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Putting the Taxpayers at Risk, Part 3

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What is driving support for the multilateral development banks (MDBs) is businesses’ constant quest for government handouts. Groups such as the Chamber of Commerce and National Association of Manufacturers spare no expense in lobbying Congress to toss money abroad in the hopes that some of it will be used to purchase U.S. products. Indeed, one of President’s Clinton’s proposals to save the world economy is to increase export subsidies, through such entities as the Export-Import Bank, which provides cheap, taxpayer-funded credit for purchasers of Boeing aircraft, GE nuclear plants, and much more. There isn’t even the pretense of helping the impoverished masses in other nations, as with the MDBs.

Of course, exporters are not the only domestic beneficiaries of foreign aid. In the short term, the MDB lending simply recycles back to private creditors and investors. Although European, and particularly German, banks face the greatest exposure in Russia, a Who’s Who of American institutions (Bank-America, BankBoston, Bankers Trust, Citicorp, Chase Manhattan, J.P. Morgan, Morgan Stanley, Republic New York, Salomon Smith Barney) also faces billions in potential losses. George Soros’s Quantum Fund alone lost about $2 billion. While IMF bailouts of debtor nations are rarely great enough to make Western investors whole, they can make the difference between acceptable losses and disaster.

MDB lending is also understandably supported by its international beneficiaries’ inefficient and corrupt incumbent regimes. Foreign aid supports those systems, irrespective of the conditions attached to a particular loan. Over the last two decades, the United States and international lenders have bailed out the Mexican economy four times; doing so has allowed the government to delay politically painful reforms. Significant elements of crony capitalism seem likely to survive in both Indonesia and South Korea. Substantial foreign aid makes that almost inevitable. Assistance to Moscow may have helped Boris Yeltsin retain power, but it has done precious little to promote real economic reform.

Rep. James Leach (R-Iowa), chairman of the House Banking and Financial Services Committee, acknowledges criticism of the Fund, but argues that the “alternatives may be worse.” Actually, unsubsidized economic failure is a powerful disciplining mechanism. It was crisis, not the IMF, that caused Indonesia, South Korea, and Thailand to begin making painful economic reforms. Without an international bailout, countries otherwise dedicated to doing only the minimum necessary to receive aid, would instead have to adopt all the changes necessary to reassure foreign bankers and investors. Private pressure works. South Korean President Kim Dae Jung promised the day after his election: “I will boldly open the market. I will make it so that foreign investors will invest with confidence.” Thailand’s evident commitment to reform led foreign investors to begin reentering the market in force in March 1998.

This more subtle nature of private pressure would also help shield reform efforts from the xenophobia that so often accompanies IMF programs. Governments would have no one else to blame for their reform programs.

Moreover, the Fund’s proclivity to bail out the profligate creates what economists call a “moral hazard,” encouraging Western bankers and investors, in particular, to make irresponsible decisions in the belief that they will be protected if things turn out badly. Federal deposit insurance similarly distorted the behavior of S&L owners, who kept the profits from risky loans but passed losses on to the taxpayers. Warns economist Allan Meltzer, “Banks and financial institutions can now act safe in the knowledge that the IMF will provide a safety net to protect them from some, or even most, of their losses.” In effect, the MDBs are committed to capitalism without loss, the economic equivalent of Christianity without hell.

Of course, if U.S. taxpayers are lucky, improvident Third World borrowers will repay their loans. But even such a best case won’t be costless, since credit isn’t free. When Washington channels billions of dollars to foreign kleptocracies, it diverts resources from other uses, such as investment by entrepreneurs in America. We will never know how much we have lost in order to promote “stability” in other nations.

The only other argument for an American bailout is to maintain Washington’s international clout. Some advocates of aid to Russia simply hope to keep Yeltsin in power. However, if his government fails to push through reforms — and the klatch of former Gorbachev economic advisors who have taken over are unlikely economic revolutionaries — popular resentment may overwhelm him. Then the West’s bountiful aid will have ended up aiding a leftist counterrevolution.

The situation in East Asia is even weirder. Some residents acted like a woman scorned after the United States failed to jump in at the first sign of economic trouble. “Americans mustn’t forget that the Asia-Pacific region is their largest trading partner,” argued Karim Raslan, a Malaysian political analyst. “You do not neglect a part of the world which is your largest trading partner.”

Of course, the fact that American investment and trade have flooded the region suggests that the United States is not being neglectful. But if the United States has to bail out every improvident nation to demonstrate “leadership,” then that leadership isn’t worth very much.

After all, if spending 50 years defending most of the globe, funding every international aid organization, and promoting free international trade doesn’t demonstrate American concern, nothing will. In fact, the East Asians were just envious that — at least until the Indonesian aid package — they hadn’t benefited from the same subsidies as had Mexico.

And a loss of influence could be beneficial. Some analysts have been muttering that Washington’s supposed lack of interest could spill over into the security field. Says Juwono Sudharsono, deputy governor of Indonesia’s National Defence Institute: “There’s a sense that it’s going to be a much more Asia-centric picture in the security field.” Which, given the collapse of hegemonic communism and the rise of allied powers such as South Korea and Japan, makes sense. Washington no longer needs to defend everyone from everyone.

If the world doesn’t adopt Bill Clinton’s program for even more intervention, then what? Policymakers need to ask the right questions. What causes poverty — and how to eradicate it — have long preoccupied development economists and foreign aid officials around the globe. Yet those are the wrong questions. The better ones are: why do countries grow economically, and how can poor nations replicate the experience of wealthier ones?

Extensive state economic intervention has long existed around the world, including the West, for political as well as philosophical reasons. Such policies have been especially evident throughout the 20th century. In particular, the vast majority of Third World states traveled the socialist path as decolonization proceeded after World War II. Their decision was in part nationalistic and part ideological.

The result was a plethora of state-run development programs, characterized by central planning and all forms of economic intervention. Over time, however, the different statist economic theories were all put to the test and found wanting. By 1989, history had clearly rendered its judgment on collectivism. The obvious lesson of this experience has received increasing acceptance: without reliance on relatively open markets, there is little that can be done to foster development.

The West’s dramatic escape from poverty has always been a good place to start in attempting to understand development. The rapid economic and social progress of Europe, during which people first rose out of the dismal poverty that characterized most of human history, was largely limited to a specific kind of regime — classical liberalism. This experience was repeated rather less exactly though more quickly in East Asia, where it took but a generation or two for desperately poor nations to develop among the world’s most successful economies.

What was true of Great Britain, the United States, Japan, and South Korea is also true of today’s successful developing states. A variety of detailed studies from many different organizations, ranging from the World Bank to the Cato Institute to the U.S. Agency for International Development, have found that economic policies matter. In general, countries with freer economies grow faster.

Of course, every nation’s economic environment is made up of a complex aggregation of individual laws and regulations. All governments, including those in the industrialized West, do stupid things — sometimes out of ignorance, sometimes in response to interest group pressure, and sometimes in an attempt to achieve non-economic ends. The basic question is whether such economic stupidity dominates national life.

As critical as are the right economic policies in promoting development, economic growth is obviously not the only element of development. But wealth creation is the only sensible starting point, the necessary if not sufficient condition for ensuring that the starving are fed, the ill are healed, and the poor have an opportunity to acquire wealth. Without wealth creation, there is nothing to distribute, and without market-oriented policies (which means competitive rather than crony capitalism), governments will be unable to generate the prosperity that offers the only hope to better the lot of the poor.

This is, in fact, the practical lesson of Third World development. Studies suggest that outward-oriented economic policies tend to widen the distribution of income. Even where growth has not diminished income inequality, it has nevertheless tended to reduce poverty.

What, then, should the industrialized states do to help the world’s poor? Get out of the way. End foreign aid, which subsidizes incumbent regimes and dirigisteeconomic policies. Open domestic markets to the products of the entrepreneurial poor abroad. And end counterproductive economic policies in the West, to expand the global economic pie.

But, unfortunately, this won’t be easy. President Clinton and the GOP Congress really aren’t interested in doing what’s right. They are addicted to wasting taxpayers’ money and attempting to buy political support through pork disguised as aid.

The MDBs don’t just waste money, however. They cause positive harm, having spent years underwriting the statist development nostrums most responsible for Third World poverty. Poorer nations have been left with both huge debts and low growth. The answer is economic freedom, not more foreign loans. Once private-property protections and an unhampered market economy are in place, private credit and investment will follow naturally.

Congress should block further bailouts of foreign nations. Lawmakers should refuse additional funding of the IMF, kill bilateral programs such as the Agency for International Development, and terminate the Exchange Stabilization Fund, which the Clinton administration has misused to subsidize improvident nations. It’s time for America to stop underwriting organizations that have done far more harm than good.

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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)