Abolish the IMF
Fred E. Foldvary
May 7, 2003
Civil Society Institute and SCU Institute on Globalization
Santa Clara University
It's my pleasure to speak to you today
as part of the series of events on the global economy
here at Santa Clara University.
The IMF is the International Monetary Fund.
It was created in 1944
at the United Nations International Monetary Conference held in Bretton Woods, New Hampshire.
The Articles of Agreement were ratified in 1945.
Operations began in 1947.
The IMF is headquartered in Washington, DC,
and has an international staff of 2600.
The proposition that the IMF should be abolished implies
that the agency is doing more harm than good.
The general implication of cost-benefit analysis is
that if the cost of a project or policy is greater than the benefit,
it should not be done.
I will argue here that not that the IMF does no good at all,
but that the economic damage it causes
is greater than the economic benefit.
Since the merits and demerits of any system are relative to alternatives,
I will also present what in my judgment are the most economically healthy policies,
policies which make it unnecessary to have an institution such as the IMF.
The original purpose of the IMF
was to help bring about a new global monetary system.
This was part of the re-establishment of the global economy that had existed prior to World War I.
The old global economy broke down
from the stresses caused by World War I
and the subsequent Great Depression.
The IMF was intended to help countries finance imbalances
in their foreign exchange payments in international trade
by means of loans called "drawing rights".
The IMF loans would prevent exchange controls and the competitive devaluations of currencies.
If a country has a fixed exchange rate with the dollar
and it imports more goods than it exports,
and if this trade deficit is not offset by investment funds coming into the country,
the country needs to borrow funds to pay for the excess imports.
If the payments deficit persisted,
then the exchange rate would be adjusted down.
The pre World War I global economy did not require an IMF.
That is because, in effect,
the old global economy had a common currency, namely gold.
In most of the countries of the world, including the United States,
money was gold, and gold was money.
The U.S. dollar was defined by law as 1/20 of an ounce of gold.
Since the major currencies such as the US dollar, the British pound,
the French Franc, and the German mark,
all were defined as amounts of gold,
they all had fixed exchange rates with one another.
These currencies were just different ways of counting gold.
Most of the purchasing media, however, was not gold.
The purchasing media included paper money,
issued either by banks or the treasury departments of national governments.
The real money was gold, and the bank notes were money substitutes.
Economists classified gold as "outside money,"
since the supply of gold was determined outside the banking system.
Bank notes were inside money,
issued and controlled inside the banking system.
Demand deposits, or checking accounts, were also inside money.
The amount of purchasing media was not restricted by the amount of gold, because most of the transactions used inside money.
Anyone could convert inside money into outside money at any time.
If you had a $20 bank note,
you could take it to a bank and exchange it for a $20 gold coin.
[Trans - US bills]
[Trans - Central banking]
The supply of inside money, paper notes and demand deposits,
was determined with two different banking systems.
In many countries, such as in the United States,
a central bank or the Treasury department issued the national currency
and controlled its supply.
In contrast, in some countries or jurisdictions,
such as in Scotland and Canada, there was free-market banking.
With free banking,
private banks could issue their own bank notes.
Both the private bank notes and demand deposits were convertible into gold.
Also, with free banking, there are no restrictions on bank branches.
The United States never had free-market banking.
Since 1913, the money has been issued by the Federal Reserve System.
From the Civil War to 1913, the Treasury Department controlled the money.
Prior to the Civil War, the States regulated the banks,
restricting branches and requiring banks to buy State bonds,
which led them to over issue banknotes.
If the United States had free banking today,
when you take money from an Wells Fargo ATM machine,
out would come Wells Fargo $20 bills.
You would spend these just as we spend federal reserve notes today,
and you could convert Wells Fargo dollars into Bank of America dollars
or into gold coins.
With competitive free banking,
Wells Fargo Bank could not issue more of its dollars
than the public was willing to hold,
since the public could convert them into gold at any time.
If the demand for money rose, more bank notes could be issued.
So free banking provided a stable and flexible monetary system.
Money is vital to trade because of Newton's Law of Economic Motion:
to every movement of physical goods,
there is an equal and opposite movement of financial goods, namely money.
When traders use a common currency,
trade gets balanced by movements of money.
Under the gold standard,
if a country exported more goods than it imported,
the export surplus would be balanced by importing gold.
If a lot of gold came in, that would raise the price level,
making exports more expensive,
and thus reducing exports and increasing imports until trade got balanced again.
But what balances trade most of all is that if a buyer runs out of money,
and can't borrow any, then he can't trade any more.
So, with a common currency, trade becomes balanced automatically.
For example, in the United States we have a common currency.
In California, we don't worry about a trade deficit with Texas or New York.
Trade between California and New York gets balanced
by movements of dollars, which are accepted in both states,
so there is no balance of payments problem among the states.
With the U.S., trade deficits become limited
by the ability or inability of people and organizations to borrow funds.
If your credit limit is reached,
they you can no longer exchange money for goods by borrowing.
The gold standard broke down during World War I and the Great Depression.
European countries went off the gold standard in order to help pay for the war by issuing money.
After World War I, countries did not return to the pure gold standard,
but rather to a mixed system,
where gold was still used, but the outside money was no longer purely gold.
All national currencies became controlled by central banks,
such as the Federal Reserve System, established in 1913.
Therefore, the monetary problems of the US during the Great Depression cannot be ascribed merely to the use of gold,
because there was a combination of gold and central banking.
The supply of purchasing media was controlled by the Fed.
After World War II, rather than go back to the gold standard,
the Bretton Woods conference set up a system where the international reserve currency was now the dollar, rather than gold,
but the U.S. dollar was still convertible into gold internationally.
The history of the IMF goes back to 1941,
when the British economist John Maynard Keynes developed a proposal
for an international currency union,
which then became a proposal by the British government in 1943.
The British envisioned an international means of payment called the "bancor".
In the U.S., Treasury Secretary Henry Morgenthau
asked his assistant, Harry Dexter White to write a memorandum
for a postwar international monetary system.
This request was made on December 14, 1941,
just one week after the attack on Pearl Harbor!
These plans basically sought a way to replace the previous use of gold as a global currency.
Why did these economists and officials not want to go back to gold?
My analysis is that it was due to a fundamental misunderstanding of the role of commodity money in a well-functioning monetary system.
Gold became discredited during the Great Depression,
being associated with the old system,
but a sound monetary system needs not just sound money
but also, even more importantly,
a free market in the money supply and in setting interest rates.
The use of commodity outside money such as gold
combined with a centrally planned supply of inside money,
can indeed lead to rigidities and a monetary breakdown.
With free banking, the rigidity of outside money anchors the value of money,
but the flexibility of inside money lets the system adjust to changing demands.
Whether from ignorance or disinclination,
the economists and policy makers of the 1940s did the opposite of free banking: they kept central banking and moved away from exogenous outside money.
[Upside down Delta]
The basic problem with the Bretton Woods monetary system was
There was a price control on the US dollar relative to gold,
and the other currencies had price controls relative to the dollar.
With price controls we eventually get shortages or surpluses.
Each country had a fixed exchange rate with the U.S. dollar,
and therefore with other currencies.
If a country imported more than it exported,
the imbalance was filled by the importer
converting domestic currency to dollars, and exporting dollars.
But, what if the country ran out of dollar reserves?
It's the same as when you run out of money and still want to buy goods.
If they want to keep buying imports,
either they borrow dollars,
or else the price control breaks down and the country has to devalue the currency,
to make it cheaper,
because foreigners don't want the currency at the current rate.
So the country's monetary authority would borrow dollars from the IMF
to deal with this temporary shortage of dollars.
If the problem was deeper, and the trade was still imbalanced,
the country would have to devalue, meaning, change the exchange rate so that, for example, one franc bought fewer dollars.
In those days, it was illegal for Americans to own gold,
but a foreign government, such as France,
could exchange dollars for gold at the fixed price of $35 per ounce.
This was not really a gold standard, because while gold was still money,
money was no longer gold.
Within the U.S., the purchasing media was now all inside money.
The global monetary system was now an inverted pyramid,
foreign currencies based on the US dollar,
and the US dollar internationally based on gold.
If too much gold left the US, the unstable pyramid would collapse,
which is exactly what happened.
If a country faced an imbalance of payments
and was short on US dollar reserves,
it could borrow dollars from the IMF.
Fed expanded the supply of dollars
at a rate that was faster
than the expansion of the demand for dollars.
Also, growing European countries were increasing their reserves of dollars, which required balance of payments surpluses for Europe and deficits for the U.S., putting pressure on U.S. gold reserves.
Other prices were rising, but gold remained price controlled at $35.
The price of gold became increasingly cheap
while the dollar lost purchasing power, so other countries, especially France, demanded US gold in exchange for dollars.
In 1968, a two-tier policy was adopted,
with a market-based price of gold for private commerce.
The gold-exchange system was finally terminated by President Nixon
in 1971, when he formally ended the international convertibility of the dollar.
The last tie to gold was severed.
When the Bretton Woods system collapsed,
it was replaced by a pure fiat money system,
in which the U.S. dollar along with all other currencies
are not based on any real commodity.
Fiat money is created by government command.
In Latin, "fiat lux" means "Let there by light" by the command of God.
Fiat money means "let there be money" by the command of government.
With fiat money, the value of a currency has no intrinsic worth.
The exchange rates among fiat currencies, if not fixed to other currencies,
are set by market supply and demand.
Economists use the metaphor of a float,
currencies bobbing up and down as financial waves affect the supply and demand.
Most countries with fiat money occasionally intervene
in an attempt to affect the exchange rate,
and this is referred to as a managed float, or dirty float.
A few countries such as Hong Kong and Estonia have currency boards instead of central banks.
Their currencies are based on the currency of another country at a fixed rate, and the currency board has enough currency reserves,
or the equivalent such as bonds in that currency, to cover conversions.
Many developing countries have pegged their currency to another currency such as the dollar,
but without sufficient reserves to guarantee complete convertibility.
In that case,
the monetary authority can get into trouble if there is a run on the currency,
if foreigners want to convert out of the national currency,
but there are insufficient reserves to meet the demand.
In that case, the government can turn to the IMF for a loan.
Another problem with currency pegging is that the exchange rate can be manipulated,
such as to encourage exports by making exports cheap.
Countries that devalue their currencies gain an artificial competitive advantage.
Of course imports are correspondingly more expensive as priced in fiats,
and that makes imported capital goods more costly,
and exports become less profitable.
Interest payments denominated in foreign currencies become more costly.
Devaluation is not a free lunch.
In an article in the Wall Street Journal in 1999,
economist Judy Shelton sees the world monetary system as having "broken down.
Price signals are distorted by gyrating currencies
that create a house of mirrors for asset valuation,
leaving investors without an accurate reflection
of global economic opportunity and risk.
Misdirected capital flows and economic dislocations
stem from distorted perceptions about the relative rates of return
from seemingly productive investment projects."
Shelton states that the fundamental global economic problem is the lack of a "global unit of account for signaling value across borders."
[Trans - fiat]
Fiat money has several problems.
One, governments may have an incentive to inflate the money.
With no cost of production,
the value of a fiat currency can fall all the way to zero,
and many fiat currencies have completely lost value.
Two, the optimal rate at which money should be created is unknowable.
In my analysis, the problem for the central banker is not one of information.
The problem is that there is no possible way to know the optimal supply of money.
Third, fluctuations in the creation of money -
the creation of too much or too little money -
can lead to distortions in interest rates,
which then create distortions in investment,
leading to economic trouble such as booms and busts.
Thus the root problem with the IMF goes beyond the IMF itself to the inherently unhealthy global monetary system.
The market is not being allowed to do its critical jobs of setting the price level and the interest rate.
In our allegedly free market economies,
we have command economies in money and banking.
It seems to me that there is something deeply wrong when we are all so dependent on the monetary wisdom of a central banking wizzard.
But even aside from a dysfunctional global money system,
the IMF itself has deep flaws.
The IMF is like an economic doctor.
National governments are its patients.
If the patients were basically healthy,
and the IMF just cured patients which occasionally got ill or inured
through no fault of their own, the IMF would not be quite so bad.
But many of the patients are like people who keep getting drunk on alcohol.
They have unhealthy monetary and fiscal lifestyles.
So they keep getting sick, and they go to the IMF doctor for help.
Unfortunately, the IMF doctor is a quack.
Rather than curing the patients,
the IMF often gives them policy medicine that not only makes their illness worse,
but does not even treat the symptoms - their pain also gets worse.
In order to understand why the IMF provides bad medicine
and why so many countries indulge in unhealthy policy practices,
we need to first understand what a healthy economic policy lifestyle looks like.
We need to understand what are the sound fiscal and monetary national
(Fiscal: taxes and spending; Monetary: money and banking.)
Unfortunately, economists themselves do not have a consensus on such a basic issue.
So the following represents my analysis of optimal policies, based on the logic and evidence from the broadest available theory and global experience.
Supporters of the IMF say that sometimes markets get crazy,
markets can fail, and we need some intervention as a remedy.
But to understand an outcome, we need to distinguish between pure markets, truly free markets,
and markets that are distorted by government intervention.
Today's markets are not pure free markets, but mixed economies,
a mixture of voluntary markets and imposed government intervention.
The incentives faced by market agents have been distorted by policies that skew prices and profits from what they would be in a pure market.
So when systems fail, it is not warranted to jump to the conclusion
that it is markets as such that have failed.
We need to examine each case to see whether it is the market
or the interventionist distortions that caused the problems. Or both.
[Trans - Healthy]
A country with a healthy fiscal and monetary economic policy does not require an IMF doctor.
There are two elements in a healthy fiscal policy.
First, the government should borrow money only for productive investments.
These will generate extra output that pays back the principal and interest.
Second, to have optimal economic growth and output,
taxes should not depress output and investment.
That implies a low or even zero marginal tax rate.
I mention this because when the IMF wants a country
to balance its budget, it often tells it to raise marginal tax rates.
A healthy monetary system also has two elements.
First, the money is not fiat,
but based on some commodity or set of commodities.
The ideal would be for the whole world to have a common outside-money
based on some physical reality.
The next best system would be a fixed global fiat monetary base,
which would thus be outside money,
with money substitutes or inside money provided by private firms.
Given today's fiat money systems,
a tiny country is usually be best off using some other country's currency,
as Liechtenstein does today, using Swiss francs.
A medium sized single country should base its currency on a combination of foreign currencies and commodities.
It should have a currency board with sufficient reserves to cover the entire domestic currency.
A large country such as the U.S., Japan, the U.K., Russia, and Euroland, could freeze its supply of fiat money,
which would then mimic some physical monetary commodity as outside money.
[Trans - free banking]
The second element of a sound monetary system would be free-market banking, or free banking.
Banks would be free to establish branches anywhere,
and they could issue their own inside paper money.
Wells Fargo, for example, would issue Wells Fargo dollars,
convertible into dollars of outside money, such as federal reserve notes.
With outside money no longer set by a central bank,
the amount of inside money would be determined
by the public's demand to hold these money substitutes.
With free banking, not is inflation avoided, but also,
the market sets the rate of interest,
which then equilibrates investment and consumption.
With a natural rate of interest set by the market,
we avoid destabilizing artificial monetary stimuli.
Since the world has gone to a fiat money standard,
where the major currencies float,
the original mission of the IMF,
to help maintain the fixed-rates with temporary loans, has dissolved.
The IMF has therefore undergone a mission creep,
or more accurately, a mission leap.
The IMF now makes long term loans to developing countries,
and provides ongoing rather than just temporary financing.
From 1972 to 1999, the IMF capital base rose 127 percent in real terms, to $281 billion.
But the World Bank was set up to make development loans.
So why duplicate this in the IMF?
when he was deputy secretary of the U.S. Treasury,
defended the IMF in an article in the Wall Street Journal in 1998.
He said that the IMF promotes strong export markets for U.S. goods,
stable financial markets, and market-based democracy.
Summers stated that "Meeting U.S. obligations to the IMF also maximizes our ability to bring about much-needed changes in the way it and the international monetary system operate."
The key claimed benefit of the IMF is that when a country falls into a financial crisis, the IMF can step in to provide help, preventing a greater crisis.
The claim is that the IMF aid can not only prevent
even more severe short-term dislocations,
but also prevent the government from imposing emergency controls
that hurt the population.
The claim is that the IMF help can provide a gradual rather than sudden adjustment to the crisis and reduce contagion to other countries.
It is claimed that the conditions of an IMF loan
can help restructure the government's policies towards a better long-term policy such as a balanced budget and the elimination of high inflation.
If the U.S. finds it beneficial to have the Federal Reserve as the lender of last resort, why not have the IMF as a global lender of last resort?
If the IMF permanently cured sick and injured economies by requiring the healthy recovery policies I described, the IMF would indeed have a net benefit.
But the IMF does not do this.
The IMF does not have the incentive to do this.
The governments and their finance and treasury ministries
and the banking and industrial interests they represent
demonstrate a greater interest in getting loans repaid
rather than in long-term remedies such as land reform.
As noted by Stiglitz "In many developing countries, a few rich people own most of the land.
The vast majority of the people work as tenant farmers, keeping only half, or less, of what they produce."
Land reform would greatly increase the income of the poor and also reduce their dependence on loans, as interest payments also deplete the income of the poor.
The successful economic development in East Asia, in countries such as Taiwan, Hong Kong, Japan and South Korea, had its foundation in land reform and the use of ground rent for public revenue.
The most effective way to implement land reform is not a physical redivision of land but to collect a substantial amount of the ground rent, something that would automatically shift land titles to those who would use the land most productively.
But the IMF shuns land reform and also the taxation of land value.
Its officials wish to preserve land value as a collateral for loans.
Land value may seem like a stable foundation for loans, but like fiat money, land has a zero cost of production, and in a crash, the value of land can collapse,
as has happened often.
The basic reason why the IMF does not and cannot require fundamental changes in policy is that today's political structures
have deep incentives to adopt unsound policies.
Changing these incentives would require foundational changes far beyond the scope of anything the IMF could realistically require.
The democracies of today are based on mass voting,
which has a congenital disease, rent seeking,
the seeking of privileges and subsidies from government.
To communicate with the masses,
candidates have a demand for campaign funds.
Special interests supply the fund in exchange for favors,
at the expense of consumers and taxpayers.
This structure inherently creates perverse incentives that can only be overcome by a change in that structure.
The IMF cannot demand changes in that structure because it itself is controlled by member countries having that structure.
[Trans IMF conditions]
If you are sick, the doctor usually does not just provide you with medicine.
The doctor often also tells you to change your diet and alter your activities.
So too, as an economic doctor,
the IMF requires policy changes as a condition for getting the loan.
The government might have to balance its budget,
tighten its monetary policy, and alter its exchange rate.
To eliminate the budget deficit,
the IMF typically tells the government to raise taxes and cut spending.
Normally, balancing the budget for consumption is good practice,
but when the economy is injured, many people are unemployed
and there is a great need to restore enterprise and investment.
IMF prescriptions to tighten monetary policy decrease bank reserves and increase interest rates often to extreme levels often above 20 or even 50 percent.
It becomes very difficult for business to operate at such rates.
When the IMF eliminates food and fuel subsidies for the poor, people riot, as happened in Indonesia, Bolivia, Ecuador, and other countries.
Joseph Stiglitz, chief economist at the World Bank from 1997 to 2000, wrote a scathing analysis of the IMF, Globalization and Its Discontents.
According to Stiglitz, IMF decisions are often based on bad economics and doctrines that, as he puts it, "seemed to be thinly veiling special interests."
Stiglitz states, "When crises hit, the IMF prescribed outmoded, inappropriate, if 'standard' solutions, without considering the effects they would have on the people in the countries told to follow these policies.
Rarely did I see forecasts about what the policies would do to poverty.
Rarely did I see thoughtful discussions and analyses of the consequences of alternative policies..."
Stiglitz states that
the IMF "remedies failed as often, or even more often than they worked.
IMF structural adjustment policies ...
led to hunger and riots in many countries;
and even when results were not so dire,
even when they managed to eke out some growth for a while,
often the benefits went disproportionately to the better-off,
with those at the bottom sometimes facing even greater poverty...
[T]he level of pain in developing countries created in the process of globalization and development as it has been guided by the IMF and the international economic organizations has been far greater than necessary."
In the early 1990s, the IMF told African countries to implement austerity policies as a condition for loans.
Imports became costlier, including fertilizer and farm inputs.
Rural banks and credit programs were shut down.
Meanwhile, the U.S. and Europe exported subsidized food and cotton.
These changes "impoverished millions of subsistence farmers and villagers."
Poverty has increased in Zambia, Mozambique, Malawi, and other countries that have enacted IMF and World Bank agricultural policies.
Even when the economy grows, the distribution of the benefits also matters.
In Mexico the benefits of growth have gone to the upper 30 percent
and even more concentratedly to the top 10 percent of the population,
while those at the bottom gained little or are even worse off.
The government of Mexico paid back its loans to the US and the IMF,
but its GDP hardly rose from 1973 to 1997,
while its per-capita debt more than tripled.
With higher taxes to pay the interest,
the net-of-tax income of Mexicans declined.
[Trans - Real estate]
Today's fiscal and monetary policies and practices create artificial, unsustainable economic booms that lead to a recession if not a financial crisis.
Stiglitz blames the liberalization of financial regulation,
but currency and land speculation is induced by unhealthy economic policies.
Speculators may speed up, but are not the basic cause, of crises.
The East Asian crisis of 1997 is a good example.
The crisis began in Thailand, which had experienced an investment boom.
Stiglitz observes that, to a great extent, foreign funds went to finance real estate purchasing and construction.
He notes that the "overbuilding in commercial real estate" was "evident to any visitor to major cities in the region."
The incentive to overbuild was caused by the implicit government subsidies to real estate speculation and construction,
the same as in Japan during the 1980s and
in the U.S. during its booms such as during the 1920s.
The Thai government pegged its currency, the baht, at an narrowly floating exchange rate of between 25 and 27 per US dollar.
This facilitated a large current-account deficit, including interest payments on government debt, with imports greater than exports.
Thailand had to attract foreign capital funds at 4% of its GDP every year to offset the current account deficit.
The US and IMF bailout of Mexico in 1995 had socialized investor losses and so foreign investors and speculators figured the IMF would bail them out in Asia too if thing went wong.
What kept foreign funds coming in to Thailand was a high interest rate on baht deposits and the promise to maintain the fixed exchange rate.
High domestic interest rates created an incentive for the domestic companies to borrow abroad.
In a real-estate boom, as real estate prices rise, banks feel they can lend more on the basis of the collateral.
Real estate developers see quick profits in putting up new buildings,
until excess capacity results.
Higher prices cause investment to become less profitable.
The developers can't rent their space, they default on their loans, and the bubble bursts." Bankruptcy becomes widespead.
Stiglitz write, "In Thailand, ... it was the already bankrupt real estate firms and those that lent to them who had the most foreign-denominated debt."
In 1996 and 1997, the Japanese yen dropped relative to the dollar.
A higher-valued dollar implied a higher-valued baht relative to the yen, and with Japan being Thailand's major trading partner, this decreased Thai exports, increasing its trade deficit.
Currency speculators tasted blood.
They correctly speculated that the fixed exchange rate was unsustainable.
The speculators sold bahts.
Currency speculators would later be blamed for causing the currency collapse, but they in fact were only exploiting the already afflicted system.
Speculators speed up but do not cause a currency collapse.
Foreigners then withdrew dollars, but there were insufficient reserves with which to provide dollars in exchange for domestic currency.
This crisis would have been prevented with land value taxation, that would have prevented the real-estate excesses, and by a credible currency board.
The IMF made the crisis worse, not better, with its conditions.
The IMF caused investor confidence to drop even more,
promoting more capital flight.
When the IMF shuts down weak banks, it can instigate a run on the other banks.
When the IMF raises interest rates, this can drive capital out, rather than in.
IMF policies thus suffer from intellectual myopia.
The IMF cure thus often makes the economic disease worse, not better.
There is a word for an illness caused or made worse by the doctor: iatrogenic.
IMF policies are too often iatrogenic, creating an even worse problem for the afflicted economy.
Iatrogenic IMF policy is like the medical practice 200 years ago
of bleeding people to cure an illness.
Several studies have concluded that IMF policies are iatrogenic.
A survey of the studies of the effects of IMF programs by Mohsin Khan finds that they do not affect inflation, and the effects of growth vary and are uncertain.
Sebastian Edwards finds that in the 1980s, the effects of conditionality were that current accounts improved but inflation increased.
Doug Bandow examined financing activities from 1947 through 1989 and discovered that six countries relied on IMF assistance for more than thirty years, twenty-four countries for twenty to twenty-nine years,
and forty-seven countries for ten to nineteen years.
Of the eighty-three developing countries that used IMF resources for at least 60 percent of the years since they started borrowing, more than half,
forty-three nations, have relied on the IMF every year.
Graham Bird concludes that
"the image of the fund coming into a country, offering swift financial support, helping to turn the balance of payments around, and then getting out,
is purely and simply wrong."
A sign of iatrogenic practice is when patients get sick more often and longer than if they are not treated.
Johnson and Shaefer report that for less-developed countries,
"IMF lending is more likely to create long-term dependancy
than to act as short-term assistance."
From 1965 to 1995, of the 137 countries receiving IMF loans,
for 81 countries the frequency of borrowing increased 50 percent after 1980.
Lawrence McQuillan, in his study of the IMF, concludes that
"the evidence demonstrates that IMF financing programs,
which rarely prescribe appropriate economic policies
or sufficient institutional reforms,
are at best ineffective
and at worst incentives for imprudent investment and public policy decisions
that reduce economic growth,
encourage long-term IMF dependency,
and create global financial chaos."
If a government cannot pay its IMF debt,
it typically renegotiates it debt and borrows more money.
People and enterprises are then heavily taxed to pay for debs
incurred in the past, but which provide no current benefits.
Who benefits from IMF practices?
Among the prime beneficiaries of this policy are the banks that loaned money to these countries.
The IMF acts as their debt collector and loan guarantor.
In the Asian crisis of 1997, the $95 billion lent by the IMF and the G-7 countries enabled the recipients to provide dollars to the firms that had borrowed from Western bankers.
The effect was to bail out the banks along with the governments.
The IMF facilitated rather than retarded currency speculation,
since the initial IMF loans were used to maintain the unsustainable exchange rates.
The IMF claims success when a loan is paid back.
This ignores that the purpose of an economy is the well being of the people.
Even if the specific conditionalities were not so bad,
the very presence of the IMF creates the perverse incentive called "moral hazard."
Moral hazard occurs in insurance when the presence of insurance
makes it more likely that the insured party indulge in the behavior insured against.
People will engage in riskier behavior if they don't bear the full consequence.
The availability of the IMF as the bailer outer of last resort provides less incentive for dysfunctional governments to avoid excessive deficits and less incentive for private lenders to be prudent.
To avoid moral hazard,
a lender of last resort should charge a premium for emergency loans.
[Transp - IMF loans]
But the IMF does the opposite, providing loans at a subsidized rate.
The subsidy makes the moral hazard worse.
A 1981 study by the IMF found that overexpansionary policy
was the main cause of balance of payments problems, not external causes.
A lender of last resort should provides funds to organizations
that are solvent but have temporary liquidity problems,
while the IMF also makes loans to insolvent governments.
Moral hazard is also reduced by requiring collateral on the borrower's assets.
Moral hazard helps prevent the sound fiscal and monetary policies that would prevent the cycle of boom and bust.
The IMF is supposed to prevent contagion,
the spread of financial injuries to other countries,
like a doctor seeking to prevent the spread of disease.
But the IMF failed.
In the past 15 years, there have been over 90 serious banking crises, many of them followed by deep depressions.
The Mexico bailout created moral hazard that made the Asian crisis worse.
The Thai crisis soon spread throughout Southeast Asia to Malaysia, Indonesia, and the Philippines, as they too had high current account deficits, fixed exchange rates with insufficient reserves, huge debts, and reduced competitiveness.
Then came the Russian crisis of 1998.
Another aspect of moral hazard is the perpetuation of corruption.
Robert Keleher cites several studies that find that foreign assistance
rather than promoting reform
instead strengthens existing governmental institutions.
The IMF's own research staff identified many of the recipient countries as corrupt.
IMF lending does not discriminate among countries with greater or lesser corruption.
Indeed, the IMF lent funds to many corrupt as well as oppressive regimes, including Romania under Ceausescu, Ethiopia under its Marxist regime, and Zaire.
The IMF loaned funds to countries such as Zaire and Russia even when it knew the funds would be used corruptly.
Billions of dollars of IMF "loans" to Russia appeared in foreign bank accounts days after being delivered.
Another effect of the IMF is that the imposition of policies on the borrowing government diminishes the national dialogue over government policy.
The imposition of IMF rules crowds out the internal resolution of policy differences, and may weaken reform efforts.
Defenders of the IMF claim that it imposes no cost to US taxpayers.
The members of the IMF supply funds when the IMF requests a capital expansion.
As of 1999 the total U.S. contribution to the IMF was $68 billion.
U.S. Appropriations bills claim that U.S. contributions to IMF funds
will not be counted as an outlay and will not increase the deficit,
because each dollar provided is a loan.
Former U.S. Treasury Secretary Robert Rubin claimed that "the IMF has not cost the taxpayer one dime".
But economic reality differs from accounting superficialities.
[Trans - Interest]
IMF loans are deliberately below market rates.
The interest that the U.S. government obtains from its IMF accounts has usually been less than the U.S. Treasury's cost of borrowing,
i.e. of U.S. Treasury bonds.
The Congressional Research Service has calculated that in real terms the IMF has added at least $4.6 billion to the U.S. national debt.
The official U.S. share of the IMF funds is 18 percent,
but that does not include costs hidden by various accounting means
that bring the U.S. share to 26 percent.
Also, the IMF does not pay the U.S. government interest on over $2 billion of its contributions.
Therefore, while the cost to U.S. taxpayers is not huge,
the proposition that IMF funding is costless to U.S. citizens is untrue.
The main reason the IMF should be abolished is that without it,
countries with bad policies would have to face the consequences:
bankruptcy, policy change, possibly regime change,
or deep structural changes.
The IMF enables government chiefs to continue their bad policies
and stay in power.
[Trans - If]
If the IMF did not exist, some countries that borrow from it would default, but that would send a signal to lenders to avoid loans that are too risky,
and that would induce governments to make more fundamental reforms
or be replaced.
If the IMF did not exist, countries with pegged exchange rates would convert to either floating exchange rates or currency boards.
Since private capital flees when it is about to get fleeced,
governments would have a greater incentive to have more economic freedom,
and to have greater transparency in both governments and in capital markets,
since failed policies would no longer be subsidized.
Private capital markets could act quickly to finance temporary balance of payments deficits due to external shocks, such as a war.
Also, if the IMF did not exist, some of its functions would be transferred to other institutions.
I think this could be an improvement, because these other institutions,
such as regional development banks, the World Bank, governments,
and private lenders, would most likely not have conditionalities
as detrimental as those of the IMF.
This would not simply be a shift of functions, but a change, because the economic culture of the other institutions would be different from those of the IMF.
There could be regional monetary funds that would be more sensitive to the local conditions.
If the IMF were abolished, something would need to be done about the debts
owed to it. These, along with member drawing rights, could be transferred to the World Bank and eventually be liquidated.
To conclude, we live in a world
where governments have an incentive to spend more than they tax,
import more than they export,
inflate money more than they produce,
and to favor the special over the general interest.
These bad incentives are exacerbated by the perverse incentive of moral hazard.
Given both the perverse incentives of the systems and the disincentives to make fundamental reforms,
I conclude that the IMF is obsolete,
the IMF makes matters worse rather than better,
and it will continue to do so,
and therefore the world would be better off without the IMF.
The bottom line: abolish the IMF.
Thank you, and I'll be pleased to answer questions.