With Friends Like These
The last five years have been marked by global financial crises — from Mexico to Thailand to Russia. Critics say the IMF is part of the problem.

In 1944, delegates from 44 nations set up an international monetary system to promote trade. Each nation set a value for its currency relative to the dollar. The U.S., in turn, fixed the value of the dollar by agreeing to sell gold to other nations at $35 an ounce.

The International Monetary Fund was set up to give temporary financing when countries had balance of payments problems as a result of their currencies breaking away from their fixed values.

In 1971, President Nixon brought this system to an end by refusing to sell gold to other nations.

But the IMF refused to die. It switched its mission, acting as a medic to developing countries in crisis.

So how has the IMF done in its second job?

"The evidence, much of it supplied by the IMF, demonstrates that the fund does more harm than good," wrote Hoover Institution economist Lawrence J. McQuillan.

Take a study by IMF economist Moshin Khan. He looked at IMF programs between 1963 and 1982.

Khan found that the nations receiving help would often¾ but not always¾ see their balance of payments improve. The effect of these programs on economic growth is unclear, he found.

Other reports have been harsher.

A Heritage Foundation study looked at IMF loans between 1965 and 1995. It found that 54% of the nations getting help were no better off than they were before the loan.

IMF loans seem like a drug to many nations. They get hooked and can’t quit.

The Cato Institute found six nations on IMF aid for more than 30 years. Twenty-four nations took IMF help for more than 20 years. And 47 got aid for more than 10 years.

The IMF now has 56 financing programs running with 53 nations. That’s about one-third of its membership and one-fourth of all the nations in the world.

Economists say that IMF loans create a moral hazard. Lenders make loans to risky nations because the IMF stands ready to bail them out.

The solution to this problem is for the IMF to stop shielding lenders from the losses they suffer from high-risk loans.

Without the IMF’s implied protection, lenders would lean more on borrowing nations to adopt sound economic policies.

But what about countries that still have economic problems? Wouldn’t they get harmed by the lack of IMF loans?

Well, if the moral hazard claim is correct, such countries would be fewer in number. Nations would shape up under the discipline of the market.

Still, some countries might have problems. But without the IMF around, the market would find ways to help those nations.

Argentina already has worked with banks to set up a fund to help if it has currency exchange problems.

We could see more plans like this if the IMF weren’t around, say critics.

To set up these programs, banks would demand sound economic procedures, and they’d monitor them closely.

Their own money would be on the line. So banks would have a strong reason to keep economic problems from growing.

By contrast, critics say, the IMF has reason to welcome economic crises. Such problems give it an excuse to demand more money and bigger staffs from its member nations.

Maybe that’s a bit harsh. IMF officials likely don’t welcome the suffering that many nations have gone through.

But it also seems they are powerless to stop it. They’ve failed to spot developing problems.

By the time the IMF steps in, things usually have gotten bad.

With that record, maybe it’s time to replace the IMF. Maybe it’s time to let market forces correct economic problems. A world without the IMF couldn’t look much worse than one with it, critics say.