Is the IMF "Pathetic"? The IMF is the closest thing to a global lender of last resort. When times are calm, it may be tempting to think of abolishing the institution. As this precrisis column pointed out, to have done so would have been a remarkably complacent idea. Meral Karasulu did what any seasoned This column isn't a defense of the IMF's batable; what's not is that today's global International Monetary Fund staffer actions during the Asian crisis or economy needs the buffering role that would do: She grinned and, for the Argentina's in the early 2000s. The both of them play. . . . umpteenth time, listened to suggestions Washington-based fund has a small army The IMF was never set up to play the that the institution was to blame for the of well-compensated people to do that. role it did during crises in Mexico, Asia 1997 Asian financial crisis. And the IMF has had its fair share of blun- and Russia in the 1990s and turmoil in "Thank you for your question," she ders, including telling Asian countries to Latin America since then. Even so, it will replied to an audience member at a May tighten fiscal policy during a crisis. be called upon the instant a crisis in one 14 EuroMoney conference in Seoul. Yet all this talk of IMF irrelevance is country spreads to another. As imperfect Then, she launched into a defense of the overdone. What's more, the chatter sug- as the IMF is, the world needs the eco- IMF's actions. gests the creation of a new bubble nomic equivalent of a fire brigade when As the IMF's representative in South called complacency. markets plunge. Korea, Karasulu is used to the drill. After "It's ironic to my mind that people There's much chatter about how glob- all, many Koreans routinely refer to the say the fund isn't needed anymore be- al prosperity is reducing the need for "IMF crisis." It's a reminder that a cause nothing in the global financial billion-dollar IMF bailouts. As of March, decade after Asia's turmoil, the IMF is system is broken at the moment," John IMF lending had shriveled to $11.8 bil- still explaining itself wherever it goes. Lipsky, the IMF's first deputy managing lion from a peak of $81 billion in 2004. Three weeks after the Seoul confer- director, said in an interview last month A single nation, Turkey, accounted for ence, there was similar griping at an in Tokyo. "It strikes me we are trying to about 75 percent of the IMF's portfolio. event I attended in Buenos Aires. The anticipate and prepare for when things Isn't that a good thing? The IMF is mood had barely changed since March may go wrong again.". . . like a paramedic: You hope you won't 2005, when President Nestor Kirchner Sure, Asia has insulated itself from need one, but it's great that one is just scored points with many of Argentina's markets with trillions of dollars of cur- a phone call away. Plenty of things 40 million people by calling the IMF rency reserves. The IMF's phones may be could still go awry and necessitate a call "pathetic." He has been demanding that ringing off the hook if China's economy to the IMF. . . . the institution stop criticizing the Latin hits a wall, the U.S. dollar plunges, the Complacency looms large in today's American country. so-called yen-carry trade blows up, a world. All too many investors think the Korea and Argentina have little in com- major terrorist attack occurs, oil prices good times are here to stay and all too mon. Yet Korea is among the nations approach $100 a barrel or some unex- many governments are ignoring their stockpiling currency reserves to avoid pected event roils world markets. imbalances for similar reasons. . . . having to go to the IMF for a bailout ever The thing is, the IMF and its Bretton All this means that, far from being ir- again. Argentina, meanwhile, continues Woods sister institution, the World Bank, relevant, the IMF may be in for a very to tout the end of its IMF-backed program have scarcely been more necessary. How busy couple of years. last year as an economic victory. efficient and cost-effective they are is de- Source: Extract from William Pesek, "Is IMF 'Pathetic' or Just Awaiting Next Crisis?" bloomberg.net, June 12, 2007. Discussion Questions 1. As private financial flows increase in volume, do you believe the IMF will have the financial resources to serve as a lender of last resort for advanced economies? Why or why not? 2. Over the last several years, the U.S. has run chronic current account deficits at the same time as several emerging markets have stockpiled reserves to avoid future currency crises. a. What do you think these facts imply regarding the possibility of default in these emerging markets? Why? b. What do you think these facts imply regarding the possibility of default in the U.S.? Why? c. Why might the U.S. still be less likely to default, compared to emerging market countries