Parkinson’s Law Reigns at the IMF

The late C. Northcote Parkinson accurately described some of the whimsical features of modern bureaucratic organizations, such as “work expands to fill up available employee time” or “organizations grow even as their responsibilities decline.” The International Monetary Fund is an example of the latter aphorism. The IMF’s reason for being disappeared in 1971, but the IMF is now bigger and more costly than it was 20 years ago. Soon, it will ask the taxpayers of major countries for more money.

The IMF is one of a handful of institutions created at the end of World War II as part of the revised postwar economic order. The ruling belief at the time was that world economic stability would be maintained best if the value of each country’s money remained fixed in relation to that of the others. Gold was given a fixed value of $35 an ounce, and all other currencies were valued in terms of gold or dollars. The gold price and the rate at which one money could be exchanged for another were expected to remain fixed.

A distinguishing feature of any fixed exchange rate system is that someone, usually the government, must be willing to serve as residual buyer or seller of its money at the fixed price. When President Richard M. Nixon closed the gold window in 1971 by refusing to sell gold to support the dollar, the system came to an end. Without support, the dollar declined in value for a time. Subsequently, the United States and other major countries agreed to let exchange rates be determined in the marketplace. At times, countries seek to influence their exchange rate, but they are not obliged to do so. Principal exchange rates fluctuate with the market.

Under the fixed exchange rate system, countries often borrowed dollars to support their exchange rate. A main function of the IMF was to lend those dollars. This function vanished in 1971 with the demise of the fixed exchange rate system. Since then, the IMF hasbeen looking for things to do.

After the oil shock of 1973-74, the IMF got involved in lending, usually at below-market rates, to countries that were unable to pay for their oil imports. Much of this lending delayed adjustments to oil price increases, so it was counterproductive. It was useful to the IMF, because it gave the organization something to do and even provided for some growth in staff.

A new, and much greater, opportunity came in 1982 when Mexico, followed by other countries, was unable to pay the interest on its international debt. The IMF stepped in to make “temporary” loans of dollars until the crisis ended. But the debt crisis didn’t end, so the IMF continued to lend well into the 1980s. Many of the loans were made on favorable terms, at below-market rates. Just as the IMF lending stopped, U.S. Treasury Secretary Nicholas F. Brady came up with a proposal to expand IMF lending to debtor countries.

The IMF is not the only lender to debtor countries, not even the only lender that makes loans below market interest rates. A sister institution, the World Bank, makes similar loans, and many governments lend to debtor countries on favorable terms. These loans are subsidized, in one way or another, by taxpayers in the industrialized countries. The availability of subsidized loans encourages countries to borrow, adding to their debt.

Unfortunately, both the IMF and the U.S. government initially misperceived the scope of the debt problem and underestimated its duration. Principally, they failed to see that the central problem was the wasteful misuse of resources in many debtor countries. Additional lending given in exchange for promises of reform rarely produced lasting improvement. It could be argued that the additional lending actually discouraged reform and efficiency measures and delayed adjustment in many countries by hiding the effects of wasteful and counterproductive domestic policies.

Critics of the IMF usually contend that IMF lending is a costly activity that duplicates services provided by others. Some go further, arguing that the lending typically goes to governments rather than to private producers, thereby encouraging public, not private, enterprise. Defenders insist that the IMF provides a unique service--not by lending, but by collecting information from borrowing governments that would not be provided to private lenders. Some of this information helps private lenders reach better decisions, and some is used by the IMF to suggest how countries might straighten out their economies. Even if this argument is valid, information gathering does not require that the IMF make loans.

An issue in recent research about the IMF’s activities is whether the IMF gives useful advice to debtor countries. This is a distinctly secondary concern. Much of the advice about controlling inflation, reducing budget deficits or correcting exchange rates is well known from experience and past research. Many countries have scores of trained economists well equipped to provide such advice. The problem is getting a debtor country to make the political decisions needed to carry out the advice. The IMF’s recent record of success in this area is not spectacular--not even very good. Typically, the countries take the money but not the advice. A year or two later, they face the same or similar problems with a larger debt and larger interest payments.

One additional justification of IMF lending is often made: The poor would suffer if the lending stopped. This suggests, contrary to fact, that the poor benefit from the loans. However, most of the money loaned by the IMF and foreign governments promptly flows out of the country. Private borrowers, usually well connected to the government, use the opportunity to shift their assets overseas. The country is left with a larger foreign debt but has little additional investment to service the debt, so the burden on taxpayers rises.

The recent food riots in Argentina, after years of IMF lending programs, should put the argument about benefits to the poor to rest. The Argentine economy has been ravaged by hyperinflation. Billions of dollars in loans have become worthless, the result of policies that the IMF opposed but that the Argentine government continued, aided by loans from the IMF and others. The mismanagement has gone so far that the poor are unable to buy food. Additional loans have not helped and, by delaying necessary economic adjustments, actually may have hindered reform. Would it not have been better for Argentina to have made the necessary adjustments years ago?

Argentina is not the only case of failure. There are many others. Brazil is not far behind in the drift into hyperinflation. There, too, IMF lending has helped perpetuate extravagant policies.

A recent research paper looked at some of the costs of running the IMF. True to Parkinson’s laws, the costs rose from decade to decade. Between the 1950s and 1988, the IMF staff doubled and redoubled. There are now four staff members for every one in the ‘50s. Much of the growth occurred in the late 1960s, when the fixed exchange rate system began to break down but the staff increased by more than 50% after the fixed exchange rates system disappeared.

Taxpayers should be concerned that the IMF has become a self-perpetuating bureaucracy that wastes valuable resources by lending to countries that follow unproductive strategies. Many of its activities duplicate activities that are provided by others. Eighteen years after its original purpose of sustaining fixed exchange rates ended, the IMF should be closed and its remaining net assets repaid to its sponsors.