Fix the IMF: Go for growth. End 'bailout nation.'

By Larry Kudlow, CNBC Anchor

As the IMF gets ready to choose a successor to Dominique Strauss-Kahn, who resigned following his arrest on charges that he sexually assaulted and raped a hotel housekeeper, it would be a good thing to step back for a moment and ask: What should the IMF do?

More specifically, can the IMF possibly morph itself into a worldwide force for economic growth instead of Bailout Nation?

Yes, it’s a powerful global economic agency. It’s also one with a very checkered past. Usually opting for austerity policies, such as currency devaluation and tax increases, the IMF has bungled a lot of rescue missions down through the years.

There was Turkey, Mexico, and the Asian Tigers. More recently, there was the Greece bailout plan, which has not succeeded. Neither have the Portugal and Ireland plans. Though the EU’s involvement in these European states has been larger than the IMF’s, the IMF was supposed to be the tough cop for budget cuts that have not materialized. The necessary debt restructuring also hasn’t occurred.

Socialist Strauss-Kahn restored IMF prestige with his political-economic activism. But he didn’t restore prosperity to the southern-tier European countries.

So, to some extent, the IMF has become Bailout Nation Europe. (I note that the U.S. owns about 20 percent of the IMF, and Bailout Nation is very unpopular among the Tea Partiers and independent voters.)

According to news reports, it is widely expected that French finance minster Christine Lagarde will get the IMF’s newly vacated top post, although there’s some talk of Jean-Claude Trichet, the able central banker.

The point is, however, will the IMF ever adopt a true economic-growth model for the basket-case countries it is trying to fix?

For example, why not East-European-style flat-tax reform to go along with the necessary social-welfare entitlement reduction? Greece and Portugal could do as well as Poland and Slovakia. And outside the eurozone, the IMF could seek currency stabilization rather than currency depreciation.

People forget, by the way, that the original IMF created in 1945 was a currency-stability fund. It was set up for the postwar era to help Germany, Japan, and many others keep their currencies lined up with the dollar, which in turn was linked to gold at $35 an ounce. But when the Bretton Woods arrangement collapsed in the early 1970s under Richard Nixon, the IMF was forced to look for a new job. And so it got into the bailout business, with policy prescriptions that frequently made the patient worse, not better.

I remember a great article years ago by David Malpass: “A Radical Idea: The IMF Should Promote Growth.” Today, a whole bunch of us like Lew Lehrman, Steve Forbes, and myself would prefer the IMF work toward a return to a gold-based world currency system.

Like many, I believe successful newly emerging economies like China, India, and Brazil should play a larger role in IMF governance and decision-making. But I think the biggest issue is what will the Fund do with all its resources and influence to promote world economic growth?

There’s news that the highly respected Economic Cycle Research Institute is now predicting a downturn in global industrial growth. Of course, the financial near-bankruptcy of the U.S., without any serious budget-cutting deals, may well contribute to that downturn this summer. So I am less worried about who runs the Fund and more concerned about whether it will be a force for economic growth.

Judging by past decades, I’m not holding my breath.

The late Jude Wanniski used to joke that if you want to find the next breakout of social and political unrest, all you need to do is get hold of the IMF travel schedule. I hope that will change. But I doubt it.