The International Monetary Fund (IMF) was created in 1944 to oversee a postwar international monetary system that was intended to promote world trade, investment, and economic growth. In a new Hoover Essay in Public Policy, The Case against the International Monetary Fund, Lawrence J. McQuillan examines the fund's past and present roles and concludes that the IMF does more harm than good. He calls for the elimination of the IMF in favor of market-based alternatives that would forestall future financial crises.
McQuillan contends that the fund's original mission was well defined and limited in scope: supervise an international system of pegged exchange rates and provide temporary, low-cost financing of countries' balance-of-payments deficits. This mission ended in 1971, when President Nixon closed the gold window. At this point McQuillan believes the IMF should have closed shop; instead, it sought and found a new, expanded mission as a financial medic for developing countries.
In its present capacity, the IMF has loaned billions of dollars to member governments with the understanding that borrowers would undertake needed economic and institutional reforms. McQuillan shows that borrowers generally ignore IMF loan conditions yet continue to receive loans for decades. Furthermore, no consensus exists among economists that IMF programs benefit borrowing countries. Importantly, much of the evidence that McQuillan cites is from IMF studies.
McQuillan uses the recent financial crises in Mexico, East Asia, and Russia to illustrate the negative affect of IMF loans on the behavior of politicians and international lenders. Cut-rate IMF loans, which bail out politicians and lenders at the expense of ordinary citizens, encourage unsound domestic economic policies and riskier global investments, McQuillan states.
McQuillan recommends abolishing the IMF in favor of market-based alternatives. He advocates that countries maintain floating exchange rates to prevent foreign-exchange and balance-of-payments crises, adopt internationally accepted accounting practices and unfettered financial markets to improve global capital flows, and undertake fundamental institutional reforms to promote self-sustaining economic growth.
McQuillan concludes that, absent IMF bailouts, governments would face stronger incentives to implement the sound economic policies and market reforms necessary for economic growth and stability.
McQuillan, a research fellow at the Hoover Institution since 1998, has coedited a book titled The International Monetary Fund - Financial Medic to the World? A Primer on Mission, Operations, and Public Policy Issues (Hoover Institution Press, 1999). He was the contributing editor and publisher of Economic Issues from 1993 to 1997 and has a Ph.D. in economics from George Mason University.
