President Clinton is gearing up for a battle with Congress over
increased United States funding for the International Monetary Fund
(IMF). The IMF-led $118 billion bailout of Asian economies and IMF
demands for substantial funding increases have prompted Congress to
question both the efficacy of financial bailouts and the relevance
of the Fund in today's global economy. While the IMF and its
international partners have the resources to meet their obligations
in Asia, intervention has reduced the Fund's liquidity. Thus, the
question on Capitol Hill is whether the IMF should be granted the
funds necessary for future rescues or, alternatively, should cease
Granting the IMF any additional funds would be a mistake. The
Fund's resources are more than sufficient. The IMF has revealed
that it had $85.62 billion in liquid resources in April 1997-nearly
$8.6 billion more than the previous April.1 Its portion of the Asian package totaled $36
billion. Since 1990, the IMF has averaged a $3.14 billion net
annual change in its outstanding credit. Thus, even if the entire
Asian package is deducted, normal IMF activities would leave $46.86
billion in IMF resources.2 Moreover,
the Fund's 1997 annual report indicates anticipated income of
approximately $28.32 billion from loan repayment and repurchases by
the end of the year 2000.3 With its
current resources and near-term income, the IMF therefore should
have more than enough money to participate in two future bailouts
equivalent to the one in Asia.
MORE HARM THAN GOOD
Supporters of the IMF advance a number of reasons to justify its
role in the global economy. IMF action, they claim, is necessary to
alleviate international financial crises and the resulting harm to
the citizens of troubled countries. Proponents also dismiss critics
of the Fund as shortsighted isolationists. Close examination,
however, refutes these claims.
- IMF activities are more likely to cause crises than to
prevent them. Every investment has an associated risk. In
general, the greater the risk, the greater the return the investor
demands from the investment to compensate for the greater
probability of failure. Market prices and returns on investments
convey crucial information about the relative risks of investment
alternatives. If these prices and relative return data are obscured
or distorted by government policies, investors cannot make informed
decisions about the security and productivity of their
The possibility of an IMF rescue creates what economists refer
to as a "moral hazard." Bailouts effectively shield investors and
politicians from the consequences of their poor economic decisions
by "socializing" risks and reducing the costs of failure associated
with an investment. Risks are socialized because everyone ends up
paying for an individual investor's errors; the costs of failure
are reduced because, directly or indirectly, the IMF compensates
investors when their investment plans fail. In other words, IMF
bailouts encourage speculation of the sort that investors probably
would avoid if the IMF were not there to shield them from failure.
Bailouts also send signals to governments that they will not have
to bear the costs of failing to reform their economies: The IMF
will be there to pay the price of their inaction. Thus, the IMF's
actions do not prevent or cure crises-they encourage them.
Financial hardship and defaults occur every day in the U.S.
economy. They are a necessary and natural reflection of free
markets. Bankruptcy is the market's method of reallocating capital
to more productive uses, or away from managers who have failed to
create wealth for investors and improve the well-being of
consumers. As assets are purchased at a reduced rate by the highest
bidder, both parties to an ill-considered lending or investment
decision suffer a loss; but the overall economy profits because
new, presumably better managers will now control the capital.
In the international market, however, the IMF distorts this
mechanism by rewarding inept managers with financial assistance.
Without the IMF, borrowers and creditors would be forced to resolve
the situation in the Asian countries by renegotiating loans or
seizing assets. A world without the IMF would have to observe the
greater discipline of market forces. Banks and investors would be
more cautious in assessing risk before investing or committing
loans. Countries wishing to receive foreign loans and investment
would have to adopt economic policies that lower the risk for
lenders and investors; specifically, they would have to create fair
and reliable bankruptcy laws, employ transparent and
internationally accepted accounting procedures, allow minimal
government interference in the allocation of credit, exercise
prudent oversight of their banking systems, and encourage rather
than prevent domestic and foreign banking competition.
- Investors, not people or countries, are being bailed
out. The IMF claims that it must act to help the people of a
troubled country. This is false. Providing money to a government
merely allows that government to meet its own debt obligations to
private-sector and public-sector creditors. On one hand, an IMF
bailout allows a government to pay its debts to large international
banks; on the other, it allows a country to meet its short-term
obligations to public-sector creditors, such as the IMF and the
World Bank. In effect, therefore, instead of helping the people,
part of the IMF assistance is helping the country to pay off its
debt to the IMF itself.
IMF rescues help neither the economies of recipient countries
nor the majority of their citizens. In the wake of the Mexican
bailout in 1995, for example, the Mexican people suffered a sharp
decline in their standard of living, large increases in
unemployment, and an overnight erosion of savings. Investors,
however, escaped with minimal losses. This scenario has been
replayed time and time again. Indonesia, South Korea, and Thailand
all have experienced similar hardships despite the IMF-led rescue
package. As in Mexico, the current IMF financial package in Asia
salvages the profit margins of international lenders and large
borrowers by guaranteeing their loans. Meanwhile, the citizens of
these countries pay the tab on the rescue package through higher
taxes or currency devaluation (which reduce purchasing power and
savings) in the hope that increased exports will provide the
foreign exchange to pay a drastically increased foreign debt.
- Fears that the Asian crisis will expand and lead to a second
Great Depression are overblown. Those who argue that the Asian
crisis could lead to a global economic meltdown are overstating the
case. For example, according to the Bank for International
Settlements, U.S. private-sector exposure in Indonesia, Malaysia,
the Philippines, South Korea, and Thailand is only $23.8
billion-some 18 percent of U.S. banks' international
lending.4 While a total loss of this
$23.8 billion-which, it should be noted, is extremely
unlikely-certainly would affect the profitability of U.S. banks in
the short term, it would not threaten their viability. Indeed, U.S.
banks remain healthy despite much larger domestic losses. The cost
to the American economy from personal bankruptcies was over $44
billion last year according to a new study from the respected
econometric research firm, WEFA Inc.5
Another concern expressed by proponents of the IMF is that the
crisis might spread to Japan. This concern is exaggerated as well.
Japan is the world's largest creditor nation and reported nearly
$230 billion in foreign exchange reserves in October 1997.
According to the Bank for International Settlements, Japanese
private-sector exposure in Indonesia, Malaysia, the Philippines,
South Korea, and Thailand is $97.2 billion.6 Thus, Japan has the foreign exchange
resources to prop up its banks without borrowing in the unlikely
event of contagion.
The belief that only a government-led initiative can prevent a
global financial crisis reveals an innate arrogance within the IMF.
It presumes that the knowledge of the thousand economists at the
IMF outstrips the judgment of hundreds of thousands of
international financiers, international investors, and currency
traders across the world-indeed, that it outstrips the judgment of
every consumer. Moreover, it assumes that the economic advisors of
190 nations are so ignorant of history that they would willingly
repeat the mistakes that led to the Great Depression, such as
imposing tariffs and barriers strong enough to halt international
trade, while simultaneously engaging in competitive currency
devaluation. At best, multilateral central planning by the IMF can
only delay the economic day of reckoning. It is better to have a
sharp correction that leads to sustainable growth than to endure an
endless series of lesser crises that prolong economic instability
and inhibit prosperity.
- Critics of the IMF are not isolationist; they support sound
economic principles and responsible international engagement.
Critics of the IMF have been portrayed as neo-isolationists who
would lead the world to another Great Depression. This also is
inaccurate. These critics advocate responsible international
engagement-the antithesis of isolationism. Former Secretary of
State George P. Shultz, former Secretary of the Treasury William E.
Simon, and former Citicorp/Citibank Chairman Walter B. Wriston
recently called for the abolition of the IMF in a Wall Street
Journal article, noting that "The IMF is ineffective,
unnecessary, and obsolete. We do not need another IMF as Mr.
[George] Soros recommends. Once the Asian crisis is over, we should
abolish the one we have."7 These
experts (as well as Nobel Laureate Milton Friedman, who also has
urged Congress not to provide additional money to the IMF) cannot
be described as isolationists. On the contrary, all are longtime
advocates of responsible U.S. global leadership. They all
understand, however, that the IMF does more harm than good and that
people would suffer less in the long term, and most likely in the
short term, in a world without the market distortions created by
WHAT CONRESS SHOULD DO
Congress is right to question the wisdom of continuing to fund
an organization that transfers money from American taxpayers to
large international lenders and borrowers, fails to soothe popular
suffering in troubled countries, and encourages reckless
risk-taking by policymakers and international investors. An
organization that has proven itself inept in accomplishing its
chosen missions for two decades does not deserve greater funding.
The U.S. Congress therefore should:
Refuse to approve additional funding
for the IMF. President Clinton has asked Congress to increase
funding for the IMF during the next fiscal year in two ways. The
first is by granting the IMF $3.4 billion for an emergency line of
credit, the New Arrangements to Borrow (NAB). The second is through
a 45 percent increase in the Fund's quota subscriptions, which
provide the money for its main account, known as the General
Resources Account. The U.S. portion of this increase is $14.5
Immediately examine the necessity
and relevance of the International Monetary Fund. Should
Congress determine that the IMF is no longer relevant, it should
take steps to eliminate it. Representative Ron Paul (R-TX), for
example, has introduced legislation-Withdraw the United States from
the International Monetary Fund (H.R. 3090)-which would direct the
Secretary of the Treasury to withdraw from the IMF as
specified in the IMF Articles of Agreement.
The IMF has a poor record when it comes to inducing countries to
embrace economic reform. This is because outside organizations like
the IMF cannot impose a solution to an essentially internal
problem; there must be a domestic political desire to implement
economic reform. Without this political will, there is little
chance of fundamental economic reform no matter how much money the
IMF has available. The hard fact is that if a country truly desires
to implement economic reform, organizations like the IMF are
The truth underlying the Asian crisis is that the countries
being bailed out by the IMF fell into their current financial
morass largely through their own shortsighted economic policies.
Likewise, international lenders and investors understand the risks
associated with their ventures. Congress should take an objective
look at the facts, ignore the alarmist arguments of IMF advocates,
and recognize that it is past time to let countries and investors
know that they will be held accountable for the consequences of
their decisions. It can do this by refusing to grant any additional
funding to the IMF.
Bryan T. Johnson is a former Policy Analyst and Brett D.
Schaefer is the Jay Kingham Fellow in International Regulatory
Affairs at The Heritage Foundation.
1. "IMF Position Improves," IMF Survey
Supplement on the Fund: Liquidity, September 1997; available on
the Internet at
. IMF claims of illiquidity would indicate the extension of
some $86 billion since April 1997.
2. International Monetary Fund, Annual
Report 1997, p. 172. All IMF account figures were converted
from the IMF's unit of account, the Special Drawing Right, at 1 to
1.36553 U.S. dollars, as specified in the Fund's 1997 annual
3. Ibid., Financial Statements, p.
4. Bank for International Settlements,
Monetary and Economic Department, The Maturity, Sectoral and
Nationality Distribution of International Bank Lending, Basle,
January 1998, Table 2; available on the Internet at http://www.bis.org.
5. "Econometrics Firm Says 1997 Cost of
Personal Bankruptcies Topped $44 Billion," Bureau of National
Affairs, Daily Report for Executives, February 11, 1998, p.
6. See note 4, supra.
7. William E. Simon, George P. Shultz,
and Walter B. Wriston, "Who Needs the IMF?" The Wall Street
Journal, February 3, 1998, p. A22.
8. Budget of the United States
Government, Fiscal Year 1999, Appendix, pp. 969_970.