April 2, 1998
Recent weeks have seen vigorous debate in Congress over U.S. participation in, and funding of, the International Monetary Fund (IMF). Both the Senate and the House of Representatives have considered supplemental appropriations bills containing the $17.9 billion the Clinton Administration has requested for the IMF. Both bills request specific reforms in IMF operations or policy. Unfortunately, the reforms either would have little impact on the current operations of the IMF or would be completely unenforceable.
Congress should utilize the rare opportunity offered by this legislation to reform the economically harmful activities of the IMF.1 Short of denying funding for or eliminating the IMF, the best way for Congress to correct the failings of current legislation would be to enact legislation like the IMF Transparency and Efficiency Act of 1998 (H.R. 3331), sponsored by Representatives Jim Saxton (R-NJ), Richard K. Armey (R-TX), and Tom Campbell (R-CA). This bill would shine a bright light on the internal workings of the IMF, which all too often have been closed to outside scrutiny. In addition, it would mitigate the market distortion caused by IMF loans. H.R. 3331 would require the IMF to charge market interest rates on its loans and establish an independent review board to examine its policies, practices, and results. Finally, H.R. 3331 contains the most stringent enforcement measures of any current reform proposal.
The Senate passed a supplemental appropriations bill on March 26, 1998, to grant the Clinton Administration's request for $17.9 billion for the IMF. Negotiations between the Administration and the leadership in the Senate resulted in changes that greatly weakened the reforms demanded by earlier versions of the bill. For example, instead of demanding that the IMF pass a resolution to change its loan policies, which was mandated in the earlier version by the Senate Appropriations Committee, the new agreement only requires the Secretary of the Treasury to certify that the world's seven largest economies--the so-called Group of Seven (G-7) countries--agree to use their influence to push two specific reforms in IMF policies.2 These reforms would obligate recipients of IMF assistance to (1) end government subsidies and directed lending, and (2) comply with international trade agreements. This deal removed the provision in the original legislation that would punish the IMF for failing to enact congressionally mandated reforms. Instead of demanding concrete results on reform before granting money to the IMF, the Senate legislation merely requests a nebulous promise from the G-7 countries to pursue reform.
The House Appropriations Committee passed two supplemental appropriations bills on March 24, 1998. One contains appropriations for both the IMF and U.S. arrears to the United Nations; the other provides funding for U.S. participation in the peacekeeping mission in Bosnia, military expenses in the Middle East, and disaster relief. The reform provisions for the IMF in the House bill are very similar to those originally present in the Senate bill. Specifically, before the funds appropriated in the bill can be disbursed, transferred, or made available to the IMF, the Secretary of the Treasury must certify that the IMF's Board of Executive Directors passed a resolution requiring every user of IMF resources to (1) comply with all international trade agreements and obligations to which the borrower is a party; (2) eliminate government-directed lending or subsidies; and (3) guarantee that countries would not discriminate between domestic and foreign creditors or debtors when resolving debt problems.
In addition, the House bill includes three directives that (1) the Department of the Treasury report on advances in financial transparency, application of internationally accepted accounting practices, elimination of subsidies, and improving the effect of IMF assistance on workers' rights; (2) the President ensure that no U.S. resources are "made available, directly or indirectly, to promote unfair competition against the American semi-conductor industry"; and (3) the IMF member countries establish an advisory commission on the international financial system.
Although the House bill is more strict than its counterpart in the Senate, it remains far from ideal. Both would give the IMF $17.9 billion--the entire amount requested by the Clinton Administration--with ineffective or unenforceable conditions and would result in little change in the ways in which the IMF does business, which is the root of the problem.
As a lender of last resort, the IMF disrupts the global market. Worse, the IMF's secretive nature prevents any accurate evaluation of the extent of this disruption. The problem, therefore, is not that the IMF lacks sufficient funds but that its distribution of subsidized loans and secretive nature reward poor governance, encourage excessive risk-taking by investors, and conceal the information necessary to counter these effects. To avoid these outcomes, the IMF should shun these kinds of subsidized loans altogether. Short of eliminating the IMF, which would be the ideal solution, Congress should focus on mitigating the more harmful consequences of the IMF's lending practices.
The IMF Transparency and Efficiency Act would address this issue by requiring the IMF to make available for public scrutiny:
An edited copy of minutes from every meeting of the IMF Board of Governors and Board of Executive Directors within three months of the meeting date; and
An edited copy of every loan and program document, a written review of program and loan performance, and all documents related to any loan program of the IMF within three months of submission of the document, review, or assessment.
Eliminate interest rate subsidies on IMF loans. IMF bailouts and structural adjustment loans are extended at highly subsidized rates and are the equivalent of a massive transfer of wealth from taxpayers in the United States and other countries. For example, the IMF extended most of its loans to Indonesia, South Korea, and Thailand at subsidized rates (between 4.5 and 4.7 percent). By contrast, these same countries were required to offer approximately 14.5 percent on comparable government bonds to access credit in the private sector. David Sachs of the Independent Institute and Peter Thiel of Thiel Capital International LLC estimate that, because of IMF subsidies, "Over three years, South Korea, Thailand, and Indonesia will have received a direct wealth transfer of at least $35 billion, mostly from U.S. and Western European taxpayers."4
Interest rates usually are determined by the borrower's risk and credit worthiness. The IMF, however, ignores these factors. In fact, it actually rewards high-risk countries that have poor credit records. In other words, the IMF reverses the normal banking practice of good lending: It rewards failure and punishes success; it rewards poor governance and excessive risk-taking by investors.
The IMF Transparency and Efficiency Act contains a key provision that would require the IMF to charge market-determined interest rates on its loans. This provision would insure that IMF loan recipients are held to the same standards for its loans that private individuals and companies are. There would be no special deals for bailing out rich investors who, unlike the average person with a bank loan, are saved from failure by subsidized loans. Moreover, this provision would minimize market distortions. It would reinforce market perceptions of risk and eliminate the backdoor transfer of wealth from U.S. taxpayers to the governments of countries that made unwise economic decisions.
The IMF Transparency and Efficiency Act also includes strict enforcement measures. Effective six months after the enactment of the bill, the Secretary of the Treasury would be required to submit a written certification to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Banking and Financial Services on the status of the reforms specified in the legislation.
Once the Secretary of the Treasury had submitted the certification, Congress would enact a joint resolution verifying and approving it. This provision insures that Congress would have the opportunity to examine and review IMF actions and confirm that the reforms stipulated in the bill indeed had been implemented. Moreover, the certification must be renewed annually. This would prevent possible backsliding and recidivism on the part of the IMF or deceptive action on the part of Treasury officials.
If the Secretary of the Treasury failed to submit the certification, or if Congress found fault and failed to pass a joint resolution supporting the certification, the IMF Transparency and Efficiency Act would forbid any "officer, employee, or agent of the United States [to] directly or indirectly, provide Federal funds to the International Monetary Fund." This provision is likely to be far more effective than prohibiting the current appropriation because it would freeze all U.S. funds committed to the IMF--past, current, and future--that are not in the IMF coffers already.
The IMF Transparency and Efficiency Act contains only one major fault. It grants the IMF the power to censor its meeting minutes, loan agreements, and performance reports before presenting them for public scrutiny. Some editing is acceptable, and possibly even necessary. This would be the case in allowing the IMF to strike passages compromising national security or releasing proprietary information.
The bill, however, allows the IMF to strike out "information which, if released, would disrupt markets." This stipulation is far too broad. It could be used as an excuse to censor information Congress needs to do its job. Moreover, this provision works against free markets. Markets work best when there is a free flow of information. Freedom of information is necessary for investors, consumers, and even governments to judge effectively the risks and returns on alternative investments and decisions. The IMF Transparency and Efficiency Act should take its title seriously and strive for "transparency" wherever possible, especially in information important to smoothly functioning markets.
Congress should not shirk its responsibilities to U.S. taxpayers. It must stop sending taxpayer dollars to an organization that refuses to submit to congressional or public scrutiny of its records, recommendations, or reviews--especially when that organization perpetuates the very crises it claims to resolve. Congress should demonstrate its commitment to protecting the interests of its constituents and promoting economic stability and healthy markets. It can do this by demanding that the IMF adopt stringent and ongoing reforms, such as those outlined in the IMF Transparency and Efficiency Act of 1998, in return for any funding.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs at The Heritage Foundation.
1 For detailed criticism of the IMF and the detrimental effects its policies have on developing countries and the global economy see: Bryan T. Johnson and Brett D. Schaefer, "Congress Should Give No More Funds to the IMF," Heritage Foundation Backgrounder No. 1157, February 12, 1998, "No New Funding for the IMF," Heritage Foundation Backgrounder Update No. 287, September 23, 1997, and "The International Monetary Fund: Outdated, Ineffective, and Unnecessary," Heritage Foundation Backgrounder No. 1113, May 6, 1997; and Bryan T. Johnson and John Sweeney, "Down the Drain: Why the IMF Bailout in Asia Is Wasteful and Won't Work," Heritage Foundation Backgrounder No. 1150, December 5, 1997.
2 The Group of Seven (G-7) includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. It meets periodically to coordinate economic policies, discuss treaties or agreements, and issue policy statements. The G-7 countries are the seven largest contributors to the International Monetary Fund (IMF) and control 44.82 percent of its votes, according to the IMF's 1997 Annual Report.