[stop-imf] NYT and FT on the Meltzer Comm'n: reports and commentary

[Robert Weissman]

Financial Times (London) 
           March 8, 2000
Report urges slimming down of IMF and World Bank
By STEPHEN FIDLER 

   A commission appointed by the US Congress is set to release a report
today calling for a radical contraction of the International Monetary Fund
and World Bank.

The report of the advisory panel, created last year to review reform of
international financial institutions, says the "frequency and severity of
recent crises raises doubts about the system of crisis management now in
place". It is critical of the "high cost and low effectiveness" of the
World Bank and the regional development banks. The report argues the IMF
should become, in effect, a lender of last resort to emerging economies
facing crisis. "Except in unusual circumstances, where a crisis poses a
threat to the global economy, (IMF) loans would be made only to countries
that have met pre- conditions that establish financial soundness."

These pre-conditions, mainly financial, would include freedom of entry and
operations for foreign financial institutions. IMF loans should have a
short maturity - say, 120 days with one allowable rollover - and carry a
genuine penalty interest rate, above cost of a country's recent market
borrowings. It says the arrangements should be phased in over three to
five years.

The panel criticises the development banks for directing so much lending
to countries with finance from private markets. Seventy per cent of World
Bank funds go to countries with market access, it says, calculating that
subsidies to borrowers total about Dollars 31bn a year.

It says the development banks should be renamed development agencies. Over
a five year period, they should phase out lending to countries that carry
an investment grade credit rating or with annual income per head of over
Dollars 4,000. Official assistance would start to be restricted for
countries with annual income of more than Dollars 2,500. For the 80 to 90
poorest countries, the development banks should provide grants not loans.

To avoid overlaps of responsibility, the commission argues that
development agencies should be prohibited from crisis lending. The World
Bank should also pull back from Asia and Latin America, leaving those
regions to the regional development institutions. That would leave the
bank's responsibility mainly in Africa, the Middle East and the poorer
parts of Europe.

The World Bank's private sector arm, the International Finance
Corporation, should be merged into the World Bank, its lending to the
private sector halted and its capital returned to shareholder governments.
The bank's political risk unit, Miga, should be eliminated.

The committee's recommendations were voted by an eight-to-three majority,
meaning that two appointees of the Democratic party, including Jeffrey
Sachs, the Harvard economic professor, voted with the Republican-appointed
majority. The committee was chaired by Allan Meltzer, monetarist economic
professor from Pittsburgh's Carnegie-Mellon University. The report's
political implications are not clear, but it is likely to augment the deep
distrust held by many US lawmakers about the value of the institutions.
Hearings in Congress begin this week on the issue.

Lawrence Summers, US treasury secretary, has already proposed slimming
down the IMF, though less so than proposed by the Meltzer panel. New
administration proposals on the role of the World Bank and the regional
banks are expected in coming weeks. The commission voted unanimously that
the IMF and World Bank should write off all claims against highly
indebt-ed poor countries and that the IMF should limit itself to providing
short-term finance to countries facing liquidity crises, pulling out of
poverty and development lending.

A statement signed by three dissenting members of the commission, led by
Fred Bergsten of the Institute for International Economics, supports some
recommendations. These include the proposed clearer delineation of the
responsibilities of the IMF and World Bank, the promotion of stronger
banking systems, the avoidance of using the IMF as a political "slush
fund" and the writing off of debts owed by the poorest countries to the
institutions.

But they say the report presents a misleading impression. "A visitor from
Mars, reading the report, could be excused for concluding that the world
economy must be in sorry shape," the dissenters argue.

The dissenters say the most damaging proposals relate to the IMF's
response to emergencies. The report's recommendations "sanction fund
support for countries with runaway budget deficits and profligate monetary
policies," the critics say. Between revolution and reform, Page 21

Financial Times 
March 8, 2000
Between revolution and
reform: The Meltzer Commission's vision for the IMF and the World Bank
moves in the right direction but is too simplistic 
By MARTIN WOLF 

   The "report of the international financial institution advisory
commission" sounds so innocuous. It is not. In the current US debate, it
will be explosive. The question is whether it will end with pure
destruction or efficient replacements for the International Monetary Fund,
World Bank and regional development banks of today.

The background to this commission was the 1998 Congressional debate on
whether to authorise Dollars 18bn in additional funding for the
International Monetary Fund. The question to be addressed was a
politically vexed one: the role of the international financial
institutions now.

These were created, under US influence, more than half a century ago.
Their aims were to promote liberalisation of controls on trade and foreign
exchange, to support a system of fixed exchange rates and to advance
postwar reconstruction and longer-term economic development. On most
measures, they have been a staggering success. As the report notes: "In
more than 50 years, more people in more countries have experienced greater
improvements in living standards than at any previous time."

Yet the world has changed. Private capital flows dwarf official lending;
floating exchange rates have replaced the adjustable pegs of the old
Bretton Woods system; and the imperatives of the cold war have gone. The
latter have been replaced in the US by a growing indifference to the rest
of the world.

The commission's recommendations can then be judged from four different
perspectives. The first is whether it has constructed a new domestic
consensus on how and why to assist developing countries. The second is
whether its broad conceptions make sense. The third is whether its
detailed proposals are equally sensible. And the last is whether its
impact will be desirable.

On the first of these points, no consensus has emerged. There is, instead,
a majority report signed by eight members and a dissent signed by four.
Since the commission, chaired by the monetarist Allan Meltzer of
Carnegie-Mellon university, contained a mixture of conservatives and
liberals (in the US sense of these words), this division is not that
surprising.

Turn then to the second issue. The majority report, for all the tensions
within it, embodies a more or less coherent view of how these institutions
should be restructured. It has the following core elements.

* The International Monetary Fund should restrict its lending to the
provision of short-term liquidity to countries in financial difficulties.

* Except in unusual conditions, loans would be made only to countries that
have met preconditions for financial soundness.

* The World Bank should focus its efforts on low-income countries that
lack access to capital markets.

* Country and regional programmes in Latin America and Asia should be the
primary responsibility of the area's regional banks.

* The IMF, World Bank and regional development banks should write off all
claims on highly indebted poor countries "that implement an effective
economic development strategy".

* The US should be prepared to increase significantly its budgetary
support for the poorest countries.

At a very broad level, these suggestions make sense. The ideas that there
should be a much clearer dividing line between the functions of the
institutions, that the IMF should focus on financial soundness and that
the development agencies exist to do what the market will not - or cannot
- do are all perfectly reasonable. Note too what the majority have not
called for. They have not demanded the abolition of what remain, on
balance, valuable international agencies; they have not suggested that the
lender of last resort function is unnecessary; and they have not opposed
aid to poor countries. This is definitely a move by the Republicans
towards the centre-ground.

So is the report good news? "Up to a point" is the answer. The devil is in
the detail and many of the details turn out to be very worrying. Consider
just a few of many examples.

On the IMF, the notion of pre-qualification for emergency assistance is
far more difficult than the report recognises. What happens if the
country's standards slip? How is the IMF to avoid being blamed for
triggering a crisis by pointing out this fact?

Then there is tension between the intrusive pre-conditions the report lays
down - freedom of entry for foreign financial institutions being one
striking example - and its concern for national sovereignty. Similarly,
the report declares that "IMF lending should not be used to salvage
insolvent financial institutions, directly or indirectly". But how is this
to be prevented without the very conditionality it rejects?

Again, the document takes the parallel between a lender of last resort for
states and for financial institutions too far. The question in the case of
countries is always whether they will be in a position to repay. That
depends on their policies, which is why macro-economic conditionality is
inevitable.

Moreover, the question of what is to be done in those systemically
important countries that do not pre-qualify is left obscure. Assistance is
not ruled out, but how it is to be offered in such cases is essentially
unexplained.

Turn then to development assistance. Why withdraw virtually all assistance
from middle-income countries that are able to attract capital inflows?
They, too, are very poor compared with the high-income countries. Much is
made in the report of the annual subsidy cost of up to Dollars 31bn a
year. But that is just 0.15 per cent of the national incomes of the
high-income countries. Why worry about that?

Again, why cut back the World Bank's responsibility in Asia and Latin
America? True, the institution is imperfect, but it has wider knowledge
and offers a better cushion against political pressures. And too much is
made of the need to move to grants. There is a strong case for continued
lending, because it forces some financial discipline on borrowers.

In the end, however, the biggest question is the fourth: will this report
lead to more effective assistance to the poor and a more stable global
financial system? Somehow, I doubt it.

It is impossible to defend the status quo without qualification. There
have been too many disasters. But the question is whether changes should
be gradual or revolutionary. The current arrangements, for all their
faults, are not bad enough to require a revolution. What is needed instead
is to shift the institutions in the directions outlined, but slowly and
with care. This may not be as exciting. But it is more sensible.

===========================================

The New York Times 

          March 8, 2000
RECKONINGS;  Errors of Commission
By PAUL KRUGMAN 

   It's perfectly O.K. to bash the International Monetary Fund -- some of
the best people do it. But it's important to bash it for the right
reasons.

Quite a few of the I.M.F.'s most vociferous critics attack it because they
believe it is in the business of rescuing financial fat cats. The idea
that the I.M.F. creates "moral hazard" -- that international lenders are
careless because they count on the I.M.F. to bail them out if something
goes wrong -- has become virtual dogma among right-wingers, many of whom
seem to think that if we abolished the I.M.F. we would also abolish
financial crises.

But this is a fantasy. There is not a shred of evidence, for example, that
the investors who poured money into Asia before its recent crisis thought
at all about the possibility of future I.M.F. bailouts. They simply
suffered from irrational exuberance -- and would have done the same
regardless. (The exception that proves the rule is Russia, which investors
thought of -- wrongly, as it happens -- as "too nuclear to fail.")

A more cogent line of criticism, associated in particular with Harvard's
Jeffrey Sachs, attacks the I.M.F. for overplaying its hand. Mr. Sachs and
others complain that when countries go to the fund for help, it demands
drastic and often inappropriate changes in their economic policies,
undermining investor confidence and actually worsening the situation. This
view doesn't suggest that the I.M.F. should go away; it suggests instead
that it should lend faster, with fewer conditions.

This critique, unlike the moral-hazard view, has quite a lot going for it.
In Asia, in particular, the I.M.F. seemed to want to restructure whole
societies from the ground up, in the process feeding rather than
countering the ongoing crisis of confidence. While some say that the
region's rapid recovery vindicates that policy, others more plausibly
argue that the rebound mainly suggests just how excessive the I.M.F.'s
demands were and how gratuitous the crisis was in the first place.

But granted that the I.M.F.'s performance has been unsatisfactory, what do
you do about it? That was one of the questions addressed by the
International Financial Institutions Advisory Commission, a
Congressionally appointed panel whose much-awaited report will be released
today. (The other was what to do about the World Bank -- but let me leave
that for some other day.)

All members of the commission agreed that the I.M.F. needed to return to
its original, narrow mission of providing emergency lending. But only 8 of
the 11 were willing to sign the full report, and even this majority vote
hides a deep divergence of views.

Here's the problem: The Republican-appointed members of the commission,
including its chairman, Allan Meltzer, are still committed to the
moral-hazard argument. The draft of the report that came into my hands
declares that "The importance of the moral hazard problem cannot be
overstated." (Oh, yes it can.) And while the report did not in so many
words call for abolition of the I.M.F., it suggested restrictions that
would in effect make even emergency lending impossible. For example, the
report wants I.M.F. loans to be repaid after only 120 days, with at most
one rollover. To get a sense of what that means: Thailand, which only
started to emerge from its crisis late last year, would have had to repay
its loans in March 1998.

Nonetheless, Mr. Sachs, who was one of the Democratic appointees, signed
the report, giving it at least an appearance of bipartisanship. Why?

My understanding, after communicating with Mr. Sachs, is that he believes
that you need to hit the I.M.F. with a two-by-four just to get its
attention, and that the specifics can be fixed later. And anyone who has
listened to smug I.M.F. officials (not all of them, but too many)
rationalize their decisions can see his point.

But the commission members who refused to sign the report had a different
view: They regarded the report as an attempt not to fix the I.M.F., but to
gut it -- which for all the fund's flaws would make the world a
considerably more dangerous place. And anyone who has read the anti-I.M.F.
literature of the right-wing think tanks that support several of the
commission's members can see their point, too.

It all comes down to a question of who's using whom. And the truth is that
I don't know.

=====================================

the New York Times 

          
March 8, 2000
Report Seeks Big Changes in I.M.F. and World Bank 
By JOSEPH KAHN 

   The International Monetary Fund and the World Bank should be radically
shrunken and overhauled because they often do more harm than good in the
developing world, a Congressional commission will recommend.

The commission, which plans to release its report Wednesday, also asserts
that both the I.M.F. and the World Bank waste billions of dollars making
loans to middle-income countries that could rely on private capital
instead.

Among its findings, the commission said that the institutions should
sharply curtail their lending programs, that they often interfere too much
in the domestic policy and even the politics of countries they seek to
help and that they had generally failed to lead nations out of poverty.

The report, more than a year in the making, is highly political. The
Republican-led Congress ordered the 11-member panel of scholars to study
how to remake the Washington-based sister institutions after agreeing to
provide $18 billion for the I.M.F. during the financial crisis that began
in Asia. The panel's conclusions seem certain to fuel a partisan effort by
some in Congress to reduce or even eliminate the United States
contributions to the two agencies, though officials consider the chance of
that happening as small.

Treasury Secretary Lawrence H. Summers, anticipating the main thrust of
the report's conclusions, proposed a plan late last year to streamline the
monetary fund that embraces several of the report's recommendations. Mr.
Summers is also conducting a study of the World Bank that aims to reflect
some common criticisms of the way the bank works. But it will also defend
its mission against people who argue that it has outlived its usefulness.

The Congressional commission, headed by Prof. Allan H. Meltzer, an expert
on monetary policy at Carnegie Mellon University, split along political
lines before drafting its final report, which had been debated openly in
Washington for weeks. Four of the five commission members appointed by
Democrats dissented. They then issued their own report that recommends
more modest changes.

The report touches on a central issue in this time of globalization: What
is the role of World War II-era international institutions set up to help
relieve poverty and provide a stable financial environment now that
private capital flows have become the overwhelmingly dominant influence on
the world's economic health? The report reflects an often-heard criticism
that the I.M.F. and World Bank have become ever larger even though they
are no longer needed to do the jobs they originally did.

"There was a sense that something had gone awry at both institutions,"
said Jerome I. Levinson, a professor at American University and a member
of the Meltzer Commission. But Mr. Levinson, along with the other
dissident Democratic appointees, said he believed the commission was
motivated by a preconceived notion that the I.M.F. and World Bank should
be eliminated.

"There were real differences between those who want to fix things and
those who think they do such harm that we're better off getting rid of
them," he said.

The report seems unlikely to lead to a revamping of the World Bank and the
I.M.F. during the Clinton administration. But it could serve as the
blueprint for an overhaul if a Republican president is elected. Even then,
however, other wealthy countries that along with the United States provide
most of the money for the bank and fund would have to agree to make
changes.

And at a time when Congress has proved stingy in financing world agencies,
including the United Nations, it seems likely that the next United States
president, as has Mr. Clinton, will find the I.M.F. and the World Bank
indispensable. The World Bank alone makes $50 billion in development loans
each year, more than three times the entire foreign aid budget of the
United States. The I.M.F. played what some supporters argued was a crucial
role defending against the spread of financial malaise in recent years,
committing tens of billions of dollars that might have been difficult to
appropriate from national legislatures on short notice.

The report recommends that the I.M.F. mainly help nations cope with
temporary problems that arise when capital leaves faster than it enters,
by making only short-term "liquidity" loans at high interest rates.

The report goes on say that the fund should stop trying to relieve
poverty, calling that a task better left to other agencies. Moreover, the
monetary fund should stop offering long-term, low-cost loans with
conditions that countries like Russia or Turkey must meet I.M.F. goals on
their finances and economies. Instead, the fund should refuse to make
loans of any kind to nations that do not meet certain rigid criteria.

For the World Bank, the prescription is Draconian. The report recommends
that the bank be renamed the World Development Agency and basically get
out of the business of making loans. Such loans, the report says, should
be the preserve of private banks and brokerage houses.

Instead, the bank should focus on providing grants to people who need them
in the poorest countries, it says.

The report suggests that as a first step the bank should phase out all
loans to nations where per capita income is $4,000 or more, which is the
bulk of its lending today. Moreover, it should allow regional development
banks, which have much less capital, to take the lead in Asia and Latin
America, where there are many such middle-income countries.