James K. Glassman

This selection first appeared in the Washington Post on 9 December 1997. James Glassman is a business columnist at the Post and the DeWitt Wallace-Reader's Digest Fellow at the American Enterprise Institute in Washington, D.C.

The International Monetary Fund, or IMF, was set up in 1945 to help guard the world's currencies under the Bretton Woods monetary agreement. But that deal was ditched long ago, and the IMF became something else entirely--a lender of last resort to countries that get into financial trouble.

In that role, it's doing far more harm than good. A free market economy has a very efficient way of dealing with misjudgment, excess, and failure. It's called bankruptcy. Lenders, investors, managers, and sometimes employees and politicians all take part of the hit--and assets pass from weak hands to strong. Everyone learns important lessons and starts afresh.

But by rushing to the rescue, the IMF is preventing this cleansing process and, in the current case of Asia, blowing a chance to inject freedom, imagination, and competition into economies that suffer from too much government control.

The IMF is also creating a classic problem of "moral hazard"--helping imprudent countries actually encourages more imprudence in the future.

Look at Mexico, which received a $50 billion bailout in 1995. Yes, Mexico is in better shape than it was two years ago [1995], but the rescue almost certainly gave governments in Asia a sense of confidence that, if they got into terrible straits, the IMF would help them, too.

Even worse, the bailout encouraged investors, including U.S. mutual funds, to make risky bond and stock purchases in countries with overheated, shaky economies. And, of course, it's postponed Mexico's own economic reforms.

Lately the IMF has been shoveling money at Thailand, Indonesia, and now Korea. The IMF itself has put up $35 billion for the three countries (roughly 18 percent of its funds come from the United States, with less than 6 percent each from Germany and Japan).

But the IMF doesn't act alone. It's the lead bank in a bailout consortium that includes the World Bank ($16 billion) and the United States individually ($8 billion). A total of $113 billion has been put up, with no end in sight.

IMF money typically comes with strings attached: requirements for higher interest rates and lower government spending, for instance. The Korean bailout will try to go even further. "Banking and financial-sector restructuring is absolutely at the heart of the program," says Stanley Fischer, the IMF's number two.

There's no doubt Korea (which will get $55 billion in bailout money) needs it. Like most other Asian nations, Korea practices command-and-control capitalism--a version of the Japanese business-government partnership model that still seduces America's liberals.

In Korea, banks made massive loans, at the government's direction, to the , or conglomerates. The banks also owned large chunks of stock in Korean companies. So when a conglomerate like Kia Motors got into trouble, the banks were hit by a double whammy--though the government tried to cover the losses up.

"Korea," said a recent editorial in the , "needs a thorough clean-out of both its banking system and the balance sheets of its industrial companies. . . . Government patronage of industry must end, and there needs to be an effective competition policy to curb the power of big companies."

Absolutely. The question is whether the IMF and its fleet of lenders can accomplish those ends better than the free market, which would create a new Korean economy through loan defaults and bankruptcies.

At a symposium at the American Enterprise Institute, Lawrence Lindsey, a former Federal Reserve governor, said unequivocally that "we would get much more done in Korea without the IMF bailout."

Deregulate Korea's banking system and let its banks be bought out by American ones. That would do more to fix the economy than all the billions the IMF can throw at the problem.

IMF officials aren't evil or stupid, but they do suffer from a kind of superhubris, or overweening pride, that international institutions tend to breed. And they often forget that they're using other people's money for their good deeds.

That money won't last forever, and Congress is not in the mood to provide more.

An article in yesterday's [8 December 1997] characterized this reluctance to back the IMF as evidence of "globalphobia," or "a retreat from the internationalist consensus that has governed U.S. economic policy for 50 years." It also cites the defeat of fast track and the new antagonism toward free trade.

Isolationism is certainly rearing its ugly head, but to oppose IMF bailouts is not to oppose free market internationalism. On the contrary. Without the IMF and the World Bank, Asia would be more open, not less. The conflict is not so much between globalists and isolationists as between those of us who want the future to take its own vivid course and politicians who try, vainly, to guide it along a path of their choosing.

The Asian countries have a lot going for them: a diligent workforce and high savings rates, for starters. But they will never achieve their promise unless they jettison the top-down control and xenophobia that have landed them in their current mess. The way to end the old ways is to allow markets to punish the perpetrators. "Capitalism without failure," says American Enterprise Institute economist Allan Meltzer, "is like religion without sin."

The IMF, using the hard-earned money of U.S. taxpayers, is trying to prevent that failure. It's the kind of charity that helps no one.