SAVING SOILED SISTERS: The IMF and the World Bank enjoy untouchable status without doing anyone but its pampered employees much good. For all that, there is a way to reform these institutions for the 21st century.
Rahn, Richard W.
SavingSoiled Sisters SavingSoiled Sisters The IMF and the World Bank enjoy untouchable status without doing anyone but its pampered employees much good. For all that, there is a way to...
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...It was Given that there are so many people of influrequired to provide most of its funds to governments, ence with a vested interest in the IMF and World but the governments that could not attract the neces-Bank, these organizations will not be abolished...
...A disThe managers of the IMF and the World Bank have allowed their missions to overlap, too often defined success as money dispersed rather than service delivered, put too much stress on the limited pool of skilled administrators in poor countries, and failed to act on serious calls for reform...
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...Bank has dispensed approximately $370 billion, coerced from taxpayers in wealthy countries, and has precious little to show for it...
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...by Richard W. Rahn 20 THE AMERICAN SPECTATOR SEPTEMBER 2007 S HOULD THE INTERNATIONAL MONETARY FUND (IMF) and the World Bank exist and, if so, what should they be doing...
...Richard W. Rahnis the chairman of the Institute for Global Economic Growth...
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...Many Third World dictators and thugs have become rich from World Bank programs—the late Congo dictator Mobuto being a prime example...
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...and other governments convinced themselves that this was necessary, so money was provided, more staff hired, and new buildings built...
...When I confronted the World Bank officer in-charge, his response was, “We have to make sure our loan is paid back...
...Senior IMF experts have experienced real hardship—at considerable personal risk—working in Afghanistan and Iraq...
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...Most poor countries lack these attributes and tolerate, if not outright engage in, massive corruption...
...Because the World Bank was making loans to government agencies in sovereign states, it only had limited control over the funded projects...
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...Critics have also noted that the IMF adds to the systemic risk of the world financial system by making it too easy for governments to avoid the full effect of The IMF did attach “conditions” for its loans, which most often included a plan for a balanced budget, consisting of some spending restraint, tax increases, and their irresponsible actions...
...In addition to their interest and fee income, both organizations could become contractors for governments or groups of governments to provide special services, such as grants administration, data collection and dissemination, or even government bailouts...
...The IMF says its “primary purpose is to ensure the stability of the international monetary system,” and the World Bank says its mission is to “eliminate global poverty...
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...Almost all countries of the world are “members” of these sister institutions, and many members try to influence decision making, often in different directions—so when everyone is in charge, no one is in charge...
...In one case, we were trying to privatize and de-monopolize the state-owned telephone company, “BulTel...
...From this cauldron of misplaced idealism and the desire for control by the “enlightened intellectual,” were born the IMF and World Bank...
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...The prevailing wisdom was that socialism was the wave of the future and that only large governmental programs could solve economic problems and other ills of society...
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...I N THE SUMMER OF 1944, many leading lights of world finance and economics, including John Maynard Keynes, met at a conference in Bretton Woods, New Hampshire, to plan the post-World War II global financial system...
...continued on page 24 22 THE AMERICAN SPECTATOR SEPTEMBER 2007 FREE Hearing Aid Catalog Shop by mail and Save 80% Clip & mail this coupon today for your free catalog...
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...If the IMF was going to serve as the banker of last resort for governments, it would need a great expansion of capital and staff...
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...And who better to be the doctor than the IMF...
...The actual causes of the Great Depression were inappropriately tight monetary policies by the Fed and other central banks, excessive tariffs, and restrictive trade policies...
...The best their advisory work, and they each have solution is to privatize them...
...The best solution is to to properly manage monies they received...
...The bank was formed on the false assumption that if rich countries lent money to poor countries, the poor countries would become rich and poverty would largely disappear...
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...The decisions made by these institutions greatly affect the well-being of the people in many countries, yet the decision makers are not democratically elected...
...Both recipient and donor countries pressure World Bank managers to make loans, and since everyone involved is spending someone else’s money, many incentives to ensure the money is well spent are missing...
...stopped the run on its gold supply by other countries, notably France, because gold had been under-priced), marking the effective end to the old fixed-rate exchange system...
...However, the World Bank provided a loan to BulTel with the express condition that the government not allow private competition...
...SavingSoiled Sisters SavingSoiled Sisters The IMF and the World Bank enjoy untouchable status without doing anyone but its pampered employees much good...
...Governments—including the U.S...
...If the required conditions are not present, then aid will be ineffective and wasted...
...As is all too typical of those from the academic and political classes, they misdiagnosed the causes of the Depression, and thus came up with unworkable “solutions” that created new problems...
...As the late, highly regarded development economist Lord Peter Bauer famously noted: “The argument that aid is indispensable for development runs into an inescapable dilemma...
...When I served as co-chairman of the Bulgarian Economic Transition Task Force in 1990, I witnessed World Bank staff undermining needed reforms...
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...The IMF did attach “conditions” for its loans, which most often included a plan for a balanced budget, consisting of some spending restraint, tax increases, and devaluation of the currency...
...These are laudable goals, even if unattainable, particularly by politically dominated multilateral institutions...
...If the conditions for development other than capital are present, the capital required will either be generated locally or be available commercially from abroad to governments or to businesses...
...This required a mechanism to “manage” the fixed-rate system—hence the IMF...
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...Rich countries are characterized by having the rule of law, protection of private property, and relatively little government interference with free markets...
...The local leaders could blame the resulting hardship on the IMF, rather than their own mismanagement, and so the IMF programs were often unpopular...
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...But these small improvements are insufficient to overcome the fatal flaws in the concept and design of the institution...
...And, of course, there were plenty of governments in Africa, Asia, and Latin America most willing to run up the bills and then ask the IMF for a bailout...
...But what if much of the debt is in someone else’s currency, such as the U.S...
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...The World Bank is proof that the old line that “foreign aid is the process of taking money from poor people in rich countries and giving it to rich people in poor countries” is not far from the mark...
...These questions are increasingly being debated by policy wonks and even by those affiliated with these institutions...
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...An area where the IMF can legitimately claim success is in its technical assistance work...
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...The IMF did that job quite well until 1971, when President Nixon “closed the gold window” (meaning the U.S...
...With the end of the fixed-rate exchange system, the IMF should have been out of a job and disbanded...
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...If a government runs an unsustainable deficit, it norcheating by the recipient governments, and the disincentives for productive activity embodied in the program...
...The regional development banks, which already duplicate many of the development activities of the World Bank, would still exist...
...SEPTEMBER 2007 THE AMERICAN SPECTATOR 21 RICHARD W. RAHN Those in charge of IMF mission development knew that leaders of most governments liked to spend other people’s money, but directly taxing people was unpopular...
...major financial and real estate assets that are presently “owned” by the governments that provided the capital...
...Many free market/supply-side American economists were also unhappy with the IMF programs that used static revenue analysis (assuming little or no change in people’s willingness to work, save, or invest as a result of tax increases) to develop tax and spending programs for others...
...Many attendees distrusted the free market economic system, blaming it for the Great Depression and the rise of Nazism...
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...RICHARD W. RAHN The World Bank had an impossible task...
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...This global success (for which the IMF can take some credit) has ironically resulted in insufficient funds to pay the IMF’s salary and operating expenses, unless it downsizes...
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...In fact, rich countries became rich because they created the institutions and policies that allowed profit-seeking individuals to create goods and services for their fellow man...
...The “government owners” could be given shares of stock equal to their contributions to each organization, and then each government could choose to either hold or sell the stock to private parties...
...In recent years, as the world economy has been growing at record rates, there have been fewer and fewer borrowers from the IMF, and some loan recipients have repaid their debts early...
...The IMF pays its staff and operating expenses from interest earned on the money it lends to governments (even though its capital funds were directly or indirectly supplied by taxpayers from devaluation of the currency...
...Hence, governments tend to run deficits...
...As expected, many of these “conditionality” programs did not work because of corruption and wealthy nations...
...B Y BECOMING NORMAL profit-seeking corporations, they would likely do a much better job in resource allocation and cost control...
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...Even though the World Bank and IMF have become more market friendly in recent years, they still funnel too much money to incompetent or corrupt governments...
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...Central banks, financial systems, and currency boards have been established in the former Communist countries of Eastern and Central Europe...
...The managers of the IMF and the World Bank have allowed their missions to overlap, too often defined success as money dispersed rather than service delivered, put too much stress on the limited pool of skilled administrators in poor countries, and failed to act on serious calls for reform (such as those recommended by the Meltzer Commission in 2000...
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...Incentives for laggard countries to adopt the high-growth policies and institutions of successful developing nations would grow once the crutch of the IMF/World Bank was removed...
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...Thus, it logically followed that if certain economic problems were global, they could only be solved by powerful global institutions, transcending the nation-state...
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...They have also fostered expectations to exceed what realistically could be done—hence, the current widespread disillusionment...
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...This left the IMF with no choice but to find a new mission and, ideally, one to make it even larger and more powerful, and that it did...
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Vol. 40 • September 2007 • No. 7
