The International Monetary Fund
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The International Monetary Fund

Distinguishing Reality from Rhetoric

Graham Bird and Dane Rowlands

There is no shortage of opinion about the International Monetary Fund (IMF). Some see it as the agent of austerity, being manipulated by wealthy nations and forcing poorer countries to pursue economic policies that suppress growth and development. A sharply contrasting view regards it as bailing out such countries with large amounts of soft finance, allowing them to avoid necessary adjustment. The challenge is to evaluate the alternative arguments and to distinguish reality from rhetoric. In this book, the authors undertake a careful and detailed empirical analysis of the underlying issues, covering participation in IMF programs, their implementation and effects on economic growth, and on the willingness of international capital markets to lend.
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Chapter 8: IMF programs and private capital flows

Graham Bird and Dane Rowlands


A central issue in discussions about the world’s financial system is the nature of the relationship between the International Monetary Fund (IMF) and private international capital markets. On the one hand they may be viewed as substitutes, with the IMF becoming involved in countries that have little access to private capital, or where private capital outflows have created a short-term external financing vacuum. Those who subscribe to the idea of creditor moral hazard go further and claim that the prospect of future IMF lending in the event of a crisis encourages private lenders to underestimate risk and to over-lend, which in turn ultimately generates the crisis and IMF intervention. Viewed as complements, on the other hand, IMF lending is claimed to have a catalytic effect on private capital market lending. In this case, the IMF is presented as bailing in private capital through signaling, coordination, or coercion. Through catalysis the IMF can facilitate balance of payments adjustment with fewer of its own resources. The nature and size of the catalytic effect is therefore of considerable importance. If catalysis is overestimated it will lead to insufficient financing and excessive balance of payments adjustment.

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