March 8, 2000

Scholars call for changes in international financial system
Testimonies before special commission critical of the IMF’s long-term lending and bailout functions

The International Monetary Fund’s conditionality is not credible and its lending has turned countries into loan addicts, according to Ian Vásquez, director of the Project on Global Economic Liberty at the Cato Institute. "Seventy countries have depended on IMF credit for 20 or more years. Once a country receives IMF credit, it is likely to become dependent on fund aid for most, if not all, of the following years," he said.

Vásquez testified before the International Financial Institution Advisory Commission of the U.S. Congress, which will report its findings and recommendations today. Vásquez told the Commission that bailouts by the IMF have created a dysfunctional relationship between lenders and borrowers at the global level. The result has been the subsidization of risk, poor surveillance and an increase in the frequency and severity of crises, he said.

"An approach based on greater reliance on two-party negotiations," he said, "holds more promise in stabilizing the international financial system than does the current approach, in which the IMF too often becomes a burdensome third party."

Steve Hanke, professor of applied economics at Johns Hopkins University and a Cato adjunct scholar, also testified, saying, "The continued liberalization of international capital flows mixed with pegged exchange rates has proven to be a deadly cocktail." He said that to avoid currency crises, poorer countries should move away from pegged exchange rates. Because "currencies in developing countries rarely float on a sea of tranquility," he said, those countries should establish truly fixed exchange rate regimes.

Hanke stated that countries would benefit from adopting dollarization or a currency board system. He argued that both monetary regimes have brought immediate results in the countries that have implemented them, including nations as diverse as Bulgaria and Argentina. Hanke said that fiscal discipline, a sound financial system or other such preconditions are not necessary for dollarization to be successful. As countries dollarize or adopt currency board systems, the IMF’s role in the global economy will be dramatically reduced, Hanke predicted.

Testimony of Steve Hanke
Testimony of Ian Vásquez