In Washington, Turkey’s troubles provoked yet another series of assaults on the International Monetary Fund, the agency that masterminded the program to cure Turkey’s rampant inflation. Critics–mostly on the right, mostly congressional Republicans–contend that the next time around, the fund should simply stay out of the way. But what next time? Turkey is the last major country grappling with out-of-control prices. In the midst of all the recriminations about currency crises and bank bailouts, it is worth noting, hyperinflation has been cured. If Turkey gets through its turmoil–a big if–it will be the happy end of a 20-year war.
Consider the picture just over a decade ago. In 1989, inflation in Argentina was almost 3,500 percent; in Brazil, 1,200 percent; in Peru, 2,500 percent. The new economies of Eastern Europe were also struck by this plague. Poland’s inflation was more than 200 percent, while Bulgaria’s was 1,400 percent. At the time these numbers didn’t even seem remarkable. We were accustomed to the reality that in large parts of the world, governments lived beyond their means and then printed money to pay the bills. But over the last decade, one after the other of these developing countries has moved sensibly and soberly toward free markets and monetary and fiscal discipline. Some have accepted the need to float their currencies; others have linked their currencies to the euro or the dollar. The result: today there are few places (that participate seriously in the world economy) with inflation rates over 20 percent.
This might help explain what happened after the Turkish collapse, which is… nothing. The crisis hasn’t spilled over into other countries–for now at least. This is partly a function of size: as one banker noted, “Turkey is not Russia.” But it is also because, after a run on a country, markets search for other places with similar weaknesses and abandon them as well. Right now there aren’t many candidates for contagion.
Hyperinflation is the worst economic malady that can befall a nation, wiping out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now (savings), whereas a recession robs you of what you might have had (higher standards of living if the economy had grown). That’s why it so often toppled governments and produced revolution. Recall that it was not the Great Depression that brought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class of that country by making its savings worthless.
Why was this war won? Mostly because of an ideological shift. By the 1980s countries around the world recognized that the only way their economies would grow was to privatize, deregulate, cut the size of government and tighten monetary policy. Conservative leaders in the West in the 1980s (Reagan, Thatcher) gave this process a huge policy push; their new and improved left-wing successors of the 1990s (Clinton, Blair) stayed the course. But an important, even central institution in the move toward free markets around the world has been the much-maligned IMF.
The IMF has made its mistakes. It partly mishandled the Asian economic crisis of 1997-98. It is still unwilling to publicly scold governments that slow down on their reforms, as Turkey did in the last six months. It needs to recognize the political reality that sometimes, in economist Steve Hanke’s words, “countries with weak laws and weak governments have to put their central banks in a straitjacket to force fiscal discipline.”
But these are tactical criticisms. The IMF–whose board is dominated by the United States–has been the principal advocate of free markets, free trade and free currencies in the world. Whether in India, Brazil, Egypt, Israel or Turkey, the IMF has forced countries to make the unpleasant, unpopular reforms that will put them on the path of sustainable growth. And it has not shied away from targeting Western governments either. In 1976 it asked the last Labour government in Britain to cut its uncontrolled deficit spending. Last month it suggested that the current Labour government pare back its extravagant spending proposals.
American conservatives, in pursuing a utopia in which countries would live by the global free market or die, are being unrealistic about politics. Are we willing to see a NATO ally like Turkey go belly up so that it learns its capitalist lesson? Liberalizing regimes, even if they don’t go far enough, need political support, especially when they hit a bump in the road. That’s why even the most fervent free marketer in the developing world supports the IMF.
The simplest, strongest proof that the IMF is an engine of free-market reform is this: in every country in the world–especially those places that adopt its reforms–the IMF is criticized from the left. Around the globe the fund is the No. 1 target of the anti-free trade, antiglobalization crowd. In one country alone, the United States, is it criticized from the right. Has the entire world misunderstood the IMF’s mission, or is it just the congressional Republicans?
