Today IMF has a really bad reputation, especially within the developing world. How deserved is this reputation?

There are three basic reasons why the IMF has a poor reputation in the developing world.

The first is that, by nature, they are creditors, and debtors do not tend to love creditors, even if they make use of them. Specifically, the IMF are the international lender of last resort, and countries therefore do not borrow from the IMF unless they are already in trouble. That makes them a very natural "bad guy," especially in domestic politics. There is also the complicated nature of sovereignty: Among most debtors and creditors, there is at least the clarity that the contract was freely entered during the "we give you money" phase, and therefore even if the repayment is painful, those were the terms of the contract. But for sovereigns, the people paying today's debt may not be the same as those who borrowed in the first place. Frequently, they may even overtly despise the previous regime, and be therefore quite unhappy about having to repay their loans.

The second is that the IMF has a history of imposing conditions on countries in exchange for bailouts in the event of impending sovereign debt crisis. These conditions have an ideological framework reflecting the thinking of the IMF itself, what John Williamson the "Washington Consensus" of the 1980s. This "consensus" reflected the views you might have found generally floating around among development economics community (World Bank, IMF, major American think tanks) diagnosing the problems of developing countries, and asking how they might fix those problems. Latin America was very much model case for these countries, and the Washington Consensus reflects the policy and thought gleaned from the experiences of the region's debt crises in the 1980s. It is worth noting that Williamson did not intend this to be an actionable policy package, or a recommendation, or even a complete list of policies advocated. It was an attempt to describe, in broad strokes, what had been recommended in the decade prior, and more or less everyone in these organizations agreed with at least in principle, though they might disagree about implementation. It is also worth noting that these solutions emerge out of the Latin American experience and an assessment of policies developed in the region, and were not simply imposed from above by the United States.

The diagnosis of Latin America's maladies focused on several key problems. Almost every aspect of the macroeconomic situation was unstable, and needed to be stabilised. Deficits were chronic, and there was no agreement about how to raise taxes or cut spending. Taxation was inefficient, and fell on the "wrong" people, creating inequality. Spending was lavish on things which were not efficient (wage subsidies, price fixing schemes, state owned enterprises) but meagre on things which had long-run benefits (education, health, infrastructure). Monetary policy was largely subservient to fiscal needs, acting as the government's bankers rather than acting independently to stabilise prices/the money supply/interest rates (depending on your view of what monetary policy should do). Foreign exchange was tightly regulated, and controls on the international movement of capital generally severe. Tariffs were high and frequently arbitrarily imposed. State-owned enterprises were money-losing white elephants, kept afloat to keep employment up. And so on.

Williamson's famous 10 points were ten broad policy solutions for those problems discussed here. As broad guiding principles, they are fairly uncontroversial. But in practice, they amounted to a general free market liberalisation package, diminishing both the size and role of the state in most respects, and subjecting it to fiscal and monetary discipline. They also advocated privatisation of SOEs, lowering of tariffs, and opening up the capital account to foreign investment (and, as a consequence, capital flight). Implementing these reforms almost always amounted to some kind of austerity, which in many cases was quite severe. This caused substantial political disruption, and of course fell hardest on those dependent on the government's role in the previous system: workers in SOEs, workers and owners in businesses that were protected by tariffs, consumers who needed state subsidised prices to afford their standard of living, and so on. Unemployment went up, consumption went down. Even on the assumption that both the diagnosis and medicine were correct, this was a painful pill to swallow.

The third point, and perhaps the most damning, is that the IMF was not generally very good at their job. There is a famous cycle, where the IMF botches its reaction to a crisis, then rigorously critiques its own actions, promising to do better next time. They then ignore their own advice, and botch the next crisis as well, bringing us back full circle. The basic reason for this is the design of the IMF is a mess, in terms of its incentives. It has three mandates: one, to be a creditor's organisation and a lender, and for this it must prioritise repayment of debts and maintain its credibility as a tough negotiator. Two, they are responsible for ensuring the stability of the global financial system and preventing a 1930s-like crisis. And three, they are a developmental organisation devoted to fostering economic growth, and providing advice and support in that direction. Alas, these things are often in conflict: what countries need to prevent crisis and return to growth may be a short-run injection of funds, but what is necessary to maintain the IMF's reputation as a negotiator is to insist on visible commitment to reforms before new money is available.

The result of all this tends to be that IMF-driven reforms are rushed, partial, and mis-sequenced. The parts that can be done at the stroke of a pen, usually are: tariffs go down, industries are privatised, the capital account is opened, and the currency is floated. The parts that require political wrangling go slower: balancing budgets and creating credible independent monetary authority sounds good, but it does require raising taxes and cutting spending, neither of which is generally popular. Redirecting government spending towards less wasteful areas sounds good, until it actually has to be done, at which point the question of who gets paid and how much becomes an acute political dispute. And the parts that require profound changes (redesigning fundamental legal institutions, reducing corruption, securing property rights) are difficult to accomplish at all, never mind in the short run.

And so, the sequencing problems emerge. Once tariffs are down, domestic firms cannot protect themselves from foreign competition, but cheap goods from abroad increase effective consumption. Once the capital account is opened, foreign investment can commence in earnest, leading to flows of "hot money" into the country, as investors seek opportunities for returns in the newly liberalised environment. Once firms are privatised, they can be purchased by investors, including foreign investors. Insofar as that jumpstarts economic growth, this is all as planned.

The difficulties tend to emerge when the other elements of reform lag behind. What happens if the budget is not, in fact, balanced, and sovereign debt continues to increase? What happens if corruption is not, in fact, eliminated, and the processes of liberalisation and privatisation create scope for crony capitalism? What happens if the monetary authority is not, in fact, independent, and yields to government pressure to print money when the deficit starts to mount? And, perhaps worst of all: What happens if an international crisis causes credit to dry up, triggering capital flight? The answer tends to be that these economies are fully exposed to the vagaries of international capital markets, but do not yet have the internal stability to weather the storm. Investors, skittish as always, pull their money out of developing countries at the least hint of trouble, causing massive capital flight. This in turn puts pressure on the currency, leading to inflation and devaluation. The usual solution, to impose capital controls to stem the panic, is forbidden by the conditions of the IMF loans.

The IMF had, by its own hand, recreated the conditions of the 1930s that it was ostensibly created to prevent. Developing countries were exposed to international crises and flows of hot money, had large hard currency debts, and were unable to pursue expansionary policies in the wake of downturns. The East Asian crisis of 1997, the Russian crisis of 1998 and the Argentine debt crisis of 1998-onwards showed that the "old style" of emerging market financial crisis was back, and the IMF was ill equipped to handle it.

On the other hand, what is the alternative? The 1930s showed us that a world with no international coordination and no bailouts could be a tremendous disaster. The Bretton Woods period, when the IMF was toothless, was largely crisis-free, but also only really possible in a basically unipolar world where the US maintained the stability of the system by itself, and that world had ended in the late 1960s. What else might have arisen had the IMF not been the global lender of last resort is hard to say. But what is clear is that they would face the same dilemma: How do ensure stability and growth, while also being a lender of last resort?