[stop-imf] Meltzer/Sachs in WSJ: Change the IMF and Bank
Robert Weissman
rob@essential.org
Wed, 8 Mar 2000 12:01:07 -0500 (EST)
Wall Street Journal
March 8, 2000
A Blueprint for IMF Reform
By Allan Meltzer and Jeffrey D. Sachs. Mr. Meltzer is a
professor of
political economy at Carnegie Mellon University. Mr.
Sachs is
director of Harvard's Center for International
Development. Mr.
Meltzer served as chairman and Mr. Sachs as a member of
the
International Financial Institution Advisory
Commission.
A related
editorial appears nearby.
The International Monetary Fund and the World Bank, set
up
respectively to preserve global financial stability and
to promote economic
development in poor nations, have made important
contributions in the past
half century. But both institutions require deep
reforms. In 1998 Congress
created the International Financial Institution
Advisory
Commission to
advise on the kinds of changes that were needed. The
commission, on
which we both served, issues its report today.
Our report steers a course between the growing number
of
critics calling
for the abolition of these institutions and the
dwindling number of officials
who still believe that tinkering is enough. The U.S.
Treasury, the leading
shareholder of both institutions, has now called for
fundamental reform.
Our report strongly supports Treasury Secretary
Lawrence
Summers in his
call for the IMF to refocus its lending on emergencies
rather than long-term
finance. In fact, we urge the IMF to get out of
long-term development
finance altogether.
The IMF was created to preserve stability in the
world's currency markets, in part by making
short-term emergency loans to countries whose
currencies came under attack. The idea was to
help preserve a global system of stable exchange
rates. When exchange rates between the major
currencies became flexible and market-driven in
the 1970s, part of the original rationale of the
IMF was lost.
The fund soon took on other tasks. In the 1980s
it tried to bail out developing countries that had
gone bankrupt after a burst of overborrowing in the
1970s. But it took far
too long to recognize that bad loans made between
poor-country
governments and private creditors needed to be canceled
rather than
simply rolled over or paid off by IMF and World Bank
loans that in turn
became unpayable.
Mediocre at Best
In the early 1990s, the IMF was given the lead in
Western assistance to
Eastern Europe and the former Soviet Union. In part
because the IMF
turned a blind eye to massive corruption in Russia and
its neighbors, its
record in the transition process has been mediocre at
best.
In the second half of the 1990s, the IMF organized
unprecedented rescue
packages for financially beleaguered countries in Asia,
Eastern Europe and
Latin America, raising several questions: Why had the
IMF failed to
foresee those crises? Why had its "remedies" failed to
prevent deep
recessions in the affected countries? Did the IMF's own
lending packages
create expectations of further bailouts, thereby
encouraging speculation?
Why did countries that shunned IMF advice, such as
Malaysia, recover
alongside those with IMF programs?
Our commission found that the starting point for reform
is for the fund to
return to its original purpose: short-term, emergency
lending. We also urge
that as the IMF cease its long-term lending operations
in Africa and other
poor countries, it should simply cancel the IMF loans
owed by the poorest
countries (as should other creditors such as the World
Bank and donor
governments, including the U.S.).
While the IMF's role as a quasi-lender of last resort
is
still needed in
emergency circumstances, this role needs fundamental
restructuring. The
expectation of future IMF bailouts actually helps to
fuel the volatile
short-term capital flows that have played a key role in
recent crises.
Therefore, a requirement should be phased in that
member
governments
seeking emergency IMF loans must satisfy preconditions
designed to
prevent future crises.
We identified four such preconditions. First,
governments should ensure
the adequate capitalization of domestic banks, so the
IMF won't have to
bail them out. Second, developing countries should
allow
foreign banks to
enter the market, in order to increase the capital base
and efficiency of the
banking sector and to reduce corruption. Third, member
governments
should commit to fiscal standards so that IMF funds do
not merely feed
their profligacy. Fourth, governments should guarantee
much more timely
and accurate financial information.
We recognize that rare emergencies on a global scale
might still arise in
ways not foreseen today. Thus, if a truly global
financial crisis explodes, the
IMF should retain freedom of maneuver even when key
countries do not
qualify for loans. Other hallowed traditions of
lender-of-last resort
operations should also be observed. IMF lending should
be short term, not
stretching out over years or decades as it does now.
The
loans should be
at penalty interest rates, so that governments would
come to the IMF only
as a last resort. And the IMF should demand priority
over all other
creditors. Private creditors would have to take their
lumps if they overlend
to sovereign borrowers.
The IMF would remain an integral part of the global
system, but in a very
different form. Rather than routinely lending to 50 or
more countries, there
might be a handful of emergency operations in a year.
The IMF would stop
trying to micromanage the governments of the developing
world. The terms
for emergency borrowing would be based on
prequalifications, rather than
conditions imposed after the fact. Member governments
would still consult
the IMF about macroeconomic and financial policies, but
these
consultations would be advisory. And of course the IMF
would continue
its useful work of standardizing and publishing global
data.
The World Bank needs equally dramatic changes. The
commission found
that the World Bank, even more than the IMF, had failed
to adjust to
fundamental changes in the world economy. As a result,
the bank has fallen
far short in its basic goal of combating global
poverty.
When the World Bank opened its doors in 1946,
international financial
flows were negligible, and the new bank aimed to
compensate for the
absence of private-sector finance. Today, by contrast,
foreign direct
investment is the key fuel of development finance, and
the World Bank is a
small player in cross-border flows to developing
countries. But the World
Bank persists, amazingly enough, in focusing most of
its
lending on a dozen
or so of the developing countries -- including
Argentina, Mexico, Brazil
and China -- that have ample access to private capital.
In the process the
bank falls disastrously short where it is really
needed,
in helping the poorest
of the poor.
The commission's most important recommendation is that
the World Bank
phase out its lending operations to the richer
developing countries and
those with ample access to private capital, thereby
refocusing its efforts on
the poorest countries. It should cancel its claims
against the highly indebted
poor countries. For the future, the World Bank and
regional development
banks should stop the pretense of "lending" for poverty
relief and instead
provide grants. The development banks should use
subsidized loans only
to support basic institutional reform.
Rename the World Bank
With its banking function largely supplanted by private
capital flows, we
suggest renaming the World Bank the World Development
Agency. To
improve effectiveness and reduce corruption, its grants
should be provided
in return for actual delivery of services, not for mere
promises. Payments
would be made only upon successful performance,
verified
by outside
auditors. The primary responsibility for country-level
assistance should lie
with the regional development agencies, which are
closer
to the local
realities.
Impoverished countries are often trapped not just by
bad
policies or a lack
of funds, but also by a lack of scientific knowledge.
New technological
approaches are needed to battle malaria, adjust to
climate change and
increase tropical food production. The new World
Development Agency
should use much more of its income to promote research
in these areas --
often in partnership with private companies -- rather
than relying on
traditional lending programs that don't focus on the
needs of poor
countries.
Each year U.S. foreign assistance to the poorest
countries amounts to only
about $6 for each U.S. citizen. Americans and their
representatives in
Congress should, and would, support significantly
increased aid if they
were assured it would be used effectively. The
commission's bipartisan
proposals seek to restore the efficacy of the
international institutions,
providing the basis for a renewed U.S. consensus on
this
country's role in
support of global financial stability and the struggle
against poverty in the
world's poorest nations.