58. Memorandum From the Chairman of the Council of Economic Advisers (Schultze) to President Carter 1
- The International Monetary Fund and Conditionality
I concur with Mike Blumenthal’s recommendation that we be very selective in influencing negotiations between the IMF and individual countries.2 The IMF has a very sensitive task in negotiating conditions for extensions of Fund credit and we should be careful not to undermine it. Most of the countries involved must take action to insure their continued access to private credit markets. The effective use of the limited resources of the Fund and the assurance of appropriate behavior on the part of countries in deficit requires the Fund at times to press for commitment to difficult economic policies.
I do have some problems with the nature of the conditionality which the IMF tends to impose. CEA is developing a paper on this which I intend to discuss with Mike. My concerns can be briefly summarized.
We expect that the large surpluses of the oil producing countries will continue for the foreseeable future. As a result, there will necessarily be deficits in other countries. The Fund’s policies have not fully adjusted to these conditions. Pressure exerted by the Fund on deficit countries to eliminate their current account deficits has had two important consequences:
1. The Fund has often stressed domestic policies to restrict demand as a means of adjustment while there have not been symmetrical pressures to expand on countries in surplus. As a result, there has been a contractionary bias in the policies of all countries taken together. This bias has hindered recovery from the 1974–75 recession. It is important that countries in trouble adopt structural policies to correct deep-seated ills. It is particularly important for many of them to increase domestic [Page 205]investment. But restricting demand is not, in all cases, the appropriate medicine.
2. Some countries are running unsustainable deficits, which must be reduced. But a widespread elimination of current account deficits at the urging of the Fund has forced larger deficits on other countries, some of whom have then been forced to turn to the Fund for assistance. Indeed, one cause of the growth of the U.S. deficit this year has been the success that other countries have had in reducing their deficits.