August 14, 2000 | Commentary on Foreign Aid and Development

Will the Real Capitalist Step Forward?

I'm awaiting the start of my economics class at Whittier College in California. I'm awake. My books are open. My mind is ready. Today's lesson: Why the International Monetary Fund and the World Bank stink.

The professor starts class with the familiar refrain heard at many colleges about these institutions - that capitalist nations use the IMF and World Bank to exploit the world's poor.

Now, it's tough being in a class taught by a professor who continually claims to know what Marx "really meant." But I can't let this one pass, and so I raise my hand to venture the truth: The World Bank and the IMF are not free-market institutions.

The professor appears bewildered. My fellow students, many of them veterans of last December's Seattle riots and even now turning out for this summer's political conventions, turn red with anger. Buzzwords such as "McJob," "exploitation" and "globalization" fill the air.

I shake my head and try to explain why the Bank and IMF are actually pillars of international bureaucracy, not the free market. Just examine their pedigree. Appropriately enough, it was economist John Maynard Keynes, that 20th century champion of government intervention, who engineered the creation of the IMF and the World Bank in the aftermath of World War II. His intention may have been to help poor countries become more prosperous and less dependent on rich ones, but both institutions have spawned what amounts to a global welfare system.

The IMF and World Bank have spent the past half century funneling billions of U.S. tax dollars into Third World countries across the globe in an effort to lift them out of poverty. The result? Of the 89 poor countries that were on the international dole during the 30-year-period, 1965 and 1995, 48 showed no improvement - and 32 of the 48 actually became poorer, research shows.

IMF loans can become addictive. Eighty-one of the 137 nations receiving IMF loans during the 1965-1995 period were borrowing more frequently after 1981 than they were before. Only 44 were borrowing less frequently. With results like these, is it really fair to blame "free-market" policies?

In fact, the 1995 U.S. bailout of Mexico probably wouldn't have been necessary if the IMF and World Bank were the engines of free-market capitalism that the lefties accuse them of being. Prior to the bailout, the IMF was pushing policies such as "pegged" exchange rates (where currency is given an artificial value) to revive Mexican exports. Wouldn't a capitalist institution have encouraged "floating" (or true value) exchange rates, as promoted by such leading free-market thinkers as Milton Friedman?

In the end, the IMF-World Bank actions helped send the Mexican economy into a tailspin, only to be "rescued" later by U.S. taxpayers and politicians in a bailout that included another dose of bad medicine: more loans. As one published report noted, "Mexico's real external debt was higher in 1998 than in 1994, nearly a third of private businesses between 1995 and 1997 declared bankruptcy," and per capita income fell below its 1980 level. It sounds as if a few "McJobs" would have been welcome.

The allegedly free-market programs of the IMF and the World Bank bear a strong resemblance to U.S. welfare programs, which cost more than $5 trillion dollars in the three and a half decades after President Johnson launched his War on Poverty. Both take taxpayer money and redistribute it in ways that promote continuing dependency rather than change. When the experts recommend that poor countries be forced to get off the public dole and implement policies that lead to long-term growth and stability, it sounds similar to the rhetoric used to promote domestic welfare reform.

Back in class, the students and the professor are still berating my unwelcome message about the IMF and the World Bank. But - scream about "evil capitalists" all they want - the real crime is impeding the market and creating a global welfare system that keeps the poor poor and makes self-sufficiency all but impossible.

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Jeffrey C. Cleveland, a junior at Whittier College in Whittier, Calif., is a former summer intern at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

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