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Putting the Taxpayers at Risk, Part 2

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The World Bank has also long promoted development at any cost. Bank loans underwrote Julius Nyerere’s coercive “ujamaa” program and Indonesia’s forced transmigration project. Millions of farmers have been forced off their land without compensation by Bank-backed dams. Bank lending long subsidized the destruction of Brazil’s rain forest.

To blunt such criticisms, the Bank began making so-called adjustment loans to promote market-oriented policy reform. But its conditions, like those imposed by the Fund, are usually too little, too late. The Bank has also proved unwilling to cut off recalcitrant borrowers. A devastating internal study, the 1992 Wapenhans Report, documented a “culture of lending” and concluded that staffers were reluctant “to take a firm stand with borrowers.” Even Bank Senior Vice President Stern admitted, “Time and again the best of policy intentions, the best of policy letters solemnly agreed to and signed by the finance minister and the Bank, broke down.”

There are four smaller versions of the World Bank. The Inter-American Development Bank has subsidized many of the same Latin American fiscal wastelands as has the World Bank. The African Development Bank has been even more prodigal and has spent years attempting to escape administrative and fiscal chaos. The Asian Development Bank and European Bank for Reconstruction and Development have little more to show for their efforts. In its first two years of operations, the latter spent $300 million on overhead — one-fourth more than the total lent for development purposes — $80 million on its headquarters building alone.

Yet it is to these organizations that the president looks for answers to economic crises. That was not their original function, but never mind. As public-choice economics explains, government bureaucracies act first in their own interests, and nothing is more important than self-preservation. Even International Monetary Fund (IMF) Executive Director Michel Camdessus acknowledges that the Asian bailouts “represent a marked departure from the kind of programs we have traditionally supported.”

Still, for a few weeks last year, Washington stood aloof as East Asian economies started to crash and burn. But then the administration announced its backing for a $33 billion bailout of Indonesia, led by the IMF, followed by the largest aid package ever, a $57 billion program for South Korea. Then Russia was supposed to collect $22.6 billion, and the Fund complained that it is almost out of cash.

Naturally, the administration pushed for another $18 billion infusion for the IMF. The president also unilaterally committed billions in U.S. resources through the Exchange Stabilization Fund. Explained Treasury Secretary Robert Rubin: “Financial stability around the world is critical to the national security and economic interests of the United States.”

Well, maybe, but the financial stability of every nation around the globe? Even assuming that the multilateral development banks (MDBs) can preserve global economic stability — and if they can, why are Brazil, Indonesia, Malaysia, South Korea, Thailand, Russia, and Ukraine, major borrowers all, in such a mess today? — that doesn’t mean it is worth the cost of attempting to do so. Washington bailed out Mexico four years ago; the reason, explained the administration, was that Mexico was unique. Its economy was intimately tied to that of America: the two nations had only recently inked the NAFTA trade accord. Moreover, the administration warned that refugees might flood across the border if prosperity was not restored. America’s southern neighbor could not be allowed to fail.

The argument was never convincing — the slump in an economy a tenth the size of America’s in no way threatened U.S. prosperity — but at least the contention had some surface plausibility. And there was only one Mexico. No other developing state could make a similar claim to U.S. aid.

Then along came Indonesia, which was a minor economic partner of the United States. Jakarta had been liberalizing, but its economy remained bedeviled by inefficient monopolies, insolvent banks, harmful trade barriers, wasteful food subsidies, and political favoritism. Being a relative, or the spouse of a relative, of President Suharto was the surest way to wealth. President Habibie’s family is not so rich, but he hasn’t been in power nearly as long.

Nor was Indonesia alone in its misbehavior. National Review ‘s Richard Brookhiser observed that “Asian capitalism, to the degree that it is different from plain old capitalism, is weaker, bleeding money to the politically connected, cushioning the powerful from their business blunders.” Some of the formerly communist states, most notably Russia, followed much the same pattern, though they were more likely to lack even the rudiments of a capitalist economy.

Governments in Indonesia, Russia, South Korea, and Thailand, which suffered the worst collapses, had no one but themselves to blame for their problems. In all of these cases, what positive changes that occurred were necessitated by countries’ economic problems, not purchased by the promise of IMF loans. Particularly in East Asia, it was only the economic crash that forced politicians to reconsider preferential monopolies, inefficient banking practices, foolish government investments, widespread business subsidies, and outdated labor laws. Governments acted only because they had to act.

Unfortunately, the bailout packages will reduce the incentive to reform by relieving the pain of financial failure. Of Indonesia, economist Mari Pangestu warns, “There are still some untouchables among banks and their customers, and you can’t do anything with the untouchables.” The regime certainly won’t do anything about them unless forced to do so.

Yet today Indonesia is likely to do only the minimum necessary to receive aid. For a time it maneuvered to avoid any conditionality, attempting to arrange loans from Malaysia and Singapore rather than the IMF. Although that strategy failed, it made and then reneged on two agreements with the Fund. IMF Deputy Managing Director Stanley Fischer responded by proclaiming his organization’s willingness to “show considerable flexibility.” So much for the organization’s vaunted toughness. Program number three was put into operation in April 1998.

Moscow has been even worse. Communism collapsed but, explains Vyacheslav Nikonov, director of the Politika Foundation in Moscow, “Russia failed to create a market economy.” Rather, the Yeltsin government fostered what democrat Grigory Yavlinsky terms “a corporatist and criminalized sort of capitalism.”

The problem was not inadequate Western assistance. Moscow collected more than $20 billion in IMF loans from 1992 to 1996. Rather than encourage Russia to reform, complain domestic reformers, the aid allowed the regime to pursue largely unsound, statist policies. As William Lash of the Center for the Study of American Business points out, privatization lags, up to three-fourths of the economy operates on barter, most citizens have no bank savings, trade policies are highly protectionist, regulations stifle domestic and international investment, and criminal cronyism rules.

Now comes another IMF bailout, this one for $22.6 billion. The conditions, that Russia reduce its fiscal deficit and accumulated debt, put its banks on a sound fiscal basis, and otherwise free up its economy, are the same as those on every other IMF loan. But ever-trusting Stanley Fischer stated, “There is certainty that the IMF measures will be implemented in full.”

That was early August 1998. By late August, Moscow was retreating from economic reform: government controls were expanding, ruble printing presses were running, bank bailouts were proceeding, and business subsidies were flowing. Moscow wasted the first loan installment of $4.8 billion to support the ruble, which nevertheless ignominiously crashed.

There’s no reason to believe that the other $17.8 billion will be any better spent. In fact, supposedly capitalist, democratic Russia is recalling to power reform communists who, under Gorbachev, were dedicated to making socialism work. Even Stanley Fischer says Moscow’s latest plans are “very destructive” and “would be an extremely retrograde step.” Indeed, he adds, “The IMF regards the fact that Russia was unable to meet its commitments and has had to restructure them unilaterally as extremely unfortunate and regrettable.” Not that this means the Fund will drop its loan program. Curiously, novelist Mark Helprin chose this moment to advocate a multiyear, multibillion dollar “Marshall Plan” for Russia.

All told, the IMF has engineered a $141 billion string of bailouts over the past year. The result? Uneasy calm in South Korea and Thailand, disastrous chaos in Indonesia and Russia, and a half dozen other nations sliding towards the economic precipice. Were Indonesia, Russia, and other countries simply left to their own devices, they would have to adopt all of the reforms necessary to recondition their economies and reassure foreign investors, who tend to be more careful with their own cash than are international aid bureaucrats with tax monies from industrialized states.

Now that Washington has intervened to prop up virtually every nation, irrespective of its economic connection to America (Indonesia, Russia, and Thailand collectively account for 2 percent of U.S. exports; Indonesia and Thailand are minor economic players, while Russia’s economy is on a par with that of the Netherlands), what state cannot expect help? One administration official told the New York Times: “We can’t step into every economic mess.” But what standard says yes to Indonesia, Russia, South Korea, and the other East Asian and Latin American states President Clinton has targeted for IMF/World Bank aid, and no to other nations suffering severe financial distress?

The list of potential new bailout recipients is long. Economists forecast lower growth throughout Latin America, as Argentina, Brazil, and Mexico feel particular pressure. Several Central and East European countries have followed the failed Russian model of inadequate economic reform. In fact, in July 1998 the IMF agreed to a $2.2 billion loan for Ukraine. And then there’s the big enchilada: Japan, in recession and teetering on the economic brink.

Of course, if the world really was ready to topple into an economic abyss, there isn’t much the IMF, which lent $23 billion last year, could do about it. (The Bank provided a similar amount.) That’s just a tenth of the private capital flow into developing states alone. It is about .5 percent of Japan’s GDP. More important, the MDBs don’t create resources; they reshuffle them.

Anyway, despite America’s extensive international ties, problems in nations such as Indonesia, Russia, and South Korea have had only a limited domestic impact. The effect of a Japanese collapse would be worse, but a few billion in loans from the Fund to the world’s second largest economy would be pointless.

However, by intervening internationally, attempting to prevent economic instability everywhere, the U.S. government risks creating economic instability at home. Piling international loan on international loan and underwriting economic failure around the globe moves potential economic instability from the foreign to the domestic stage.

Part 1 | Part 2 | Part 3

BOOKS BY DOUG BANDOW

Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996)
Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994)
The Politics of Envy : Statism As Theology (1994)
The U.S.-South Korean Alliance : Time for a Change (1992)
The Politics of Plunder : Misgovernment in Washington (1990)
Beyond Good Intentions : A Biblical View of Politics (1988)

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    Doug Bandow is vice president of policy at Citizen Outreach, the Cobden Fellow in International Economics at the Institute for Policy Innovation, a senior fellow at the Cato Institute, and serves as adjunct scholar for The Future of Freedom Foundation. He is a former special assistant to President Reagan; he is also a graduate of Stanford Law School and a member of the California and D.C. bars. BOOKS BY DOUG BANDOW: Leviathan Unchained: Washington’s Bipartisan Big Government Consensus (forthcoming) Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996) Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994) The Politics of Envy : Statism As Theology (1994) The U.S.-South Korean Alliance : Time for a Change (1992) The Politics of Plunder : Misgovernment in Washington (1990) Beyond Good Intentions : A Biblical View of Politics (1988)