Today’s topic is how the IMF can assist in the modernization / development process of countries and most effectively stabilize economies without distorting markets. Any subsidy or aid program naturally distorts the market somehow. If the benefits are assumed to be sustainable and the subsidies temporary, it is usually considered a good investment. This model remains intact for direct aid inflows.

However, the most cost-effective way of dealing with economic downturns is preventative measures, which is exactly what FCLs focus on. By having macroeconomic stability as a prerequisite (counter-cyclical policies, saving money during good times to spend in bad, a.k.a. the opposite of what Bush did to America with his tax cats), and a FCL in place, a country is insulated from external economic shocks.

The IMF has received a bad rep, not entirely undeserved, for its failed development policies of the 1980s and 90s. In order to get IMF loans, countries had to agree to the IMFs market liberalization policies. The so-called “Washington Consensus” was an ill designed blanket solution, a “one-size-fits-all” approach. This approach has led to billions in miscalculated development money, and “lost decades” of development.

The problem with the “Washington Consensus” is that it mistakenly supposed that policies that lead to growth in already developed countries would work in developing countries. But this was a foolish miscalculation. Every country needs its own specific plan for fighting poverty, as well as infant industry protection. The IMF and World Bank now help countries prepare individualized  Poverty Reduction Strategy Paper (PRSP).

The IMF has done a better job in recent years of addressing individual countries concerns in a more socially responsible way. The IMF has expanded its policies into debt forgiveness (HIPC) and credit lines (FCLs). Aside from FCLs, which require strong macroeconomic performance for eligibility, a similar program exists to help less developed countries finance their debt, PRGF. Regardless of where a country is on the “development ladder”, there is an IMF policy to assist.

IMF Lending at a Glance

These credit lines give countries insurance that they will be able to finance their debt at a reasonable interest rate, guaranteed by the IMF. This would help countries avoid “debt crises” like we have in Europe, where the immediate threat is the not the size of the country’s debt, but the interest it must pay for new debt.

Only 3 countries currently have FCLs: Mexico, Colombia and Poland. Each of these countries has a long history of crises, but did remarkably well in the ongoing global recession. Even more remarkably, none of these countries ever had to draw on FCL funds. Simply by having the insurance of the FCL, markets remained confident enough to buy debt from these countries at low-interest rates.

Attached is a presentation I did this semester, giving all the economic indicators of FCL countries. The IMF has changed its policies from detrimental to development to incredibly effective and efficient. It is past time public perception of the IMF changes to reflect its contributions to global economic stability.

FCL Final