CONTROVERSIAL REPORT RECOMMENDS REDUCED IMF, WORLD BANK ROLE.
A commission appointed by the US Congress is set to release a report today calling for a radical contraction of the IMF and World Bank, reports the Financial Times (p.4). The story notes that the committee's recommendations were voted by a 8-to-3 majority. A statement signed by three dissenting members of the commission, led by C. Fred Bergstein 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 the dissenters say the report presents a misleading impression, the newspaper reports: "A visitor from Mars, reading the report, could be excused for concluding that the world economy must be in a sorry shape."
Meanwhile, two of the commission members, Allan Meltzer and Jeffrey D. Sachs, in a Wall Street Journal op-ed (p.A22) reiterate the commission's key recommendations. They argue that the IMF should focus on short-term emergency lending based on prequalifications at a penalty rate, noting that the commission's most important recommendation is that the World Bank phase out its lending operations to richer developing countries and those with ample access to private capital.
Paul Krugman, in his New York Times column (p.A27), argues that the commission's assumption that the IMF creates "moral hazard" 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 IMF bailouts. A Wall Street Journal editorial (p.A22) says that the main thrust of the Meltzer commission report is to take the important activities of the IMF and the development banks out of politics, arguing that the report should not "fall victim to simple-minded partisanship."
The New York Times (p.C4) forecasts that the report seems unlikely to lead to a revamping of the Word Bank and the IMF during the Clinton administration. But it could serve as the blueprint for an overhaul if a Republican president is elected. The newspaper notes that the commission's prescription for the World Bank is "Draconian," adding that the dissenters on the commission believe the majority of the commission members were motivated by a preconceived notion that the IMF and World Bank should be eliminated.
The commission's recommendation to write off all claims against highly indebted countries, adds the Guardian (UK, p.12), delighted debt campaigners Jubilee 2000, who have been calling for unpayable third world debts to be written off by the end of the year. "What they have said about debt relief is very encouraging, but they've got to put their money where their mouths are," Justin Forsyth, head of policy at OXFAM, cautioned. Aid campaigners hope the report will break the logjam and give the US administration the political backing to fund America's contribution to the HIPC trust fund set up to underwrite the Bank and the Fund's share of debt relief.
Other development experts, meanwhile, fear that traditional hostility towards the Fund on Capitol Hill may yet sink the US administration's attempts to find the $210 million shortfall. Development experts also warned that slimming down the Fund and focusing the Bank only on the poorest countries [as the report recommends] could reduce the amount of funding for development. "Building sewers and schools is vital for development even in middle income countries, but no private sector fund is going to be interested in lending for that," said Seth Amgott, a spokesman for OXFAM America.
Commenting in the FT (p.13), Martin Wolf writes that at a very broad level, the suggestions [in the US congressional commission's report] 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 markets will not-or cannot-do are all perfectly reasonable.
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. Why withdraw assistance from middle-income countries that are able to attract capital inflows? They, too, are very poor compared with high-income countries. The annual subsidy cost of $31 billion a year is just 0.15 percent of the national incomes of high-income countries. Why worry about that?
And why cut back the World Bank's responsibility in Asia and Latin America? True, that institution is imperfect, but it has wider knowledge and offers a better cushion against political pressures. Too much is made of the need [for the Bank] to move to grants. There is a strong case for continued lending, because it forces some financial discipline on borrowers.
The current arrangements, for all their faults, are not bad enough to require a revolution, Wolf concludes. What is needed instead is to shift the institutions, but slowly and with care. This may not be as exciting. But it is more sensible, Wolf says.
The comments come as Les Echos (France, p.10) and the Frankfurter Allgemeine Zeitung (Germany, p.17) also report on the report's recommendations.
In other news, former Japanese Vice-Finance Minister for International Affairs Eisuke Sakakibara and former World Bank Chief Economist Joseph Stiglitz will jointly [conduct] research on Asian economies and are expected to push for reforms of the IMF, reports Reuters.