Monday, September 18, 2006

Who Needs the IMF?

Newsweek has a story this week with the same title as this post. Unfortunately, they chose Kenneth Rogoff, a Harvard Econ Prof and former employee of the IMF, to write the article. Here's the opening graph:

Sept. 25, 2006 issue - As the international Monetary Fund holds its big fall meetings in Singapore this week, it faces a financial world that has been turned on its head. Traditionally, the Fund has helped out bankrupt emerging-market governments using loan money collected mainly from Western nations. But now, the Fund is being asked, in effect, to play a much broader role in helping maintain financial stability in a world where the lenders and creditors are trading places. With the United States borrowing two thirds of global net savings and Euro-zone countries like Italy, Greece and Portugal struggling to control their government finances—while emerging markets sit on mounting foreign-exchange reserves—many worry that ground zero for the next big global financial crisis could be somewhere in the wealthy West. Given that Asia now accounts for almost 40 percent of global income, and an even larger share of its surpluses, it makes no sense that IMF voting rights and leadership posts are still dominated by the United States and Europe.

First of all, the IMF was established to administer the currency regime known as Bretton Woods that was established after WWII. Since Nixon severed the dollar's link to gold and essentially killed Bretton Woods in the early 70s, the IMF has been looking around for a job. I guess it would have made too much sense to disband an agency whose mission was no longer valid. Second, the IMFs more recent role as lender of last resort to emerging market economies has produced questionable results at best. The moral hazard created by the existence of an IMF prepared to bail out any country that digs a deep enough hole means that profligate governments never receive the market punishment they deserve and that would teach them to follow basic, sensible economic policies. And lastly, the US is the biggest contributor to the fund; why should we give up any leadership position at the fund when it is lending our money? Who needs the IMF? No One! Click on the title to read the whole story.

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