Contact FreedomWorks

400 North Capitol Street, NW
Suite 765
Washington, DC 20001

  • Toll Free 1.888.564.6273
  • Local 202.783.3870

Capitol Comment

Capitol Comment 177 - The U.S. Should Bail Out of the IMF


If the U.S. Congress approves bailing out the financially troubled Asian nations and replenishing the International Monetary Fund (IMF) for future bailouts, American taxpayers will be footing the bill for the mistakes of other countries.

Although some Asian governments have attempted to blame foreign causes such as international currency traders for their difficulties, Asia's current financial crisis is clearly a result of government regulation and corruption, restrictions on foreign capital and competition, and closed financial systems.1 Rather than embrace open markets and less government intervention, Asian nations adopted their own version of economic development that attempted to combine a capitalist economy with strong central planning. This strategy resulted in market distortions and corruption, which in turn has led to financial crisis.

Who benefits from a bailout? The IMF and the U.S. government are using taxpayer money to bail out wealthy Wall Street investors and bankers who do not want to take responsibility for their poor risk analysis that will cause them to suffer huge losses if these Asian countries' banks and businesses declare bankruptcy. Milton Friedman recently stated: "To the greatest extent it [the IMF Asian bailout] bails out outside investors who have been investing in those countries. It isn't bailing out the people in Korea who made bad loans. It's bailing out the people in Washington and London and Germany who made bad loans."

In addition, IMF money supports non-democratic governments that thrive on corruption and protectionism. These funds allow them to delay crucial economic reforms such as stabilizing their currencies, cutting taxes, and establishing clear and open financial institutions. By helping governments prop up insolvent banks, bailout money spares governments of the crisis that has resulted from their own central planning. This only reaffirms the use of faulty central planning policies and discourages necessary economic reforms.

Do IMF bailouts work? The IMF bailout of Indonesia, Thailand, the Philippines, and South Korea is estimated to cost at least $100 billion.2 Spending this much money requires close examination of the efficacy of bailouts. Unfortunately, the IMF's record is dismal.

The evidence shows that no amount of IMF aid is likely to make governments pursue crucial economic reforms. Rather, it removes the economic consequences of their past actions and allows these governments to avoid making the difficult choices they would have had to make without IMF aid. The IMF's aid to less-developed countries has actually created further dependence on the IMF rather than stable and growing, open economies.3

Not only do IMF bailouts have a dismal record of economic improvement (Of the 89 less-developed countries that received IMF money between 1965 and 1995, 48 are no better off economically now than they were before receiving the loans. Of these 48, 32 actually are poorer.4 ), but the IMF forces countries to adopt extreme austerity measures at a time when banks are failing and economic activity is contracting. IMF-supported interventions typically include a set of austere fiscal programs such as currency depreciation and higher taxes. Unfortunately, depreciating a currency can ignite inflation, and higher taxes can put the brakes on economic growth.5 For example, three years after the 1995 U.S. bailout of Mexico, Mexican living standards are still lower than before the currency devaluation, and the Mexican economy is still burdened with IMF-induced higher tax rates.

The U.S. should defund the IMF now. Milton Friedman, a major critic of the IMF points out: "There's no free lunch. They [the IMF] are providing a benefit to the investors in those countries and that benefit costs money. ... The bigger problem is that the IMF is also in a way the cause of the Asia crisis."

To prevent future fiscal crises, solvent nations should refuse to bail out financially-troubled countries. The end of IMF bailouts would allow real market reforms to move forward in these countries. The U.S should begin by rejecting requests for further funding increases and then formulate a complete withdrawal from the IMF.

1Bryan T. Johnson and John Sweeney, "Down the Drain: Why the IMF Bailout in Asia Is Wasteful and Won't Work," The Heritage Foundation, December 5, 1997.

2Tim Shorrock, "Administration Backs Bailout of East Asia," The Journal of Commerce, January 23, 1998.

3Doug Bandow, "A Record of Addiction and Failure," Perpetuating Poverty: The World Bank, the IMF, and the Developing World, (Washington, D.C.: Cato Institute, 1994), p. 19.

4Bryan Johnson and Brett Schaefer, "The IMF: Outdated, Ineffective, and Unnecessary" (Washington, D.C.: The Heritage Foundation, 1997) p. 3.

5Lawrence Kudlow, "Just Say No," American Skandia Investment Holding Corporation, 1997.