in desperate fiscal straits by the time IMF economists arrive on the scene to discuss a loan.

More often than not, the country has over-extended itself financially through some combination of imprudence and bad luck. Countries come to the IMF precisely because they know that it will lend to them when no one else will, and at interest rates lower than most could only dream of, even in the best of times. IMF loans thus relieve austerity: they help governments limit the amount of budgetary belt-tightening required in a crisis.

You think I am crazy? Allow me to draw an analogy from my personal finances. Just after I finished school, my older brother Hal ran into some financial difficulties. He and his wife had started ripping out all the walls, plumbing, and wiring in their modest Washington apartment, hoping to refurbish it prior to the arrival of their first child. It was an ambitious plan, but it seemed doable--until Hal started having problems with his baking business.

Suddenly they found themselves desperately over-extended. Hal went to the bank for a loan, but with his business struggling, he didn't qualify. With all his credit cards at their limit, and all his cash gone, Hal finally came to me for a loan. I had managed to put aside some modest savings, which I freely lent him indefinitely at zero interest.

Even with my help, things weren't easy. Hal had to work longer hours than ever before, and he still had to sharply cut back on household expenditures across the board. But my loan did help, eventually Hal's business recovered, my nephew was born and--much later--the apartment remodeling project came to a successful conclusion.

Now, did my brother blame me for the period of belt-tightening austerity his family had to face? No, obviously not.

Admittedly, this is a simplistic analogy, but it captures the essence of the issue. Yes, I did not ask Hal what, exactly, he planned to do with my money (would he use it to fix his plumbing, to help his business, or would he waste it somehow?). When the IMF comes in, it typically applies some degree of conditionality, as would any other lender, to ensure that its loan is eventually repaid, and used for its intended purpose. Unlike my loan to Hal, the IMF usually does ask government officials to show how they plan to put their country back on its feet.

Indeed, it is this planning dialogue that does more than anything else to help stabilize the economy and restore a viable balance of payments. It is not always an easy process, and reasonable people can and do disagree about the design of IMF-supported programs both before and after the fact. The IMF really does need to listen to its critics and constantly to seek better ways to accomplish its aims. But it is patently absurd to charge that misguided IMF policy advice is the main reason why debt-crisis countries face austerity.

When a country finally suffers through austerity and repays its IMF loans, no rich private shareholder gets fat as a result. The IMF's shareholders are its 184 member countries, and the Fund does not really pay dividends, other than in an accounting sense. As soon as one country repays its loans, the IMF is better placed to re-lend the foreign exchange to the next country in crisis. However effective the IMF's crisis prevention efforts are, realistically there will always be a next crisis country.

Yes, the IMF needs many changes, as does the broader international financial system within which it operates. But saying that it causes austerity is like saying that doctors cause plagues.

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