The IMF Con

September 27, 2004

You won’t hear either presidential candidate say much about the issue of foreign aid during this election season, despite the record levels of federal spending and debt that plague our economy.  Very few Americans realize the extent to which Congress sends billions of their tax dollars overseas to fund the most counterproductive foreign welfare schemes imaginable, always in the guise of helping the poor.  A recent report by the congressional Joint Economic Committee on which I serve highlights the reckless manner in which one organization, the International Monetary Fund, wastes your money around the world.  

The IMF provides a perfect illustration of the both the folly of foreign aid and the real motivations behind it.  The IMF touts itself as a bank of sorts, although it makes “loans” that no rational bank would consider-- mostly to shaky governments with weak economies and unstable currencies.  The IMF has little incentive to operate profitably like a private bank, since its funding comes mostly from a credulous US Congress that demands little accountability.  As a result, it is free to make high-risk loans at below- market interest rates. 

The real purpose of the IMF is to channel tax dollars to politically-connected companies.  The huge multinational banks and corporations in particular love the IMF, as both used IMF funds-- taxpayer funds-- to bail themselves out from billions in losses after the Asian financial crisis. Big corporations obtain lucrative contracts for a wide variety of construction projects funded with IMF loans.  It's a familiar game in Washington, where corporate welfare is disguised as compassion for the poor.

In fact, IMF loans often do far more harm than good.  At best IMF borrowers are governments of countries with little economic productivity; at worst the money ends up in the hands of corrupt dictators. Either way, most recipient nations face huge debts they cannot service, which only adds to their poverty and instability. IMF money ultimately corrupts those countries it purports to help, by keeping afloat reckless political institutions that destroy their own economies.

Government-to-government transfers through a middleman like the IMF cannot produce real growth.  When capital remains in private hands, it is allocated to its most productive uses as determined by the choices of consumers in the market.  Placing capital in the hands of politicians and bureaucrats inevitably results in inefficiencies, shortages, and economic crises, as even the best-intentioned politicians cannot know the most efficient use of resources.

American taxpayers already lend various governments more than $5 billion annually through the IMF, at a yearly cost of over $300 million because of loan defaults and subsidized interest rates.  Now the IMF wants to double its pool of funding, which will put taxpayers on the hook for $12 billion in loans at a cost of about $750 million each year.  Furthermore, since the IMF creates “drawing rights” accounts that are redeemable in US dollars, it in essence prints US dollars when it increases those drawing rights.  This is a clear violation of our national sovereignty, and a vivid example of why we should stop participating in international schemes like the IMF altogether.

The IMF and other complex schemes only serve to obscure the real issue: Why should US taxpayers be forced to send money abroad?  Certainly the Constitution provides no authority for foreign aid.  In historical and practical terms, redistribution of wealth from rich to poor nations has done little or nothing to alleviate suffering abroad.  Only free markets, property rights, and the rule of law can create the conditions necessary to lift poor nations out of poverty.