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. Last Updated: 07/27/2016

Missing Truth on IMF

More than most peoples, Russians are familiar with the phenomenon of the state-sponsored lie. Under 70 years of Soviet rule, the Big Lie was a regular weapon in the government's arsenal, an instrument that helped both to control subject populations and to keep foreign enemies off balance.


Democratic governments are different. Of course, outrageous official falsehoods are often uttered under free and open political systems. What is different here is the purpose. Typically, democratic governments lie to fool themselves.


Witness the pronouncements, in Moscow and the West, that have accompanied the latest round of Russia's loan negotiations with the International Monetary Fund. To date, none of the governments involved in arranging this $10.2 billion deal seem to have been able to bring themselves to talk honestly about what they are doing.


Some of the assertions on this latest round of IMF lending are so implausible and absurd that only a Western government official, or an international civil servant, could possibly believe them.


Take, for example, the statement by IMF managing director Michel Camdessus that this immense pre-election cash infusion is not intended to affect the outcome of the presidential elections in Russia this June. (As he put it: "We do not take sides.") Perhaps someone should inform him that two of the three largest shareholders in his fund, the governments of the United States and Germany, are on record as favoring immediate IMF loans to "support" Russia -- and that the $10.2 billion figure negotiators settled upon would just about cover Boris Yeltsin's new, election-year-inspired spending promises.


Not all of the deceptive official language surrounding the IMF loan, of course, is so completely transparent. Wishful thinking also plays a large, and pernicious, role. For the central tenet in the recent negotiations is that a major commitment by the IMF's "Extended Fund Facility" will be instrumental in promoting economic reform in Russia.


The nostrum of "economic reform through IMF loans" combines two presumptions: that international "economic reform" loans bring about economic reform, and that the IMF is a capable administrator of "economic reform" lending. Strictly speaking, neither presumption is valid.


Remember the economic crisis in Mexico in late 1994 and early 1995? That debacle -- in which tens of billions of dollars of private capital vaporized, and from which the Mexican economy will not soon recover -- was triggered by the misguided and ultimately unsustainable macroeconomic policies of the Mexican government. Those reckless policies, however, were put into place while Mexico was under IMF "policy reform" supervision. In the early '90s, in fact, Mexico was the IMF's single biggest borrower.


Here, let us face an obvious fact. The IMF is not an institution created to promote "economic reform." It was instead devised (at the 1944 Bretton Woods conference) to help promote currency convertability among the world's major economies -- a very different sort of task.


The era of fixed exchange rates for the major currencies ended over 20 years ago, with the Smithsonian agreements in 1973. Ever since then, the IMF has been in the unenviable position of all organizations that outlive the problems they were supposed to solve.


In search of a new rationale to justify its continuing existence, the IMF has volunteered for a succession of new duties. "Promoting economic reform in Russia" is only the latest of these. What the IMF does is provide hard currency loans to governments at more attractive rates than they could obtain for themselves. Why this function should qualify the IMF as an agent for expediting "economic reform," much less the reform of economies in transition, is, to say the least, unclear.


With or without the IMF, however, there is a more basic dilemma in the idea of "economic reform lending." Loans that go to a government treasury will not automatically finance enlightened economic policies. Transfers of disposable resources, instead, simply permit governments to pursue their pre-existing intentions with greater ease.


If a government's economic viewpoint is disciplined and fairly liberal, loans in the name of "economic reform" may bring a country toward economic health. In the hands of a feckless, populist, or dirigiste national directorate, however, those same loans could actually worsen a country's economic prospects. Indeed, on more than one occasion, loans for "economic reform" have permitted the borrowing government to follow policies so economically irrational that they probably could not have been financed without outside help.


How will Russia use its latest package of "economic reform" loans? The question begs the issue of the Yeltsin government's economic intentions.


Here judgments may differ. From my American vantage point, it looks as if the education of Boris Yeltsin is very much a work in progress. Others may disagree and instead attribute the policy gyrations, missteps, and reversals we have seen since early 1992 more to political pressures and election results.


That a big cash transfer to Moscow will directly hasten economic reforms is hardly self evident. The loans may even ultimately slow the pace of reform in Russia, by postponing the government's day of reckoning with financial and commercial realities.


In Voltaire's "Candide," Dr. Pangloss defends his rosy illusions by explaining that he could not go on if he had to face the world as it truly is. In Russia today, the opposite is true: Unless one is willing to face the world as it is, it will be difficult indeed to go on. Voters in Russia and the West alike have yet to hear a forthright discussion of the new IMF loan package for Moscow. They deserve better -- and should demand it.





Nicholas Eberstadt is a vesearcher with the American Enterprise Institute in Washington, D.C., and with Harvard University. He contributed this comment to The Moscow Times.