The ILLR and the IMF

Created in an era of very limited international capital mobility where financial crises emerged slowly within the current account and were more easily contained, the Fund was not designed to function as a Bagehot- style crisis lender for the global economy. Yet, shortly after the collapse of the Bretton Woods monetary regime in the early 1970s, Henry Wallich pointed out that the IMF’s role in helping countries facing balance of payments difficulties "has some of the characteristics of a lender-of-1 ast resort operation.” He also presciently speculated that "over the course of time, this role of the IMF may expand.”[1] Twenty years later, it became normal for scholars to refer to the Fund as the world economy’s de facto ILLR. With the benefit of hindsight, James Boughton reviewed the IMF’s evolution into its role as a crisis manager and determined that the Fund’s role changed significantly in 1982.[2] It was at this time that the institution fully matured into its ILLR role by bailing out Mexico and other debt- ridden economies.[3]

Scholarly interest in the ILLR concept grew in the 1990s as an onslaught of currency crises struck developing economies from Latin America to Asia. Many such crises were accompanied by big international financial bailouts where, once again, the IMF appeared to take the lead. The increasingly important role of the IMF in international financial crisis management fueled an impressive research program that sought to explain variation in IMF lending activities. Scholars conducted studies identifying why some countries received larger loan packages than others or why the number of conditions imposed on one government varied from others.[4] Other scholars focused on whether or not crisis lending via the IMF was the appropriate ILLR mechanism for the global economy. Stanley Fischer penned a strong treatise in defense of the Fund’s ILLR capabilities, but he also suggested ways that its ability to manage crises could be improved.[5] The US government even jumped into the debate when it commissioned and later released the so-called Meltzer Report. This study suggested how the Fund could be molded into a more effective "quasi-lender of last resort to solvent emerging market economies.”[6]

At the same time, others presented critical analyses of the IMF’s ILLR capacity, questioning whether or not the Fund could even be considered for the role in the first place.[7] Anna Schwartz (2002) offered the most forceful critique of the IMF as ILLR. She identified three primary attributes that an actor must have in order to function as a "true” ILLR in line with Bagehot’s classical conception: (1) the ability to create money, (2) the ability to act quickly and respond to a crisis at a moment’s notice, and (3) the ability to act without the consent of any other relevant actor. Schwartz concludes that because the Fund does not meet any of these requirements it is ill equipped to effectively operate as an ILLR. Below,

I build on these critiques of the Fund’s ILLR credentials by more carefully considering the problems of unresponsiveness and resource insufficiency.

  • [1] Wallich 1977, p. 97.
  • [2] Boughton 2000.
  • [3] Sachs (1995) also identifies the Latin American debt crisis as the turning point in theIMF’s actions as the ILLR.
  • [4] See Broz and Hawes 2006; Copelovitch 2010; Dreher and Jensen 2007; Dreher, Strum,and Vreeland 2009; Dreher and Vaubel 2004; McDowell 2016; Moser and Sturm 2011;Nelson 2014; Oatley and Yackee 2004; Stone 2004, 2008, 2011; Thacker 1999; Vaubel1986; Vreeland 2003, 2007; Willett 2002.
  • [5] Fischer 1999. See also Bolton and Skeel 2005, Calomiris 2000, and Mishkin 2000.
  • [6] Meltzer 2000, p. 43. This was the final product of the International Financial InstitutionAdvisory Commission, which was commissioned by the US Congress in November 1998 toconsider the current effectiveness and future roles of the major international financial institutions (IFIs).
  • [7] Capie 1998; Goodhart 1999; Schwartz 2002.
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