The IMF and World Bank can be ignored

It’s a golden rule of bureaucracy: once created, they never go away, even if their original raison d’être no longer exists. Take the World Bank and the IMF: they were created as part of the Bretton Woods-managed currency system, which was agreed in 1944. The US dollar was convertible into gold at a fixed rate and other currencies’ value were pegged against the greenback.

But when the system eventually collapsed completely in 1971, the World Bank and the IMF did not dissolve themselves. They simply reinvented themselves and are now seen as indispensable custodians of the global economic order, ready to step in when things go wrong.

This is where another golden rule comes in. O’sullivan’s First Law, as laid down in National Review in 1989 by John O’sullivan, the distinguished British journalist, is as simple as it is devastating: “All organisations that are not actually Right-wing will over time become Left-wing.” The way the IMF and the World Bank, which were once associated with the so-called “neoliberal” or “Washington consensus”, have degenerated into embracing ever more radical forms of interventionism is a great illustration of this principle.

The IMF is now calling on many countries to raise taxes to reduce deficits and tackle inequality. The argument is partly the usual “centrist” mush (2017-style), and partly a worrying embrace of neo-corbynite wealth taxation. “Empirical evidence suggests that it may be possible to increase progressivity without adversely affecting economic growth”, it claimed, “for instance, by raising marginal tax rates at the top in countries with relatively low rates and progressivity.” I disagree, of course. If taxes were levied at (say) 5pc on income and were raised to 8pc, growth wouldn’t be affected – but in practice, for almost all countries in the world, tax rates are already too high, regardless of what the IMF may claim “scientific” evidence might “prove”. Most dangerous was the claim, also all too fashionable these days among people who should know better, that taxes on land and property are “equitable and efficient, and remain underused”. Nope: down that road lies ruin or at least a brain drain, as France and Sweden’s embrace of wealth taxes has shown.

Even worse, it feels as if the IMF actually wants those countries that pioneered flat taxes and low marginal tax rates to start demolishing their good work, and embrace the antiprogress, highly graduated approach that continues to dominate in Western Europe. The Fund presumably also wants to stop the Trump tax reforms, whatever they might turn out to be, in their tracks. Needless to say, the advice was embraced by Jeremy Corbyn.

The irony is that, for years, the World Bank and the IMF were seen as the foot soldiers of capitalism, as organisations that were fighting for free markets and a smaller state. Some of that reputation was deserved, and the two bodies were, in recent years, supportive of reducing budget deficits. But even at the height of their “neoliberal” era, their approach was always more technocratic than it was libertarian. It was about applying, sometimes clumsily, neoclassical models to economies coming out of communism or impoverished, developing countries that suffered from extreme levels of inflation, low growth, over-regulation and bloated state sectors.

In the Eighties and early Nineties, free market ideas were still in the ascendant in academia, and there was widespread support for privatisation; hence those employed in international bureaucracies became advocates of such ideas. But in doing so they fell into crucial traps: in the case of the post-communist states, they backed mass asset sell-offs without fully understanding the need for accompanying changes to legal structures. Free markets, as real classical liberals understand, require the rule of law as well as private property to function properly. Sadly, this message wasn’t always understood by the international bodies advocating reforms. Another issue was financial liberalisation: it’s a great idea, assuming that with greater freedom comes greater responsibility. Banks need to be allowed to go bust if they fail, not encouraged to take ever greater risks in the knowledge of a certain bail-out or liquidity injection.

Yet the IMF and the World Bank were at least three quarters right at the time. Today, sadly, they have simply succumbed to the global war on genuine free markets, and are thus best ignored altogether. allister.heath@telegraph.co.uk