The International Monetary Fund, along with sister institutions such as the
World Bank, has been in the news lately. With Michel Camdessus of France
leaving as IMF chief, a nasty spat has developed over his successor.
On another front, a commission created by Congress as a condition of giving
another $18 billion to the IMF last year has just issued a thoughtful report
that legislators should take note of, but is more likely to be overlooked or
ignored in this election year.
It might be helpful to review some of the context and history of this
troubled institution. The IMF was set up in 1944 as part of the Bretton Woods
international financial system under which member nations agreed to keep their
currency fixed to the dollar, which, in turn, was fixed to gold at $35 an
ounce.
For the next three decades it mainly made small loans to developed
countries, notably the United Kingdom, to bridge financial gaps created by
unwise or inflationary domestic policies.
In 1971, however, the developed countries cut the last ties between gold
and currencies and adopted a regime of `floating` exchange rates, with the
values of currencies to be determined by international markets. There really
was no role left for the IMF, but like any bureaucracy it sought ambitious new
missions.
The IMF became the `lender of last resort` for poorer nations, using large
loans from New York-based banks. The mission was sold as a way to bail out
poor countries, but the initiative helped the international banking community
as well.
When IMF loans couldn't be repaid, they were rolled over, giving the IMF a
wedge to dictate fiscal and monetary policies in the target countries. For the
most part, its standard prescription was to urge higher taxes and devalued
currencies, which made the countries even poorer.
In the 1990s the IMF was used for international bailouts of countries or
regions (Mexico, Brazil, Asia) that had economic crises (often exacerbated by
following IMF guidelines) and as a fund to ease the transition from communism
to capitalism in Russia and Eastern Europe.
These demands led to vigorously increased money flows: IMF lending hit $94
billion last year, compared with $40 billion in 1994 - and $3.7 billion in
1968.
Most of this money, simply put, has been wasted or detrimental to the
economies it was supposed to help. Political leaders around the world who know
the IMF will bail them out have every incentive to continue profligate
economic policies.
A significant share of IMF money sent to Russia and Eastern Europe has
ended up in Swiss bank accounts controlled by top officials. Just last week,
MSNBC presented an investigative piece based on revelations from a former FBI
money-laundering expert that hundreds of millions in IMF funds for Ukraine
went to a money-laundering scheme that buttressed the political power of
corrupt officials - while the United States ignored the scandal for political
reasons.
The U.S. commission, headed by Carnegie-Mellon economist Allan Meltzer,
wants the IMF to stop large-scale, long-term lending (and policy
micro-management) and return to its original mission of making short-term
emergency loans. It also recommends cancellation of IMF loans owed by poor
countries that will probably never pay them back. It is an important study and
should be given broad consideration.
Those reforms would make the IMF a less harmful institution. It is time,
however, to consider greatly reducing or eliminating the IMF altogether.
Bailing out foolish governments only reduces the incentives for them to
take their lumps and abandon bad policies.
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