IMF Bailout and the US Debt Crisis

IMF bailout allows a nation in crisis to adjust its policies, allowing it to recover and grow. But, these policy adjustments vary according to each country’s circumstances. For example, a country that is experiencing capital outflows may need to restore investor confidence. This requires addressing the factors that led to capital flight, such as a low currency, high inflation, and an overly-leveraged banking system.

A number of studies indicate that IMF loan conditionality programs improve economic growth and income standards for bailed-out countries (Atoyan and Conway 2006; Killick 1995). But, critics argue that these gains are short-lived as a bailed-out government soon returns to irresponsible fiscal policies.

In addition, IMF loans allow political and business interests responsible for financial crises to circumvent less expensive market solutions in which creditors and governments (in the absence of a bailout) would have incentives to renegotiate debts. In the case of Ghana, for example, seven IMF bailouts between 1979 and 1992 have not improved key macroeconomic indicators such as debt as a percentage of GDP or inflation.

The U.S. should focus on removing IMF involvement in these countries by offering incentives to reform their economic institutions and allow foreign investors to privately renegotiate their debts. The United States can accomplish this by supporting a search for alternative financing from the private sector and by helping these countries develop strategies that enable them to avoid future IMF-backed bailouts. This is a better strategy than placing the burden of these loans on American taxpayers and consumers who are not responsible for the unwise monetary policies that cause financial crises in the first place.