IMF: Born To Lose

Scripps Howard News Service
Matthew Zobian
(Matthew Zobian is a MBA finance student in Penn State's Smeal
College of Business.)

You almost have to feel sorry for the International Monetary Fund. It seems that everyone has a different opinion on where the "world's central bank" makes its mistakes and how it should be changed. The criticism over its lending practices and orthodox economic mandates hit a deafening crescendo during the fallout of the 1997 Asian Financial Crisis, and now it appears that at least some of the blame for the collapse of Argentina's economy will be placed squarely and publicly in its lap.

The IMF is bound to have problems because it has the most dangerous banking job on Earth: to give massive, cheap loans to risky governments. So while it certainly deserves its fair share of criticism, asking if it performs its job well is actually the wrong question. The real issue is if the job, and the IMF, should exist at all.

The IMF, a special agency of the United Nations, didn't start out as the world's lender of last resort. Few people realize that its original task in 1945 was simply to help manage the currencies of North America and Europe according to the Bretton Woods Agreement. When the agreement was abandoned in the 1970's the IMF was no longer needed and should have been dismantled. Instead it did what most huge publicly funded bureaucracies tend to do: It continued to grow. The IMF created a completely new - and questionable - role for itself by giving below-market rate loans to developing countries that wanted to finance their rising oil importation bills.

Developing countries should certainly be given access to foreign capital. But that's the job of the international capital markets, which are hungry for competitive returns and are efficient at pricing the risk and rewarding sound national economic policies. Millions of economists, analysts, savers and investors around the world see to that. When a supranational lending agency like the IMF short-circuits that process by making and implicitly guaranteeing billion dollar below-market loans, it temporarily isolates those risky borrowers from the economic discipline of the market. Economists call this dangerous situation, appropriately enough, "moral hazard" and it is a recipe for disaster.

Soon enough, disaster struck. In 1982 one of the IMF's biggest clients, Mexico, threatened to default on its huge foreign debt. The IMF stepped in as a lender of last resort and lent the country billions of dollars more, kicking off our modern era of massive IMF-led international bailouts.

To what should have been no one's surprise, Mexico needed to be bailed out again a scant 13 years later and it didn't take long for the IMF to begin getting in over its head. It now finds itself bailing out developing countries that are borrowing for all kinds of hazardous reasons: reckless monetary and fiscal policies, politically shady investments, property speculation, wasteful state subsidies, etc. Argentina is only the latest IMF client to default, and the street riots that have followed seem like a recurring nightmare of Indonesia's angry mobs less than five years ago.

The world must recognize that as long as developing countries exercise their sovereign right to pursue bad economic policies there will always be financial and social crises. But halting the massive flow of cheap IMF loans would at least reduce their frequency and severity, and that would be real progress. It would also remove one more excuse by anti-globalists and conspiracy theorists to blame Western institutions for the persistence of Third World poverty and instability. Without the IMF to kick around, perhaps the real causes - the Third World's market regulation, state activism, corruption, and poor enforcement of property rights - will come to the fore.

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Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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