The Real Hazard of Globalization

It is fashionable to blame the International Monetary Fund for the wave of financial turmoil that has swept emerging markets since Mexico's ``Tequila crisis'' of 1994. By bailing out countries in trouble time and again, the IMF allegedly encouraged investors to take unwarranted risks, plowing money into countries without properly assessing whether they could ever pay it back. According to IMF critics, bailouts allowed leaders from Brazil to Turkey to avoid painful but necessary reforms, with the perverse effect of making crises inevitable.

This argument - an example of what economists call ``moral hazard'' - is easy on the mind, but it has feet of clay. In fact, foreign investment in emerging markets already started to subside after 1995, then plummeted with the Asian crisis of 1997, and has remained low ever since - even as the IMF orchestrated many of the bailouts that allegedly distorted investor behavior in the first place!

Moreover, foreign investment in emerging markets shifted after 1994 to factories, real estate, service industries, and so forth. Unlike foreign bondholders, who could cut and run after the IMF guaranteed that they would be paid, these direct investors suffered major losses when crisis struck--and thus can hardly be said to have benefited from bailouts.