Financial Times - March 23, 2000
PERSONAL VIEW: THE TROUBLING ASPECTS OF IMF REFORM
Allowing the institution to serve only an elite club of nations would be a mistake, says Lawrence Summers
The recent Asian financial crisis and the Mexican crisis of 1994-95 brought home forcefully that the global economy has changed since the World Bank and the International Monetary Fund were created, and that these international financial institutions must change as well.
This basic fact has underpinned US efforts to reform the international financial architecture - including, most recently, our proposals for deep institutional reform at both the IMF and the multilateral development banks. We believe that these further reforms would greatly strengthen the international financial institutions' capacity to support global financial stability and growth in a more integrated world, while remaining true to the ideals on which they were founded.
Our proposals, which I will be outlining before the House of Representatives banking committee on Thursday, start from the reality that in a world in which private markets are the overwhelming source of capital, the role of the international financial institutions must be to support rather than supplant private finance. This has important implications for the focus of both the World Bank and the IMF and the pricing and design of their financial products.
More specifically, we believe that: the IMF should increasingly focus on enhancing transparency for markets, and put greater emphasis on the vulnerability of national balance sheets. Its lending to emerging market economies should be more centred on emergencies; and its financial role in the poorest countries should be more limited to the macroeconomic.
The World Bank should be broadly responsible for international support for growth and lasting human development in the poorest countries. Its role in the emerging market economies should be confined to where it can deploy its unique capacity to apply conditions, to respond to emergencies and to finance crucial social investments. It should have an increased role in supporting the development of global public goods such as vaccines for diseases such as HlV/Aids and better environmental protections.
The report of the International Financial Institutions Advisory Commission, chaired by Alan Meltzer, which was submitted to Congress this month, shares many of the same goals and aspirations: most notably, the desire for a clearer delineation of the respective roles of the World Bank and the IMF, the desire for strong and well-targeted support for successful development in the poorest countries; and the need for conditional debt relief for highly indebted countries with a track record of reform.
We do, however, part company, in important respects, with the majority report on how these principles can best be applied. Taken together, we believe that its recommendations would in effect cut off access to international official finance for the majority of countries around the world in which the international community has a compelling interest. From Thailand to Bulgaria to Brazil, our capacity to influence the direction and policies of these economies in ways that support global interests would be lost.
While we have not completed our full review of the majority's report, four aspects strike us as particularly troubling.
First, it could limit lending to a narrow set of relatively prosperous economies, thereby preventing the international community from responding to crises such as those in Asia. Few, if any, of the countries that have suffered financial crises in recent years - notably Mexico, Brazil and South Korea - would have qualified for emergency IMF support. The commission's brief acknowledgment that these rules might have to be overthrown in times of systemic risk is welcome, but it equally calls into question how the rest of the report's proposals in this area are to be interpreted and applied.
Second, it would allow a set of pre-qualified borrowers unconditional access to IMF resources, despite the fact that history has confirmed time and again that unconditional support is less likely to achieve its object, and despite the moral hazard that the availability of such support could invite. Moreover, the commission's suggested criteria for qualification, by focusing almost exclusively on the financial sector, run counter to the lesson of recent crises: that problems that surface in the financial sector can often have their roots in deeper economic and structural problems. These are problems that the report's criteria would be likely to overlook.
Third, the report would exclude the vast majority of the current recipients of multilateral development bank finance from the support and insurance against instability that such programmes can provide. This is despite the emerging market economies' growing significance to the global economic system; and despite the fact that these are still the countries where the majority of the world's poorest people live.
Fourth, the report recommends substituting grant-based funding for loans in the vast majority of World Bank programmes. This would dramatically reduce the total amount of resources that can be brought to bear in these economies and require an unworkable system for delivering such assistance. Roughly half of the World Bank's concessional lending to the poorest countries today is funded by incoming repayments of past loans. With official assistance in such scarce supply, this self-financing capacity, with respect to very highly subsidised support, is a resource that we should be very wary of giving up.
The founders of the Bretton Woods institutions did not summon the principles for their new system out of the air. They drew them directly from their own pre-war experience, when the absence of effective global institutions helped pave the way for deflation and depression, and ultimately, the second world war.
That same lesson has been taught again and again in the postwar period - indeed, it must apply more forcefully today, when the world's economies are more interconnected than they have ever been. The international financial institutions have much to learn, and much to adapt to, in this new world. But the notions that the IMF should serve only an elite club of nations, and that the World Bank's global activities should be radically scaled back, cannot be ones that the US or the international community would be wise to support.
The author is US Treasury secretary