How About Global Growth?
The IMF needs a new vision.

Mr. Malpass is the Chief International Economist for Bear Stearns.
January 3, 2002, 8:00 a.m.

It's tempting to argue for the abolition of the IMF, as former Secretary of State George Shultz has, but this approach is a dead end from a political standpoint. The IMF carefully cultivates congressional support. IMF and World Bank funding don't show up on the U.S. budget, giving them a major advantage over U.S. programs. And Washington views the IMF as a valuable front group for projecting U.S. influence abroad. The fact that it systematically impoverishes foreigners is ignored, and has been for decades.

The issue, then, is how to get the IMF to condition its loans on constructive economic programs. Instead, the IMF keeps using its money, much of it from the U.S. taxpayer, to support economic policies that would never be tolerated in the U.S. The Clinton administration championed this double standard, and the Bush administration has gone along. These policies — which can be summarized as unstable currencies and high tax rates — are causing trouble not only in Argentina but elsewhere. For example:

The IMF's May evaluation of South Africa stated that "Directors observed that the major challenges are to preserve the gains made in external competitiveness. . . . They considered the pursuit of a flexible exchange rate policy to be appropriate." This implies that the rand should be allowed to weaken. No surprise, then, that the rand has lost 50% of its value since May, halving living standards and leading South Africa to expand its controls on capital outflows. There's still time for South Africa's Reserve Bank to reverse its weak rand policy and soften the negative consequences of the latest currency collapse. The next step is to bring down the staggeringly high income-tax rates.

In Turkey, multiple IMF programs have ignored the pressing need for mechanisms to achieve lira stability. As a result, a dollar buys 1.44 million lira, making Turkey 50% poorer than it was a year ago. With the U.S. and IMF pumping in massive funding, it would be easy for the central bank to reduce the number of lira, assure its future stability, and reduce inflation. Once the currency is addressed, tax receipts will rise and tax rates could be reduced.

Mexican President Vicente Fox used his first 18 months in office in a single-minded pursuit of more value-added taxes, an IMF favorite. As a result, his popularity sank, as did his ability to carry out pressing pro-growth reforms. The IMF and the U.S. should encourage Mexico to lower the VAT and take steps toward a more market-oriented economy.

The IMF's policy pattern is as clear in Argentina as in previous collapses around the globe. It gives countries bad economic advice, then lends heavily to them, allows them to waste the new funds, and watches as the government's popularity plummets. When the economic crisis is deep, the IMF blames the government and pulls the plug, knowing that it always gets paid first and in full. In Argentina, as elsewhere, the population and the private sector are left holding the bag. The result is a country more deeply impoverished than it would have been without IMF involvement.

Naturally, the IMF sees these instances differently. Every time an important IMF client collapses, the agency blames the country and the private sector, and proposes a bigger role for itself in overseeing the world financial system. In this vein, the IMF put a sweeping proposal on the table in November — an international bankruptcy process to move away from a strategy of bailouts to a strategy of "orderly" sovereign bankruptcies.

Lost on the IMF is the irony of having itself become the bankruptcy arbiter while it is the biggest creditor and principal economic adviser. Lost on the Bush administration is the developing world's disappointment at having the first post-Clinton IMF reform proposal be completely divorced from any pro-growth initiative.

The U.S. should break this cycle. The world needs a prosperity initiative to complement the war on terrorism. Without it, developing countries are likely to continue sinking, limiting the number and wealth of our friends and potential customers and creating further problems for U.S. security and economic interests.

Past reform efforts have focused on financial flows rather than economic growth. In my view, none of them will work. The key to a successful IMF reform is a change in the policies the IMF recommends. The IMF needs a new vision based on sound money, limited government, lower tax rates, free trade, and a belief that people at the bottom of the economic ladder should be able to move up.

The IMF needs to make growth its mission, not austerity or balanced budgets. It should be encouraged to monitor itself through quantitative measures such as a country's median per capita income in dollar terms. For many developing countries, this measure has been stagnant at best. Current IMF programs imply continued stagnation, because they are based on currency weakness and high tax rates. Proper economic programs should project an increase in per capita income, and then deliver it most of the time.

Leading the IMF to seek growth would break it from the bad habit of prescribing weak currencies, high tax rates, massive bailouts, and now bankrutcy. As the IMF's biggest owner, the U.S. is responsible for guiding that reform effort, and should bring more focus to the table.

— This article first appeared in the Wall Street Journal.