DEBUNKUNG ECONOMIC MYTHOLOGY - PART3"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.

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!

Grandiose aims

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

Employment levels

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?

As for sustainable economic growth, you can't have that at

the same time as high unemployment. Sorry, IMF

Poverty reduction

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

(DA).

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

"Blind costing"

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 high way 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.

Corruption

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 (ii)

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.