US CONGRESS SPLIT OVER REPORT ON IMF, WORLD BANK REFORMS.
The report of the US congressional advisory commission chaired by economist Allan Meltzer calling for a sharp contraction in the IMF and the World Bank unleashed a strong bipartisan reaction in Congress yesterday, reports the Financial Times (p.7). The report was released at a press conference on Capitol Hill yesterday, says the story, noting that two leading Republican congressmen-House speaker Dennis Hastert and House majority leader Dick Armey-had earlier called a press conference to welcome the report. But it was attacked by Democratic lawmakers.
House minority leader Richard Gephardt said the Meltzer report "illustrates an extreme neo-isolationist attitude" towards the Fund and the Bank. "Instead of proposing thoughtful reform, the report takes a slash-and-burn approach."
The political impact of the report is not clear, but the welcoming of it by Armey, a longstanding IMF critic, suggests that the Republicans may try to use it to attach further conditions on the IMF as they consider legislation that would help fund a debt relief initiative for the poorest countries.
The tenor of the report, which recommends sliming down the IMF to focus on lending to pre-qualifying countries during financial crises and proposes that the World Bank be turned mainly into a provider of grants for the world's poorest countries, has alarmed officials at both the Bank and the Fund, which have argued that much of the analysis on which it is based is flawed. Moreover, officials from the two organizations suggest there has been an attempt to portray the report as a relatively innocent effort to bring the institutions back to their original purposes-when in fact it would gut them and hurt many economies in the process.
The Washington Post (p.E1) notes that as reform plans goes, the report is pretty radical. The story adds that World Bank President James Wolfensohn, in a detailed letter to Meltzer, agreed on the need for change. But he contested major points in the report, including the proposal to end loans to better-off countries. Bank officials argue that the commission misses the point. A country may have access to private money, but it generally doesn't go into such things as schools and public health.
The Los Angeles Times (p.C3) also reports.
In related commentary, World Bank vice president for operations strategy Joanne Salop in Euromoney (p.98) responds to a recent article in the same magazine by the Meltzer commission's key staffer, Adam Lerrick. Lerrick complained that the Bank has no special credit analysis skills that qualify it to lend to the developing world, that it has largely been superseded by the capital markets and that it has failed to recognize this reality.
Salop counters that in a world where almost three billion people live on less than $2 a day, the Bank must use every tool at its disposal to carry out its mission to reduce poverty. Poor people in developing countries would be the losers if Lerrick's recommendations were carried out - especially the two billion of them living in countries that would be directly affected, Salop says. Particularly, she challenges Lerrick's view that World Bank lending through its IBRD window "displaces" private capital. Indeed, recent research suggests quite the reverse in countries with good policies, lending by the Bank and other multilateral agencies leverages larger inflows of private capital. It is estimated that 1 percent of GDP in external assistance increases private investment by an extra 1.9 percent of GDP in countries with good economic management, Salop points out.
The World Bank Group's purpose is to catalyze the private sector, not to compete with it, she adds. The strategic objective of much of its lending is to help developing countries and countries in transition to create the right environment for their economies-and the private sector-to flourish. It defies logic to believe that the Bank's lending in support of policy and institutional reforms could be causing discomfort in the private sector. A 1996 US General Accounting Office report on the Bank, commissioned by Congress to investigate this very issue, found that market participants valued the Bank's role in promoting the environment for private sector transactions.
Meanwhile, economist Fred Bergsten, one of the three analysts who put out a dissenting opinion on the controversial Meltzer report, said the suggestions would undermine the world economy and hurt US economic interests, Reuters notes. "The majority proposals would sharply increase the risk of international economic disorder and dash the prospects of economic development for millions of poor people," he said.
Gephardt added: "The authors of the majority report claim to advocate reform for the purpose of strengthening the IMF and the World Bank. In reality they aim to weaken the resources and undermine credibility of these institutions."
World Bank chief spokesperson Caroline Anstey said the commission's "faulty recommendations" were based on flawed data. "While we welcome review of the Bank's work by both our supporters and our critics, we find the results of this particular review very disappointing," she said. "Based on a faulty analysis and misuse of statistics, it has produced a set of recommendations which are also flawed and could possibly do real harm to development and to the poor."
IMF officials also rejected the idea that the IMF should withdraw from poverty lending in Africa and other poor countries, notes the FT. A Fund official said most studies had shown that aid was almost never effective when the macroeconomic framework in the recipient country was weak.
Development groups welcomed the idea of debt relief, but said the report failed to address fundamental problems at the Bank and the Fund, which both played major roles in efforts to resolve the world financial crisis of 1997-1999, Reuters notes. A New York Times editorial (p.A28) says one of the biggest and best ideas in the report is the call to cancel the crushing debt of the world's poorest countries. If the commission does nothing else but spur the United States and its allies to get behind this plan, it will have accomplished a lot, the newspaper notes, adding that the first step forward the goal of sharpening the focus of the IMF and World Bank is to lift the debts that keep desperately poor countries trapped in poverty.
Timothy Geithner, Undersecretary of International Affairs at the US Treasury Department, exhibited little of the hysteria of the report's authors in welcoming the suggestions it contained, adds Dow Jones. "We're going to take a thoughtful look at all the recommendations of the commission," Geithner told Jim Leach, Republican chairman of the House Banking Committee. Some of the recommendations "may make sense," he added.
The Treasury now has 90 days to consider the commission's report and draft a response to Congress on what reforms it will urge upon the IMF and the World Bank in the official lending community.
The news comes as Meltzer and Harvard economist Jeffrey Sachs, one of five Democratic appointees on the 11-man panel who signed their names to the report, write in the Asian Wall Street Journal and the Wall Street Journal Europe that 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.
The remarks come as the Congress Daily, the International Herald Tribune, the WSJE, Agence France-Presse, Bloomberg, La Tribune (France, p.7), the Neue Zürcher Zeitung (Switzerland), Handelsblatt (Germany), and the AWSJ also report on the Meltzer commission's recommendations.
SHORTSIGHTED VISION FOR REFORM, OBSERVERS COMMENT
The report of the US congressional advisory commission on the reform of the international financial institutions is infused with wishful thinking, University of California, Berkeley professors Barry Eichengreen and Richard Portes in the FT (p.13). It longs for simpler times, when investors and countries were left to their own devices. Leaving the global financial system at the mercy of the markets will be even more hazardous in the future. Electronic trading will allow investors to react, and overreact, even faster than before. Investors' leverage is likely to increase still further, magnifying threats to systemic stability and encouraging the spread of crises.
The report does not propose any meaningful institutional changes such as collective action clauses. It relies on blind faith that the changes will somehow come about if left to the participants. Because it ignores the need for fundamental reform beyond the IMF and the World Bank themselves, the report fails to provide a new vision of an international financial architecture, Eichengreen and Portes conclude.
WORLD BANK PICKS EBRD EXPERT AS CHIEF ECONOMIST. The World Bank yesterday named a new chief economist, bringing in former EBRD chief economist Nicholas Stern to replace the controversial Joseph Stiglitz in the high-profile position, reports Reuters. Noting that "I agree with Joe on quite a lot of things but probably not on everything," Stern said would try to bring "a good sense of direction" to World Bank efforts to curb poverty and boost growth.
Stiglitz, a member of the committee charged with appointing his successor, said Stern had the right qualities for the job, which involves overseeing the economic thinking behind the World Bank's lending and other operations. "There was an enormously strong array of potential candidates from around the world," he said in a statement announcing Stern's appointment. "The search committee was looking for someone with a high level of academic distinction, a deep knowledge of development and a real concern for the development agenda, especially as it affects the poorest. We believe we have found all these qualities in Nick Stern."
AFP also reports, quoting World Bank President James Wolfensohn as saying, "His experience in advising numerous governments and development institutions, his extensive exposure to and knowledge of developing countries, and his outstanding research record are exemplary." The Wall Street Journal (p. B13) also reports.
Stern worked at the EBRD from 1994 to 1999 as the Bank wrestled with the problems of steering the formerly centrally planned economies of eastern Europe and the ex-Soviet Union toward a market-oriented system, Reuters notes. "We give our warmest congratulations to Nick," EBRD President Horst Köhler is quoted as saying. "His appointment is well-deserved. I am sure he will be able to put all the experience gained at the EBRD to good use at the World Bank, and this will contribute to an even closer cooperation between the two institutions." Bloomberg also reports.
People who know Stern believe he will enhance the prestige and intellectual clout of the Bank, the Financial Times (p.7) adds. Stiglitz will continue to advise the Bank as part of an advisory committee of distinguished economists and policy experts formed by Stern, Reuters notes. The panel would also include Nobel Prize-winning development economist Amartya Sen, the Bank said. The Guardian (UK, p.26) also reports.