The current financial crisis in East Asia is causing fears of a global economic meltdown. While many policymakers have called for additional taxpayer money to bailout the IMF, the roots of this crisis lie in excessive government intervention, closed financial systems, reliance on family-owned conglomerates, and corruption that spans governments and businesses.

The IMF bailout will not solve the underlying problems in these countries and is likely to make matters worse. It may provide some short-term relief, but the root causes of these crises must be addressed by instituting fundamental reforms, such as liberalizing closed financial systems, reducing government spending and slowing economic growth, and refusing to prop up weak banks and companies.

However, these policies are difficult to implement. Even if they are adopted, it is questionable whether the IMF can successfully manage these programs in today’s political and economic global climate. In addition, the research methodology used to examine the effectiveness of IMF bailouts must be improved. Studies that use dummies to capture changes in moral hazard are flawed because they ignore the fact that dummy responses do not reflect real economic conditions.

Further, the skewed incentives of bailouts encourage debtors to take risks and increase their borrowing. A better solution would be to establish an international bankruptcy regime similar to the Chapter 11 system in the United States that allows sovereign debtors to restructure their loans. This would reduce moral hazard and prevent future sovereign defaults and liquidity crises in developing countries.