Commentary: Don't Use the IMF to Push U.S. Foreign Policy

The fund needs to refocus on its core mission--solving and preventing global financial crises

By Pete Engardio

It's understandable that the Bush Administration wants to use every weapon at its disposal in its war on terror. But it should keep the International Monetary Fund out of it.

When the IMF originally planned its annual meeting for late September in Washington, the top item on the agenda might have been called "back to basics." Fund officials recognized that their institution had become vastly overextended. Founded in 1944 to resolve balance-of-payments crises that threaten the global financial system, the fund has instead evolved into a mega-bureaucracy that tries to micromanage everything from trade policies to social programs in dozens of developing nations. Thus, the IMF has become a lightning rod for both the right and the left. And it has gained a reputation for spending too much time pushing U.S. policy agendas.

Under Managing Director Horst Köhler, who took office in early 2000, the fund has begun a sweeping review of its policies to reduce the number of onerous strings attached to its loans. It also wants to focus more on its core mission to solve and prevent financial crises. "If the fund gets involved in too many areas, we spread ourselves too thin," says Masood Ahmed, the IMF official leading the policy review.

But when the IMF convenes its postponed meeting in Ottawa, Ont., on Nov. 17, that discussion will be a side issue. Instead, a more prominent topic will be how the IMF can help in the crusade against money laundering and the funding of terror organizations. The IMF is rightly resisting such a role because it has little to do with its mission. The IMF also is being mobilized to raise billions of dollars for Pakistan as a reward for General Pervez Musharraf's support of the U.S.-led war in Afghanistan. And diplomats say the U.S. wants to use the IMF to pressure Indonesia to make sure its banks aren't conduits for Muslim radicals.

If the fund is to regain credibility as a politically neutral source of financial and economic advice, it can't be seen as a Western foreign-policy tool. In the 1990s, the IMF damaged its credibility by appearing to adopt a double standard: IMF loan recipients viewed as strategic to the West, such as Russia, made a mockery of reform and seemed to get away with it. Yet the IMF rode herd on countries such as Indonesia, which found it politically impossible to fulfill the more than 100 conditions attached to its 1998 bailout. Many were at the behest of the U.S., which sought more open markets for its exports.

Even under the reformist Köhler, it has been tough to keep geopolitics from driving IMF priorities. The controversial $8 billion package arranged in August for Argentina came only after Latin leaders warned Bush that America's clout in the region would suffer if it let Buenos Aires down. And it's hard to believe increased IMF support for Turkey wasn't influenced by its NATO membership and willingness to let the U.S. use its air bases.

CANNY SHIFT. There's a good reason the U.S. drafts the IMF for its causes: The fund has a $79 billion war chest, while foreign-aid cuts in the 1990s mean Washington has less money to lavish on old and new allies. "The U.S. is unwilling to go to Congress to get funds to finance foreign policy," says Allen H. Meltzer, who led a 1999 congressional study calling for an IMF overhaul. "So we use multilateral institutions."

Mingling politics with loans is a risky business. Consider Pakistan. Before September 11, the IMF already was close to approving new loans for Islamabad. But that was because Pakistan had made progress on improving its corrupt tax collection and lowering inflation. Now, it's likely to get much more money. What happens if Pakistan reneges on reform while the U.S. is still at war? Would the IMF pull the plug? Not a chance. That sends the wrong message to other nations.

Clearly, Washington needs to be generous to needy nations that serve its interests. But its rewards should come through foreign aid. The IMF must focus on its own reforms, which will enhance its role as trusted guardian of the global financial system. That mission is as vital as ever.

Engardio writes on global economic issues from New York.

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