Is The IMF Killing Off Its Patients?

By Adam Zagorin/Washington

No one likes to question leaders during an emergency. We prefer to leave the hard work of fixing problems in their hands and stand quietly back, offering patient support as our well-trained experts plunge ahead. But it has been hard in the past few weeks, as Russia has stumbled and Southeast Asia has continued its miserable descent, not to ask a nagging, disloyal question: Just what is the International Monetary Fund doing?

Russia, for instance, received a pledge of nearly $23 billion from the fund earlier this summer as part of an ambitious bailout program. Economic stability in Russia is an easy sell: wags call it "Indonesia with nukes." So many in the West--including the IMF's critics on Capitol Hill--were delighted to hear IMF chief Michel Camdessus promise last month that the Russian economy had responded to fiscal CPR and was now, thankfully, on the mend.

In fact, the Russian economy was still suffering from some awful infections: corruption, capital flight and a government that was showing the kind of fiscal discipline generally associated with teenagers. Worse, the mechanisms for transferring IMF funding into productive growth--through things like banks and social agencies--have been all but helpless amid widespread policy bickering inside the Kremlin. Still, the IMF okayed the injection and insisted on dramatic changes, particularly to the country's dysfunctional taxation system. Over time, such fixes might indeed help ease Russia's dire liquidity crunch, but their immediate effect has been to shred the last bit of confidence in Russia's short-term economic health.

Russia is far from being an anomaly. Since late 1997 the fund has committed approximately $100 billion to the economies of Thailand, South Korea and Indonesia. But it has still failed to provide Asia with even the basic currency stability that is critical before the region can begin to pull out of its severe economic slump.

You can't blame the IMF for all these problems--Russians are still struggling with the very idea of a market economy, and Southeast Asia is paying the price for years of crony capitalism and reckless lending by local banks. But the IMF may just be making the problems worse. Instead of simply delivering needed money, the fund has also been delivering ultimatums, using the desperate straits of its borrowers as a way to insist on deep economic reforms. There's nothing wrong with the basic impetus--many of these badly sick countries are in need of what economists call a "brain transplant"--but the focus on sudden change instead of relief has left many nations twisting in knots to solve problems quickly that should require years of patient work. It has also led nations--and Russia is Example A--to give an inaccurate picture of their economies. The IMF's celebration of Russia's "recovery" last month was based on Russian data, figures that can be verified only with great difficulty.

The problem with attacking the IMF is that there are few alternatives. The U.S. Treasury could take a lead role in bailing out troubled economies. But it prefers not to foot the enormous bill alone or impose diktats from Washington. Many of the suggestions the IMF makes to borrowers, often in close consultation with the Treasury, are sound. But few of the nations are in any shape to digest, implement and enforce the Wizard of Oz transformations the institution wants. The fund needs to abandon its attempt to enforce deep structural reforms and focus instead on resuscitating these economies, particularly by helping them pay off their crippling short-term debt and managing their sliding currencies. The IMF may be right that these sick economies will eventually need brain transplants. But first they need a pulse.

--By Adam Zagorin/Washington