Article Review

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Reinhart, C. M., & Trebesch, C. (2016). The International Monetary Fund: 70 Years of
Reinvention. The Journal of Economic Perspectives, 30(1), 3-27.
Summary
The paper reveals the reinvention of the International Monetary Fund along multiple
dimensions over time. The history of reinventing IMF contends with the institutional change
demand-driven theory as required by its clients as well as the different forms of crisis which have
underwent substantial change over time. Some of the activities performed on the basis of IMF
reinvention are not necessarily new. Prior to the emergence of the market economies which have
continually been dominated by the IMF programs, its earliest clients were the advanced
economies in the 1970s. The IMF reinvention has been in different dimensions and occasions
since its creation an estimated 70yeras ago. In regard to the Bretton Woods system, a mutually
pegged exchange rates network was overseen by the IMF. Getting the parity right was the key
challenge of the system , otherwise, an overvalued currency economy would result to
vulnerability thus weakening the payments balance together with the reserve losses
internationally. The IMF has redefined it role since its short lived lull in 2008, making large
loans to the European wealthy economies, with the largest of the extremely large loans to Greece
where challenges on debt sustainability have manifested. Sensibly, this most recent change has
brought the full cycle of IMF given that the advanced economies were its largest and earliest
clients before the domination of its activity by the emerging market economies in the 1980s.
A number of IMF members recognize it to be an extremely successful institution. Its
membership has steadily increased from 28 initial memberships in 1945 to 188 in 2015 with
notable growth in both advanced economies and emerging market economies. The numerous
intense program activities in both the developed and developing economies provides an

explanation of IMF being an institution making use of funds from higher-income countries with
the aim of granting the lower-income countries with crisis loans. The shifting Clientele led to
the popular and academic debate of the role of IMF to cope with crises which were later
relegated towards discussing the emerging markets episodes. Towards the end of World War II
and decades after its end, most of the IMF programs provided support to the balance-ofpayments to the European comparatively wealthy economies. In the 1990s to 2000s, the number
of IMF lending programs increased resulting to a new wave of IMF in the less developed
countries. This marked a shifting in the countries borrowing from the IMF which was a great
influence in the programs scope and modalities. The introduction of the ESAF (Enhanced
Structural Adjustment Facility) by IMF had the main aim of focusing on granting the low-income
countries an opportunity to make low-interest loans. This was the beginning of addressing the
debt crisis that had occurred in the 1980s. It involved the 16 countries external debt restructuring
under the Brady Plan which led to an agreement by the creditors in writing down the debts owed
in exchange for the issuance of new debt with the likelihood of repayment. The participation by
IMF involved setting aside a portion of its own loan as the high inflation nations undertook antiinflation programs and macroeconomic stabilization programs.
Before the 2008 global financial crisis, a number of countries in the European
peripherals, as well as the United States, the United Kingdom and Iceland underwent a boom in
their capital inflows. This global financial crisis sapped the global economic activity leading to
erosion of confidence in the sovereign government finances and a sudden stop in accessing the
international capital markets that the advanced economies had taken for granted in the post
World War II era. This caused an enormous increase in the lending volumes as directed by the
higher-income economies. While the currency challenges were among the IMF involvements

dominant trigger, sovereign defaults and banking crises emerged to be the main focus during this
period. The IMF had a shifting to cope with the problems related to the chronic debt
sustainability from providing brief support in the balance-of-payments in the fixed exchange
rates era. Consequently, IMF engaged in serial lending programs in both advanced economies
and emerging markets economies. Further, the institutions undergo the lending risk into
insolvency widely spread among the low income countries experiencing the official sectors
chronic arrears and most evident in Iceland since 2010. The discount-window-like programs
have failed in most of the instances. The suggested and proposed the Flexible Credit Line has
been applied by three countries including Poland, Mexico and Colombia while the Liquidity and
Precautionary Line has been applied in two cases. The limited effect of the IMF programs has
been contributed to by the stigmatization issues that have remained up to date. The danger of
inability to embrace the performance of a lender-of-last-resort function due to the IMFs stay
from its initial mission acts as the fuelling force behind the recommendation by the IMF as the
only lender of last resort especially to the countries that meet the banking s certain prerequisite
standards.
Evaluation and Appraisal
The article documents the IMF programs evolving clientele by providing a sense of the
shifting of the activities across the different parts of the world and between the emerging and
advanced markets economies. The authors connect the activities shifting to the financial
liberalizations ascendancy together with the cross-border finances subsequent increase in the
global factors including the global saving patterns, primary commodity prices and international
interest rates. This was necessary given that in relation to the reconstruction finance and
humanitarian aid, the IMF grants and loans provided both the advanced and emerging markets

economies with the much needed support in balance of payments. The shifting Clientele
documentation was also important given the questioned economies faced the double problems of
having the industrial goods and imported customers significant needs and the hard currencys
limited reserves for making such purchases. The shifting of the activities to liberalize the
financial status of the IMF members is up to date influenced by the subsequent global factors.
Some of these countries including the United Kingdom and the United States have inherited a
high wartime level. Other members of the IMF including Japan and Germany which
experienced a roaring inflation wiped out the domestic stock debts significant portions.
Therefore, it was necessary for the authors to documents the shifting Clientele just as they did.
The article considers the manner in which the set of situations responded to by IMF has
changed from time to time focusing on the on currency problems and the system bankings
engulfing challenges as well as the sovereign debt crises comprising of the corporate banking
sectors large-scale bailouts and protracted output slumps. The authors limited their opinions to
currency problems which is not commendable when suggesting ways of solving the sovereign
debt crises. Globally, most of the currency realignments have turned out to be temporary
disturbances which can be settled not only by the IMF programs but also by the corporate sectors
in the banking industry in various advanced and emerging economies. Further, most of the
episodes on currency devaluation are not associated with and not part of the IMF adjustment
program. Therefore, comparing the effects of the banking crises and currency crises was not an
up to date solution. Currency devaluation problems can be associated with either a slowdown in
an economy growth or output decline but cannot be compared to the small and short-lived effects
they have to IMF. Further, the systemic banking crises-related recessions tend to be more
protracted and severe as compared to the currency devaluation crises.

The authors focus on the fundamental changes in the borrowing patterns of IMF instead
of delving into the concerns of the way in which various crises were settled. With limited or no
access to private capital markets by the lower-income countries during the long stretches of time,
the IMF together with other official financing sources emerged to be permanent substitutes to
accessing private capital markets causing the IMF to revise their borrowing patterns to suit the
low-income countries. During this time, there were many concerns on solving the existing
financial crises in both the advanced and emerging markets economies. The authors could as well
elaborate on the mechanisms and IMF programs put in place to settle the ongoing crises in
different IMF member countries. The article has provided more information on the changes
implemented on the IMF borrowing patterns to suit the access to private capital markets by the
emerging markets economies. Although this is still important in explaining the reinvention of
IMF, it is also essential to discuss the measures put in place to settle the debt and banking system
crises to encourage more members into joining IMF leading to its expansion and growth not only
to the advanced economies but also to the less developed markets.
The article criticizes the role of IMF in the international financial architecture as well as
the challenges arising from serial lending by IMF and lending to IMF members with excessive
debt burdens. The author suggests that the lending patterns changing nature from time to time
has caused the conflicting objectives experienced in IMF. IMF has improved its involvement in
lending into sovereign economies as way to deal with the potentially unsustainable debt cases
and providing longer-term and larger loan packages. This critique by the author is healthy and
advises the IMF against frequent change in its lending patterns in order to avoid its objectives
conflict. For instance, the pattern observed is that IMF programs share with countries in the
restructuring process with the private capital creditors climbed during the 2008 global financial

crisis from 20 percent to 70 percent which was a total conflict to its objectives. Therefore,
international financial architecture of IMF needs to maintain consistency in its lending patterns
irrespective of the favorable or unfavorable external environment as suggested in the article.