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Why Has the IMF Failed Its Mission?
Economist and Nobel Laureate Joseph E. Stiglitz argues that the IMF has failed its mission to secure global economic stability. He identifies the reasons for this failure with changes in the IMF’s mission and economic policies.
Economist and Nobel Laureate Joseph E. Stiglitz argues that many of the problems with the current phase of economic globalization can be laid at the feet of the International Monetary Fund (IMF). In his role as Senior Vice President and Chief Economist at the World Bank in the late 1990s, Stiglitz was privy to the policies and failures of the IMF.
In his book, Globalization and Its Discontents, Stiglitz lays out an argument for why the IMF has failed in its mission to ensure global economic stability.
Betrayal of Its Initial Mission
While the IMF’s initial mission was based on the assumption that markets did not always work perfectly—that is, there were times when intervention, however limited, might be needed to secure a stable global economic order—Stiglitz argues that that philosophy has changed. Now, says Stiglitz, the IMF operates largely on the untenable ideology that markets should be left to operate on their own, and that no (or very little) direction or intervention is needed.
This, argues Stiglitz, is not only a betrayal of the ideas underlying the IMF’s inception, but it is simply bad economics. The underlying belief at the creation of the IMF was that, in times of crisis, the IMF should foster expansionary economic policy—for instance, encouraging or enabling increased expenditures, lower taxes, lower interest rates—in order to stimulate the economy. In short, a country’s populace would have more money available and so increase their purchasing, thereby stimulating the economy. Now, says Stiglitz, the IMF has adopted exactly the opposite approach: providing funds for countries only if they institute contractionary policies such as cutting deficits, raising taxes, and raising interest rates.
Whereas the IMF’s initial goal was to bring a country in crisis back as close to full employment of it’s workforce as possible, it has dramatically changed course. The change of course, Stiglitz puts flatly, makes it “clear that the IMF has failed in its mission.”
Bad Economic Policies
Stiglitz argues that the IMF’s policies not only do not work, but often make matters worse for the countries in crisis. He notes several misdirected policies:
Taxation without Representation
Stiglitz notes that even though the IMF is a public institution, funded by money from taxpayers around the world, it is not held accountable to the interests of these taxpayers. He identifies the problem of governance as one of the prime “underlying factors” for problems with the IMF.
Stiglitz says that the IMF reports to ministers of finance and central banks around the world thatare in many ways insulated from the concerns of the IMF’s ultimate constituency: the global populace. Stiglitz notes that control of the IMF is accomplished through a complicated set of voting arrangements based in large part on the economic influence of the member countries. Additionally, the U.S. has effective veto power over IMF decisions.
Stiglitz says that the IMF (and later, the World Bank as it was reduced to a “junior partner” with the IMF) was driven by the collective will of the G-7 (the governments of the seven most advanced industrial countries). Open, democratic debate over IMF policies and procedures would threaten the influence of these industrial giants, which would clearly not be in their best interests. So, say Stiglitz, the current drivers of IMF policy see it in their best interest to avoid democratic accountability and dialogue.
According to Stiglitz, the IMF is dominated not merely by wealthy, industrialized nations, but—more narrowly—by the commercial and financial interests within those countries. Stiglitz says that the fact that the IMF draws on public funds to forward the interests of a select few—with no effective voice in the IMF’s policies, amounts, in his words, to “taxation without representation.”
Mandates, Policies and Leadership
Table 1 presents the initial mandates, policies and leadership of the IMF, World Bank and the WTO and how they have changed.
Table 1: Comparison of IMF, World Bank and WTO Characteristics
Data and Methods:
Based on the author's experience as the Senior Vice President and Chief Economist at the World Bank in the late 1990s.
Stiglitz, Joseph E. 2002. Globalization and Its Discontents. New York: Norton. Ch.8, pp.195-213.