Oxford SWF Project

Ashby Monk

Managing Director of the IMF Dominique Strauss-Kahn gave an interesting speech over the weekend at the International Finance Forum in Beijing. He covers a variety of topics, but one of his areas of interest was the accumulation of precautionary reserves as self-insurance. In his view, this practice carries significant social costs. As such, providing global financial insurance is best left to the IMF:

“For all these reasons, I see a clear need for global financial insurance…At the global level, I believe that the IMF can serve as an effective and reliable lender of last resort…However, to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources.”

In my view, if the IMF wants to be a reliable lender of last resort, it should first focus on the way it lends before addressing how much money it has available.

We all know that IMF support comes with ‘strings attached’ — when it provides resources to a member country, the funding arrangements specify the conditions underpinning support. Known as IMF ‘conditionality’, this may include specifying policies that the member country will need to carry out before the arrangement takes place or policies that must be implemented before follow-on disbursements of IMF resources are made. While some of these policies are justifiable, as the IMF wants to ensure that the money is repaid, some go beyond what is appropriate to the situation.

For example, Mussa and Savastano, two IMF employees, see conditionality as an opportunity to effect more substantial domestic policy changes:

“[n]ational authorities may modify policies to comply with IMF conditionality when it would be difficult to find domestic political census in the absence of external pressure…the IMF and its conditionality become a scapegoat on both sides of the bargain. That such a scapegoat can be useful in securing necessary or desirable, but unpopular, policy adjustments is clear.”

I tend to agree with the Feldstein critique of this–he questioned whether an international agency such as the IMF should impose any policies of a domestic nature on sovereign countries. Also, he questioned the morality of taking advantage of short-term financial crises in such a manner.

In the end,  “hoarding” international reserves is seen as an essential precautionary practice if countries are to avoid becoming entangled with the IMF and losing state autonomy. Resolving this perception would be the best way for Strauss-Kahn to stop the accumulation of precautionary reserves at the national level and make the IMF a credible provider of global financial insurance.