Conditionality almost killed the IMF. The disastrous consequences of its conditional approach to the Asian financial crisis (the first lending phase, at least) not only justified many of the activist critiques that followed the Fund, they also resigned a generation of policymakers to fortify their countries from ever having to go cap in hand to the Fund again. The massive reserve accumulation of the past decade is a direct result of this apprehension. As recently as last fall, serious voices were questioning the relevance of the Fund in the 21st century, and many saw it heading the way of dodo.
Fast-forward 12 months, and the Fund is once again acting to stabilize emerging markets around the world. Iceland, Hungary, Belarus, Pakistan. All have lined up to meet IMF officials, with Iceland and Hungary agreeing to emergency packages, and Ukraine and Pakistan close to the same. Remarkably, Belarus has requested an assistance package just to be safe, and indicated a desire to liberalize (no arm twisting here). Belarus is a typical example of emerging market policymakers using IMF conditionality as a credible commitment mechanism to entrench policy reform (and its rapprochement with the West). There are even questions whether the Fund will have the resources to meet the certain increase in demand for its services over the coming months.
The IMF's ressurection is not without controversy (even that great bastion of free market orthodoxy, the Wall Street Journal, has expressed concern over the Fund's approach to Pakistan); specifically, whether the Fund will play the role of international credit union or policy reformer. The early indications are promising: the Fund has announced the creation of an emergency fund (max $100bn) to provide short-term financing assistance to emerging economies experiencing balance of payments crises. The emergency fund will be made available to "pre-approved" countries without any conditionality attached (in reality, a handful, with Argentina notably "pre-declined").
This is a welcome development, and points to a Fund that has learned from its past deficiencies. The Fund has no business dictating the policy reforms of countries experiencing temporary balance of payments crises. Assisting these well-run economies overcome their short-term BOP problems could help stem the kind of contagion that caused such havoc in the late 1990's. The Fund's approach to countries like Pakistan is more conditional (as it should be), and it remains to be seen what these structural reforms will look like. But in acting to stem the current financial crisis through rapid, unconditional assistance to otherwise healthy economies, the Fund has taken a major step forward. It should be applauded.