IMF Should Be Abolished
|February 25, 2004||Posted by Fred Foldvary under Archive, Progress Report, The Progress Report|
Abolish the IMF
by Fred E. Foldvary, Senior Editor
The International Monetary Fund is lending many billions of dollars to the governments of East Asian countries, where banks and other companies have failed. The governments of the United States and other wealthy industrialized countries are pouring ever more funds into the IMF to make these loans, money that comes from the taxpayers. The question is, why should an American or British taxpayer have to bail out some investors who lost out? Even worse, why should taxpayers bail out politicians who followed foolish policies? It not only forces taxpayers to subsidize greed and corruption, but these bailouts are getting bigger and bigger. The problem with a lender of last resort, like the IMF, is that when it too fails, when all the past bailouts finally bring down the biggest bank, then the entire system, the entire global economy, will collapse in a depression far worse than that of the 1930s. To avoid such a disaster, the IMF should be terminated.
The IMF was set up in 1945 as part of the Bretton Woods international monetary agreement that established a new global money and banking system. The United States dollar was to be internationally convertible to gold at $35 per ounce, and other countries fixed the value of their currencies relative to the dollar. If a country had a temporary shortage of dollars, they would be able to borrow from the IMF.
The Bretton Woods system was unsustainable, because as the US dollar inflated, other countries traded dollars for gold, and gold was flowing out of the US treasury. In 1971, the US stopped the gold convertibility, and the world went on a floating exchange rate system, where the values of currencies are set by market supply and demand. Some developing countries, such as in East Asia, tried to keep their currencies tied to the dollar or other major currencies, a policy that provides short-run stability but eventually leads to massive distortions and the devaluations that have taken place.
With the floating system, trade imbalances can be made up for by changes in the relative values of floating currencies as well as movements of currency. IMF changed its mission to become an international bank that made short-term loans to governments. For example, during 1992-3, the Latvian government had to purchase oil from Russia for heating during the winter. Previously, the oil was provided at highly subsidized prices, but no more. Folks in Latvia could not afford the market price for oil, so the government borrowed from the IMF.
But IMF loans come with strings and stings. The IMF told the government of Latvia to increase sales taxes. These were bad for business, but the IMF had the country over a barrel. IMF conditions usually result in austerity and hardship for people as they require higher taxes on income and sales, and lower spending for social programs. Some of the aims of the IMF conditions are sensible, such as balancing the government budget and stopping high inflation. It is the way these are to be accomplished that is the problem. The IMF does not recommend or require shifting taxes to land rent, which would stimulate the economy. It makes governments tax income, sales, and profits, which hurts the recovery. IMF officials do not want to tax land rent, because they want to keep land value as collateral.
But that’s part of the problem, along with currency manipulation. Real-estate speculation in East Asia led to too much construction and high land values. Investors poured money into these fast- growing economies while the governments kept the value of their currencies fixed. Eventually, real estate bubbles crash, and take the banks down with them, as happened previously in Japan. The unrealistic currency exchange rates collapsed, as happened before also in Mexico. The IMF then came in with loans to bail out the investors and governments.
If this was a one-time event, then folks would learn their lesson, and life would go on as normal. Unfortunately, the very existence of the IMF and its policies make theses problems occur over and over again. It’s like folks who live by a river that keeps flooding. The government then gives them money to rebuild. It is kind to help folks in need, but what happens in this case is that the taxpayers subsidize living by the river, which is a waste of resources. Folks who live in an area that gets flooded all the time should buy their own insurance, or else not live there.
In the US, bank deposit insurance bailed out the banks that wasted resources in loans to failed real estate projects during the 1980s. The people who put their money into these institutions did not care how foolish or greedy the management was, since the deposits were guaranteed. Similarly, country after country – Mexico, Eastern European nations, and now the defanged East Asia “tigers” followed policies that eventually brought down their economies, knowing that the IMF would bail them out.
The IMF is already drained. After bailing out South Korea, Indonesia, Thailand, the Philippines, and other countries, the IMF now only has $30 billion left. What next, if Russia, Latin America and Africa “need” to be helped? Joint Economic Committee chairman Rep. Jim Saxon (R.-N.J.) will hold hearings on the risk to U.S. taxpayers of these constant bailouts.
It is time to abolish the IMF. Stop the bailouts now. Why should governments be borrowing money to subsidize investors and companies? If companies are no longer subsidized by governments and governments no longer subsidized by the IMF, then maybe, just maybe, they will have to turn to sound economic policies in order to compete and survive.
What’s your opinion on closing the IMF? Tell The Progress Report what you think and what you’re willing to do!
Copyright 1997 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieveal system, without giving full credit to Fred Foldvary and The Progress Report.