End the IMF
AUGUST 24, 2011 by SHELDON RICHMAN
The sex scandal involving the recently departed International Monetary Fund chief, Dominique Strauss-Kahn—criminal or not—was never a reason to abolish the agency. But then we didn’t need another reason. The agency, centerpiece of J. M. Keynes’s inflationary Bretton Woods brainchild, should never have been created in the first place, since it was another calculated step toward global government-controlled money. Its re-creation after its original mandate—maintaining the system of dollar-based fixed exchanges rates—became obsolete 40 years ago is a textbook case of bureaucratic mission creep. Its existence is no more justified by the new mission—a 911 for profligate, debt-ridden governments—than it was by the old one.
The IMF has 187 member governments, which together this year have provided $340 billion to the agency. Each country is assigned a contribution quota and a vote count weighted roughly according to its quota. The U.S. government’s financial quota is over 17 percent of the total, almost three times that of the second-largest contributor, Japan. It controls 16.74 percent of the votes. Treasury Secretary Timothy Geithner is the U.S. member of the board of governors, with Federal Reserve Chairman Ben Bernanke as alternate governor. This should be enough to establish that the IMF’s agenda is not free markets.
All IMF money comes from the taxpayers and central bank printing presses. So there’s the first charge against it: It’s financed through compulsion. That should shape our expectations about the agency.
What does the IMF do? Here’s how it describes its mission:
• Surveillance: “oversees the international monetary system and monitors the financial and economic policies of its members”;
• Technical assistance: “assist[s] mainly low- and middle-income countries in effectively managing their economies”; and
• Lending: “provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms.”
Regarding the first, the IMF has been notoriously bad at foreseeing crises. But that should not be surprising. Why would bureaucrats living rather well off the taxpayers, with no personal capital at risk, be expected to be competent at spotting economic trouble?
The promise of “technical assistance” is dubious and even risible because the dominant governments of the world can hardly be said to have “effectively” managed their own economies. The IMF often advises distressed countries to raise taxes and to cut government spending to reduce budget deficits, upsetting both Keynesians and supply-siders. This is regarded as market-oriented, or “neoliberal,” advice, but to the extent that externally imposed measures engender public resentment, they give real market reform a bad name and set back the cause of genuine liberalism.
For example, the IMF may advise a government to remove price controls on food, which in itself would be a pro-market measure if accompanied by other reforms. However, if corresponding government-created scarcities—through licensing, franchises, patents, and so on—remain in place, average people will suffer and blame “the free market.” Food riots occurred some years ago in Egypt under just such circumstances, and as a result market reforms are widely distrusted there.
IMF loans constitute a double bailout. First, they save kleptocratic politicians from the consequences of their exploitative schemes, sparing them the necessity of radical reform—including land reform and free banking.
Second, IMF loans rescue the failing country’s creditors—Wall Street banks, typically—from a government default. In addition U.S. agricultural interests have come out in favor of increased support for the IMF to stimulate American farm exports. In 2009 the debate over increased U.S. funding was framed in the context of pushing an export-led American economic recovery.
This is surely doing well by doing good—with the taxpayers’ money.
Who pays? Aside from the taxpayers who supply the IMF with money, the tab is eventually paid by the working people of the subject countries through the higher taxes prescribed by the IMF.
The likelihood of the IMF’s compounding problems is immense. In The White Man’s Burden, former World Bank economist William Easterly writes: The IMF’s “core function of enforcing financial discipline is flawed by an intrusive Planner’s mentality that sets arbitrary numerical targets for key indicators of government behavior. Like all Planners, the IMF fits the complex reality of economic systems into a Procrustean bed of numerical targets that have little to do with that complexity.”
The IMF emphasizes that loans always come with “conditionality,” but for reasons already alluded to, that should offer little reassurance to advocates of free markets. The agency notes that it uses the principle of “parsimony” when writing conditions: “program-related conditions should be limited to the minimum necessary to achieve the goals of the Fund-supported program . . . .” Thus the deepest violations of individual liberty and market principles—feudal land distribution, for example—will be left untouched. Real markets don’t exist when large tracts of land are controlled by a privileged elite, leaving most people little choice but to take whatever is given. Their acceptance may represent the “best available option,” but if their choice set has been artificially constricted, that’s not saying much. (Fortunately the informal economy offers some hope.)
IMF loans of course channel resources to central governments, reinforcing their power and further politicizing the “aided” countries. As P. T. Bauer wrote,
Foreign aid has thus done much to politicize life in the Third World. And when social and economic life is extensively politicized, who has the power becomes supremely important, sometimes a matter of life and death. . . . People divert their resources and attention from productive activity into other areas, such as trying to forecast political developments, placating or bribing politicians and civil servants, operating or evading controls.
In the end the IMF has fostered long-term dependency, perpetual indebtedness, moral hazard, and politicization, while discrediting market reform and forestalling revolutionary liberal change. The solution is not for the IMF to impose free markets, even if it could. That would smack of imperialism and, writes Easterly, would have “patronizing echoes of the White Man’s Burden.”
The IMF should be scrapped and the people suffering under kleptocracy left to discover the requirements for improving their own conditions. How much more “help” can they stand?