ECONOMIC SCENE: Why the IMF should lighten up on the world’s poorest nations

For decades, many poor countries saw the International Monetary Fund as the economic enforcer for rich nations. When a developing country lived beyond its means and fell into crisis, the IMF stepped in with loans to cushion the blow if, and only if, the government adopted stern economic policies like higher interest rates or budget cuts.

Today’s international financial crisis, however, is pushing the 185-nation Washington-based institution to take a softer stance with developing nations just as the crisis is boosting its importance after years of decline. There are several reasons for the change:

• The worsening plight of many poor nations isn’t entirely their fault, because the crisis was caused by the bursting of the housing bubble in the United States. This crisis “has already driven more than 50 million people [in poor nations] into extreme poverty, particularly women and children,” noted the development committee of the IMF and World Bank last month.

• Given its own massive trade and federal budget deficit, the US, the IMF’s chief backer, can hardly lecture poor countries about economic profligacy.
• Some emerging nations, especially China, India, and Brazil, have developed increasingly powerful economic engines. They aren’t so easy to push around. Indeed, a swift recovery in these emerging markets as well as in even poorer countries would be welcome as a valuable boost to the world economy.

Now the question is: Should the IMF further soften its stance and arrange outright grants for poor nations instead of loans?

Neal Watkins thinks so – and here’s why.

Suppose someone drove a car into your house, doing extensive damage, says Mr. Watkins, executive director of Jubilee USA Network, an advocacy group seeking debt relief for the poorest nations. That driver could be the US, where the bursting of the housing bubble led to the global financial crisis.

The driver goes into the house and offers a loan to cover the damages. A loan is better than nothing, says Watkins. But it would be more just if the driver actually paid for the damage.

The rich countries recognized their responsibility for the crisis last month in London at the Group of 20 summit – a gathering of the leaders from industrial nations and important emerging countries, Watkins says. They even spoke of allotting $50 billion of a total of $1.1 trillion in anticrisis funds to aid the poorest countries. If that money came as grants, it wouldn’t add to those nations’ debt burdens.

At this point, though, it’s doubtful the IMF will get all the anticrisis money promised by its members. The Obama administration offered $100 billion. That money depends on congressional approval. President Obama wants it approved as soon as possible, if he can get it at all.

Mark Weisbrot, an economist with the Center for Economic and Policy Research, wants to turn the tables on the IMF. He wants conditions imposed on it before it gets any extra money.

Mr. Weisbrot charges the institution with “incompetence,” which has led to many serious policy mistakes in past lending to developing countries. To qualify for money, the IMF should promise to go easy on loan conditions for troubled developing countries so as not to worsen the global slump, he says. And he would like the rich countries, with more than 50 percent of voting rights in the IMF, to give up more voting power to the developing world.

That might not endear the enforcer to the developing world, but it might make it a little less unpopular.