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A Letter to the Editor
By Michael Mussa
Director of the International Monetary Fund’s (IMF’s) Research Department
December 28, 1998
True, fiscal discipline urgently requires improvement. This is the central priority of the adjustment program recently agreed with the Fund, which is backed by actions that were taken prior to its approval by the IMF Board and by conditionality that firmly links continued international support to implementation of responsible and necessary fiscal measures. Success is never assured, but determined efforts to contain economic instability merit international support.
Second, Professor Barro argues that the IMF-U.S. support package for Mexico in 1995 was a reward for corrupt and risky bank lending and poor macroeconomic policies and that it did not prevent a sharp economic contraction and high inflation--both much worse than in Argentina, which followed sound policies. He also says it was judged by many observers to be a success only because the U.S. Treasury got repaid.
Mexico did experience a severe recession in 1995. But this does not demonstrate failure. No country can escape fully the consequences of policy failures. For Mexico in 1995, however, a default on sovereign debt was avoided. While this benefited holders of that debt, it also avoided a deeper and more prolonged recession in Mexico and greater damage to other Latin American economies and to Mexico's trading partners. The fact that Mexico rapidly repaid its loans from the U.S. Treasury is only one measure of success.
As for Argentina, it faced the spillover effects of the Mexican crisis and also suffered a painful recession in 1995. But with the efforts of its government and with support from the IMF and the international community, the accomplishments of Argentina's convertibility plan were preserved. The role of the Fund in this success is ignored by many of the IMF's critics.
Third, with respect to the situation in Russia, Barro argues that the Russian government will never formulate a sensible economic plan, but that the IMF will provide Russia with the funds to continue the pretense that it always is repaid. While the Fund has a strong record of collecting on loans, there are, unfortunately, a few cases of countries with prolonged arrears. The Fund does not claim it is always repaid on time. Moreover, regardless of what might have been the expectations of some of Russia's creditors, the fact is that Fund disbursements to Russia have been suspended, along with the collapse of Russia's stabilization efforts. Discussions with the Russian authorities continue. Hopefully, a new program to deal with Russia's difficult situation will be agreed upon that will merit renewed Fund financial support.