With friends like the IMF…

National Review, April 27, 1992

ECONOMIC RECOVERY in the former Soviet Union is impossible without deregulated prices, the privatization of state enterprises, and a legal code that clearly defines and protects property rights. None of these changes will work unless the ruble is stabilized, however. Unless Russians know how many U.S. dollars, German Marks, or Japanese yen their rubles are worth, the hoarding, hyperinflation, and capital flight will persist.

It is a pity, therefore, that Russia's precarious situation forced it to enlist the help of the International Monetary Fund. Since the early 1980s the IMF has routinely urged LDCs (Less Developed Countries) to devalue their currency as a means of achieving a trade surplus, in order to pay off their hard-currency debts.

There's only one problem: the devaluation strategy doesn't work. A recent survey of IMF policies by Alan Reynolds of the Hudson Institute documents numerous cases in which devaluations have produced ruinious inflations, higher government budget deficits, and lower levels of real economic activity. The IMF usually compounds the problem by urging governments to close their budget deficits with higher taxes.

There are no great IMF success stories. The list of countries "helped" by the IMF reads like a poverty Who's Who. Egypt, India, Sudan, and Yugoslavia have been waiting for the IMF formula to work for more than thirty years; 23 other nations have been on the IMF dole for more than twenty years.

By comparison, consider South Korea and Japan. Neither of them relied on the IMF. Both ran enormous trade deficits for decades, financing them with inflows of private capital. The foreign debts incurred by Japan and Korea signified strength: investment opportunities in excess of domestic wealth. As income rose, domestic savings grew faster than domestic investment opportunities. Not only was the foreign debt repaid, but each country now invests a large chunk of its savings abroad. Russia had no realistic choice but to join the IMF. But it starts out unburdened with foreign debt, and should do its best to stay out of the IMF's devalue/inflate cycle.