I.M.F. Role in World Economic Woes Is Hotly Debated (fwd)

[Robert Weissman <rob@essential.org>]

A long but very useful story:

New York Times, 10/2/98

I.M.F. Role in World Economic Woes Is Hotly Debated

By DAVID E. SANGER

WASHINGTON -- When the world's finance ministers and central bankers
gathered last year in Hong Kong, they nervously congratulated each other
for containing -- at least for the moment -- a nasty financial brush fire
in Asia. In a year's time, many predicted in hallway chatter, the troubles
in Thailand and Indonesia would look like a replay of Mexico in 1995 -- a
rough bump in the road for a world enjoying remarkable prosperity. 

Talk about bad market calls. Twelve months later, as the same financial
mandarins clog Washington with their limousines and glide through endless
receptions at the annual meeting of the International Monetary Fund and
the World Bank, just about everything that could have gone wrong in the
world economy has: the worst downturn in Japan since World War II,
economic meltdown in Russia, a depression in Indonesia that is plunging
100 million people below the poverty line, and deep fears over what
happens next in Latin America. 

What makes this year's IMF meeting most remarkable, though, is that the
harshest criticisms are directed at the monetary fund itself, and, by
extension, at the U.S. Treasury, which is viewed as the power behind the
IMF. 

This year, in place of confident predictions, there are mutual
recriminations. Arguments are breaking out over whether the true culprits
were crony capitalists and weakened leaders like Russian President Boris
Yeltsin, or huge investors who poured money into the world's emerging
markets with reckless abandon in the mid-1990s and panicked in the past 12
months. 

Whatever the reason, one reality prevails: Hundreds of billions of dollars
have fled from economies on four continents -- seeking the safest havens
possible, often in the United States -- and the money is not returning
anytime soon. 

And the subtext of every seminar on capital flows and every conclave of
nervous ministers will be some painfully blunt questions: Can this be
stopped? Or is the world headed for a global recession? 

Fifty-three years ago the IMF was created after the Bretton Woods
conference which sought to stabilize the world economy and secure the
peace after World War II. Now it is under attack from all sides, charged
not only with worsening a bad situation by misjudging the economics, but
with being polit ically tone-deaf in some of the most volatile capitals in
the world, from Jakarta, Indonesia, to Moscow. For the first time, there
are disturbing questions about whether the institution itself is still
capable, financially or politically, of containing the kind of economic
contagion that caught th e world unaware. 

Once, the IMF's critics were largely found in Africa and South Asia, were
the fund was often viewed as arrogant; today they include Wall Street's
biggest players and top officials in the most powerful economies of Asia
and Europe. 

Only a few -- including former Secretary of State George Schultz and
members of Congress who are increasingly suspicious of all international
institutions -- are talking about scrapping the IMF altogether. But almost
everyone is talking about creating a "new financial architecture" that can
do wha t the old one clearly cannot: smother financial wildfires before
they leap around the globe. 

President Clinton, British Prime Minister Tony Blair and other leaders,
after months of silence, have edged into the debate, in some cases
wresting the issue for the first time from their finance ministers and
central banks. Their fear, their advisers say, is that 15 months of
financial turmoil ar e now threatening political stability. 

The blunt-speaking Prime Minister of Singapore, Goh Chok Tong, recently
described the cost of failure in stark terms that both Clinton and
Treasury Secretary Robert Rubin have avoided. "A prolonged economic
downturn in Asia will revive latent tensions against the West," he warned. 

Such concerns have turned this year's meeting into a tumbled mass of
worries and a groping for short and long-term solutions. The Japanese, the
French, the Southeast Asians are all arriving in Washington with different
diagnoses of what went wrong, and different solutions about how to set it
right . The United States has its own set of plans, a mix of suggestions
to force more disclosure of financial data in countries around the world
and to impose more American-style financial standards and regulation. 

Meanwhile, an ideological argument is breaking out over whether the world
should slow down a long march toward more free and open markets -- a
strategy pressed by the Clinton administration for the past six years.
Others argue that it is unwise to start rebuilding the hospital while the
patients are still on the operating tables. 

"Last year the standard answer that all of us were given came down to
this:  'We have the IMF and the World Bank, and they know best,"'
Indonesian Foreign Minister Ali Alatas said over breakfast in Washington
the other day, reflecting on how the crisis turned 30 years of astounding
growth in his country into an overnight depression. 

"Then they said everything that went wrong was our fault," he said. "But
now, now I think people know that much of the problem came from the
outside, and we need something better." 

And the IMF itself is beginning to fight back, an awkward role for an
institution dominated by Ph.D. economists who are unaccustomed to being
openly challenged. 

"Every place you turn you read the same story, that we came in, that we
made things worse," said Stanley Fischer, the deputy managing director of
the fund, who was born in Northern Rhodesia -- now Zambia -- and became
chairman of the Massachusetts Institute of Technology's economics
department before taking a job that has now put him in the center of the
financial storm. 

"We frequently get the blame, some of it well-deserved," he said. "But it
is politically convenient for governments around the world to cry, 'The
IMF made us do it,' and pin their mistakes on us. That's fine. We'd rather
be loved, but more than that we'd like to be effective." 

MISCALCULATIONS, POLITICS AND SAFETY NETS

On a steaming January day, Michel Camdessus, the IMF's top official,
slipped into Jakarta to the private residence of President Suharto and sat
down for a four-hour meeting to tick off, line by line, the huge reforms
Indonesia would have to implement in return for tens of billions of
dollars in em ergency aid. Two previous deals had collapsed when Suharto
ignored the fund's conditions, so Camdessus insisted that he strike a deal
directly with Suharto, then Asia's longest-serving leader. 

It was a meeting of men who knew different worlds of power politics:
Suharto rose as a general in central Java, and Camdessus had detonated
mines in Algeria for the French army before entering the French Treasury
on his way to becoming head of France's central bank. 

"It was all there," a senior IMF official recalled. "He was told he had to
dismantle the national airplane project, the clove monopoly, all the
distribution monopolies." 

At one point, Camdessus looked at the impassive Suharto and said, "You see
what this means for your family," a reference to their vast investments in
the country's key industries. 

"He said, 'I called in my children, and they all understand."'

But within months, that exchange in Jakarta came to symbolize the IMF's
twin troubles: Its inability to understand and reckon with the national
politics of countries in need of radical reform, and its focus on economic
stabilization rather than the social costs of its actions. 

Suharto had no intention of fulfilling the agreement. It was, one of his
former Cabinet members said, "a delaying move that was obvious to everyone
except Camdessus." 

Perhaps one reason why the IMF sometimes appears tone-deaf is that its
senior staff is almost entirely composed of Ph.D. economists. There are
few officials with deep experience in international politics, much less
the complexities of Javanese culture that were at work in Indonesia.
Historically, experts in politics and security have gravitated to the
United Nations, development experts to the World Bank, and economists to
the IMF -- creating dangerous gaps in a crisis like this one. 

As a result, the fund had only a rudimentary understanding of what would
happen if its demands were met and all Indonesia's state monopolies were
quickly dissolved. While that system lined the pockets of the Suhartos and
their friends, it also distributed food, gasoline and other staples to a
country that stretches for 3,000 miles over thousands of islands. To help
balance the budget, the fund demanded a quick end to expensive subsidies
that keep the price of food and gasoline artificially low. 

But that, combined with the huge currency devaluation that sparked the
crisis, resulted in high prices and shortages that fueled riots that
continue to this day, as millions of Indonesians lose their jobs. 

The IMF -- unintentionally, its officials insist -- also sped Suharto's
resignation, insisting on the elimination of "crony capitalism," code
words for removing the Suharto family from the center of the economy.
Ultimately, that may prove to be Indonesia's salvation, if the new
government can contain the rioting against the ethnic Chinese minority --
whose money is desperately needed to save the country's fast-shrinking
economy. 

"It is worth noting," Fischer said this week, "that our programs in Asia
-- in Indonesia, Korea and Thailand -- only took hold after there was a
change in government." 

Nonetheless, the Indonesia experience has revived the argument that the
IMF is so focused on stabilizing banks and currencies, on preventing
capital flight and freeing up markets, that it is blind to the social
costs of its actions. Among the toughest critics has been its sister
institution, the W orld Bank, whose main charge is alleviating poverty. 

"You've seen the tension almost every day," one senior World Bank official
said recently. The bank has gone to extraordinary lengths in recent months
to differentiate its role from that of the fund, and to announce a
tripling of aid to the poorest in the countries hit by the economic chaos. 

Even U.N. Secretary General Kofi Annan has joined the argument, warning in
a speech at Harvard recently that "if globalization is to succeed, it must
succeed for poor and rich alike. It must deliver rights no less than
riches. It must be harnessed to the cause not of capital alone, but of
developm ent and prosperity for the poorest of the world." 

IMF officials say they are changing strategies when they see they are
exacting too great a social cost. 

"It's a very difficult formula to get exactly right," Fischer said in
August, as Russia was teetering and the IMF was sending in $4.8 billion in
aid that was rapidly wasted. "You need enough discipline to send the right
message to the markets and keep investors from fleeing. But you need
enough leeway to keep people from suffering more than they otherwise
would." 

In recent months, he noted, the IMF has allowed more spending to sustain
subsidies for basic goods for longer periods in Indonesia, Korea and
elsewhere. 

"There is a new flexibility at the IMF" a senior Indonesian official
concluded recently. "It is a lot better." 

A U.S. PAWN, OR A RUNAWAY AGENCY? 

The Clinton administration admits that the IMF has many failings, many of
them on display this year. But it insists that the world has gone through
global financial crises without an IMF once before in this century -- and
the result was the 1930s. 

"I have no doubt the situation over the past year would have been much
worse -- with greater devaluations, more defaults, more contagion, and
greater trade dislocations -- without the program agreed with the IMF and
the finance it has provided," Deputy Treasury Secretary Lawrence Summers
told Congress ast week. 

Many Republicans and some Democrats are unconvinced. Even though the
Senate has overwhelmingly approved an $18 billion contribution to the fund
to help it fight new crises, the House defeated that measure two weeks
ago. The fund's last hope of getting the money, which will free up nearly
$100 bill ion in contributions from other nations waiting for the United
States to act, will come when the House and Senate try to resolve their
budget differences in a conference committee in the next 10 days. 

A rejection, Rubin insists, would send a message around the world that the
United States is turning its back on the one institution charged with
restoring economic stability. 

Everywhere else in the world, though, politicians and businessmen insist
that one of the biggest problems with the IMF is that, contrary to the
view of Congress, it acts as the U.S. Treasury's lap dog. Ask in Jakarta
or Moscow, and the response is the same: The IMF never ventures far
without looki ng back for the approving nod of its master. 

That view may not be far wrong. In ordinary times, the United States
largely leaves its hands off, as the IMF's executive board -- made up of
24 representatives of the 182 member nations -- delve into the intricacies
of budget policy in Greece or banking regulation in Argentina.
"Surveillance" of the world's economies is the fund's main activity. 

When the United States weighs in, however, is when the IMF is called on to
rescue a country in deep trouble. Only then does the IMF -- and the U.S.
Treasury -- have the leverage to extract commitments in return for
billions in aid. In theory, the U.S. influence is limited: It has an 18.5
percent vote in the fund. Germany, Japan, France and Britain have about 5
percent each. But in practice the United States usually gets its way,
exercising its influence behind the scenes, often in interactions between
Fischer and Summers. 

The two met when Fischer was on the MIT faculty and Summers was a graduate
student taking one of his classes, later becoming a colleague at MIT. Each
served as chief economist of the World Bank. It was Summers who was
instrumental in placing Fischer in the fund's no. 2 job, and these days
they talk constantly. 

"It's usually a warm relationship," Fischer said this summer. "Remember,
this is a job where you cannot turn to outsiders for advice -- you can't
call the chief economist at a Wall Street firm, or even many of your
academic friends, because so many of the issues are confidential." 

The Treasury's relations with Camdessus are often more strained as he
plays the role of world diplomat, traveling the globe and trying to coax
along political leaders. The tensions were obvious from the start of the
Asia crisis. The fund made little secret of its displeasure that the
United States was not offering direct aid to Thailand, a major U.S. ally,
as a sign of support and confidence. 

Mindful of the backlash in Congress when Mexico was bailed out with U.S.
money, that was the last thing the Treasury planned to do. Summers, in
turn, thought the fund was not forcing the Thais to implement its reform
commitments rigorously enough or disclose their true financial picture.
Within th e U.S. government there was other dissension: The State and
Defense Departments felt the United States should do more for Thailand,
but backed off when the Treasury asked if they would like to pony up some
aid out of their own budgets. 

There were other conflicts. When Japan used the last IMF meeting to
propose setting up a $100 billion "Asia Fund" -- one that would exclude
the United States and would probably offer aid under much more relaxed
conditions than the IMF does. Rubin called up Camdessus at breakfast one
morning and to ld him that the Japanese proposal would undercut the IMF's
authority. 

"We've just had a dispute with Michel," Rubin reported to his aides as he
returned to his orange juice and croissant. One of them shot back: "And
it's only 8 a.m." 

Camdessus backed down at Rubin's insistence and walked away from money
that Asia could have used. Japan says it will be back with a similar
proposal this weekend, this time for a $30 billion fund. 

Camdessus has also rankled U.S. officials with statements that amounted to
cheerleading to reassure the markets -- sometimes in the face of the
facts. In June, with Russia on its way to collapse, Camdessus declared
that "contrary to what markets and commentators are imagining" about the
slow collapse of Russia's economy, "this is not a crisis. This is not a
major development." 

The bailouts of Russia and South Korea were prime examples of how
Washington muscles into the IMF's turf as soon as major U.S. strategic
interests are involved. 

Last Christmas, as South Korea slipped within days of running out of hard
currency to pay its debts in December, it sent a secret envoy, Kim Kihwan,
to work out a rescue package. "I didn't bother going to the IMF," Kim
recalled recently. "I called Summers' office at the Treasury from my home
in Seoul, flew to Washington and went directly there. I knew that was how
this would get done." 

Within days the Treasury dispatched David Lipton, its most experienced
veteran of emergency bailouts, who is leaving his post as undersecretary
for international affairs this month, to shadow the IMF staff's
negotiations with the government in Seoul. 

Fischer was displeased. "To make a negotiation effective, it has to be
clear who has the authority to do the negotiating," he said. 

WHO LOST RUSSIA? 

The pattern was repeated this summer, when the United States raced to put
together a $17 billion package for Russia. The IMF's staff in Moscow
declared that Russia needed no money at all -- it just needed to enact
policies that would restore confidence in investors. The Americans and
Germans came to a different conclusion. 

Soon after, U.S. officials gathered in the White House situation room to
consider what might happen to Russia if the ruble was evalued and market
reforms collapsed and to push the IMF to come up with emergency money. So
the fund began assembling a last-ditch program to prop up a country that
had resisted its reform plans for seven years. 

Camdessus, though, was still hesitant, questioning whether the IMF should
risk its scarce resources in Russia. "We had to pull Michel along," a
senior Treasury official recalled. 

As it turned out, Camdessus' instincts were right while the approach
championed by Rubin and Summers proved disastrously wrong. The first
installment of that payment -- $4.8 billion -- was wasted, propping up the
currency long enough, in the words of one IMF official, "to let the
oligarchs get their money out of the country." Then Yeltsin reversed his
commitments, let the ruble devalue anyway, began printing money with
abandon and fired virtually every reformer in his government -- resulting
in a collapse of the IMF agreements and the indefinite suspension of its
aid program. 

Now, inside the IMF and on Capitol Hill, there are recriminations over
"who lost Russia." 

Publicly, Fischer argues that "there are no apologies owed for what we
attempted in Russia." But some IMF officials complain privately that they
let Rubin and Summers run roughshod over them, striking a deal that fell
apart within weeks as the Russian parliament rebelled and Yeltsin backed
away from his commitments. 

Summers responds that the United States "took a calculated risk" because
"it was vastly better that Russia succeed than not succeed." 

The Russian collapse touched off new rounds of economic contagion, with
investors fleeing Latin America, and triggering huge losses in hedge funds
like Long Term Capital, the Greenwich, Conn., investment firm that needed
to be rescued by Wall Street powerhouses whose money it had invested. 

"Russia was a turning point," said Robert Hormats, the vice chairman of
Goldman, Sachs & Co. "It made the world realize that some countries can
fail, even if the IMF and the Treasury intercede. And that changed the
perception of risk." 

Now, as the countries meet to face a future that the IMF has warned could
be very bleak, they need to reverse those perceptions, or watch countries
slowly starve for lack of capital. The emerging markets are calling for
controls on short term investments. The French want a stronger IMF. The
Americans say the answer is more disclosure, so that investors are better
warned, and tougher regulation. 

"These are usually nice, quiet meetings; everyone very polite," a top U.S.
official said earlier this week. "Not this year."