Monday, June 27, 2011

Shut Down the Wasteful IMF

American Spectator
Doug Bandou

The International Monetary Fund often is in the news, but rarely in the U.S. That changed when Managing Director Dominique Strauss-Kahn ended up at New York's Rikers prison charged with rape. Strauss-Kahn's travail well symbolizes the IMF: an institution of entitlement and privilege focused on mulcting the rest of us.

The leading contender to replace Strauss-Kahn, who resigned while proclaiming his innocence, is French Finance Minister Christine Lagarde. The board plans to make its selection by June 30, but instead should shutter the organization.

The Fund was one of the "Bretton Woods" institutions created in 1945. Its purpose was to stabilize exchange rates. When the system of fixed exchange rates collapsed in 1971, the IMF effortlessly found a new job, promoting development. The Fund created a generous dole for Third World governments.
After Communism fell, such east European nations as Romania, Ukraine, and Hungary became major borrowers. The IMF now is a leading lender to Greece, Ireland, and Portugal. In fact, before his arrest Strauss-Kahn was heading back to Europe for talks on expanding the Greek bailout arranged last year.

The IMF is funded by its member governments, which also back its large-scale borrowing. The organization has steadily increased lending over time. In 1989 the IMF pressed to double its capital which, explained Managing Director Michel Camdessus, would be "the cheapest way for taxpayers in the richer countries to come to the aid of the poor." In 2009 the heavily indebted industrial states agreed to an immediate $100 billion increase in Fund resources in response to the financial crisis and approved the objective of trebling the Fund's $250 billion in resources. (The organization has a multitude of "credit facilities," credit "arrangements," and "credit lines.")

The IMF famously imposes policy changes as part of its lending programs. Unfortunately, there is no evidence that the organization has effectively promoted economic growth. Even its advocates can point to few successes.

Two decades ago Richard Feinberg and Catherine Gwin concluded that "the record of IMF-assisted adjustment efforts in Sub-Saharan Africa is discouraging." Back before he thought foreign aid could end poverty, economist Jeffrey Sachs warned that most agreements "are now honored in the breach."
The Fund spent decades subsidizing the world's economic basket cases, including Egypt, pre-reform India, Sudan, pre-reform Turkey, communist Yugoslavia, Bangladesh, Guinea-Bissau, Pakistan, Zaire (now Congo), and Zambia. None advanced because of Fund programs. In contrast, expanding private investment and trade offered development opportunities for countries that adopted sensible economic policies.

Now the IMF has become the bailout king. There always were better alternatives to throwing cash at countries suffering economic and financial crashes: bankruptcies, debt reschedulings, and forced work-outs. The common panic fomented by the Fund was rarely justified. Former Treasury Secretary and Secretary of State George Shultz opposed an earlier proposal to increase IMF resources: "typically crises are overrated in prospect and used to justify things that have big, big downsides, and in which the downsides are not quite seen at the time the intervention is being proposed."

However, the organization gloried in finding another purpose. Mexico became the Fund's biggest borrower. Then there was Asia.

But the financial disasters stopped. Noted the Economist magazine in 2006: "What is a firefighter to do when there aren't any fires? The IMF spent 1994-2002 dashing from one financial conflagration to the next. But the sirens have been silent for some time. As a result, the fund's budget is shrinking and the moral of its staff is sinking."

No longer. Europe is in crisis, with Greece now Borrower No. 2 -- and likely headed to No. 1 with another bailout in the offing.

Alas, the IMF continues to record few hits. There are several reasons for the organization's lack of success.

In setting loan conditions, the Fund often focused on narrow accounting data, causing its advice to have perverse consequences -- such as raising taxes rather than cutting bloated spending. Moreover, reform is a process. Without political support, which is less likely when the policies appear to be imposed from outside, governments are unlikely to move forward and undertake even more politically painful reforms. As a result, IMF programs often occur in policy environments that remain terribly distorted in other ways.

Even when the organization pushes for sensible reform, it has rarely proved to be a tough taskmaster. Only a minority of borrowers reduced their need for aid; many nations were addicted to Fund programs for decades. New programs routinely followed old, failed ones. For example, Peru negotiated seventeen different programs between 1971 and 1977. Economist John Williamson pointed to the problem of the Fund feeling pressure "to lend money in order to justify having it."

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