James Morgan on the future of the IMF

James Morgan

Has the International Monetary Fund failed Indonesia? And does it serve any purpose at all? The BBC's Economic correspondent, James Morgan, has some answers.

The International Monetary Fund seems to get everywhere. Even as I write I see it appear in two stories in our main news bulletin. So it is not surprising that the Fund is becoming subject to comment in circles far beyond those which used to interest themselves in such matters.

• The House of Representatives seems to want to ban the Fund lending to any nation where abortion is practised.
• Academics fight over how many wrong things the Fund is doing in Indonesia.
• Governments say it must be fully supported.

The argument seems to be whether the Fund should be abolished or rule the world.

The abolitionists have a case. They argue that if the Fund did not exist it would not have to be invented. Their point is that since people know it is there they will make riskier decisions because if things go wrong there will be an IMF-backed bail-out.

The IMF's moral hazard

This is part of the general problem known as moral hazard, which saw its finest flowering in the United States a few years ago. There savings and loan institutions across the country had to be saved by a huge government operation.

The owners of the S&Ls knew their depositors were guaranteed by the government so they bet the bank on huge gambles which could offer huge returns. They lost - and the government compensated the depositors.

So if the IMF were not there would lenders and borrowers behave more sensibly? Maybe, but the argument misses one major point.

The IMF was set up more than 50 years ago to protect the international monetary system. That system has changed beyond recognition but today it means that the IMF is there to help ensure that anyone in any country can pay for the goods he or she buys from another country in a currency acceptable to the creditor.

That is nearly true today. Thus in Indonesia the Fund is not just trying to reform an economy, it is trying to ensure Indonesia can meet the obligations it and the other 180 members have assumed.

For the future the aim is even more ambitious: to enable anyone to invest where he or she wants. These may or may not be worthy causes, but so far the world has not renounced them.

Abolishing the Fund would be one way of abandoning the work of 50 years of liberalisation and establishing an international payments system based on the rule of law.