Commentary

Time to Reassess the Role of the IMF in the U.S. Foreign Policy

This article was published in Investors’ Business Daily, Jan. 22, 2003.

Argentineans took to the streets recently to commemorate the first anniversary of the collapse of the economically inept government of President Fernando De La Rua. Unfortunately, his departure did not bring about an economic turnaround. Argentina remains in economic and political turmoil. A major reason for Argentina’s demise is the incompetence of the government, which has been made possible by the International Monetary Fund and its main sponsor, the United States.

Argentina has experienced growing government intervention in the economy for much of the 20th century. In the 1940’s, Juan Peron nationalized much of Argentina’s industrial base. In the 1970’s, Argentina followed Raul Prebisch’s theory of import substitution and autarky. Both proved disastrous.

President Carlos Menem finally introduced far-reaching, but incomplete market reforms in the early 1990s. Unfortunately, those reforms were accompanied by a dramatic increase in government spending. Between 1989 and 2000, federal government spending as a percentage of GDP grew from 9.4 percent to 21 percent. Throughout Menem’s presidency, Argentina’s corrupt legal system remained unreformed. In 2001, Transparency International ranked Argentina 57th out of 91 countries surveyed.

An important external factor that has contributed to Argentina’s downfall was the intervention of the IMF. Argentina joined the IMF in 1956. It has received IMF loans in 34 of the last 46 years. The aim of those loans was macroeconomic stability. However, by 2002 Argentina was in chaos. Its per capita income was 23 percent lower and its external debt eight times higher than what it was in 1980. Even by the IMF’s own lax standards, its involvement in Argentina was a fiasco. As a result, the Argentineans now revile both the IMF and its main sponsor, the United States. Another loser, because of its association with the IMF, is the ideal of the free market.

At the root of the problem is the fact that far from being a capitalist tool, the IMF is not a market organization. It often serves as a benefactor to corrupt and inept regimes, which engage in gross macroeconomic mismanagement. Were it not for the IMF, economically incompetent governments would be forced to seek loans under normal free market conditions. Lenders would lend to governments at rates reflecting the risk involved. In other words, the more incompetent governments would be forced to borrow at higher interest and vice-versa. Higher interest rates would thus stimulate governmental circumspection in borrowing and expenditure.

The IMF does the opposite. It lends money at discounted rates to governments of most developing countries. It also provides massive aid to governments, whose survival it deems important to the “stability” of the world economy. But its decisions are not made on the basis of sound economic principles; they are political. Thus strategically important countries to the United States, such as Russia, Mexico and Turkey, enjoy disproportionate IMF largess.

That brings us to the main actor within the IMF, the United States. An American goal is to try to foster economic stability throughout the world by protecting the markets from “unnecessary” shocks. The United States thus uses the IMF to lend the money of American taxpayers at below-market rates.

Some critics berate the United States for using the IMF to earn interest on loans to countries in economic distress. In fact, American taxpayers loose out, because their money could earn higher interest in the market place.

Moreover, once government mismanagement creates the crisis, economic corrections become necessary. By letting markets work, policymakers can identify damaging policies, resolve crises more effectively and avoid repeating similar mistakes in the future. Argentina is no different. Knowing that the IMF would come to their rescue, Argentina’s politicians and investors continued to steer the economy towards disaster.

The degree of the current crisis is thus related to the extent of the IMF “help.” But the IMF intervention was even more harmful. It contributed to the disenchantment of the Argentinean people with the free market even though they have hardly experienced it. Last but not least, the IMF failure aroused Argentinean hatred of its main sponsor, the United States.

The United States should reevaluate its participation in the IMF. As far as its political and economic goals are concerned, the IMF is inimical to the U.S. national interest. It prevents the market mechanism from operating and encourages irresponsible behavior on the part of recipient governments and investors. It exacerbates the degree of economic adjustments and compromises both the free market and the reputation of the United States in the world. Instead of associating the United States with its natural allies — the masses of hardworking people — it associates America with their oppressors.

Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.