The arrest of the former head of the International Monetary Fund in New York provides a salutary opportunity to re-examine the behaviour and role of the organisation.
Dominique Strauss-Kahn’s penchant for $3,000-a-night hotels and first class flights (an odd habit for a socialist statesman) is not uncharacteristic of the IMF. Its 1,844 economists enjoy the bulk of the IMF’s $515 million annual wage bill and pay no income tax. In addition, they each spend about $50,400 a year on travel.
Who pays for all this largesse? Ordinary taxpayers across the IMF’s 187 member states, far removed from its palatial headquarters in Washington, D.C.
What do they get for it? Advice – and creditor status to spendthrift governments.
Each year, the IMF, at a cost of many millions of dollars, grants member countries an Article IV consultation. Not surprisingly, these become a public relations exercise for the presiding government, or they are ignored.
For instance, last year the Australian government flaunted the IMF’s ‘findings’ that ‘Australia was one of the few advanced economies to escape recession in 2009’ and that ‘returning quickly to budget surpluses…will put Australia on a firmer footing to deal with future shocks.’
Australia’s economic authorities already knew that, and in any case, are far more familiar with its economic data and circumstances – just as other countries’ economic policymakers are with theirs. No sane person or business would pay the cost of the IMF’s analyses.
Despite having the most sophisticated models and credentialed economists, the IMF did not see the global financial crisis coming.
Rather, in April 2007, just a few months before the crisis unfurled itself, the IMF’s World Economic Outlook said risks to the global economy were extremely low. Yet the GFC has been a boon for the IMF. Member countries have agreed to triple its lending resources to about $750 billion. Australia is increasing its contribution by $5.3 billion.
The availability of credit weakens the incentive for governments to live within their means and encourages foreigners to lend to impecunious regimes. Bondholders know the IMF will ultimately ensure they are substantially repaid. In fact, the incidence of default among countries has increased markedly since the establishment of the IMF in 1945.
It is ironic that a global financial crisis borne of perverse financial incentives has led to the further entrenchment of the IMF. When a business collapses because of shoddy planning, its competitors aren’t required to rescue it. Countries such as Greece and Ireland, now in a fiscal funk, should bear the consequences of their profligacy, however unpleasant it might be to limit spending to taxes collected.
Their pain will ensure that voters there and in other countries will less readily tolerate fiscal excesses from their governments. One such excess is the size and scope of the IMF.
Discuss in our Forums
See what other readers are saying about this article!
Click here to read & post comments.
1 post so far.