The IMF has made matters worse in Asia by establishing moral hazard - The more the IMF bails out countries, the more we can expect countries to slip into crises in the future because it encourages risky behavior on the part of governments and investors who fully expect that if anything goes wrong, the IMF will come to their rescue. The moral hazard problem existed in the past and we are seeing it today. With every election cycle in the past 20 years, for example, Mexico has experienced a currency crisis caused by irresponsible monetary and fiscal policy. Each episode has been accompanied by U.S. Treasury and IMF bailouts, each time in increasing amounts. In Mexico, everybody has come to expect a financial rescue at the end of each presidential term.The only way to eliminate this is for private sector institutions to feel the full consequence of their investment decisions (the financial aid cuts investors' losses rather than allowing them to bear the full responsibility for their decisions) ; that will only happen, however, if the IMF ends its bailout function.
IMF bailouts pose another burden on ordinary citizens because they don't work very well. The Fund's money goes to governments that have created the crisis to begin with and that have shown themselves to be unwilling or reluctant to introduce necessary reforms. Giving money to such governments does not tend to promote market reforms, it tends to delay them because it takes the pressure off of governments to change their policies. Governments would also react differently if no IMF interventions were forthcoming. There would be little alternative to widespread and rapid reforms if policymakers were not shielded from economic reality.
This would suggest that whats needed is public debate rather than the unquestioning financial support of U.S. taxpayers that the IMF has come to expect.
The IMF in theory makes short-term loans in exchange for policy changes in recipient countries. This has not, however, helped countries move to the free market. Instead the Fund has created loan addicts as review of its lending reveals. Eleven nations have been relying on IMF aid for at least 30 years; 32 countries had been borrowers for between 20 and 29 years; and 41 countries had been using IMF credit for between 10 and 19 years. That is not evidence of either the success of the Fund's so-called conditionality or the temporary nature of the Fund's short-term loans.
Numerous independent studies have found that the IMF creates long-term aid dependency, that its credit slows the process of reform and that it has a bureaucratic incentive to lend (I mentioned this in a previous post).
Good example of how political interference tends to produce poor outcomes.
None.
