Wednesday, April 18, 2007

Milton Friedman's Comments on The World Bank & IMF

I recently read one of Milton Friedman’s s speeches. “Why Government is the Problem” adopted from his 1991 Wriston Lecture published by Hoover Institution in 1993. In highlighting the differences between public endeavors and private enterprises and why government is actually the problem he mentioned IMF and the World Bank as examples. I quote:

“The general rule is that government undertakes an activity that seems desirable at the time. Once the activity begins, where it proves desirable or not, people in both government and the private sector acquires a vested interest in it. If the initial reason for undertaking for undertaking the activity disappears, they have a strong incentive to find another justification for its continued existence.

A clear example in the international sphere is the International Monetary Fund (IMF), which was established to administer a system of fixed exchange rates, whether that is a good system or a bad system beside the point. In 1971, after President Nixon closed the gold window, the fixed exchange rate system collapsed and was replaced by a system of floating exchange rate. The IMF’s function disappeared, yet, instead of being disbanded, it changed its function and expanded. It became a relief agency for backward countries and proceeded to dig deeper into the pockets of its sponsors to finance its new activities. At Bretton Woods, two agencies were established: one to administer a fixed exchange rate system and the other, the World Bank, to perform the function of promoting development. Now you have two agencies to promote development, both of them, in my opinion doing far more harm than good.[1]

One wonders if the public sector’s love for its institutes is extended to the agents, whom it appointed to oversee them. Right now it seems public sector’s reason to appoint Dr. Wolfowitz as the president of the World Bank has vanished. However the question is if public sector has a “vested interest” in his person as the president of this organization. Financial Times recent story is interesting: Wolfowitz deputy urges him to quit.

[1] It is Friedman’s idea. Many would disagree.

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