GOING POSTAL – 22 OCTOBER 2018 / EP 40
DEBUNKUNG ECONOMIC MYTHOLOGY – PART 3
“THE FUTILITY OF INSTITUTIONAL MEDDLING”
My mission for this week
A number of readers who responded to my post last Monday, on “inflation and interest rate suppression”, asked me to explain the roles of the International Monetary Fund (IMF), the World Bank and the Bank of International Settlements (BIS).
Ever obliging, my response is as follows:
The BIS stands out in this trio as the institution that has a useful function. It was formed in 1930 and is owned by the world’s 60 central banks. It acts as a prime counterparty for central banks in their financial transactions, mainly international. It also engages generally in discussion between central banks, with the intention of fostering collaboration between them.
The IMF is different. It was established at Bretton Woods in 1945 at the same conference that put the dollar on the Gold Standard at the redemption exchange rate of $35 for an ounce of gold.
The IMF comprises 189 countries and its ambitious founding aims are: “to foster global monetary cooperation, to secure financial stability, to facilitate international trade, promote high employment & sustainable economic growth, and reduce poverty around the world.”
Although not mentioned specifically as one of its original aims, the IMF is now permitted to make sovereign loans, on highly preferential terms, to countries with profligate leaders and ailing economies (two features causally related). The latest is yet another loan to Brazil.
the ECB prints confetti to bail out its bust members
In this sense it acts in a quasi-central banking role. For example, the European Central Bank (ECB) is using the confetti it prints every month to bail out every nation in the Eurozone whose finances are stretched to breaking point, partly no doubt to discourage another EU exit!
Although the above-declared aims appear to be laudable enough, once the gloss is removed they fall plainly into the category of “wouldn’t it be great if…..” or, in plainer terms, “pie in the sky”. Let’s look at these fine words.
How would they “foster global monetary cooperation” when each country ploughs its own monetary furrow and differs from others only in the degree of purchasing power it destroys every year? The IMF also wants to “facilitate international trade”? Well, just look around you. The countries that trade most successfully are those that pursue policies of genuine free trade – and recognise that trade takes place between businesses, not governments. The last thing they need is help from the IMF.
Note that the IMF also wants to “promote high employment and sustainable economic growth”. Well, again, wouldn’t that be nice! An external agency like the IMF is in no position to promote high employment in a country that, like France (one of the IMF’s own founding signatories), inflicts prohibitive employment taxes, insurances and other surcharges of various descriptions on employers.
I have received first hand information from a Languedoc winegrower that to put 100 euros in a worker’s pocket it costs the employer 170 euros (a tax equal to 70% of net pay). Moreover, dispensing with an employee’s services triggers entitlement to a wholly disproportionate level of compensation that the beleaguered employer must bear.
Is it any wonder that small and growing businesses are petrified of officially taking on much-needed labour? Or that there are such persistently high levels of unemployment in France?
sustainable growth and high unemployment don’t go together
As for sustainable economic growth, you can’t have that at the same time as high unemployment. Sorry, IMF.
Oh, and the IMF also wants to “reduce poverty around the world” – another candidate for the “pious hope” award.
In any case, this aim overlaps the remit of the World Bank, which includes the provision of loans for capital projects around the world. The World Bank comprises the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
throwing billions at projects doomed from the start
While its humanitarian aims, such as reducing child mortality, combating diseases and improving maternal health, are undoubtedly bringing about major improvements on these issues in poorer countries, getting value for money is a far more questionable proposition when it involves throwing billions at projects for constructing bridges, reservoirs, dams, grain silos, power stations, motorways, airports and harbours.
The World Bank has never learnt the lesson of grossly wasteful spending without economic analysis. Even China has discovered that pointless dispensation of funds on needless projects must be stopped. Swathes of office and residential spending in Binhai New Area remain empty. Big-ticket projects, including major highway and high-speed rail networks, are underused and have failed in their demand stimulation objectives.
All extravagant monetary dispensation, whether it emanates from government-led development aid quotas or the World Bank, and no matter how well meaning, suffers from the “blind costing” syndrome: such projects are not, and can never be, susceptible to independent economic calculation. Only an enterprise with private capital, whose own money is at stake, is capable of arriving at a risk/reward equation that alone will show how feasible a multi-billion dollar project may be.
Such independent analysis will always be superior to the “perceived advantage” motivation, which squanders billions on poorly conceived and mismanaged “good ideas” that were of questionable viability in the first place, including some that have caused environmental havoc and have harmed indigenous people – such as the Kenyan project on Lake Turkana that led to land-grabbing and serious territorial disruption.
And there is always the corruption factor. As I stated in my 23 July “Going Postal” essay (on the supreme irony of EU tariff rules that effectively disallow imports from poorer countries that finish up needing EU aid instead):
“People in these developing countries have to be sustained by inefficient and corrupt foreign aid programmes. As we know, much of this money, sequestered from domestic taxpayers and given to aid agencies, finds its way into the private coffers of feckless elites in countries consistently pillaged by their own rulers.
“Lessons taught over more than 50 years have shown that (i) the more development aid a country receives, the less likely it is to achieve economic success; (ii) excessive largesse tends to undermine the recipient country’s own food and agricultural industry, making famine more rather than less likely; and (iii) aid can never take the place of self-reliance.”
And don’t lose sight of the cost. These mega-institutions have thousands on their government payrolls, all handsomely paid by taxpayers who never voted on any of it.
EMILE WOOLF – ECONOMIC PERSPECTIVES – 40