Commentary

What To Expect From IMF? Look At Mexico

By Ian Vásquez and L. Jacobo Rodríguez
Investor’s Business Daily.>

Now that the House has decided to put off a vote on IMF funding until after the spring recess, Congress still has time to consider the wisdom of the White House’s $18 billion request.

Lawmakers need only look south of the border. Backers of the International Monetary Fund point to the $52 billion bailout of Mexico in ‘95 as a shining example of the fund’s success.

But three years later, the IMF’s failures there are obvious.

The bailout set a bad precedent that could cost U.S. taxpayers dearly. Mexico has already repaid the money it borrowed from the U.S. Treasury, mostly by borrowing from other sources. But it has yet to repay the IMF — and 18% of IMF funds are donated by the U.S.

Clinton claims that the bailout forced Mexico to “put in place a tough adjustment program to get its economic house in order.” That’s wrong. In fact, IMF credit actually let the Mexican government put off necessary reforms.

Take the state-owned oil monopoly, Pemex. It has not been privatized or even deregulated. Today, the price of gasoline at the pump is much higher in Mexico than in the U.S.


The legacy of the Mexican bailout of ‘95 is the Asian crisis of today — or at least its severity. The bailout sent a signal to the world that if anything went wrong in emerging economies, the IMF would come to investors’ rescue.


Without the bailout crutch, Mexico would have been forced to renegotiate an extension of its debt’s maturity with its creditors and sell its assets to pay them off. Such measures would have restored market confidence in Mexico. They also would have meant a fairly quick resumption of private capital inflows. Instead, the Mexican government was let off the hook, and Mexico’s debt holders got their money back.

Truth is, the risk of a global crisis was never credible, even if the Mexican economy — about one-twentieth the size of the U.S. economy had collapsed completely.

And Mexico’s citizens surely didn’t benefit. In fact, they suffered a sharp decline in their standard of living. Real per capita income has fallen back to its ‘74 level, and the people of Mexico still have to bear the greater debt burden.

From the end of ‘94 to the end of ‘96, Mexico added 560 billion to its total external debt, which now tops 5160 billion. Instead of fully opening up banking to foreign investment, the government has bailed out commercial banks to the tune of 545 billion by buying all their bad or shaky loans.

The result? Mexico’s weak banking sector, a major cause of the crisis, is still in urgent need of restructuring.

Regardless of whether or when Mexico repays the IMF, America’s contributions to the fund add to the U.S. national debt and affect the borrowing costs of the federal government.

IMF loans waste taxpayers money, because the IMF lends at rates of interest that do not reflect the true risk of the loans, and rates of return the U.S. receives are lower than interest rates for U.S Treasury bills. The fact that the fund keeps asking for more money is not a good indication that the money it has already received has been spent wisely.

In any event, whether or not Mexico repaid all of its loans to the U.S. misses the point. The problem, according to economist Allan Meltzer, is that the “IMF’s programs drive a large wedge between the social risk — the risk borne by the troubled country — and the private risk borne by bankers.”

The legacy of the Mexican bailout of ‘95 is the Asian crisis of today — or at least its severity. The bailout sent a signal to the world that if anything went wrong in emerging economies, the IMF would come to investors’ rescue. What else can explain the near doubling of private capital inflows to East Asian countries in ‘95 alone?

To end the crisis — generating system in which neither governments nor investors bear the full cost of their reckless behavior, Congress should “just say no” to Clinton and the IMF.

Ian Vasquez is director and L. Jacobo Rodriguez is assistant director of the Project on Global Economic Liberty at the Cato institute.