Wednesday, November 09, 2005

IMF, Knowledge Problem and Government Failure

In its latest Article IV Mission, IMF cautions against tax reduction in Hong Kong. IMF fears such a move may cause Hong Kong to rely too much on volatile revenue sources, read the story here.

I don't know how many times since its inception after WWII IMF accomplishes its mission of helping countries to steer clear of crisis. Judging by the advice that they prescribe, the success rate cannot be high.

The reason is simple, and not the usual moral hazard story. The usual moral hazard story says that the presence of IMF encourages countries to behave in an imprudent manner realizing that the IMF will come in later with a bailout package. That is an incentive argument.

Another argument relies on the distribution of knowledge. How could IMF, a bureaucratic agency, marshal the neccessary knowledge required to set things straight in a screwed up country it is trying to help?

In addition, almost all the time, the reason why a country needs a helping hand from the IMF is government failure. Asking help from the IMF is like asking a bigger government to replace the smaller one which had created the problem in the first place!

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