Econintersect: Two respected economists have published an essay in Newsweek that argues the IMF, as it is now, should not exist. They point out that the world is far different from when the IMF was organized in 1944 at Bretton Woods. Amar Bhide and Edmund Phelps conclude that the IMF does “more harm than good” and the “business model sabotages properly functioning capitalism.” The argument is made that the IMF distorts capitalism by “victimizing ordinary citizens while benefiting elites.”When the fixed exchange rate regime ended at Bretton Woods II in 1971, the new floating rate era was envisioned to be destined to be a new age for Capitalism. But, instead, an era of currency manipulation ensued. From the article:
When the fixed-rate regime of Bretton Woods ended in 1971, economists imagined at first that a new era of freely floating exchange rates would keep imports and exports roughly in balance, thus eliminating large trade deficits and the need to borrow abroad to cover them. But many governments were loath to let exchange rates float freely. To hold down prices for imported food and energy, they kept their currencies at overvalued levels—and so their foreign debts mounted. They borrowed abroad for other reasons, too: for grandiose public-works projects; to keep state-owned industries afloat; and, not least, because it suited sticky-fingered ruling families.
Because of the IMF operation, Bhide and Phelps say that irresponsible – verging on immoral – borrowing and lending has occurred. Here are a couple of hard-hitting one-liners:
Responsible governments have no business borrowing vast sums from abroad, rather than from domestic sources. That’s what tinpot regimes do.
…lending even more to borrowers who can’t pay what they already owe? That’s what loan sharks and mafiosi do.
Amar Bhide is Thomas Schmidheiny Professor, The Fletcher School of Law and Diplomacy, Tufts University, Medford, MA. Edmund S. Phelps is McVickar Professor of Political Economy, Columbia University, New York, NY and the 2006 Nobel Prize winner in Economics. Both men are founding members of the Center on Capitalism and Society.