The Clinton Administration is pressuring Congress to appropriate an additional $18 billion in funding for the International Monetary Fund (IMF). Supporters of this increase believe that the IMF is a necessary tool to stabilize markets, establish strong and stable currencies, solve the recent Asian financial crisis, and open foreign markets to trade. However, not one of these claims is accurate. Instead, countries in Asia that have not depended on the IMF for assistance have been less affected by the financial crisis and are recovering either more quickly or at least as well.
Moreover, the IMF's track record, both in stabilizing economies and currencies and in promoting trade, is disappointing. Many IMF policies, such as currency devaluation, are not likely to stabilize the economies of countries in crisis. And its lending practices are no substitute for fast-track negotiating authority and free trade. Historically, instead of helping U.S. farmers market their products to IMF recipients, the Fund's recommendations and loans by themselves have been far more likely to work against U.S. exports.
If Congress is interested in promoting sound policies that bolster agricultural exports, it should support fast-track trade negotiating authority for the President and the efforts of organizations like the World Trade Organization (WTO). Members of Congress should oppose further funding of organizations like the IMF that have failed to demonstrate the ability to promote economic stability and economic growth.
MYTH #1: The IMF is a necessary
tool to stabilize markets in financial crisis, and this helps to
maintain market share for U.S. exports
Supporters of the International Monetary Fund believe that it is uniquely positioned to bring market stability to economies in crisis. For example, Dean Kleckner, president of the American Farm Bureau Federation, recently testified before Congress that "U.S. agriculture's ability to gain and maintain market share is based on many factors, including...the ability to utilize market stabilizing tools such as a properly functioning IMF."1
Reality: The IMF is more likely to
undermine the market than to bring it stability
The very possibility of receiving an IMF rescue package creates what economists call a "moral hazard." Bailouts shield investors and politicians from the consequences of poor decisions by "socializing" risks--spreading them across a bigger constituency and thus reducing the costs associated with each failed investment. Many people end up paying for an investor's errors. The costs of failure for the investor are reduced and, either directly or indirectly, the IMF compensates investors when their plans fail. IMF bailouts encourage speculation of the sort that investors probably would avoid if the IMF were not around to shield them from failure. Bailouts also signal governments that they will not have to bear the costs of failing to reform their economies; instead, the IMF will pay the price of their inaction. Thus, IMF activities neither prevent nor cure financial crises. They only encourage them.2
The Administration has portrayed IMF funding as a way to avoid or mitigate the consequences of the Asian crisis for U.S. agricultural exports. According to August Schumacher, Jr., Under Secretary for Farm and Agricultural Services at the U.S. Department of Agriculture, "The recovery of U.S. agricultural exports will depend on the success of IMF-led efforts."3 However, an IMF bailout is more likely to work against increasing U.S. agricultural exports to Asia, and it may even aid the industry's foreign competitors. For example, Indonesia, South Korea, and Thailand are the sources of about 8.5 percent of the agricultural, fish, and forestry products imported by the United States in FY 1997. Indonesia and Thailand, in fact, imported only $1.4 billion of U.S. agricultural, fish, and forestry products, but they exported $4.5 billion of these products to the United States in 1997, giving these two countries a $3.1 billion trade surplus with the United States on agricultural, fish, and forestry products.4 This trade surplus is likely to worsen in the wake of the Asian financial crisis, regardless of IMF assistance. While trade deficits by themselves are neither good nor bad, they do serve as a barometer of trade relations. IMF assistance will further worsen the U.S. trade deficit by aiding foreign competitors of the U.S. agricultural industry.
MYTH #2: IMF financial assistance
is vital for countries trying to establish strong, stable
Supporters of IMF funding argue that unstable foreign currencies subject to devaluation can be stabilized with IMF assistance. For example, some 40 agricultural groups and companies argued in a February 1998 letter to Members of Congress that "We are concerned that if the IMF does not have sufficient funds to intervene in any future crisis there will be further devaluation in Asian currencies."5
Reality: The IMF does not promote
strong, stable currencies
One of the Fund's most common economic prescriptions is currency devaluation, which often undermines investor confidence and can lead to economic crisis. This is precisely what has happened in Asia. According to Business Week, IMF Managing Director Michel Camdessus said that he had personally visited Indonesia, the Philippines, South Korea, and Thailand numerous times to urge them to devalue their currencies.6 The end result was the successive devaluation of the region's currencies.7 As a Wall Street Journal editorial put it, "what began as an IMF program for `stability' turned into round after round of competitive devaluation."8
Although some of the countries recovering from the Asian crisis received IMF assistance, there is no convincing evidence that IMF assistance is necessary or even likely to help countries stabilize their currencies. Currency stability is much more dependent on a government's economic policies. Countries with sound economic policies are more resistant to financial crises, a fact clearly demonstrated by the relatively minor impact that the Asian crisis had on Hong Kong, Singapore, and Taiwan. Once a crisis has occurred, countries must act immediately to address the crisis and implement reform to restore investor confidence. Korea and Thailand took such steps, albeit with IMF assistance, and apparently have arrested the crisis. However, IMF assistance is no guarantee of success, nor is it sufficient or necessary to restore investor confidence. For example:
Indonesia has received IMF assistance, yet it remains in crisis because of its resistance to the sort of reform that would restore investor confidence. Its first two agreements with the IMF (it is now on its third in eight months) failed to rally investor confidence either in Indonesia or in the rupiah.9 Indeed, it was the failure of the Suharto government to adopt reform and the failure of private debtors to negotiate with international creditors that failed to restore confidence despite the IMF's assistance. According to a Standard & Poor's official, "A resolution of the [private] debt problem and Suharto's rededication to other economic reforms are the only things that can save Indonesia."10 Worse, the IMF actually works against currency stability. When Indonesia indicated that it was willing to take independent action to stabilize its economy by announcing its intention to establish a currency board, the value of the Indonesian rupiah climbed about 30 percent against the dollar. However, when the IMF forced Indonesia to abandon this plan, the value of the rupiah collapsed.11
At the same time, Malaysia has restored relative stability to its currency and restored investor confidence without IMF assistance. For example, National Power of Great Britain recently announced a $125 million investment in the Malaysian power company Malakoff; DHL Worldwide Express plans to invest nearly $27 million to expand its operations in Malaysia; Ericsson, a Swedish telecommunications company, announced that it will invest about $11 million to set up a regional communications hub in Malaysia; and U.S. insurer American International Group announced a $10 million joint venture software company that will work closely with Malaysia's Multimedia.12
The IMF policy of devaluation is likely to hurt U.S. agricultural exports because rapid reductions in a country's currency values, all else being equal, result in more exports for that country and fewer imports. For example, when a country's currency loses 25 percent of its value, its exports become about 25 percent cheaper, and imports from all other countries are about 25 percent more expensive. The result: The country whose currency was devalued will export more and import less. In real terms, IMF policies have made U.S. exports to Indonesia, Thailand, and South Korea more expensive than they were before the Fund's involvement. According to the U.S. Department of Agriculture, the value of U.S. agricultural exports is projected to be 2 percent less than in 1997--even assuming a relatively quick recovery in Asia.13
MYTH #3: The recovery of Asia
depends on IMF assistance
Advocates of increased IMF funding often argue that President Clinton's $18 billion request for IMF funding is needed to help Asian economies recover, to prevent the spread of the financial crisis, and to prevent the recurrence of a similar crisis in other parts of the globe. For example, an Iowa Farm Bureau press release states that "the United States must take immediate action to stabilize the Asian financial crisis by providing additional funding to the International Monetary Fund (IMF)."14 The American Farm Bureau Federation stated that "IMF-led assistance programs are critical to the overall recovery in the region [Asia]."15
Reality: Countries with little or
no reliance on IMF loans have been less affected by the recent
financial crisis in Asia or are recovering at least as well as
countries that received an IMF bailout
Although Hong Kong, Singapore, and Taiwan were affected by the Asian crisis, they have no dealings with the IMF and appear to be weathering the problems in Asia better than their IMF-assisted neighbors.16 In fact, it is because these countries have pursued wise economic policies that they were largely unaffected by the financial crisis. Taiwan, for example, remains independent of the IMF and continues to grow. A recent Heritage analysis observed that, "as stock markets plummeted during 1997 in Thailand, Indonesia, and Korea by 55, 52, and 42 percent, respectively, the stock market in Taiwan grew by 18 percent."17 In addition, the prime lending rate (the price of capital and a direct indication of risk) in Hong Kong, Singapore, and Taiwan remains lower than in other Asian nations: 10 percent, 7.5 percent, and 7.65 percent, respectively.18
Malaysia, Indonesia, South Korea, and Thailand were hit particularly hard by the Asian crisis. Malaysia weathered the financial storm as well as South Korea and Thailand and better than Indonesia, despite being the only one of these countries to refuse IMF loans.19 The Malaysian ringgit has remained steadier and stronger in value in relation to the U.S. dollar than the Indonesian rupiah, the South Korean won, and the Thai baht, and Malaysia maintains its prime lending rate of 12 percent, compared to 36 percent, 11.5 percent, and 14.75 percent, respectively, in Indonesia, South Korea, and Thailand.20 The evidence indicates that pursuit of the sound economic policies--not IMF assistance--is the key to withstanding financial crisis and maintaining economic growth.21
MYTH #4: The IMF is a good tool to
open foreign markets, particularly since the President's request
for fast-track authority has not been granted
Supporters of the IMF often argue that since Congress failed to provide President Clinton with fast-track trade negotiating authority, the IMF is uniquely positioned to help liberalize and open foreign markets to U.S. exports. According to the Iowa Farm Bureau, for example, "A U.S. contribution to the IMF of $18 billion will not only help rebuild foreign economies, but keep U.S. farmers at the trade table as the absence of fast track legislation continues."22
Reality: Neither the IMF nor an
$18 billion funding increase is an effective substitute for
fast-track authority and free trade
The agricultural industry in general understands the importance of trade liberalizing policies, such as fast-track authority and free trade, and the effectiveness of the World Trade Organization. The lack of fast-track negotiating authority threatens the expansion of market share for U.S. agricultural exports abroad. However, the IMF is not a viable alternative to traditional trade liberalizing vehicles.
According to Under Secretary Schumacher, "U.S. farm and food products can face tariffs of 100, 200, and 300 percent or more in some markets. Our own import duties average less than 5 percent, while bound agricultural tariffs worldwide average around 56 percent.... [W]e need to get these high bound tariffs down further."23 The agricultural industry is understandably concerned that the lack of fast-track authority will prevent any progress in reducing these barriers to U.S. agricultural exports and impede trade liberalization globally.
However, supporting free trade is not the IMF's primary goal, and recipients of IMF aid typically are the most egregious abusers of trade barriers. According to research conducted at The Heritage Foundation, the average tariff rate for IMF loan recipients is more than 17 percent--over five times higher than the average tariff rate of the countries in the European Union and Japan. For example:
Thailand, South Korea, and Indonesia received over $35 billion from the IMF in the recent Asian bailout, yet they collectively maintain an average tariff rate of 11 percent--over five times higher than Japan's and nearly four times greater than tariff rates of members of the European Union.
Bangladesh has received five loans totaling $1.125 billion from the IMF since 1983, yet it has maintained an average tariff rate of around 50 percent for most of this period.
India received two loans totaling $2.86 billion from the IMF in 1991 and 1992, yet it has maintained an average tariff rate of over 30 percent for most of this period.
Pakistan has received five loans totaling over $3 billion from the IMF since 1989, yet it has maintained an average tariff rate of around 47 percent for most of this period.
By comparison, the 15 countries of the European Union maintain an average tariff rate of 3.6 percent; Japan has an average tariff rate of less than 2 percent; and Hong Kong has an average tariff rate of 0.1 percent.24 Portugal is the only one of these 17 countries to receive an IMF loan in the past 15 years; its 1984 loan was for about $600 million.
Non-tariff barriers to trade among IMF recipients are extremely high and also work to keep U.S. exports out of these countries. Based on data compiled and analyzed for The Heritage Foundation/Wall Street Journal 1998 Index of Economic Freedom, most non-tariff barriers among IMF recipients include (but are not limited to) import bans and quotas, corrupt customs officials, unnecessary licensing and labeling requirements, and unrealistic health and sanitary requirements aimed specifically at keeping out U.S. exports, including agricultural products. The Index analysis also indicates that these non-tariff barriers are more prevalent among IMF recipients than non-recipients.25
The IMF was created in 1944 by the Bretton Woods Agreement, along with the World Bank and the General Agreement on Tariffs and Trade (GATT), which is now the World Trade Organization. GATT, not the IMF, was created to promote free trade. Consequently, the IMF has been ill-equipped to deal with trade liberalization issues. Historically, even when the IMF has attempted to promote trade liberalization, its efforts have been largely ineffectual. This makes its assistance more likely to reward countries that have high barriers to trade with loans than to encourage them to lower their barriers to levels maintained by the United States, Europe, or Japan.
Some supporters of additional funding for the IMF base their position on the belief that the IMF, through its policies and assistance, can preserve and promote U.S. agricultural exports to countries in financial crisis. This is a fallacy: If anything, IMF assistance is likely to aid foreign agricultural exporters that compete with American farmers, and to hinder all U.S. exports. Nothing the IMF has done or can do will restore the lost value of the Asian currencies. Nor is IMF assistance necessary to prevent currencies from falling even further. On the contrary, IMF policies and assistance are more likely to undermine currency strength and stability. Furthermore, IMF funding cannot offset the resulting decrease in U.S. exports to these countries. Only the adoption of sound economic policies by the Asian governments will result in economic stability, end the Asian financial crisis, and increase trade with America.
The best way to increase U.S. exports is to pursue free trade agreements and push for trade liberalization worldwide. If Congress truly wants to promote policies that bolster U.S. exports, it should give the President fast-track trade negotiating authority and support the efforts of organizations like the World Trade Organization while opposing ineffective organizations like the IMF.
Bryan T. Johnson is a former Policy Analyst for International Economic Affairs at The Heritage Foundation.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs at The Heritage Foundation.
1. Dean Kleckner, President of the American Farm Bureau Federation, "The 1998 Outlook for Agricultural Trade," statement before the Committee on Banking and Financial Services, U.S. House of Representatives, 105th Cong., 2nd Sess., February 3, 1998, p. 3.
2. For a detailed explanation of the destabilizing influence of the IMF on international markets, see Edwin J. Feulner, Jr., "The IMF Needs Real Reforms, Not More Money," Heritage Foundation Backgrounder No. 1175, May 9, 1998; Bryan T. Johnson and Brett D. Schaefer, "Congress Should Give No More Funds to the IMF," Heritage Foundation Backgrounder No. 1157, February 12, 1998; William E. Simon, George P. Shultz, and Walter B. Wriston, "Who Needs the IMF?" The Wall Street Journal, February 3, 1998, p. A22; and Lawrence B. Lindsey, "The Bad News About Bailouts," The New York Times, January 6, 1998.
3. August Schumacher, Jr., Under Secretary for Farm and Foreign Agricultural Services, U.S. Department of Agriculture, statement before the Subcommittee on General Farm Commodities, Committee on Agriculture, U.S. House of Representatives, 105th Cong., 2nd Sess., February 4, 1998.
4. Data from "FAS Hot Country Pages: Export and Import Data," Foreign Agricultural Service, U.S. Department of Agriculture, at http://www.fas.usda.gov/scriptsw/bico/bico_frm.idc.
7. On June 2, 1997, for example, before the Asian crisis, the U.S. dollar was worth 893.5 South Korean won; by April 30, 1998, it was worth 1,335.5 won, or about 33 percent less. On June 2, 1997, the U.S. dollar was worth 24.9 Thai baht; on April 30, 1998, it was worth 38.605 baht, or 36 percent less. On July 1, 1997, the U.S. dollar was worth 2,431.5 Indonesian rupiah; by April 30, 1998, after falling below 17,000 rupiah to the U.S. dollar in January, the rupiah had stabilized at 8,085 to the U.S. dollar, or about 70 percent below its July 1, 1997, value.
12. Andrew Taylor, "Foreign Power Seduces Generators," Financial Times, April 30, 1998, p. 26; Michelle Sheares, "DHL Has Faith in Malaysia, Plans to Expand Operations," New Straits Times Press (Malaysia), April 21, 1998, p. 1; Wendy Lim, "Ericsson Data Hub in Malaysia," New Straits Times Press (Malaysia), April 15, 1998, p. 18; Douglas Wong, "AIG Gets 5 Years to Trim Holding," The Straits Times Press Limited (Singapore), May 5, 1998, p. 57.
16. South Korea was approved for two IMF standby arrangements, one in 1984 worth $786 million and another in 1986 worth $382 million. Thailand also was approved for two standby arrangements, one in 1983 worth $371 million and one in 1986 for $546 million.
17. Stephen J. Yates, "Economic Freedom Inoculates Taiwan Against the Asian Economic Flu," Heritage Foundation Executive Memorandum No. 505, January 14, 1998.
19. This is despite the many continuing social and political problems in Malaysia, which include a pervasive system of mandated racial preferences in government contracts, employment, and access to credit, and a human rights record criticized by the U.S. Department of State.
21. Even if IMF assistance were necessary to bring about recovery in Asia, the IMF would not need an additional $18 billion from the United States. The IMF already has begun to extend loans to Indonesia, South Korea, and Thailand and has more resources than it needs to meet its obligations. Indeed, the IMF has more than enough in resources to conduct two bailouts comparable in size to the recent Asian bailout of $36 billion. The IMF request for additional funds came long before the Asian crisis. The fact is that the IMF and the Administration are not asking for more money to aid in the Asian bailout; in reality, they seek the additional funding to expand IMF activities and fund future bailouts. See Feulner, "The IMF Needs Real Reforms, Not More Money," op. cit.
24. Based on an analysis of average tariff rates in Bryan T. Johnson, "Debunking Claims That Foreign Aid Serves U.S. Economic Interests Abroad," Heritage Foundation F.Y.I. No. 146, July 21, 1997, and data on IMF recipients in IMF annual reports, 1983 to 1997.
25. Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick, 1998 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 1998).