Why the IMF keeps lending
to countries it cannot fix
Argentina has had more IMF programs than almost any country in history. The count depends on how one tallies arrangements, waivers, and extensions, but the number exceeds twenty. The pattern is consistent: a crisis, a program, initial stabilization, eventual collapse, and a return to the Fund. The standard explanations cycle through familiar territory — too much austerity, too little political commitment, bad timing, weak institutions. Each explanation contains some truth. None of them fully accounts for why the pattern repeats so reliably across different governments, different program designs, and different external conditions.
A more systematic answer requires looking not at the content of the programs but at the incentives of the institutions involved. When you do, the failure pattern stops looking like a streak of bad luck and starts looking like exactly what the incentives predict.
The IMF is an international bureaucracy whose primary output is lending programs. If all IMF programs were successful, there would eventually be little to no need for the IMF. An outcome that goes against a bureaucracy’s self-survival instinct. This creates a bias toward program approval even when the probability of success is low. Refusing to lend — declaring a country unready for a program — is institutionally costly: it generates political pressure from large shareholders, accusations of abandoning vulnerable populations, and risks to the Fund’s own financial position if the country deteriorates without a program. Approving a program that later fails distributes those costs across time and shifts the visible blame to the borrowing government. The asymmetry is built into the structure, not into anyone’s bad intentions.
Borrowing governments face the mirror-image problem. They approach the IMF not because they want structural reform but because they need financing. The short-term benefit — bridge financing that averts an immediate crisis — is highly concentrated and politically valuable. The costs of conditionality — fiscal adjustment, subsidy removal, exchange rate liberalization — are immediate, politically painful, and fall on organized constituencies. This is Mancur Olson’s concentrated-benefits logic applied to sovereign borrowing: the political incentives systematically favor access to financing while minimizing reform.
The game that follows is predictable. Governments signal commitment to access the program, implement the most visible conditions while slowing structural reforms that require sustained political will, and either exit early when market conditions improve or slide toward non-compliance. The IMF, facing the institutional cost of declaring a program failed, grants waivers and restructures rather than cutting disbursements. Both sides have more to gain from keeping the program alive than from stopping it — until the underlying imbalances reassert themselves and the cycle begins again. Previous posts on Argentina’s IMF tango and the US Treasury bailout document specific episodes of this dynamic.
Argentina’s case adds a further dimension that is rarely acknowledged openly. By the time of the 2018 program — the largest in IMF history — Argentina’s outstanding debt to the Fund had reached a scale where a default would have constituted a material hit to the IMF’s own finances. This created a specific financial trap on top of the general institutional bias: the IMF had become too exposed to Argentina to credibly threaten non-renewal or program termination. The leverage that conditionality is supposed to provide — the implicit threat of cutting off financing — was substantially undermined by the Fund’s own balance sheet exposure. A lender that cannot afford to stop lending has already lost its most important disciplinary tool. The result was a program that both sides knew was fragile, sustained by a mutual interest in avoiding the immediate consequences of its failure.
A defense that doesn’t hold
When the question of dollarization arises — as it has repeatedly in Argentina — the IMF (mirroring most economists who oppose the idea) invokes two standard objections: a dollarized country cannot adjust its exchange rate in response to external shocks, and it loses its central bank as a lender of last resort (LOLR). Both arguments are theoretically sound. Both are also deeply conditional — and in the cases where they matter most, the conditions are not met.
The shock absorption argument assumes a central bank that is credibly independent and technically capable of executing countercyclical policy. Argentina’s central bank has been one of the most politically subordinated in the world, cycling through exchange rate regimes — fixed, floating, dual markets, capital controls — each of which failed for the same underlying reason: fiscal dominance meant the central bank was transmitting political instability into monetary instability rather than buffering the economy against external shocks. The textbook argument defends a theoretical institution that does not exist in practice.
The LOLR argument fails on different grounds — and more directly. A LOLR works by supplying the currency that the banking system and the public demand during a confidence crisis. In Argentina, as in Ecuador before dollarization, what the public demands during a crisis is not the domestic currency. It is dollars. When deposit holders run to convert pesos or sucres into dollars, the central bank cannot satisfy that demand because it cannot print dollars. Printing more domestic currency in that environment accelerates the panic rather than arresting it.
There is also a simpler point. A country that has gone to the IMF more than twenty times does not have a functioning domestic LOLS. It has the IMF as its LOLR — the very institution whose repeated interventions have failed to produce durable stability. The argument against dollarization on LOLR grounds proves too much: it defends an institution that is not delivering the function being cited in its defense. Dollarization does not mean giving up a LOLR. You cannot give up what you do not have.
The Ecuador exception
In January 2000, Ecuador dollarized. The country was in the middle of a severe financial crisis — the sucre had collapsed, the banking system was effectively insolvent, and inflation was approaching 100 percent annually. The IMF was skeptical. The Fund’s preference was for a conventional stabilization program that preserved exchange rate flexibility. Ecuador moved ahead anyway, largely without IMF endorsement, and eliminated the central bank’s money-printing capacity unilaterally.
The reform worked. Inflation collapsed rapidly. The banking system stabilized. The economy recovered. There is something worth pausing on here: Ecuador found its most durable monetary reform precisely by stepping outside the IMF framework rather than working within it. The irony is sharp without needing to be overstated — a country that achieved what decades of conventional programs could not, by going around the institution whose job it was to help.
The mechanism explains why it worked. Dollarization did not just change the exchange rate regime — it removed the option of monetary financing of the fiscal deficit almost entirely. That removal eliminated erratic exchange rate policies, depreciation premia on interest rates, and inflation expectations. Ecuador’s real exchange rate has been less volatile under dollarization than Argentina’s has been under its own central bank — the opposite of what the standard argument predicts.
If Ecuador’s experience demonstrated the viability of dollarization for a chronically unstable monetary regime, why has the IMF not incorporated it more openly into its toolkit? The public choice answer is uncomfortable but traceable. A dollarized country no longer needs the IMF in the same way — it cannot have a balance of payments crisis in the traditional sense and does not need the Fund’s monetary policy guidance. Dollarization, in countries where the Fund is most active, reduces demand for the Fund’s core services. Organizations do not enthusiastically promote solutions that make themselves less necessary.
The diagnosis is easier than the cure
Identifying the incentive structure does not automatically generate a solution. Reforming the IMF would require changing the interests of the large shareholders who control it — a political problem as much as an economic one. And dollarization, as Ecuador’s subsequent fiscal difficulties demonstrate, resolves the monetary problem without resolving the underlying political economy of public spending. Countries can still accumulate unsustainable debt in dollars; they just cannot inflate their way out of it.
But the first step toward better outcomes is recognizing that the failure pattern in Latin America is not accidental. It is structural. The programs keep failing for the same reason: the institution that designs them has incentives to approve them, the governments that sign them have incentives to simulate compliance, and the monetary arrangements the Fund defends rest on arguments that do not apply to the institutions that actually exist. Until those incentives change, the tango continues.
This material was originally published here: https://economicorder.substack.com/p/why-the-imf-keeps-lending-to-countries
Our Partners
