When American business talks about capitalism, it usually means free markets for everyone but itself. Thus, the Chamber of Commerce, the National Association of Manufacturers, and big exporters like Boeing are lobbying Congress to approve roughly $18 billion in funding for the International Monetary Fund (IMF) -- a backdoor method of seeding foreign economies with money to buy U.S. goods.
Congress should say no. The IMF has long impeded economic growth in poorer countries, and its new penchant for bailouts is likely to further slow reform while putting U.S. taxpayers at risk.
The IMF was created in the aftermath of World War II to help countries meet balance-of-payments shortfalls. When that original role disappeared along with fixed exchange rates in the early 1970s, the fund showed an agile instinct for self-preservation by shifting to the economic-development business. Persistent failure in that new incarnation didn't stop the IMF from expanding into the markets created by the collapse of communism. Now the fund has taken another step and become the bailout king. Last fall the U.S. agreed to a $100 billion increase in the IMF's capital base; fund executive director Michel Camdessus is pushing for $60 billion more.
The real test of any aid agency is whether its clients move from dependency to self-sufficiency. Bryan Johnson and Brett Schaefer of the Heritage Foundation figure that in the end, more than half of the IMF's borrowers between 1965 and 1995 were no better off than when they started. A third were actually poorer. Almost all were deeper in debt. Eighty-four countries have been borrowing from the fund for at least a decade.
Although the IMF sets conditions for its loans, it usually focuses on narrow accounting measures -- currency devaluations, for example -- that often bring borrowers' economies to a halt.
Moreover, the fund is shamelessly eager to lend: It responded to Indonesia's recalcitrance by promising "considerable flexibility" and by constantly renegotiating its loan agreement.
The main losers in a world without the fund would be the businesses that today lobby so heavily for it. The IMF's proclivity to bail out the profligate creates what economists call a moral hazard: Western investors make irresponsible decisions in the belief that they will be protected regardless of the results.
Nor are the IMF's conditions ever enough. Economic reform is a continuing process, yet the fund buys onlv one-time compliance. And the fund has routinely aided the worst examples of socialism and state capitalism -- including Romania's Nicolae Ceausescu -- even as it turns liberalization into a foreign import, prompting nationalist resentment against "economic imperialism" such as that now raging in Indonesia and South Korea.
The 1995 Mexican bailout marked the IMF's entry into a new line of work entirely -- one reflected in U.S. Treasury Secretary Robert Rubin's argument that "the financial stability of the world is at risk." Of course, if the world is ready to topple into the economic abyss, there won't be much the fund can do about it -- the $23 billion it lent last year was just a tenth of the private capital flow to developing states alone. The IMF doesn't create resources; it only reshuffles them. What's more, as the IMF, backed by the U.S., piles international loan on international loan, it risks transferring instability from the foreign to the American domestic stage.
Nor do the IMF's loans aid the reform process: In the short term, the money cycles back to private creditors; in the longer run, fund programs subsidize inefficient and corrupt political systems. Over the past two decades the IMF and other lenders have bailed out the Mexican economy four times, allowing the government to delay painful reforms. Significant elements of crony capitalism seem likely to survive in both Indonesia and South Korea as well.
Fund supporters argue there's no alternative. Actually, unsubsidized economic failure imposes a far tougher discipline: Without an international bailout, countries like Indonesia would have to adopt all the changes necessary to reassure foreign bankers and investors. As South Korean President Kim Dae Jung promised, "I will make it so that foreign investors will invest with confidence." Reliance on the market's invisible hand would also help shield reform efforts from domestic xenophobia. Governments would have no one else to blame.
The main losers in a world without the fund would be the businesses that today lobby so heavily for it. The IMF's proclivity to bail out the profligate creates what economists call a moral hazard: Western investors make irresponsible decisions in the belief that they will be protected regardless of the results. In effect, the fund is promoting capitalism without loss, rather like Christianity without hell.
Financial crisis requires economic reforms, not IMF loans. As nations liberalize, private investment and credit will return. It is time to close the fund.