David R. Henderson  

End the IMF

PRINT
Just Say Yes... Cancer Screening Costs and Ben...

Various bloggers are talking about who should be the new managing director of the International Monetary Fund. Here's my nominee: nobody. The IMF should be abolished. I came across an article I wrote in Canada's Financial Post in 1999. I think it still holds up. Some excerpts:

Even if the Mexican bailout had been a success in this broader sense, the IMF subsidy sent, and other bailouts are sending, two bad signals. First: If you're a government official who screws up your economy enough, the IMF will bail you out. Just this week, for example, the IMF loaned another $4.5-billion to the Russian government, $1.9-billion of which will be used to pay back an earlier IMF loan. The new loan was made contingent on Russian parliamentary approval of a package of new laws. Some of the laws, ironically, will increase taxes on Russians, as if what a formerly communist country needs to get its house in order is to tax its people more. The second signal the IMF bailouts send is to investors, who will make much riskier investments than otherwise because the downside is covered. Investors are saying, in essence, "heads I win, tails I break even." Neither foreign governments nor investors are missing that signal.

In a recent Fortune article, MIT economist Paul Krugman minimized the IMF's harmful effect because it has "very little actual money." But apply that same reasoning to the 1980s U.S. savings and loan crisis. Just as the IMF subsidizes investors' downside risk, the Federal Savings and Loan Insurance Corp.'s (FSLIC) deposit insurance gave depositors zero incentive to monitor the S&Ls' loan portfolios. In 1983, shortly before the S&L crisis was at its worst (in the end, it cost more than $175-billion in present-value terms), the FSLIC had only about $6.4-billion in the kitty. By Mr. Krugman's reasoning, the S&L crisis didn't happen. Think of the IMF as a giant FSLIC. The crucial factor is not the IMF's funds at any point in time, but how much more it can get. Just recently, the U.S. government gave it $18-billion.


And:
Last year, when Russian official Anatoly Chubais bragged to the Russian press that he had "conned" the IMF and its chief negotiator, Stanley Fischer, none of us taxpayers who paid the price could legally take action against Mr. Fischer. He wasn't fired, and he and the IMF have continued to make loans. An even greater "moral hazard" than is implicit in IMF loans is the moral hazard in giving such power to a small group of people. Their power must end.



COMMENTS (6 to date)
Charlie writes:

If there was only $1 in the IMF, would it still cause some a harmful effect?

Across some futures, investors know the backstop won't be available. It seems erroneous to assume the size of the backstop is irrelevant to the decisions of market participants.

David R. Henderson writes:

@Charlie,
If there was only $1 in the IMF, would it still cause some a harmful effect?
Yes, it well could, for the reason I gave in my post. That's why I made the point I did with reference to FSLIC. It's like the old Jay Leno ad for Doritos: "Keep eating them; we'll make more." Draw down the $1 and we'll replace it with $10 billion.

Blackadder writes:

I know there is research suggesting that foreign aid tends to impede democratization by giving dictators a funding source independent of the prosperity of their people. Does the same hold also for IMF loans?

Octahedron writes:

After reading about the East Asia Crisis, my opinion of the IMF began to dwindle. When it comes to the business of bailing out other nations I still have yet to get a good counter argument that the IMF does a good job at that compared to what might have been had the IMF not done so.

paul gregory writes:

David: I agree. The IMF was set up to police the Bretton Woods agreement. Since that system fell apart, the IMF has had to invent a role for itself. I know that Russia did not grow until it ignored IMF advice on an overvalued exchange rate. My sense is that the IMF does much more harm than good.

Charlie writes:

"@Charlie,
If there was only $1 in the IMF, would it still cause some a harmful effect?
Yes, it well could, for the reason I gave in my post. That's why I made the point I did with reference to FSLIC. It's like the old Jay Leno ad for Doritos: "Keep eating them; we'll make more." Draw down the $1 and we'll replace it with $10 billion."

If we are going to add more money, we could still just create an agency where there wasn't one. We created TARP, after all. I guess you could argue it makes it harder, but if we end up doing it again anyway, it may just make it more costly. It costs not just the organizational capital required to put it together each time, but the institutional knowledge gained each time.

It gets back to the game theory problem. The fact that bailouts exist strongly reveal an ex post preference for bailouts (even if the incentives are strictly political, they are still there). Disbanding the IMF is not the same as credibly committing to no bailouts, and if it is time inconsistent, it may be a useless (or costly) gesture.

Comments for this entry have been closed
Return to top