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The International Monetary Fund: Pouring More Good Money After Bad

Doug Bandow

Michael Cam-dessus, Managing Director of the International Monetary Fund (IMF), wants to help the world's poor. How? By doubling his organization's resources. At the annual World Bank-IMF meeting last fall he declared that hiking the IMF's capital from $120 billion to $240 billion would be "the cheapest way for taxpayers in the richer countries to come to the aid of the poor." If the U.S. and other member countries were stingy and refused to go along with such a big increase, he warned, the IMF would have to borrow money to meet its needs and "that would be a pity."

For more than four decades the international bureaucrats at the World Bank and the IMF have been proclaiming their commitment to international growth and development. Yet the result of their lending is massive impoverishment and indebtedness around the globe. The money of Western taxpayers has gone to fatten the bank accounts of foreign rulers, pacify local interest groups, expand bloated bureaucracies, and underwrite projects whose only purpose is to inflate national egos. Even what were once thought to be the best of loan programs -- roads, factories, and docks -- are deteriorating and bleeding poor nations dry.

The World Bank, as "America's" institution (by tradition, the U.S. chooses the Bank president), has always received more press attention than the Fund. In contrast, the IMF, whose Executive Director is picked by the European nations, has eschewed press attention. Although it has the distinction of being the only international organization that has regularly sparked riots in foreign capitals, it has kept a low profile in Washington.

Except when asking for money -- In 1982 the IMF wanted a quota increase and it had to run a political gauntlet ranging from the Competitive Enterprise Institute on the right to several Naderite groups on the left. Only with strong support from the supposedly conservative Reagan administration did the House narrowly pass the funding measure, after which the IMF quietly faded back into the background.

The IMF is now making news again, however. Although its $120 billion pool of gold currencies would hardly seem inadequate for worthwhile lending to the Third World nations that can't pay back their current loans, Camdessus wants to increase the Fund's activities. In particular, the organization wants to greatly expand lending to Eastern Europe; the IMF signed a $710 million loan agreement with Poland last December, for instance. Another reason the Fund wants more money is that the IMF, like commercial banks, is having trouble collecting on its past loans. As of 1989 total arrears were $3.6 billion, up more than 50 percent over the preceding year. Under these circumstances most people would suggest increased prudence in extending new credit, but an independent international bureaucracy able to tap the wallets of taxpayers around the globe sees the solution quite differently: increase lending.

The IMF was created as part of the Bretton Woods system at the close of World War II to help nations suffering balance of payments difficulties. When Richard Nixon closed what was left of the gold window in 1971, the original function of the IMF disappeared, but that had no impact on the organization's lending. Indeed, the IMF soon ended up providing more credit than ever before -- the new IMF loans increased nearly sixfold from 1973 to 1974. Total outstanding credit went from about $1.3 billion in 1973 to $45 billion in 1985.

What does the IMF do with its money? In contrast to the World Bank, the Fund does not back individual projects, such as a power plant or urban redevelopment program. Instead, the IMF makes loans to governments, theoretically to assist them in promoting overall economic development. The Fund imposes a variety of policy conditions on borrowers that are supposed to improve the borrowers' economic performance and ensure that loans are paid back.

Once the World Bank began its massive expansions of the 1970s, the IMF's only plausible justification for existence was that it was the sole international institution concerned with borrowers' economic policies. By the mid-1980s, however, the Bank was providing billions annually in so-called structural adjustment loans and the Fund lost its last raison d'etre. Not only does the Bank lend more than the IMF every year, but it uses much of its resources for the same purposes.

Unfortunately, the World Bank has achieved little with its annual lending in excess of $20 billion, and the IMF is equally ineffectual. For the Fund has had no more success in promoting real market-oriented policy reform than has the Bank. Instead, all the IMF has done is create yet another permanent subsidy for corrupt rulers of statist regimes, irrespective of the destructiveness of their policies.

The best test of the effectiveness of the IMF is whether any troubled developing country has ever "graduated" because of its Fund loan program. Alas, success stories seem nonexistent. South Korea has collected IMF loans, but it began using the Fund credit only in 1974, after that nation's economic miracle was underway. New Zealand and Great Britain have both borrowed on occasion, but they industrialized long before there even was an IMF.

In contrast, the Fund has been subsidizing the world's economic basket cases for years, without apparent effect. Since 1959, Egypt has never once been off the IMF dole. Ghana took its first loan in 1962 and wasn't a borrower for just three of the succeeding 27 years. India was one of the IMF's first customers and, aside for short intervals, has been on the IMF programs for more than 40 years.

Mali has been an IMF borrower for more than 25 years. Since 1959, the Sudan has owed the Fund for all but two years. Bangladesh, Uganda, Zaire, and Zambia all started borrowing in the early 1970s and have yet to stop. IMF loans to Argentina, Bolivia, Brazil, Costa Rica, Dominican Republic, Haiti, Peru, and Uruguay have helped turn those nations into permanent debtors without doing anything to solve their economic ills.

There are several problems with IMF lending. First, the IMF has often focused on narrow accounting data while ignoring the broad policies that have retarded development. As a result, the Fund's advice has often had perverse consequences. As a condition for a loan, the IMF will, for instance, demand that a nation reduce its current account deficit -- so the borrower restricts imports. Insistence that a country cut its budget deficit may cause the government to raise taxes, slowing growth. (As Argentina moves toward more market-oriented policies, the IMF is demanding that the Menem administration increase the Value Added Tax, for instance.) Even where the budget deficit does not actually grow as the economy shrinks, the Fund has succeeded in reducing the budget deficit only by reinforcing the very borrower policies that block growth.

Moreover, the IMF, like the World Bank, does little to enforce its conditions. A country will violate its agreement with the Fund, the organization will suspend the loan, and then the two will negotiate a new agreement. Money will start to flow again, the borrower will violate the new conditions, the IMF will hold up payments, the loan will be renegotiated, and the process will begin anew. How else can one explain continued lending to Brazil throughout the 1980s, 27 years of credit for Zaire, decades of assistance to India, and so on? At times it would appear that the more perverse the policies, the more generous the IMF.

Indeed, India borrowed prodigiously throughout the 1950s and 1960s as it was pursuing a Soviet-style industrialization program. The Mexican government was destroying its economy in the 1970s even as it was a regular IMF customer. Kenya, which borrowed roughly $130 million in 1988 and owed more than $380 million total at the end of last year is currently building a 60 story, $200 million office building -- complete with a larger-than-life statue of President Daniel arap Moi -- in Nairobi. Shortly after its Marxist revolution, Ethiopia began borrowing from the Fund; yet it was the government's collectivization of agriculture that dramatically worsened the famine during the mid-1980s.

The loans to Ethiopia exhibit another damning aspect of IMF lending. The Fund underwrites any government, however venal and brutal. Naturally, the loans are not earmarked for repression. But the IMF extends credit directly to governments and money is fungible. Whether Ethiopia took its IMF cash and directly bought bombs for use against Eritrean rebels or shifted its accounts around in Addis Ababa first makes no real difference: in either case, the Fund was an accomplice to murder. Another good IMF customer was Romania, which finally paid off its debts in 1988 as part of Nicolae Ceausescu's autarchic policies. China owed the Fund $600 million as of the end of last year; in January, the IMF held a seminar on monetary policy in Beijing. Burma, Pinochet's Chile, Laos, Nicaragua under Somoza and the Sandinistas, South Africa, Syria, Vietnam, Zaire -- the Fund has rarely met a dictatorship it didn't like.

There is an even more insidious problem with the IMF lending. Countries such as Bangladesh, China, Mexico, Tanzania, and Vietnam have all moved unsteadily towards more market-oriented policies because they have felt the consequences of disastrous economic failure. For years they operated money-losing enterprises and bloated public bureaucracies and manipulated money, credit, trade, and prices for the benefit of well-connected elites. Foreign money helped cover the resulting financial losses and sustain their economies, pushing off the day of reckoning. More loans and aid today, by reducing the pain of continuing bad policies, will only retard the adjustment process. Unfortunately, economic reform is politically painful, but it is also unavoidable. More IMF lending will only drag out the agony.

This is not to ignore the seriousness of the international debt-crisis, with Third World states owing roughly $1.3 trillion to Western governments, multilateral institutions, and banks. The problem, however, obviously is not inadequate lending. Rather, much of the earlier loans have been wasted. Once borrowers have adopted the sort of reforms that will allow capital to be used productively in their nations, foreign credit and investment will flow in naturally. Until then, additional money will only be wasted.

In the meantime, U.S. officials should give up trying to fashion a global solution to the debt crisis. Countries and banks should be left to negotiate together; selective write-downs, extensions, and debt-equity swaps should be adapted to the countries involved. And Congress should reject any funding increase for the IMF (last fall, the Bush Administration agreed to a 50 percent capital hike), World Bank, or other international financial institutions.

Michael Camdessus insists that increasing his organization's budget is the most effective way for the rich in the West to help the world's poor. But the poor are rarely in attendance at the lavish bank receptions that mark the annual World Bank-IMF meetings. Indeed, it is the one time of the year when Washington finds itself short of limousines, and luxury hotels are almost continuously gridlocked as finance ministers and bankers criss-cross the city.

What the world's poor really need are governments that no longer strangle and loot their economies. And as long as the IMF helps fund the regimes that are responsible for impoverishing their people, it will remain a large part of the problem.

Doug Bandow is a Senior Fellow at the Cato Institute and the author of Beyond Good Intentions: A Biblical View of Politics, (Crossway Books) and The Politics of Plunder: Misgovernment in Washington, recently published by Transaction Books. He formerly served as a Special Assistant to President Reagan for Policy Development.
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