THE LAST STAND

November 24, 1998
		The IMF put together a $41.5 billion deal to help Brazil defend its economy against the spreading global economic crisis. Asia's and Russia's economies have already been crippled. Will the IMF plan work this time? Return to this forum's introduction.

Will the IMF plan cause a recession in Brazil? Can the IMF restrict the way bailout funds are distributed? Is Brazil's economic problems due to graft? How many years will it take for Brazil to recover? Does this plan deal with the "moral hazard" associated with international bailouts? Viewer Comments     November 13, 1998: A detailed look at the IMF/Brazil deal. October 27, 1998: A look at Russia's collapsing economy. October 20, 1998: The global economic crisis is hurting U.S. companies. October 15, 1998: The Federal Reserve cuts interest rates to fend of an economic downturn. October 9, 1998: A discussion of the global economic crisis. Browse the NewsHour's coverage of economic issues.

Bill Murphy of Harrisburg, PA, asks: When IMF money goes into an economy, it seems to be passed out to the wealthy who then invest it back into the source countries. How can the receiving countries be required to restrict how they distribute the funds? Mary Bush, former IMF executive board member, responds: It is probably an overstatement that IMF funds are "passed out to the wealthy". However, clearly there are circumstances where corruption is so rampant and there is so much leakage in the system that some portion of IMF loans did not support the intended economic adjustment measures. Of course when this happens, it is not a good thing. IMF funding historically has been used to help governments meet their domestic and international obligations and to maintain an ample level of reserves. The IMF tries to avoid "dictating" to countries the precise uses for funds; this is important for a nation's sovereignty. However in the economic programs that it negotiates with borrowers, the use of funding is normally influenced in some indirect ways such as agreements on levels of reserves, cuts in government spending and so on. Steven Radelet of the Harvard Institute for International Development responds: It seems as if the wealthy get all the money, but that is not quite the case. IMF money is given as loans to the Central Bank of a country, which then can either keep some of the foreign currency as reserves, or sell the it to commercial banks on the open market. As with any commodity, the more that the Central Bank makes available, the cheaper it is. In this case, a cheaper dollar means a stronger local currency, or a more appreciated exchange rate. In principle, the dollars are available to anyone in the market, not just wealthy investors, and some of the foreign exchange is undoubtedly used for essential imports and other needs. (However, governments sometimes make sure that certain preferred customers are at the front of the queue!) Some of the dollars are purchased by domestic debtors, who may be wealthy investors or owners of firms, that use the funds to repay dollar debts or shift their assets from domestic currency (onshore) to foreign currency (offshore). In this way, some of the new loans from the IMF to the government are simply used by domestic firms to repay foreign creditors. A far better approach would be to have the foreign creditors share some of the burden of adjustment, so that not all of the new loans simply repay the old loans (more on this in question 5 below). Money from the World Bank and the Asian Development Bank (ADB) goes directly to government treasuries, rather than the central banks. The treasuries then sell the foreign currency to the central bank, a process which generates domestic currency for the government to use to finance budgetary expenditures. The World Bank and the ADB have some leverage in how these funds are spent in the budget, and can push for spending on social safety nets, food distribution programs, and the like. In general, however, money is fungible, so the international community cannot precisely dictate how the money is spent. Nor is it necessarily a good idea for them to do so. The IMF and the World Bank already have a very strong say in the operations of many countries, and often their policy advice is off-base, as we have seen in recent months in Asia. We do not want a situation in which a cadre of bureaucrats in Washington are setting economic policy for the world and telling every government what to do with their money. Rather, we need to work towards a system in which countries that are members in good standing of the international community receive appropriate assistance in times of need, and in which both domestic firms and international financiers share in the burden when loans go sour.

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