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Putting the Taxpayers at Risk, Part 1


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President Clinton has not let a little scandal stand in the way of his ongoing attempt to scam the American people. As talk of impeachment enveloped him in Washington, he flew to New York City to give what his staff termed an “important” speech. Which meant a proposal for yet more taxpayer bailouts of more improvident foreign nations.

Economic chaos overseas constitutes “the biggest financial challenge facing the world in a half century,” he told a Council on Foreign Relations audience. Left unresolved, the problems could eventually threaten U.S. prosperity and security. Therefore, he argued, Congress should vote an extra $18 billion for the International Monetary Fund (IMF) and expand export subsidies, the Fund should increase lending to Latin America, the World Bank should double aid to Asia, Japan should revive its economy, and finance ministers from around the world should meet to coordinate their activities.

Of course, Clinton is not alone in believing that all that’s needed to solve any international problem is to spend a few score more billion dollars. But such optimism is curious. After all, Washington has provided more than $1 trillion in foreign aid (in today’s dollars) since World War II. The result? According to the United Nations Development Program, one billion people cannot meet their basic needs. Nearly three-fifths of the globe’s 4.4 billion people don’t enjoy basic sanitation. Many lack adequate housing, drinkable water, and life-saving health care. Is there anything to suggest that more of the same – particularly more cash to the multilateral development banks (MDBs), particularly the IMF and World Bank – will improve the condition of the world’s poor? The answer, unfortunately, is no. In fact, more money to these institutions is likely to slow rather than spur the globe’s move to the free market and to economic recovery.

The MDBs were created 50 years ago as part of the Bretton Woods agreements and cost the United States about $2 billion a year. As conduits for government-to-government aid, it was inevitable that they would promote central planning rather than deregulated markets. As a result, they have retarded economic progress throughout the world.

The IMF was originally established to help nations suffering balance-of-payments difficulties. That function disappeared in 1971, but the Fund proved to be an organizational survivor and was soon providing more credit than ever, though then to subsidize Third World development. Now it has become the lead institution in bailing out countries in crisis, as in East Asia last year and Mexico in 1994.

Unfortunately, the IMF fails the best test of effectiveness – helping developing countries achieve self-sustaining growth. The organization has been subsidizing the world’s economic basket cases for years, without apparent effect. Three nations, Egypt, India, and Turkey, have relied on IMF aid for more than 40 years; 16 foreign states have been on the Fund dole for 30 to 39 years. An incredible 67 have been using Fund credit for at least a decade.

This should come as no surprise. Although the Fund ritualistically proclaims its commitment to capitalism, it has often promoted government regulation over entrepreneurial initiative. For instance, the IMF is famous for demanding devaluations – the very step that set off Mexico’s panic. The Fund blocked an Indonesian plan to create a currency board to stabilize the rupiah. Moreover, the organization has pushed higher taxes on such nations as Argentina, Mau-ritius, and Russia, as if insufficient government intervention was their problem. The IMF’s loan package for Mexico effectively validated that nation’s reliance on price and wage controls.

Even when the Fund does push for sensible reform, it rarely seriously enforces its conditions. For instance, Peru negotiated 17 separate agreements between 1971 and 1977; Brazil won eight separate standby programs between 1965 and 1972. American pressure to maintain support for Mexico and especially Russia have made IMF conditions on loans to those nations largely illusory.

Nor have the IMF’s conditions ever stopped it from lending to highly collectivist – and even socialist – regimes. The largest Third World borrowers between 1947 and 1987 were India, Brazil, Argentina, Mexico, and Yugoslavia, all of which relied ondirigiste, antigrowth economic policies throughout the period despite the Fund’s loan conditions. Support for the odious Ceausescu regime in Romania demonstrates that IMF officials lack a conscience as well as common sense.

Instead of being embarrassed, IMF officials glory in their lack of economic orthodoxy. The organization formally disclaimed any bias against collectivist systems:

“The Fund has had programs in all types of economies and has worked with their authorities, identifying the best way to achieve external balance or exercising its function of surveillance over the payments and exchange system…. In many instances, Fund-supported programs have accommodated such nonmarket devices as production controls, administered prices, and subsidies.”

Yet how is a country with such policies going to achieve self-sustaining economic growth? It is hard to take seriously an organization’s claim to be “pro-development” when it regularly pours large sums of money into the worst economic systems on earth.

Alas, the World Bank’s record is, if anything, worse. Originally envisioned as a “lender of last resort” for developing countries, Bank policy changed dramatically under President Robert McNamara during the 1970s. Admitted one official toForbes magazine at the time: “We’re like a Soviet factory. The push is to maximize lending…. Our ability to influence projects in a way that makes sense is completely undermined.”

The basic problem with the Bank is that it likes central economic planning. It has, for instance, consistently backed governments whose statist policies precluded self-sustaining development. One internal review found that 54 percent of agricultural projects between 1979 and 1984 were operating in countries with counterproductive price controls and other misguided regulations. The auditors warned that “it is not possible to implement viable projects in an unfavorable policy environment,” but the Bank continued to lend.

Moreover, the Bank has committed roughly 80 percent of its resources to public enterprises, most of them financial black holes. Today new, market-oriented governments in many poorer nations are attempting to privatize their old, Bank-funded mistakes.

Part 1 | Part 2 | Part 3


Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996)
Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994)
The Politics of Envy : Statism As Theology (1994)
The U.S.-South Korean Alliance : Time for a Change (1992)
The Politics of Plunder : Misgovernment in Washington (1990)
Beyond Good Intentions : A Biblical View of Politics (1988)

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    Doug Bandow is vice president of policy at Citizen Outreach, the Cobden Fellow in International Economics at the Institute for Policy Innovation, a senior fellow at the Cato Institute, and serves as adjunct scholar for The Future of Freedom Foundation. He is a former special assistant to President Reagan; he is also a graduate of Stanford Law School and a member of the California and D.C. bars. BOOKS BY DOUG BANDOW: Leviathan Unchained: Washington’s Bipartisan Big Government Consensus (forthcoming) Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996) Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994) The Politics of Envy : Statism As Theology (1994) The U.S.-South Korean Alliance : Time for a Change (1992) The Politics of Plunder : Misgovernment in Washington (1990) Beyond Good Intentions : A Biblical View of Politics (1988)