IGNORANCE about the role of markets and international institutions like the World Bank and IMF is as widespread among right-wingers in the USA as among left-wingers in India. The American right believes that free, untrammelled markets are a good thing while the Indian left believes they are a bad thing, but both seem to agree that it is the task of the World Bank and the IMF to create a world where markets alone determine outcomes.
The very opposite is true. The World Bank and IMF have been created precisely because markets are imperfect, and incapable of ensuring optimal economic development. Their job is to induce financial flows and policy changes which markets by themselves would never achieve. You may or may not agree that the two institutions are doing job well. But their job is to correct market failure.
This may not seem obvious, because they are usually seen as correcting the failure of client governments rather than markets. The institutions lay down conditions which governments must fulfil to obtain loan instalments. Many of the conditions aim at freeing market forces in the client countries.
For this reason the two institutions are credited with the view that the markets alone know best, and that government intervention, no matter how well-intentioned, is bound to make things worse. This is the perception of both the American right and the Indian left.
CONSENSUS: And yet a moment\’s thinking will make it clear that this cannot be the case. If the IMF really believes that markets know best, it will instantly have to disband itself. This is because the IMF is in no sense a product of the marketplace. On the contrary, it constitutes the international public sector. All its shareholders are governments. All its clients are governments. The IMF and World Bank are creations of governments, by governments, and for governments. If markets knew best, there would be absolutely no need for either the World Bank or IMF to exist. The fact that virtually every country in the world has joined these institutions shows there is a consensus that markets do not always know best, and need assistance from government-owned agencies.
At the annual Bank-Fund meeting last year. I remember an American reporter asking the IMF chief, Mr M. Camdessus, how could be wise for the IMF to lend to certain countries when commercial banks felt it was foolhardy. Mr Camdessus mumbled something about helping countries in distress. He would have been more honest if he had added that the judgment of commercial banks in these matters is so flawed that they cannot be trusted to do a good job. These very banks refused to lend any money to solvent developing countries in the 1960s and early 1970s, when such loans would have been excellent investments. But after becoming flush with petrodollars in the mid 1970s, these banks went on a lending spree to developing countries that crossed all boundaries of prudence. By the time the debt crisis exploded in 1982, the debt service ratio of Brazil had touched 81 per cent and of Mexico 56 per cent. These countries were blamed, rightly, for borrowing too much, but the lending banks were just as blameworthy. Market forces having failed to do the job, the IMF and the World Bank were called in to repair the damage.
DUBIOUS PROJECTS: Not the paradox here. If markets knew best, commercial banks would never have lent money for dubious projects and wasteful expenditure in developing countries that followed anti-market policies. Yet they did so. Some commercial banks try to excuse their stupidity by saying that, unlike the IMF, they did not have the expertise to formulate or monitor-appropriate loan conditions. This will not wash. The IMF does not get its experts from heaven. It recruits them from the global pool of economists, and the commercial banks should have attracted experts from the same pool, and even from the IMF. The very fact that they failed to do so is another instance of market failure.
Markets may not always know best, but neither do governments nor international agencies. There are very mixed experience of various countries in overcoming the debt crisis shows that we need the special strengths of market forces, this relevant expertise of the public sector in each country, and the strengths of the international public sector.