- The Meltzer Commission Report, combined with street protests, has intensified the debate sparked by the IMF’s handling of the global financial crisis.
- IMF critics loosely fall into three camps: abolitionists, progressive reformers, and the Meltzer Commission.
- The U.S. Treasury Department, arguably the principal influence on IMF policies, has offered a modest reform proposal that lacks a clear vision for change.
The global financial crisis that erupted in 1997 set the stage for the first genuine debate in several decades over the role of the International Monetary Fund (IMF). Most analysts agree that IMF-promoted policies to liberalize capital and financial markets in East Asia in the early 1990s at the very least aggravated the crisis. After rapid capital flight plunged the Asian countries into an economic tailspin, the IMF prescribed harsh economic measures in some countries that arguably made the impact more severe.
Because the U.S. government is generally accepted as the principal influence on IMF policies, much of the reinvigorated debate over the institution’s role has been centered in Washington and in recommendations aimed at the Treasury Department and Congress. The introduction of legislation in 1998—authorizing $18 billion to increase the IMF’s financial resources—provided a focal point for critics of the fund from across the political spectrum. Although the bill eventually passed, the debate has continued to grow in intensity. In March 2000, a congressionally appointed bipartisan commission issued a scathing report on the IMF and World Bank. The following month, tens of thousands of protesters converged on the IMF and World Bank semiannual meetings in Washington, demonstrating that the debate had extended far beyond elite circles.
The proposals of IMF critics fall roughly into three general categories. One set advocates the elimination of the IMF. These include conservatives who charge that the IMF is a waste of public funds in an age when private capital flows to the developing world have dramatically increased. This group also criticizes IMF bailouts for eliminating the discipline of risk in private markets. These staunch defenders of free markets are joined by some prominent individuals from the left who argue that the abolition of the IMF would, among other things, create more space for developing countries to pursue alternative economic policies that do not conform with the IMF’s free market prescriptions.
A second set of proposals stems from the belief that there remains a need for a strong governmental role in promoting international financial stability and reducing inequalities. This approach attempts to achieve these goals by reshaping or replacing the IMF and the World Bank. Labor unions, a number of environmental groups, and other progressive analysts have called for deep changes in the institutions to curtail their power to impose draconian austerity measures while seeking ways for them to play a positive role in reducing poverty, promoting international labor and environmental standards, and placing controls on global capital flows.
A third set of proposals can be found in the recommendations of the International Financial Institutions Advisory Commission. This commission was created as part of the 1998 legislation that increased the IMF’s financial resources. It is typically referred to as the Meltzer Commission, after the group’s Chairman, Allan Meltzer, an expert on monetary policy at Carnegie Mellon University. The commission’s majority report calls for the IMF to be scaled back to serve only as a lender of last resort to solvent member governments facing liquidity crises. It would eliminate the IMF’s power to impose conditions on developing countries in return for long-term assistance. However, it would still require that countries meet a list of rigid, free market-oriented “preconditions” in order to be eligible for short-term crisis assistance.
Following the March 2000 release of the commission’s report, Treasury Secretary Lawrence Summers firmly denounced it, arguing that, if implemented, it would “profoundly undermine the capacity of the IMF…and thus weaken the international financial institutions’ capacity to promote central U.S. interests.” Hoping to prevent the commission’s report from gathering support in Congress, Summers released his own more modest reform proposal. Nevertheless, several prominent members of Congress have indicated their commitment to enacting at least some of the commission’s recommendations. In addition, Meltzer and other commission members have been meeting with officials of other governments to promote their proposals internationally. The IMF has not yet issued a formal response to the Meltzer Commission, although it has made a concerted effort in the past year to improve its global public image, in particular by announcing that poverty reduction is now the institution’s overarching goal.
Problems with Current U.S. Policy
- The Treasury Department’s reform proposal focuses on transparency and surveillance, while ignoring the problem of volatile speculative capital.
- Under the Meltzer Commission’s recommendations, the IMF would terminate long-term assistance tied to structural adjustment conditions but would maintain tremendous influence by requiring that countries meet free market-oriented “preconditions” to qualify for emergency assistance.
- A country’s failure to prequalify for assistance would likely provoke financial market jitters that would undermine the goal of stability.
Treasury Secretary Summers continues to defend the IMF as “among the most effective and cost-efficient means available to advance U.S. priorities worldwide.” Commenting on the fund’s response to the 1997-98 global financial crisis, Summers claimed that without the IMF, “the crisis would have been deeper and more protracted, with more devastating impact on the affected economies and potentially much more severe consequences for U.S. farmers, workers, and businesses.”
Indeed, there have been signs of recovery among some of the countries hardest hit by the financial crisis. However, the economic indicators in many countries suggest that they have not fully recovered. Perhaps even more disturbing than the lingering effects of the financial crisis is the fact that little has been done to prevent such tragedies in the future. The Treasury Department’s IMF reform plan is strikingly vague. It focuses primarily on improving the transparency and surveillance of member countries’ economic indicators, ignoring the fact that the Asian countries had been following prudent economic policies prior to the crisis, and most had both low and falling inflation and budget surpluses. It was rampant speculation or “hot money”—not a lack of information—that set off the Asian crisis, and yet there is not a word in the Treasury’s reform plan on the need to discourage speculative capital flows.
In the absence of a clear plan from the Clinton administration, much attention has focused on the more radical recommendations of the Meltzer Commission. Media coverage of the Majority Report of the Commission (signed by 8 of 11 members) has focused on the recommendation to terminate long-term IMF assistance tied to conditions. This was understandably welcomed by many critics of the orthodox structural adjustment conditions, which have caused suffering for so many millions of people around the world. However, while the commission would abolish the IMF’s power to impose conditions on long-term assistance, it would still require that countries meet a list of rigid “preconditions” to be eligible for short-term (120 days maximum) crisis assistance. These “preconditions” include the following:
Freedom of entry and operation for foreign financial institutions
This requirement would disqualify from emergency assistance countries such as Brazil, which announced in early 2000 its intention to place controls on foreign banks. Indeed in many countries, the growing influence of foreign banks is a volatile political issue, stemming from the fear that these global banks are not as committed as domestic financial institutions to meeting local credit needs or maintaining the host country’s financial stability.
Adequately capitalized commercial banks
This capitalization, the report says, should be consistent with recommendations from the Basel Committee on Banking Supervision, an organization based at the Bank for International Settlements, which sets voluntary standards for the international banking industry. The Basel Committee promotes a ratio between a bank’s investments and outstanding loans that is far higher than in most countries in the world. In fact, most developing countries currently have no standards at all on capitalization. Even if countries were able to adopt such a standard, it is unclear whether this would have the desired stabilizing effect. According to Jane D’Arista of the Financial Markets Center, such a standard could in fact worsen the impact of a recession. Since banks face difficulty attracting investments during these periods, they would need to call in loans to maintain the required capitalization ratio, forcing firms into bankruptcy.
A proper fiscal requirement to assure that IMF resources would not be used to sustain “irresponsible budget policies”
The problem with this requirement is that the IMF would have the power to define “irresponsible.” In the past, the IMF’s knee-jerk approach has been to pressure governments to slash spending on social programs. The IMF even chastised Sweden—a country with low inflation, tremendous productivity growth, and falling unemployment—for providing overly generous unemployment insurance. There is nothing in the commission’s report that would require a different approach in the future.
These “preconditions” would allow the IMF to maintain tremendous influence over member country governments, despite the termination of its long-term policy-based lending. Jerome Levinson, a commission member who dissented from the majority report, argues that the preconditions are so strict that the countries most in need of IMF assistance would probably be cut off. Moreover, the IMF’s announcement that a certain country has failed to prequalify for emergency assistance would likely provoke jitters in the international financial markets that would undermine the IMF’s goal of stability.
Perhaps the most positive contribution of the Meltzer Report is a recommendation that the World Bank and IMF cancel all debts to the heavily indebted poorest countries. However, the report conditions debt cancellation upon the World Bank’s approval of each country’s economic development strategy. This would likely perpetuate the same type of pressure to implement structural adjustment programs that has been the target of criticism in the past. Furthermore, as Commissioner Levinson points out, it is simply illogical to place conditions on debts that, according to the commission, are unrepayable. He advocates unconditional cancellation, but with future assistance dependent on whether these countries effectively handle the funds freed up through debt relief.
Toward a New Foreign Policy
- Citizens should take advantage of current openings to advocate for the reorientation of the IMF to serve the needs of the world’s people rather than international investors.
- The IMF should terminate its support for capital account liberalization.
- The U.S. government should promote an international dialogue encouraging a bankruptcy mechanism to ensure that financial crises and sovereign debt obligations do not place undue burdens on countries.
The challenge for citizen organizations and concerned policymakers is to take advantage of the current crack in the consensus around the IMF’s role to advance alternative goals and policies that promote stability in the international financial system without adversely affecting the environment and the broad majority of the world’s people. An ideal solution would include the development of a neutral international arbitration panel that could help prevent crises by reducing debt burdens before they reach a crisis stage and by requiring investors and creditors to share the costs of any crisis, thereby encouraging more responsible behavior. Building on precedents set by national insolvency codes (including Chapter 9 of the U.S. bankruptcy law), the panel would be empowered to intervene: 1) to restructure and/or cancel debts, to ensure that important social services are not sacrificed to meet debt obligations, or 2) to prevent a liquidity crisis from becoming a solvency crisis, by arbitrating an agreement that meets the needs of the sovereign debtor and creditor, thereby helping to reduce the need for bailouts.
With the establishment of such a mechanism, the IMF would ideally play a reduced role as a lender of last resort and a gatherer and publisher of international economic data. However, since the international legal framework to force global creditors to accept this type of arrangement does not yet exist, it is impractical to expect that such a change would be accomplished overnight.
To help prevent future crises, the IMF should terminate its support for capital account liberalization and instead abide by its charter, which authorizes member nations to “exercise such controls as are necessary to regulate international capital movements.” Even some of the IMF’s own analysts have expressed some support for capital controls, conceding in a January 2000 study that such measures have been effective in reducing vulnerability in Malaysia, India, and China. There is also growing support in a number of countries for an international tax on foreign currency transactions in order to discourage speculative capital flows.
In the event that crises do occur, the IMF should have a stated policy that private creditors and investors must make a substantial contribution before any public “bailout” monies are disbursed. We cannot continue to allow a public institution to focus on shielding private investors while taxpayers and average workers bear the brunt of crises.
The goal of IMF (as well as World Bank) lending must be reoriented to reduce poverty, support sustainable development, and champion internationally recognized labor and human rights. Both institutions are beginning to require borrowing countries to consult with civil society to develop a poverty reduction strategy. However, participants are skeptical that the IMF would approve of a strategy that does not conform with its standard macroeconomic and structural adjustment policies.
Regarding labor rights, the institutions maintain a hypocritical position of promoting labor market “flexibility” measures that undermine unions while claiming they cannot promote labor rights enforcement, because this would constitute interference in domestic politics. A U.S. law requiring the U.S. executive director (the U.S. representative to the IMF board) to support IMF programs that maintain and improve core labor standards has had little impact. These standards—bans on child and slave labor, the prohibition of discrimination, and the rights to freedom of association and collective bargaining—are important, not only because they are internationally recognized rights, but also because they are essential to ensure that the benefits of development are broadly distributed. If the IMF is serious about poverty reduction, it should ensure that its assistance enhances rather than undermines these rights.
In addition to encouraging a new lending approach, the U.S. government should support increasing the resources available for—and expanding the number of countries eligible for—a version of debt relief that is not tied to structural adjustment conditions. The IMF also must achieve a higher level of transparency, accountability, and public participation in decisionmaking.
Yet, there remains the distinct possibility that the IMF will prove to be unreformable. So while continuing the essential work of trying to reform the IMF, proposals for alternative institutions should be developed, in case it becomes necessary to replace the IMF.