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Show Hinckley Journal of Politics Spring 2000 the IMF must continue to offer. Since the Fund was created, it has been the only international agency that has been able to successfully help economies in need. The function of the IMF is simply too important at this time to abolish it completely (Wolf 1998). Many people believe that critics of the IMF are isolationists. On the contrary, the opposite is the case (Fuelner 1998, 3). Former Secretary of State George P. Shultz (1998) says, "I am very skeptical of what the IMF has done." Along with him, former Treasury Secretary William E. Simon, former Chairman of Citicorp/Citibank Walter B. Wriston, Nobel laureate Milton Friedman, and 1996 Vice Presidential candidate Jack Kemp among others have asserted that the IMF needs reform and that money should not be added to the Fund. None of these men can be described as isolationist. On the contrary, each is a longtime advocate of "responsible U.S. global leadership." These experts believe completely that the IMF has done more harm than good through its actions, and that people would suffer less in the long term, in a world without the market distortions currently created by the IMF. "Like these men, critics of the IMF in general support sound economic principles and responsible international engagement" (Fuelner 1998, 4). IMF Bailouts Aee More Likely to Cause Financial Crises through Exacerbating "Moral Hazard," Than to Prevent or Cure Them "Bailouts" seem to be very misguided. In basic economics we learn the "guiding principle of a well-functioning market economy is that those who undertake risks should either lose or gain according to the outcomes produced by those decisions" (Calomiris 1998, 1). Charles W Calomiris, a Columbia University Business School professor and member of NBER (National Bureau of Economic Research), and of the American Enterprise Institute, asked the question, "What have been the costs of violating that guiding principle through government absorption of financial losses?" Three kinds of costs figure prominently. Number one is an "undesirable redistribution of wealth from taxpayers to the politically influential in developing economies." Second is "the promotion of excessive risk taking and inefficient investment." Finally occurs the "undermining of the natural process of deregulation and economic and political reform which global competition would otherwise promote" (Calomiris 1998, 1). While bailouts entail loans from the IMF and foreign governments at subsidized interest rates to developing country governments, the people who are most directly affected by IMF interventions-the world's poor-are those who can least afford it. If the goal is to help developing countries progress economically and to promote a liberal global economy, then the least [that] rich countries can do is deny further funding for the IMF (Vasquez 1998, 2). Calomiris also addresses this problem when he maintains the IMF and the U.S. Treasury in most cases are repaid. But these loans provide powerful justification for increased taxation to repay them. When the crisis has passed, the big winners are the wealthy, politically influential risk takers, and the biggest losers are the taxpayers in countries like Mexico or Indonesia. Studies by the World Bank and the IMF have documented some 90 episodes of severe banking crises over the past two decades. In more than 20 of those cases, the bailout costs to developing country governments have exceeded 10 percent of Gross Domestic Product (GDP). Moreover, in half of those 20 cases, losses to a country have been around 25 percent of its GDP (Calomiris 1998, 1). In contrast, defenders of the IMF argue that the IMF's hard-currency loans have prevented the financial problems from reaching epidemic proportions, while its stringent loan conditions will help cure the disease and prevent it from recurring. While this may be the case in some instances, critics disagree with this for the most part and argue that the rescues invite reckless financial behavior by borrowers and lenders, creating what economists call a moral haxpxd (Heifer 1998, 1). Ricki Tigert Heifer of the Brookings Institution defines moral hazard as: a well known problem in the world of banking and insurance. Policymakers seek to contain it for banks-which benefit from deposit insurance and central banking services-by requiring some portion of their assets to be backed by capital, or shareholders' funds, and by supervisory restraints on risk taking. Insurers seek to contain risk taking by requiring their insured to absorb some of the first dollars of their losses (deductibles) or by issuing insurance only up to some limit (Heifer 1998, 2). Most economists recognize that international financial rescues inevitably entail some sort of moral hazard and feel that it is unlikely that international financial crises will disappear. However, a key challenge for policymakers is to balance the benefits of rescues when such crises occur against the costs associated with the distorted incentives that these rescues create. Bailouts unfortunately shield investors and politicians from the consequences of their poor decisions by "socializing" risks and reducing the cost of failure associated within investment Risks are socialized because everyone ends up paying for individual investors' errors. IMF bailouts encourage speculation of the sort that investors would not participate in if the IMF were not there to shield them from failure. Bailouts send signals to governments that they will not have to bear the costs of failing to reform their economies (Fuelner 1998, 4). Former U.S. Treasury Secretary Robert Rubin even recognizes that if the IMF continues to bail out countries, we will almost certainly expect countries to slip into crises in the future because it encourages risky behavior on the part of governments and investors. This is a problem in that countries in crisis will fully expect that if any thing goes wrong, the IMF will come to their rescue (Vasquez 1998, 2). 17 |
