CHINA AND THE IMF….The IMF, and western governments in general, have been remarkably eager to extend financial help to emerging economies as the global financial crisis has unfolded. Brad Setser suggests that this might be because they feared that China would step in and make them obsolete:
I wonder if the possibility that institutions like the IMF could be bypassed if they didn’t respond more quickly and creatively than in the past didn’t help to spur the recent set of policy changes. Those in the IMF’s Executive Board who normally would object to unconditional lending didn’t block the new short-term lending facility — perhaps at least in part because of recognition that the IMF potentially isn’t the only game in town (or in the world).
This comes via Dan Drezner, who suggests a flip side: despite their vast reserves of dollar holdings, Russia and China aren’t really stepping up to the plate:
For all their aspirations to great power status, both countries lack the policy expertise necessary to take on greater leadership roles. This leads to profound risk aversion, which leads to inaction. On the flip side, the U.S. is accustomed to talking to the countries in crisis, which both provides it with more information and allows Washington to act more quickly.
As long as we’re taking guesses here, here’s one of my own. Normally, IMF help tends to be a little slow in coming because they insist on onerous terms that are political death for the leaders of the target countries. The IMF usually doesn’t budge much, however, because it feels like it needs to incentivize good behavior. If its terms were lax, countries would all feel free to follow profligate economic policies and then head over to Uncle IMF whenever they got a little behind. They want their terms to be onerous, and the upshot is that it takes a while before a country is in bad enough shape to agree to an IMF rescue.
But two things are different this time. First, the crisis has hit very, very fast. It’s not taking a year or two for countries to figure out that bankruptcy is unavoidable, it’s taking a month or two. Second, this isn’t a case of a single country that made some bad choices. It’s plainly a global conflagration, and furthermore, one that was primarily stoked by the United States, not by emerging economies doing stupid things. Everyone was doing stupid things, and the entire world is heading down the toilet, which means that the IMF’s usual onerous terms just aren’t necessary. The moral hazard issue isn’t a big one.
So: given the global nature of the crisis, the IMF is willing to offer more generous terms than usual for its aid. And given the speed and depth of the crisis, failing countries are facing reality faster than usual. Result: more and faster IMF/western aid than usual.
And yes, Russia has its own problems and China has never played this game before. They’ll probably dip their toes in the water eventually this time, and then next time feel a little more confident in taking a more active role. In the meantime, whatever the reason, it’s heartening that the IMF is facing reality and changing their policies this time around. This crisis really is different.