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THE GLOBAL CAPITAL MARKET: The IMF as an Emergency Lender

The U.S. government drew the IMF into the 1994 Mexican rescue. The organization then took the lead role in helping Argentina stave off the subsequent “tequila” crisis — an Argentinean headache blamed by many on Mexico‚Äôs election-year binge. By 1997, the Fund was orchestrating international rescue efforts for Thailand, Indonesia, and Korea, putting up tens of billions of dollars itself and imposing stiff conditions on the borrowers.

In reality, the IMF has been seeking a new permanent role ever since the demise of the Bretton Woods system it was designed to oversee. It has eagerly embraced the role of international lender of last resort, and has requested extra resources for that purpose. (At the IMF’s 1997 annual meeting in Hong Kong, shareholder nations agreed to increase its $200 billion capital by 45 percent.) The IMF is also seeking a proposed amendment to its Articles of Agreement, which would codify the Fund’s role in promoting open capital markets, as well as member countries’ obligation to work, gradually if need be, toward that same goal (Fischer, 1997). Article VIII of the original IMF agreement pushed countries to establish currency convertibility as necessary to facilitate trade, and the Fund stood ready with resources should this obligation lead to pressures on their fixed exchange rates. The proposed article amendments in effect would oblige the Fund to stand ready with backstop finance should private capital flows prove troublesome. After all, the IMF can hardly let countries that have followed its advice twist slowly in the wind if things go awry.

The Fund clearly is right, it seems to me, to advocate an orderly process of progressive integration into world capital markets. Convertibility for current-account transactions seemed risky as well in the 1940s, but it proved an unprecedented engine for global growth. International finance likewise can be an engine of growth, as it has been in the past. For this to occur, however, adequate prudential safeguards must be in place first; capital markets must be competitive and free of government-sponsored favoritism; and investors and capital recipients alike must be motivated to avoid excessive risks and make use of new avenues for diversification.14 These are tall, but not hopeless, orders. The Fund’s official espousal of financial openness represents a break with the attitudes of its founders, but one that seems entirely realistic after a half-century of financial-market recovery.