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Abolish th IMF
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Last Update:
10 May, 2000
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Forbes
Magazine
April 17, 2000
Abolish The IMF
By Steve H. Hanke
THE INTERNATIONAL MONETARY FUND INTERFERES too much in the domestic
politics of the countries it seeks to assist. What's more, the IMF's
policies don't generate prosperity or alleviate poverty. That's what a
bipartisan congressional commission concluded recently. Unfortunately, the
panel's prescription was misguided: Reinvent the IMF, yet again.
The only cure for the IMF's ills is to pull the plug on that international
bureaucracy. Why? Look no further than the disaster it wrought in Southeast
Asia. With the collapse of the Thai baht in mid-1997, the entire region
entered an economic maelstrom. The IMF's remedy: floating exchange rates.
We were told that this elixir would bring prosperity. Indeed, when
Indonesia floated the rupiah in August 1997 the IMF's deputy managing
director, Stanley Fischer, confidently proclaimed that this move, "in
combination with Indonesia's strong fundamentals, supported by prudent
fiscal and monetary policies, will allow its economy to continue its
impressive economic performance of the last several years." (Fischer has
since been elevated to the post of acting managing director.)
Balderdash. With the exception of Hong Kong, all the countries in Southeast
Asia allowed their currencies to float. And float they did. Downward. The
accompanying table is a postmortem. From the end of 1996 through December
1999 the Indonesian rupiah did the worst relative to the greenback. And the
other floaters suffered large devaluations, too.
Consequently, their economies took heavy hits. There's no denying that the
worse the devaluation, the worse the economic devastation. Indonesia
suffered the most. Some said the poor, at least, were insulated from the
problem. Hardly. Local price runups hurt the poor the most.
Why was Hong Kong the exception to this ugly situation? As I predicted in
my Nov. 17, 1997 column, Hong Kong would not devalue its dollar. The reason
was that it had a currency board, which firmly fixes the local currency to
the U.S. dollar. As the storm raged, its link to the greenback held tight,
and GDP per capita fell by much less than it did in neighboring countries.
True to form, the IMF is spinning a different yarn. Its chief spokesman,
Thomas Dawson, wrote an indignant defense of its Asian policies in the Wall
Street Journal in mid-March. To obfuscate how the institution's wrongheaded
policies decimated Asian living standards, he noted that South Korea's
growth was 10% in 1999 and Thailand's 4%. But those were only partial
recoveries from the sickening falls these economies had suffered.
I can testify firsthand how destructive--and politically driven--the IMF
can be. In February 1998 then-President Suharto, the Indonesian leader,
appointed me as his adviser. To stop the rupiah's fall, I recommended that
Indonesia adopt a currency board like Hong Kong's. The markets loved it. On
the day this proposal hit the press the rupiah strengthened by 28% against
the dollar.
Mind you, Suharto was not a popular man with the IMF or the Clinton
Administration. Since a currency board would have stabilized the rupiah,
that would have enhanced his position. So the IMF and the Administration
mounted a massive counterattack, pressuring the Indonesian government to
back off the board idea.
Recently, however, I was inadvertently vindicated by none other than Michel
Camdessus, the departing IMF managing director. On his retirement Camdessus
boasted that "We created the conditions that obliged President Suharto to
leave his job." In other words, they caused considerable human suffering in
the course of trying to accomplish a political goal.
Upon hearing this, former secretary of state George Shultz told National
Public Radio: "I don't think that's a function of the IMF. Look what's
happened in Indonesia--income per capita cut in half, poverty widespread,
religious intolerance on the rise."
I couldn't have said it better.
http://www.forbes.com/forbes/00/0417/6509084a.htm
http://www.forbes.com/forbes/00/0417/6509084a2.htm
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