NCPA - National Center for Policy Analysis

Reevaluate The International Monetary Fund

June 9, 1999

Last year, Congress gave the International Monetary Fund (IMF) billions of dollars more to deal with the Asian financial crisis. However, it is only a matter of time before the IMF is back for more.

The IMF was created after World War II to help manage an international monetary system based on fixed exchange rates. But this regime completely collapsed in 1971. Since then, the world's major currencies have floated, adjusting their exchange rates daily in response to changing market conditions. Hence, the fundamental reason for the IMF's existence has disappeared.

But like all good bureaucracies, the IMF did not go away. It found a new job helping developing countries deal with their debt problems. However, the IMF was never really equipped to handle this job. It also created a new problem as international investors began expecting IMF bailouts whenever a country got in over its head.

Recently, the Federal Reserve Bank of Minneapolis devoted its entire 1998 annual report to a review of the IMF's policies. It concludes that the IMF should cease lending money because it only exacerbates the problems it is trying to fix.

The report argues that the IMF is trying to be something it cannot be -- a lender of last resort -- because it doesn't have the resources to fulfill that function. As a result, the report concludes:

"The IMF's policies generate rampant moral hazard so that they may actually increase the likelihood that countries get into financial difficulties. In this sense, the IMF's activities are harmful."

The Asian financial crisis seems to be largely over. But sooner or later there will be another. That is why now is the time for a serious reevaluation of the role and function of the IMF. By the time the next crisis arrives it will be too late.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 8, 1999.


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