MAI in IMF (fwd)

[Robert Weissman <rob@essential.org>]

The MAI reborn:
IMF change of bylaws gives it unprecedented power over national capital 
controls
Friends of the Earth

	 As citizens and parliaments around the world have awoken to the risks 
posed by the Multilateral Agreement on Investment (MAI), a similar but more 
secretive agreement is being pursued by the IMF.  The IMF is trying to 
expand its mandate by seeking global authority over national governments' 
ability to control capital in and outflows.  In an effort to certify this 
expansion, IMF management is actively, be it very privately, negotiating an 
important amendment of its Articles of Agreement which would give the IMF 
the power to require member countries to commit to full capital account 
liberalization.   The IMF justifies this new grab for power by claiming 
that: 1) the benefits of liberalizing the capital account outweigh the 
potential costs; and 2) only the IMF can guarantee that capital account 
liberalization is carried out in an orderly, non- disruptive way.  But as 
recently experienced by the citizens of Mexico and East Asia, 1) the 
demonstrated costs of speculation overshadow the theoretical benefits of 
unregulated capital flows; and 2) the IMF's dismal track record in 
stabilizing economies inspires little confidence in the institution.


The MAI's quest to remove all barriers to capital flows

	To guard against the worst effects of speculative foreign investment and to 
avoid financial crises, some developing countries put controls on inflows of 
foreign money. The aim is to limit the flows to levels that don't overwhelm 
the domestic economy, and to screen out short-term speculative investments 
in favor of longer-term commitment.  Despite the value of capital controls, 
the MAI would establish a general right for foreign investors to make 
portfolio investments free from any restrictions or government oversight.

	 Another way to deal with the risks of speculative capital flows is to 
regulate capital outflows. Chile, for example, requires foreign investors to 
keep initial investments in the country for at least one year, although 
earnings from the investment can be taken out at will. The Chilean 
government has imposed this requirement so that investors cannot come in for 
a short time just to profit from currency fluctuations or other forms of 
speculation.  According to the MAI, the ability to make financial transfers 
is considered a core investor right.  Under the proposed agreement, 
investors would be able to withdraw their investments and profits without 
government oversight.

Changing the IMF's bylaws to expand control over capital account 
liberalization

	By amending its Articles of Agreement, the IMF is advancing the same agenda 
of capital deregulation as promoted by the MAI.  Possibly as soon as its 
Spring meeting in April, IMF management will seek an amendment of Article 
VIII and XIV of the Articles of Agreement.  Today, these articles apply to a 
nation's current account and oblige members to refrain from imposing any 
restrictions on payments and transfers for trade and international business 
transactions.  Countries' requests to maintain some trade barriers require 
IMF approval, as do macroeconomic policy decisions tied to full trade 
liberalization.

	Amending the Articles of Agreement to include capital account 
liberalization under the general obligations of the Fund would commit 
members to fully liberalize their capital accounts that is, remove all 
barriers to international capital flows.  This amendment would extend the 
same power the IMF has over a nation's current account to its capital 
account. The IMF would be able to dictate the extent of the controls a 
country may maintain (for the time being), the rate of the capital account 
liberalization, and changes in macroeconomic policy. In other words, the  
IMF would become the ultimate authority on capital account liberalization.

	The IMF's new authority over capital accounts would vastly expand the IMF's 
mandate.  The IMF's current mandate gives it power over a very narrow 
category of international economic regulation.  Under the IMF's expanded 
mandate, a more expansive and loosely defined set of government policies can 
be overruled or outlawed by the Fund.

	 All governments regulate flows of money, products, and services across 
their borders.  These  regulations of international economic transactions 
can be divided into three categories:

	 	Trade barriers: These typically take the form of tariffs, quotas and 
subsidies intended to foster domestic production. The Fund is ideologically 
committed to removing trade barriers but can only act on its beliefs in 
countries undergoing a structural adjustment or stabilization program by 
conditioning the IMF loan approval on the removal of specific trade 
barriers;

	 	Restrictions on payments relating to trade and investment deals: 
Governments sometimes impose such restrictions to prevent domestic 
companies' payments for imports or foreign companies' repatriated profits 
from depleting a nation's foreign reserves. Under the general membership 
obligations of the current Articles of Agreement, the IMF has the power to 
approve or disapprove all of these restrictions on payments;

	 	Investment controls (capital accounts): These include limitations on the 
ability of foreign corporations to invest in certain economic sectors and 
limitations on foreign investors' ability to purchase stocks or bonds, make 
bank loans, or issue bonds. As with trade, the IMF currently can only force 
governments to limit these restrictions in countries undergoing structural 
adjustment.

	By amending its Articles of Agreement, the IMF is seeking to expand its 
power over all investment controls.  The IMF's current controls on payments, 
while potentially important, merely adjust the way in which trade and 
investment transactions are paid.  Trade and investment policies are the 
primary means by which governments regulate economic integration with other 
countries. Giving the IMF control over capital accounts (which essentially 
is national investment policy) would allow the fund to move closer to the 
position of ultimate regulator of the global economy.  It would also give 
the fund a veto over such sensitive social policies as foreign ownership of 
the media or promotion of local businesses over multinational corporations.
	
The IMF manufacturing a sphere of influence

	At a time when the IMF is being criticized for having outlived its purpose, 
this new mandate would legitimize its existence in a rapidly changing global 
financial world.  Most significantly, it would finally provide the IMF with 
power and control over economic policy decisions in emerging markets and 
East and Central European countries.  In the past, these countries' 
rejection of  IMF assistance severely limited the IMF's influence over their 
macroeconomic policy decisions.  Now, any country that has capital account 
controls would have to relinquish their decision making power over degree of 
capital movements to the IMF.  They would have to negotiate with and abide 
by the IMF's targets for capital account liberalization and the policy 
changes required to promote further liberalization.  If a country chooses 
not to follow IMF advice, the country would lose its access to IMF funding 
and, therefore, would never have access to future financial assistance as 
part of an IMF stabilization, structural adjustment or bailout program.  
Furthermore, losing the IMF stamp of approval severely limits access to 
private capital.
	
The IMF in search of a rationale behind expanding its power

	According to the IMF, extending its power over the design of the 
macroeconomic policy framework for capital account liberalization is 
supposed to reduce the risk of inappropriate government economic policies 
that would shock market confidence and lead to the flight of money out of 
the country.  With the IMF in charge, inappropriate market swings would be 
avoided as the institution would prescribe the right policy framework.  In 
other words, the IMF maintains that only its own programs are sound, and 
need to be implemented world wide in order to ensure global financial 
stability.

	Emphasizing the need for transparency, the IMF's new Special Data 
Dissemination Standard (SDDS) and the associated Dissemination Standard 
Bulletin Board on the Internet also gives the IMF a promotional boost. The 
SDDS requires governments to provide better and more timely information to 
the markets which would lead to earlier and more appropriate market 
behavior.  The IMF regards its SDDS as another critical contribution the IMF 
is making to a more orderly liberalization of capital movements.

	Finally, the IMF justifies its critical role in providing surveillance 
based on an analysis of a country's economic situation.  The IMF Article IV 
consultations analyze the current economic situation and provide IMF Board 
with recommendations for needed economic policy reforms. The IMF suggests 
that it would need to strengthen its surveillance function in order to 
detect warning signals of future crises.  It is to be understood, though, 
that these discussions would continue in secret as the market tends to 
overreact to IMF concerns.

The IMF searches for more money

	Last but not least, the IMF's budget would need a vast expansion.  In the 
words of IMF Deputy Managing Director Stanley Fisher, "no matter how much 
information is provided to markets, surveillance is strengthened, prudential 
regulations are refined, and the government policies will improve, crises 
will happen."  What Fisher is referring to is that markets do not always act 
appropriately, they tend to act too late, too early or excessively.  
Contagion effects are all too common, irrational and the result of herd 
behavior or an inaccurate appraisal of the underlying economic situation.  
In order to avoid the possibly devastating consequences of inappropriate 
capital market reactions, it is the role of the IMF to bail out governments 
and to "correct maladjustments in countries' balance of payments without 
resorting to measures destructive of national and international prosperity."


	The IMF needs more money because increased capital account liberalization 
will increase the scale of international capital flows.  Any financial 
crisis, therefore most likely will be of a larger scale than previous 
crises.  But the IMF expects fewer crises to require official funding in the 
future as its authority over countries' capital account liberalization 
process should also increase the efficiency of international capital 
markets.  In other words, the IMF argues that capital account liberalization 
will increase the likelihood of larger, even if fewer, crises.  A resource 
increase is needed to ensure that the IMF remains up to the task of 
promoting orderly liberalization of international capital markets.

	Finally, the budget increase has the important side effect of strengthening 
the IMF's power in requiring policy changes.  The IMF needs to be able to 
guarantee it can finance any future bailout of its member countries in order 
to force countries to follow IMF advice.  With the quota increase, the IMF 
can make its case that future bailouts will depend on the governments' 
willingness to implement IMF imposed capital account liberalization 
policies.

Who will pay the price?

	The IMF's amendment of its Articles of Agreement is subsidized by people 
both in the North and the South.  U.S. taxpayers are called on to give more 
money to the IMF to bail out reckless investors and bankers.  Without public 
debate, the US public is asked to endorse a policy that will create more 
financial crises and force us to bail out investors who were reaping great 
profits from house-of-cards schemes.  The IMF's approach towards capital 
account liberalization provides a cushy deal for corporations and investors, 
but leaves little incentive for lenders to evaluate risk fully and little 
hope that the taxpayer won't be called upon repeatedly to rescue failing 
economies.

	Finally, while the financial crises might be short lived, people in these 
countries will be paying back for a long time to come.  The IMF bailout of 
countries is actually a bailout of private investors and commercial banks.  
The IMF socializes private debt.  In the case of East Asia, foreign loans to 
private companies are now guaranteed by the government, even though these 
loans were privately contracted.  The private sector's foreign debt, that 
can no longer be serviced, will ultimately be borne by the citizens of 
Thailand, Indonesia, and South Korea.  Without the IMF bailout, foreign 
banks would have had to absorb more of the losses.  With the IMF bailout 
scheme most of international banks' financial responsibility has been 
absolved.  Furthermore, unlike private debt, debt to the IMF cannot be 
renegotiated, sold at a discount on the secondary market, reduced, or 
forgiven. And, the IMF required economic stamp of approval, to attract 
foreign capital, ensures that governments pay back their loans on time at 
the appropriate rate.

	The official debt will then be paid back through an economic reform program 
subsidized by the local people who did not assume the financial risk.  In 
fact, the IMF "solution" has ensured that foreign lenders, the actors that 
assumed the financial risk, face no losses while squeezing the East Asian 
population for repayment of IMF loans.  Through this approach, the IMF is 
violating Article I of its Articles of Agreement, which mandates the IMF to 
help member countries in need so that they won't have to resort to "measures 
destructive of national and international prosperity."  Measures promoting 
job loss, economic depression, and destruction of natural resources are 
destructive of national prosperity.