[stop-imf] Dawson on IMF reform

[Robert Weissman]

This fascinating commentary from Tom Dawson shows how much the IMF has
learned in the last five years, including especially from the World
Bank: A much more effective tactic than to deny your critics' claims is
to embrace them, and then contend that you are addressing every one of
the complaints.

--
Robert Weissman


http://www.imf.org/external/np/vc/2002/072502.htm



The Way Ahead
A Commentary by Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
Far Eastern Economic Review
July 25, 2002

A recent trip to East Asia provided me a welcome break from United
States headlines of crony capitalism, lack of transparency, collapsing
asset values and large current-account deficits. What a difference five
years makes. The resilience of the U.S. economy now is being tested as
East Asia's was back in July 1997. That crisis tested the International
Monetary Fund as never before. The lessons learnt prompted an overhaul
of the international financial architecture and many aspects of IMF
operations. Reforms are under way in seven key areas.

The flow of short-term foreign capital through economies whose financial
structures are
ill-equipped to regulate and absorb it can often be devastating. So
first, the IMF is now more vocal in pointing out the risks of rapid
capital-account liberalization. Recently, we advised Sri Lanka against
opening up its capital account until its financial sector was further
strengthened.

Second, unlike many previous debt crises, the Asian Crisis was marked by
unsustainable
private-sector debt that needed messy debt workouts. In future, there
must be greater
private-sector involvement, or PSI, in the resolution of financial
crises. But progress on
establishing a PSI framework has been difficult as countries differ in
the composition of their private-sector debt and in the laws and customs
governing workouts. Nevertheless, the
experience from recent PSI cases could yield general principles to guide
the process. A
framework for the orderly restructuring of unsustainable public debt
also is needed. The
absence of a mechanism for securing majority action among a diverse set
of creditors is
currently an important shortcoming. Now being proposed is a
dispute-resolution forum,
operating independently of the IMF, that would enjoy limited but
exclusive powers to carry out an orderly restructuring.

Third, greater private-sector involvement and better mechanisms for debt
workouts should
lessen the need for bailout packages. We are also working to establish
clearly the rules
governing access to IMF financing. Because our resources are limited,
complementary regional mechanisms such as the Chiang Mai Initiative are
useful.

Fourth, the IMF is assisting the efforts of the Bank of International
Settlements and groups
such as the Financial Stability Forum to revamp banking regulation to
keep financial institutions in developed countries from taking undue
risks in their lending to developing countries. The IMF has also
launched—in collaboration with the World Bank—a thorough health check-up
of the financial sectors of our member countries.

The unforeseen speed with which the crisis spread to many countries in
the region has
suggested a need for the IMF to bolster its surveillance of
international capital markets. So fifth, our new quarterly Global
Financial Stability Report highlights risks and vulnerabilities in
global capital markets. The IMF now also reports on the observance of
standards and codes. Another source of contagion during the crisis was a
common source of vulnerability—unsustainable exchange-rate pegs. While
we cannot provide cookie-cutter advice on the choice of exchange-rate
regime, we have been supportive of the decision of many emerging-market
countries to move to floating exchange rates in combination with
inflation targeting. The move to such regimes should help to reduce the
risk of external crises.

Next, the crisis highlighted the weakness of social safety nets in
developing countries. Some
crisis countries, such as South Korea, were able to address these
deficiencies as part of their
IMF-supported programmes. Findings of micro studies of how different
groups of the
population fared during the Asian Crisis have enhanced our ability in
future to shield vulnerable segments of the population from the effects
of financial crises.

Lastly, the IMF's fiscal-policy advice now is attuned to the need to
allow fiscal deficits to
expand during crises to buffer the fall in output. We have also been
attentive to the criticism that the extensive conditions attached to
IMF-supported programmes during the Asian Crisis went beyond countries'
abilities to implement them and were often not critical to the
resolution of the crisis. Conditionality is being streamlined to have
fewer, less intrusive, conditions limited to areas critical to the goals
of the programmes.

Interestingly enough, these seven areas where reform has been under way
for many years are exactly the ones in which former World Bank chief
economist Joseph Stiglitz, in his new book, says reform is needed. Once
he's through with his book tour, Stiglitz may want to catch up with news
of the reforms actually taking place.