Unfortunately, the World Bank and IMF were created during the era when people really thought that foreign aid worked. They have institutionalized this view ever since. Indeed, World Bank Chief Economist Nicholas Stern recently said, "Aid has never been more effective than it is now." Yet, his own analysis shows that free trade will do far more to improve the lot of developing nations than more foreign aid. Elimination of trade barriers by rich countries would raise 300 million people in the developing world out of poverty by 2015, Stern reckons.
While the World Bank at least understands that free trade is key to growth, the IMF persists in believing that balanced budgets are the only thing that matters. For this reason, it attacked President Bush's tax proposal last week on the grounds that it will increase the U.S. budget deficit.
The IMF position makes some sense in developing countries, where there is no capital market in which to sell government bonds. Hence, central banks tend to print money to finance deficits, leading to inflation and a depreciating currency. But it makes little sense to criticize the United States on the same grounds, because our central bank is independent of the federal government and the Treasury Department can always borrow as much as it needs to finance deficits. However, the IMF follows a "one size fits all" policy, so everyone must be criticized equally even if it makes no sense.
This does not mean that the IMF is ignorant of its own failures. Indeed, it recently published an important critique of itself. The paper found that the benefits of IMF programs are problematic at best. One of their key features is integrating financial markets into the world economy. Yet the report found that "an objective reading of the vast research effort to date suggests that there is no strong, robust and uniform support for the theoretical argument that financial globalization per se delivers a higher rate of economic growth." Indeed, some countries adopting financial liberalization "experienced output collapses related to costly banking or currency crises," the report noted.
Iraq would do better to follow the path of Germany and Japan and avoid the World Bank/IMF model if it hopes to restore its economy. Instead of relying on foreign aid, as the World Bank does, and raising taxes to balance its budget, as the IMF wants, Iraq should eliminate all price controls, privatize the oil industry, establish secure property rights, lower tax rates and link the Iraqi currency to the dollar. If it does all these things, foreign investment will make foreign aid and IMF programs unnecessary.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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