Opinion

Abolish the IMF

The Progress Report's new editorial calls for closure of the International Monetary Fund. We're not alone. Former Secretary of the U.S. Treasury, William Simon, now seeks U.S. withdrawal from the International Monetary Fund. Here is his commentary from a Wall Street Journal article last October:

The IMF is ineffective, unnecessary and obsolete. It was established after World War II, together with the World Bank, to promote trade and development in an international economy that had been torn apart by two decades of depression and war. In the system of fixed exchange rates established by the Bretton Woods agreements, the IMF's purpose was to provide short-term loans to countries experiencing temporary problems with their balances of payments. This was an important function during the period following the war, and the IMF generally performed it quite well.

But this function became obsolete in the early 1970s when the world abandoned the Bretton Woods system in favor of the current system, in which currency values are set by the market. Instead of going out of business as that new system matured, the bureaucrats at the IMF invented a new function for themselves -- namely, to provide so-called structural adjustment loans to countries that are, for various reasons, deeply in debt. These loans are granted on the condition that the recipient countries take steps to reduce their debt, often by increasing taxes and reducing government spending. This mission, of course, was never contemplated in the IMF's original charter; indeed, these structural adjustment loans look very much like the development loans that are supposedly under the purview of the World Bank.

Many critics of the IMF point out that these loans have been quite ineffective in preventing currency crises and in promoting stable economic growth in developing countries. Quite the contrary, as these critics say, the IMF may actually promote crises, because governments often resist sound economic and financial policies (which may be unpopular) because they know that the IMF will be there to bail them out in the event of a crisis. As Gregory Fossedal, a leading expert on the IMF, has pointed out, "All of the major currency and banking crises of the last five years have occurred under conditions of heightened surveillance by the IMF." These include the crises in Mexico in 1994, in Africa in 1995 and in Thailand, Korea and Malaysia in 1997. The IMF, with the help of the U.S., has now bailed Mexico out four times since 1976, and it will no doubt do so again and again unless the IMF is put out of business once and for all.

Because the IMF has no legitimate function in our present system of floating exchange rates, we can eliminate it, and safely rely on private institutions, operating in the context of a free market, to provide liquidity and capital for developing nations, just as they do for the industrial nations.

As a former secretary of the Treasury, I do not lightly call for the elimination of a financial institution that has been in operation for more than 50 years, and that served a pivotal role in the international economy in the period following World War II. It is obvious, however, that the IMF no longer serves a constructive role in the world economy, and has not done so since the 1970s. We should therefore have the courage to close it down -- and the most effective way to accomplish this goal would be to withdraw U.S. funding.

A few years ago, such a call to end the IMF would have been attacked on all sides as an extreme and highly controversial recommendation. But today a growing number of respected observers agree that the organization is no longer needed. George Shultz, the esteemed former secretary of state and of the Treasury, has recently called for the elimination of the IMF. In a 1995 lecture before members of the American Economic Association, Mr. Shultz observed that "the IMF has more money than mission." As a consequence, he said, we should "merge this outmoded institution with the World Bank, and create a charter for the new organization that encourages emphasis on private contributions to economic development." This would make a great deal of practical sense.

The House and Senate now have a golden opportunity to force the long overdue elimination of the IMF. There is no longer any reason to burden taxpayers with the expenses of this outdated institution.

Mr. Simon was Secretary of the Treasury from 1974 to 1977.
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