IMF "reform" plans from U.S. Treasury - Financial Times (fwd)

[Robert Weissman <rob@essential.org>]

Wednesday December 15 1999
Financial Times

 A new mandate for the IMF
Commentary by Martin Wolf
The Fund should give up long-term lending to poor countries and focus on
crisis prevention instead

The departure of Michel Camdessus, managing director of the International
Monetary Fund, is an opportunity to refocus the institution he has led for
an unprecedented period of 13 years. The ending of the financial turmoil
of 1997 and 1998 can only facilitate achievement of this task. The IMF's
power and status demonstrate that there can be life after death. Almost
three decades ago, its raison d'être - the Bretton Woods system of fixed
exchange rates - disappeared. By the end of the 1970s, the Fund had also
ceased to have a role in lending to crisis-hit advanced economies. It had
to re-invent itself.

It did. Over the past two decades, the IMF's chief functions, apart from
surveillance, have been the management of financial crises in developing
countries and long-term structural reform in the poorest. To these it
added, in the 1990s, the transformation of the former communist countries
of central and eastern Europe and the former Soviet Union.

As an exemplar of bureaucratic entrepreneurship, the IMF is a triumph. It
has successfully added new product lines and expanded its activities. No
ill wind fails to blow it some good. Yet what is good for the institution
is not necessarily ideal for the world. A change in management is the
ideal time to refocus the institution on its core tasks. These are, as
Larry Summers, the US treasury secretary, said in London yesterday,
"promoting financial stability within countries, a stable flow of capital
between them and rapid recoveries following any financial disruptions."

The tasks are huge. The epoch-making change - to whose implications the
Fund, along with everybody else, woke up far too slowly - has been capital
market opening. In the 1990s nearly $1,300bn in private capital has flowed
to the emerging market economies, compared with $170bn in the previous
decade.

This is a brave new world with big new dangers in it. The biggest mistake
of the past decade has been the failure to warn adequately against
ill-executed capital market liberalisation. What now needs to be done is
to rectify that error. The new standards and codes of conduct and efforts
to upgrade the quality of information are important. Above all, as Mr
Summers rightly argues, great attention needs to be paid to the
interaction of the national balance sheet with the exchange-rate regime.

IMF surveillance is an important tool for reducing vulnerability, as is
its role in helping to set standards. But it also has to deal with crises.
Mr Summers suggests that its lending be normally restricted to short-term
credit lines. Such lending is also to be modest in scale, except during
global panics of the kind seen in 1997 and 1998.

The world's biggest failure hitherto has, however, been the inability to
ensure swift refinance or restructuring of unpayable debts. Mr Summers
remains too cautious on how this failing is to be remedied. Contrary to
what he says, lending to countries in arrears to private creditors should
not be exceptional. The Fund is the closest thing the world has to an
international bankruptcy procedure, with lending into arrears a way to
ensure that creditors have an incentive to come to terms with the debtors.
It should be considered whenever a borrower is making a serious effort to
reform.

Preventing and helping countries deal with financial crises are now the
core functions of the Fund. As Mr Summers argues, all else is secondary.
The Fund should withdraw from long-term lending to countries able to
attract private funding. It should also restrict its long-term involvement
with countries dependent on concessional assistance.

This is not the direction in which Mr Camdessus has sought to go. In his
speech to this year's annual meetings of the World Bank and IMF, in
Washington, he hailed the rebranding of the "extended structural
adjustment facility" (ESAF) as a "poverty reduction and growth facility".

That is not the job of the Fund. It is also not particularly good at it.
Even orthodox economists, such as Paul Collier, currently at the World
Bank, and Jan Gunning, currently at Oxford University, argue that the Fund
has too often been wrong on the sequencing of policy reform in Africa.*
They argue, more fundamentally, that conditionality does not work, except
in crisis conditions. Moreover, with 35 countries in receipt of ESAF
credits last year, it is difficult for private markets to identify which
countries are making progress. Finally, they argue, the Fund's focus on
fiscal stabilisation in the post-crisis environment leads to the
inappropriate exclusion of aid from resources available to cover budget
deficits.

Generous debt relief for countries with good performance should eliminate
continuous IMF involvement. Meanwhile, the World Bank should assume
responsibility, by focusing its support on countries with good policies
and a record of performance. If the world's leading countries do not like
how the Bank does its job, they should transform it.

These reforms would separate the functions of the IMF and World Bank. The
former would be concerned with the entry of more advanced emerging markets
into the global capital market. The latter would focus on securing
economic take off and poverty reduction in the world's poorest countries.

These changes in the functions of the Fund need to be accompanied by
reforms to how it works. It is more transparent than it was, but needs to
be made far more so. Explicit outside assessment of the Fund's programmes
should become the norm. As important, the emerging market economies need
to feel that the Fund is not just a way for the world's most powerful
countries to exercise indirectly the direct control that they relinquished
decades ago.

There could be no better step towards this aim than appointment of a
managing director who comes from an emerging market economy. There are
many officials in emerging market economies who have an excellent grasp of
economics and, more important, have done what the Fund recommends. If, for
example, someone like Leszek Balcerowicz, Poland's finance minister, were
to recommend rectitude to the ministers of an emerging market economy, his
auditors would know that he had lived what he preached. Nothing could
better establish the legitimacy of the Fund's operations.

The task of readying emerging market economies for an open global capital
market has proved far more complex than first imagined. That should now be
the overriding goal of the IMF. The shareholders should choose someone who
will focus the Fund upon it.

* The IMF's Role in Structural Adjustment, The Economic Journal, November
1999.