For more than four decades, the U.S. has been the largest contributor to not only the IMF but also to all of the other multilateral-aid institutions, such as the World Bank. Indeed, Washington even provides the largest check to the African Development Bank, the Asian Development Bank, the European Bank of Reconstruction and Development, and the Inter-American Development Bank.
Has the IMF contributed to economic growth and development?
The answer is no. Not that the IMF itself has any doubts about its effectiveness. In the fall of 1989, Michael Camdessus, the Fund’s managing director, told the World Bank-IMF meeting that increasing his organization’s capital from $120 billion to $240 billion would be “the cheapest way for taxpayers in the richer countries to come to the aid of the poor.” (“Tough-minded, budget-conscious” Treasury Department negotiators agreed to a 50 percent hike of $60 billion.)
But the Fund has been making loans for more than four decades. With what results? Impoverishment, indebtedness, and political dependency around the globe. In some cases, the Philippines and Zaire, for instance, foreign transfers were blatantly looted. In others, the money was wasted on inefficient prestige projects. And even what were once thought to be the best of investments — docks, factories, and roads — are deteriorating as well as bleeding economically impoverished nations to death.
The IMF was created as part of the Bretton Woods system at the close of World War 11 to help nations that were suffering balance-of-payments difficulties. When Richard Nixon closed what was left of the gold window in 1971, the original function of the IMF disappeared. But it soon was providing more credit than ever before — for new IMF loans increased nearly sixfold from 1973 to 1974. An official history of the Fund observes that during this period, the IMF’s managing director, H. Joharmes Witteveen, “took several innovative steps to increase the Fund’s lending activity and capacity.”
In contrast to the World Bank, the Fund does not back individual projects, but instead makes general loans to governments, with conditions theoretically intended to assist them in promoting economic development. the best test of the effectiveness of the IMF, then, is how many troubled developing countries have ever “graduated” because of Fund loan-programs.
The most often cited examples are South Korea, New Zealand and Great Britain. South Korea has received IMF loans, but it began using Fund credit only in 1974, after its economic miracle was underway. New Zealand and Great Britain have both borrowed on occasions, but they industrialized long before there was an IMF.
Even friends of the IMF have trouble pointing to truly successful examples. Richard Feinberg and Catherine Gwin, for instance, concluded in 1989 that “the record of IMF-assisted adjustment efforts in Sub-Saharan Africa is discouraging.” Economist Jeffrey Sachs says that most Fund agreements “are now honored in the breach.” Raymond Mikesell of the University of Oregon reports that most developing states “are not pursuing policies associated with successful adjustment and growth” despite IMF lending. Several other commentators have found what Sachs describes as “mediocre compliance at best.” Even the Fund acknowledges a declining compliance rate in recent years.
In short, the organization has been subsidizing the world’s economic basket cases for years, without positive effect. Six nations — Chile, Egypt, India, Sudan, Turkey, and Yugoslavia have been relying on IMF aid for more than 30 years through 1989. Twenty-three nations have been borrowing for between 20 and 29 yews. And forty-eight, almost one-third of the world’s nations, have been using Fund credit for between 10 and 19 years.
Since 1957, Egypt has never been off the IMF dole. Yugoslavia, which took its first loan in 1949, was not a borrower in just three of the following 41 years. India was one of the IMF’s first customers and, aside from short intervals, has been on Fund programs for four decades. Bangladesh, Barbados, Gambia, Guinea-Bissau, Pakistan, Uganda, Zaire and Zambia all started borrowing from the IMF in the early 1970s and have yet to stop. IMF loans to Argentina, Bolivia, Brazil, Costa Rica, the Dominican Republic, Haiti, Peru, and Uruguay have helped turn those nations into permanent debtors without doing anything to solve their economic ills. Particularly striking is the fact that of the 83 developing states that have been using IMF funds for at least 60 percent of the them since they started borrowing, more than half of them — 43 nations — have relied on the IMF every year. While the Fund has not necessarily caused countries to become permanently dependent on foreign funds, its efforts have not helped nations achieve self-sustaining growth.
There are several problems with EW lending, though the organization makes it hard to judge its activities. Sachs, for instance, has complained about IMF secrecy “which makes it extremely difficult for outside observers to prepare a serious quantitative appraisal of W policies.” Ultimately, however, the best test of the IMF’s achievements is whether Fund borrowers seem to be making progress as a result of its assistance.
Unfortunately, they are not doing so. Among the IMF’s failings is its reliance on inappropriate conditions. For instance, the Fund has often focused on narrow accounting data, causing its advice to have perverse consequences. IMF demands that a borrower reduce its current account deficit has encouraged the adoption of protectionist measures; insistence that a nation reduce its budget deficit has encouraged governments to raise taxes, slowing growth.
Moreover, the IMF does little to enforce its conditions. When a country violates its agreement with the Fund, the organization customarily grants a waiver, or suspends the agreement, while scheduling talks to negotiate a new loan. The money will flow again. How else to explain seventeen different arrangements with Peru between 1971 and 1977 and eight separate standby programs for Brazil between 1965 and 1972?
The main difficulty with IMF lending, however, is that no matter how sensible the advice offered by the Fund, and no matter how worthwhile the conditions set for loans, the IMF’s activities have only a limited impact, leaving the borrowers’ overall economic policies badly distorted. For example, while the organization was encouraging Mexico to have a slightly more sensible exchange-rate policy during the 1970s, the Mexican government was creating a monstrous, money-losing public sector, wrecking its economy.
Thus, foreign assistance — from the IMF, other multilateral institutions, the U.S. and other countries — effectively subsidizes the very cause of poor nations’ problems, for the recipients continue maintaining their counterproductive economic policies. For instance, among the Fund’s biggest clients have been Argentina, Brazil, India, and Yugoslavia, all of which persistently have promulgated anti-growth, dirigiste policies despite IMF loans and conditions. Support for the odious Ceausescu regime in Romania suggests that past Fund officials lacked a conscience as well as common sense.
Indeed, the IMF has even defended itself from the charge that it is prejudiced against collectivism: “The Fund has had programs in all types of economies and has worked with their authorities, identifying the best way to achieve external balance or exercising its function of surveillance over the payments and exchange system. . . . In many instances, Fund-supported programs have accommodated such nonmarket devices as production controls, administered prices, and subsidies.” How tolerant! But, one wonders, just how is a country with such policies going to achieve self-sustaining economic growth?
For years, foreign money has helped cover financial losses and sustain economies throughout the Third World, pushing off the borrowers’ day of reckoning. Today, the borrowers are left with huge debts and low growth. The answer is not to grant new political loans to these governments. The solution is for these countries to slash public outlays and taxes, privatize state enterprises, and eliminate stultifying regulations. Private credit and investment will then follow naturally.
The transition will, of course, be painful for those who have become dependent on the political largess. But foreign assistance, whether from the IMF or other political institutions, will only make matters worse in the long run. It is time to cut off, once and for all, our foreign-aid spigot. It is time to end America’s participation in the IMF.