NCPA - National Center for Policy Analysis

Better Off Without The International Monetary Fund

April 16, 2003

The World Bank and International Monetary Fund (IMF) were created during the era when people really thought that foreign aid worked. They have institutionalized this view ever since.

While the World Bank at least understands that free trade is key to growth, the IMF persists in believing that balanced budgets are the only thing that matters. For this reason, it attacked President Bush's tax proposal last week on the grounds that it will increase the U.S. budget deficit.

  • The IMF position makes some sense in developing countries, where there is no capital market in which to sell government bonds -- hence, central banks tend to print money to finance deficits, leading to inflation and a depreciating currency.
  • But it makes little sense to criticize the United States on the same grounds, because our central bank is independent of the federal government and the Treasury Department can always borrow as much as it needs to finance deficits.
  • However, the IMF follows a one size fits all" policy, so everyone must be criticized equally even if it makes no sense.

Iraq would do better to follow the path of Germany and Japan and avoid the World Bank/IMF model if it hopes to restore its economy. Instead of relying on foreign aid, as the World Bank does, and raising taxes to balance its budget, as the IMF wants, Iraq should eliminate all price controls, privatize the oil industry, establish secure property rights, lower tax rates and link the Iraqi currency to the dollar. If it does all these things, foreign investment will make foreign aid and IMF programs unnecessary.

Source: Bruce Bartlett, "Better Off Without International Monetary Fund," April 16, 2003, National Center for Policy Analysis.


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