For decades, the IMF has been a lender of last resort for countries in financial trouble. The IMF’s de facto seniority in repayment, its gold and reserve assets and its ability to borrow at short notice allow the Fund to provide rapid emergency financing when a country needs it. But critics like Allan Meltzer of Carnegie Mellon University argue that the IMF’s bailout system inevitably induces moral hazard, a perverse incentive for borrowing governments to put off tough economic reforms. Their solution is for the IMF to scale back its activities, if not shut down completely.
IMF bailouts are normally conditioned on debtor countries agreeing to a set of economic reforms intended to revive and maintain the country’s long-term growth rate. These include devaluing currencies, reducing tariffs, encouraging foreign investment and privatizing state-owned enterprises among others. While these policy reforms sound well-meaning, they are often not embraced by the debtor governments as they are forced to choose between implementing the policy reforms or having the IMF provide them with emergency financing.
Researchers have studied the effectiveness of IMF loan programs, finding mixed results. A number of studies have reported positive economic effects of the programs while others have reported negative or no impacts. These differences may stem from the different research methodologies used in the studies.
A popular approach involves using control countries as benchmarks against which to compare the impact of an IMF program on bailed-out countries. However, this method involves the difficult task of identifying the appropriate benchmark. In addition, it is often difficult to find exogenous control countries with similar characteristics and economies to the bailed-out countries. As a result, this method has many limitations and is susceptible to confounding and selection bias.