IMF Clips 9/22/98

[Robert Weissman <rob@essential.org>]

>From Environmental Media Services:


 CONTENTS:

--  CLINTON: NEED WAY TO MODERATE GLOBAL "BOOM,BUST" CYCLE
--  TONY BLAIR CALLS FOR IMF REFORM TO EASE GLOBAL FINANCIAL CRISIS
--  COMMENTARY: AN UNREFORMED IMF DOESN'T DESERVE A DIME
	 (Rep. Jim Saxton)
--  GLOBAL VIEW: NEW 'ARCHITECTURE' FOR GLOBAL FINANCE? PLEASE SPECIFY
--  THAILAND PLEDGES 'FREE MARKETS' IN TRYING TO SOLVE FINANCIAL CRISIS
___________________________________________________
Dow Jones Newswires -- September 21, 1998

 CLINTON: NEED WAY TO MODERATE GLOBAL "BOOM,BUST" CYCLE
 Dow Jones Newswires

 WASHINGTON -- President Clinton said the global financial system needs new
ways to guard against international "boom and bust" cycles.

 In a speech at New York University, Clinton said that the International
Monetary Fund and other financial monetary institutions have proven to be a
remarkably flexible and expandible institution. However, the world has
changed since those institutions were created, according to Clinton.

 While individual nations have gone a long way to implementing institutions
to cope with wild swings in economic performance since the great U.S. stock
market crash of 1929, nothing has been done to address such problems on an
international scale, he said.

 Clinton didn't elaborate. But he did say that major industrialized nations
should do "much more" to develop the "social safety net" for citizens in
countries that have encountered major financial problems.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.

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The Wall Street Journal Interactive Edition -- September 22, 1998

 TONY BLAIR CALLS FOR IMF REFORM TO EASE GLOBAL FINANCIAL CRISIS
 By MICHAEL M. PHILLIPS 
 Staff Reporter of THE WALL STREET JOURNAL

 WASHINGTON -- With the Asian crisis spreading around the globe, British
Prime Minster Tony Blair added his voice Monday to the chorus demanding
that some limits be placed on the freewheeling nature of 1990s global
capitalism.

 Speaking at the very heart of the world financial system -- the New York
Stock Exchange -- Mr. Blair called for a one-year multilateral effort to
reform the global financial system to prevent the kind of currency crisis
that has swept through Asia and Russia and is threatening to absorb Brazil.

 "The current crisis illustrates the weaknesses of the existing
international financial system," Mr. Blair said. "It needs to be modernized
to meet the challenges of a new century."

 His comments added to the growing consensus that something must be done to
insulate developing nations from financial volatility, the dark side of the
international-capital flows that have flooded emerging markets the past
decade. In a speech at New York University Monday, President Clinton
concurred: "Themost urgent thing we can do is to find a way to keep capital
flowing freely so that the market system works around the world, but do it
in a way that prevents these catastrophic developments."

 Cross-border financial flows have been encouraged by the International
Monetary Fund, the U.S. and other major industrialized nations, which have
urged developing countries to open their borders to foreign investors.
Developing nations have considered the inflows a welcome way to jump-start
growth and create jobs.

 However, the nations feel differently about sudden capital outflows, such
as those that appeared since the devaluation of the Thai baht and signaled
the start of the Asia crisis last July. Increasingly, that skeptical view
is being shared -- at least to some degree -- by policy makers in the U.S.,
the U.K. and many other nations, which are reconsidering the wisdom of the
rapid liberalization of capital movements.

 "The gung-ho world capitalism which was evolving will no longer be the
order of the day," predicted Columbia University economist Jagdish Bhagwati.

 Extreme financial instability surfaced briefly during the Mexican peso
crisis of 1994-95. That turmoil subsided quickly, and efforts to reform the
global-financial system lost momentum. But the Asian crisis has brought
them back to the forefront.

 The IMF released data Monday showing that net-private-capital flows to
emerging markets fell to $173.7 billion in 1997 from $240.8 billion a year
earlier -- a 28% drop that seems likely to have worsened this year.
Net-private-capital flows to Asia measured just $13.9 billion in 1997, an
87% plunge from the $110.4 billion that poured into the region in 1996.
Commercial lenders and portfolio investors actually took $44 billion more
out of Asia last year than they put in.

 Policy makers such as U.S. Treasury Secretary Robert Rubin have long
argued that emerging-market governments must adopt sound fiscal, monetary
and regulatory reforms, the kind of policies that attract foreign investors.

 But this group also is seeking ways to protect developing nations from the
capital flight that occurs when investors fear that if they sit tight, they
will lose their money to a collapsing currency or other economic disaster.
Even countries with relatively healthy economic policies can find
themselves the victims of a panicky outflow of capital.

 "I do think it's quite possible that substantial changes need to be made"
to the financial system, Mr. Rubin said in an interview Monday.

 The problem is that nobody has a clear idea of what changes are necessary
or how to implement them. "It's very easy to throw ideas out on the table,
and it's an important thing to do," Mr. Rubin said. "But the key is then to
analyze them with the seriousness that will enable judgments to be made
about all the possible ramifications and how this might work. And I don't
think that any of this is perfectly understood."

 Mr. Rubin said economists have learned an enormous amount during the
course of the Asian crisis. A group of 22 developing and industrialized
nations has been preparing reports on several areas of global-financial
reform, including how to ensure that international bailouts, such as those
in place for many Asian countries, don't simply rescue Western investors
while imposing severe economic hardship on the populace of poor countries.
The 22 nations will meet in Washington on Oct. 5 to discuss its findings.

 In the meantime, academics and policy makers alike are tossing out
suggestions. "We should not be afraid to think radically and
fundamentally," Mr. Blair said. He identified five steps:

      Encouraging countries to be more open with economic information,
allowing foreign investors to make a more-reasoned estimate of the      risks.

      Insisting that the IMF and World Bank devote more energy to bank
supervision and regulation in developing nations.

      Ensuring that the IMF has sufficient funds to help deserving nations
--      at least those that adhere to sound policies -- survive when global
      financial panic leaves them strapped.

      Demanding greater openness and accountability by the international
  financial institutions themselves.

      Reconsidering policies that urge emerging markets to adopt a rapid
  and full liberalization of capital accounts.

 "The recent sharp movements in global capital flows have provided a stark
demonstration that while open capital markets do bring in substantial
benefits, they also pose serious challenges," Mr. Blair said.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.

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The Wall Street Journal Interactive Edition -- September 22, 1998
 COMMENTARY: AN UNREFORMED IMF DOESN'T DESERVE A DIME
 By REP. JIM SAXTON

 Last Thursday the House of Representatives rejected the Clinton
administration's demand for an $18 billion taxpayer contribution to the
International Monetary Fund's capital base. Instead it approved an
allocation of $3.4 billion. The Senate, however, approved the
administration's request. When members of Congress meet in the coming weeks
to reconcile the two bills, they should stand firm against the pressures of
the administration and various special interest groups, which are demanding
the $18 billion without meaningful IMF reforms.

 Surrendering to IMF demands could spell trouble for markets world-wide.
Contrary to the claims of the U.S. Treasury and the IMF's own top
officials, the fund is far from destitute. It does not need more money. It
needs drastic reform, to make reasonable use of the billions it's already
got. The IMF is a powerful, arrogant, and often counterproductive
bureaucracy whose operations are cloaked in excessive secrecy. The failed
program in Russia and the turmoil it triggered in international financial
markets are only the most recent reasons for concern about the
destabilizing effects of the IMF on the international economy.

 Members of Congress have a responsibility to
 evaluate how taxpayer money is used. IMF secrecy hampers our ability to
make such judgments. The fund even treats its operational budgets as
classified information. Keeping such material from the public view means
that Congress has no way to consult with independent experts about IMF
operations and spending. We do know, however, the IMF is far richer than
the destitution implied by Treasury officials, or the $5 billion to $9
billion in remaining usable resources claimed by IMF Deputy Director
Stanley Fischer.

 Recently the General Accounting Office provided the Joint Economic
Committee with a review of IMF resources. Even after subtracting the full
amount of the Russian loan, the IMF holds $39 billion in usable
contributions and $32 billion in gold, along with $15 billion in its
General Arrangements to Borrow credit line. Thus, the IMF has access to
about $86 billion in capital.

 Also, the IMF has the authority to borrow considerable sums directly from
private financial markets; $60 billion is well within historic guidelines.
The IMF is not helpless to address its liquidity needs. It can sell bonds
to raise money and provide usable resources for operations.

 Insofar as the IMF does suffer liquidity problems, they are due to a
classic form of mismanagement. The IMF has evolved from an institution with
liquid assets and liabilities to one in which assets have become
longer-term, while liabilities remain short-term. As the IMF engages in
more long-term structural and development lending, its assets and
liabilities will continue to be mismatched, and it will also have fewer
available resources when inevitable liquidity crises do arise. With total
usable resources of $130 billion and an ability to borrow even more, the
IMF would have plenty for emergencies if it stopped trying to micromanage
the planet and reserved its funds exclusively for emergency lending.

 Meanwhile, there are five key economic problems with the IMF's operations:

      The near certainty of IMF bailouts of countries around the world
      encourages risky lending behavior. As expectations of bailouts
      become well established, lenders alter their behavior and adopt
      riskier lending strategies. This is known as "moral hazard.."

      Subsidized interest rates encourage economic inefficiency and
      exacerbate the moral hazard problem. The standard interest rate
      charged by the IMF for its bailout loans, currently under 4.5%,
      simultaneously encourages unsound lending practices and promotes
      high-risk investments.

      There is an urgent need for more openness. The IMF is a closed and
      secretive organization, run in a manner inconsistent with U.S.
      performance and accountability standards.

      The fund is costly to the U.S. taxpayer. Government funds are used
      directly and indirectly to subsidize bailouts that promote perverse
      incentives leading to more vulnerable financial systems.

      The IMF frequently imposes inappropriate conditions on countries
      that request its assistance--undermining rather than helping the target
      economies. In Indonesia, for instance, the IMF called for the end of
      food and fuel subsidies at a time when millions of people could no
      longer afford the necessities of life. These conditions sparked riots
      and violence that caused long term damage to the prospect of
      economic recovery.

 Without reforms, increased IMF lending to insolvent entities at subsidized
interest rates encourages excessive risk-taking by investors. This added
incentive for risk-taking invites future insolvency and may actually
encourage financial instability. With the IMF lending to some of the
world's riskiest economies at the outrageously low rate of under 5%, it is
not surprising that the U.S. Treasury and the IMF expect increased calls
for IMF intervention in coming years.

 I have proposed legislation that calls for real IMF openness and
efficiency by requiring the release of meeting minutes, loan and associated
documents, and staff analyses of the IMF programs. The IMF must open its
books, let the market determine lending interest rates, rescind its calls
for higher taxes and better safeguard U.S. taxpayer money. Until it does
so, the best thing Congress can do for world prosperity is refuse to
increase the IMF budget by a single dime.

 Rep. Saxton (R., N.J.) is chairman of Congress's Joint Economic Committee.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.

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The Wall Street Journal Interactive Edition -- September 22, 1998
 GLOBAL VIEW: NEW 'ARCHITECTURE' FOR GLOBAL FINANCE? PLEASE SPECIFY
 By GEORGE MELLOAN

 As Treasury Secretary Robert Rubin discoursed on the global money meltdown
before the House Banking Committee last week, a curious thing happened. As
he talked, the Dow Jones Industrial Average displayed on the CNBC screen
sank, dropping 45 points by the time he had finished. When Alan Greenspan
took his turn, the Dow had gained back almost all it had lost.

 Surely this was only coincidental. We know that these men can move
markets, but it is scary to think that they can do it with that much
precision. On the other hand, when you contrast the quality of the economic
analysis offered by Mr. Rubin and Mr. Greenspan, perhaps the movement of
the Dow wasn't so mysterious after all.

 The Rubin testimony was a compendium of generalities, much like the
slickly tooled but empty speech on the same subject that Bill Clinton had
delivered two days before at the Council on Foreign Relations in New York.
Mr. Clinton said he had ordered Mr. Rubin to get together with his finance
minister peers from around the world to design a new "architecture" for
global finance. But what Mr. Rubin was asking of Congress sounded like
nothing more nor less than a plea for $18 billion in support of the
existing architecture, which so far as governments are concerned centers
around that shaky edifice known as the International Monetary Fund.

 In a beautiful exercise in scapegoating, Mr. Rubin blamed Asian
governments and imprudent international bankers for the serial collapse of
national financial systems over the last 15 months. Not at all
surprisingly, there was little mention of the role his Treasury and the IMF
had played in advising those very same governments. Nor was there any
mention of the bad advice the U.S. had offered Japan as it wallowed in a
post-bubble slough in the early 1990s. Japan embraced that good old
Democrat formula, tax and spend, and now is slumping deeper into recession
and a state of public dismay. If Mr. Rubin had any ideas for new
"architecture" last week, it wasn't obvious, and Bernie Sanders, the
left-leaning maverick Congressman from Vermont, did a public service by
pointing out that the emperor, and the IMF, have no clothes.

 Mr. Greenspan had no new architecture either but he indirectly threw cold
water on the president's speech by saying he knows of no plans for
coordinated interest rate cutting by central banks. He also offered an
erudite treatise on how states can protect themselves from sudden swings in
flows of hot money, not neglecting to mention that imposing new capital
controls is not recommended. Along the way, without putting too fine a
point on it, he displayed his admiration for an earlier era, before the
world became plastered with fiat currencies, when money was based on
something real and long-term capital investment from abroad could help fuel
the strong, stable growth of a country like the United States.

 If nothing else, the hearings at least put before the Congress and the
public the possibility that the meltdown might just keep on moving from
east to west, rolling on from Asia and Russia into Europe and the U.S.
Certainly the slump in asset values in those regions have affected
investors in the West, losing them liquidity. Wall Street hardly needs to
be told that there already is something of a meltdown in the U.S. It may be
bringing stocks down to more appropriate levels but if it continues it also
could have consequences for the American economy.

 It should be clear, even in a distracted Washington, that Mr. Clinton's
speech was mostly hot air. Finance ministers are not going to sit down and
design some new "architecture" and even if they did it probably would work
no better than the present architecture. Finance ministers and central
bankers do not run the world--the world runs them.

 But public officials of individual countries need to address their own
problems, starting with Japan. As the second largest economy, its malaise
is big enough to affect the global economy. With all that bad advice from
Washington having failed, it needs to look for its own solutions. Now that
it has a serious opposition party, maybe the ruling Liberal Democratic
Party will be forced to act on the two central problems, a shattered
banking system and an inhibitive tax and regulatory system.

 Russia, which sucked Western banks, including the IMF, into a giant Ponzi
scheme, is not a major factor in the world economy, but it remains
politically important. The Russian government, in true Ponzi fashion,
rolled over debts until they wouldn't roll any more, at which time it
stopped paying. The IMF still doesn't know where all its money went.

 All the bad debts piling up around the world, coupled with sinking
currencies and sinking stocks, results in a world-wide loss of liquidity.
Indonesian companies, for example, might be perfectly viable if they could
get working capital, but their banks are under water and can't supply it.
Indonesia and Russia are suffering inflation in their own currencies, which
no one wants; but deflation in dollar terms, which means that producers are
having a tough time. It is fine to say that central banks should supply
liquidity and that is what the markets are urging Mr. Greenspan to do with
dollar policy. But he knows that the only answers are more fundamental
reforms.

 Banking systems that overborrowed hard currencies and now cannot pay them
back must be restored. Governments such as Russia and Japan need to look at
the way taxes and regulation have gummed up the efficient function of
economic processes. Both countries have suffered from excessive centralized
control of the economy and they won't recover until those inhibitions are
relaxed and some fresh air is allowed into their
 economies.

 As to international institutions, maybe it's time to start dismantling
some of the old broken-down "architecture." Free market economists for
years have argued the IMF creates a moral hazard, encouraging reckless
lending by offering lenders a safety net. Less often mentioned is the fact
that governments too depend on that safety net, so much so that they have
little incentive to adopt and implement sound financial and monetary
policies. As the IMF's resources dwindle after an incredible binge of
subsidizing the follies of governments and lenders, it is indeed a good
time to look for other policy approaches. The most practical approach would
be to let those same governments and lenders sort things out for themselves.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.

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The Wall Street Journal Interactive Edition -- September 22, 1998
 THAILAND PLEDGES 'FREE MARKETS' IN TRYING TO SOLVE FINANCIAL CRISIS

 By EDUARDO LACHICA and JOE REBELLO 
 Staff Reporters of THE WALL STREET JOURNAL

 WASHINGTON -- Distancing itself from Malaysia's restrictive financial
policies, Thailand vowed to keep its markets open and to cooperate with
other countries in constructing a sounder international financial system.

 Thailand is "determined to stay the course of free markets" rather than
"withdrawing or closing down" or taking measures that would be
"counterproductive" and "retrogressive," Thai Foreign Minister Surin
Pitsuwan said here on Monday. Mr. Surin didn't mention Malaysia by name but
his remarks were highly suggestive of an effort to differentiate Bangkok's
reaction to the regional financial crisis from that of its neighbor.

 Malaysia has drawn criticism from various authorities, most prominently by
U.S. Federal Reserve Chairman Alan Greenspan, for abruptly slapping
controls on the trading of the ringgit outside the Malaysian borders. Mr.
Surin said Malaysia's actions have had a "negative impact" on its neighbors
by scaring off foreign investment from the region.

 While Malaysia is trying to work its way out of the crisis unaided by the
International Monetary Fund, Thailand is working hard to demonstrate the
effectiveness of its IMF-assisted recovery program. Thailand's decision to
admit its own mistakes and build on them reflects its "national character,"
Mr. Surin said. "We haven't been colonized. We have nothing to prove as far
as our liberty and freedom are concerned," he said in another allusion to
the histories of some of Thailand's neighbors.

 Mr. Surin, however, acknowledged the need for a global consensus on the
restraint of speculative capital flows.

 "Some mechanism of monitoring, of supervision, of control of major
movement of capital from one place to another purely on the basis of
speculation is in order," the Thai official said. But that mechanism, he
said, should be finely balanced so that it doesn't restrain free trade
unnecessarily.

 He said Asian countries are likely to press for such a consensus during
the joint IMF-World Bank annual meeting starting next week.

 The Thai minister is in Washington to consult with the Clinton
administration on various Asia-related issues, including the outcome of the
recent parliamentary elections in Cambodia.

 Mr. Surin also acknowledged that the Association of Southeast Asian
Nations, to which both Thailand and Malaysia belong, need to do a better
job of coordinating their economic policies. He rejected as no longer
relevant in an age of rapid global financial flows the argument that a
country's financial policy is a strictly internal matter that shouldn't be
shared with others. One mistake in financial policy by a single Asean
member could cause distress to others, he said.

 The Asean nations officially agreed in Manila late last year to consult
with one another on financial affairs but "we need to do more," Mr. Surin
said.

 He said Thailand is prepared to respond to President Bill Clinton's call
for an international consensus on measures to overcome the effects of the
Asian crisis and to revive global economic growth.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.
 
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Dow Jones Newswires -- September 21, 1998
IMF WARNS ABOUT CONTINUED GLOBAL ECONOMIC TROUBLES
 Dow Jones Newswires

 WASHINGTON (AP)--Global capital markets could face more turbulence if
Japan does not quickly solve its pressing economic problems and financial
difficulties in Asia and Latin America get worse, the International
Monetary Fund said Monday.

 The IMF also said in its annual report on capital markets that while the
United States and Europe have not been affected by these crises, there were
risks of an economic downturn, particularly if stock prices declined sharply.

 The report focuses mainly on the effects of the Asian crisis, which began
last July. It does not deal with the economic meltdown in Russia last month
and the financial shocks Brazil and other Latin American countries have
experienced in recent weeks.

 The report said net private capital flows to emerging market countries
around the world fell dramatically in 1997, the first significant downturn
in a decade.

 Charles Adams, one of the report's authors, said, "what we have been
seeing is a quite sizable and sharp drying up of financing" for many of
these economies.

 He said there had been a spillover effect as countries in other parts of
the world, particularly Russia and Latin America, experienced the same
capital outflows as Asian nations.

 The report said a key risk for the future is that Japan "will not move
promptly and resolutely to address its financial sector problems while
ensuring adequate domestic demand ... Speed is becoming increasingly
critical."

 Japan's banks have an estimated dlrs 1 trillion in bad debts on their
books. Last week Prime Minister Keizo Obuchi's government announced a plan
to stabilize the banking system.

 Adams said a key message of the report is that Japan must act not just to
help itself but to spur recovery in other parts of Asia.

 The report emphasizes the importance of strong banking systems as capital
moves around the world faster than ever before.

 It says efforts should be made to understand the "waves of excessive
exuberance and pessimism" that international investors display, including
their "herding behavior."

 The report says investor behavior might improve if governments of emerging
market countries provided better financial information. But the report
says, "it remains to be seen in practice to what degree large swings in
capital flows will be significantly reduced by making this information
available."

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.