56. Memorandum From Secretary of the Treasury Blumenthal to President Carter1


  • The International Monetary Fund (IMF) and “Conditionality”

We have been getting requests to use our influence to help particular countries in their negotiations for financing from the IMF, and I wanted to offer my suggestions for our approach.

You know from recent talks with Latin American heads of state that some are complaining that the IMF is too harsh in its “conditionality”—i.e., the economic stablization and payments adjustment measures it requires of countries as a condition for its financing. Peru is the most recent case.2 Usually they ask us to intercede with IMF management for softer treatment in their particular case.

This is not a new issue, nor is it confined to developing countries. The IMF has for years served as a kind of whipping boy. Countries facing severe economic difficulties and the need for strong corrective measures often need an external source to blame. The IMF is an ideal candidate and is accustomed to being in that position. If we didn’t have the IMF, we would have to invent another institution to perform this function.

In many countries there is a division between those who support needed actions and those who want to ignore the economic facts of life and try to pursue programs that are unsustainable. The IMF would not be doing a borrowing country any favor by coming down on the wrong side. Quite the contrary. Reasonable economic and financial stability provides the essential basis for the sustained real growth that developing countries need. Unfortunately, there is no real substitute for policies to restore economic stability—other than grants or long-term aid, which is not the IMF’s function. The IMF can provide only balance of payments financing, and in amounts that are usually quite limited relative to the size of the problem. The real value of an IMF program is the policy changes it brings, not the money.

The IMF is not, in my judgment, politically unrealistic in its policy prescriptions. It does not ignore political consequences. The IMF looks care [Page 202] fully at all aspects of a country’s situation in a realistic and balanced way, and tailors the program to the country’s particular circumstances. The IMF’s record is a good one. It has helped a large number of countries to correct their economic problems, and it presses for measures that are consistent with our objectives of an open and liberal trade and payments system. The IMF’s contribution to the world economy is widely recognized—including in the Congress, which is much more supportive of the IMF than of the other institutions.

While the U.S. has an important voice in IMF matters, we cannot and should not try to control IMF operations. Any U.S. influence on particular country financing proposals must be used selectively and through quiet, informal discussions. Any changes we could make in a particular program would be marginal. We should not be disturbed by positions taken by the IMF at the outset of a negotiation, since there is a process of bargaining and compromise on both sides. If we overstep in trying to exercise influence, we will weaken and undermine the fundamental principles and useful work of this valuable institution.

W. Michael Blumenthal3
  1. Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 40, Hutcheson, Rick 9/77 [2]. Confidential. Carter wrote at the top of the page: “cc Mike—I agree. J.”
  2. In March 1977, Peru undertook negotiations with the International Monetary Fund for a credit to help stave off a potential default on its massive foreign debt. The conditions under which the IMF was prepared to offer assistance were very controversial in Peru.
  3. Blumenthal signed “Mike” above this typed signature.