Congress has been pressured by the International
Monetary Fund (IMF), the Clinton Administration, and various
domestic interests since January 1997 to provide the IMF with
additional funds. It resisted the pressure to rubber-stamp these
requests and chose instead to conduct an informative debate on many
IMF-related issues before finally approving $17.9 billion in
additional funds on October 23, 1998. The important issues Congress
considered included the IMF's lack of transparency, the social and
economic consequences of the IMF's loan conditions, and the failure
of the IMF to promote economic growth and stability.
Although the IMF eventually received the
$17.9 billion from the United States, the impact of the
congressional debate should not be underestimated. Largely due to
this debate, the focus in Congress shifted from how much money the
IMF needs to whether the world needs an organization like the IMF
in today's global economic environment. During 20 months of
hearings on the IMF and its policies, Congress succeeded in
identifying serious problems. Stories of mismanagement and
ineffectiveness became public, such as the IMF's demand that
Indonesia close certain banks in autumn 1997, an action that later
internal IMF memorandums credit with worsening that country's
economic crisis. The exposure of such problems solidified
international support for reform and increased calls for halting
the IMF's unchallenged lending policies and increasing
transparency.
Today, most economists and political
leaders acknowledge the moral hazards that IMF bailouts create by
encouraging developing countries to continue the types of
government intervention practices that limit economic growth
instead of encouraging it. Indeed, such international leaders as
Prime Minister Tony Blair of the United Kingdom now point out that
the global economy is radically different from what it was in 1944,
when the IMF and the World Bank were established. And they have
called for an international conference to discuss what role, if
any, these institutions should play in the future.
Although Congress's delay in voting on the
IMF funds was long enough to allow international opinion to change,
it was not successful in altering the way the IMF conducts its
business in the short term. Along with approving new funds for the
IMF, Congress included in the Omnibus Appropriations bill a number of
reforms to the IMF's policy and practice. Unfortunately, these
reforms will not be sufficient to solve the problems that bedevil
the IMF. Moreover, the IMF's ineffectual enforcement and
verification practices will serve to hinder these reform
efforts.
The
debate over the IMF is far from over. It is likely that the IMF
will request additional funding in the near future, and the Clinton
Administration can be expected to support that request. In order to
fulfill Congress's reform goals, the 106th Congress must be
prepared to meet such a request with a coherent legislative
strategy and a fully developed reform package. In the short term,
Congress should ensure that the reforms outlined in the Omnibus
bill are implemented. It also should determine whether suggested
reforms are sufficient to address the IMF's problems. Moreover,
Congress needs to correct the failings of the Omnibus reform
package, such as the lack of adequate enforcement provisions. And
it should push the Administration to support a new conference on
the role of organizations like the IMF in the future.
The IMF Funding Effort
Although the IMF has long engendered
criticism for failing to provoke necessary reforms in the countries
that receive its generous loan packages, the current dilemma came
to the forefront of domestic concern in January 1997. At that time,
the IMF Board of Governors approved a new credit line called the
New Arrangements to Borrow (NAB). Under these arrangements, the
United States and 24 other member countries pledged to lend funds
to the IMF if "supplementary resources are needed to forestall or
cope with an impairment of the international monetary system or to
deal with an exceptional situation that poses a threat to the
stability of that system." The IMF specifically cited the
Mexican peso crisis as an example of a circumstance under which the
NAB would be utilized.
The
Clinton Administration quickly announced its support for the NAB
and requested that Congress approve $3.4 billion in new IMF funding
in the fiscal year (FY) 1998 budget. Congress appropriated the
money, but it also included language to restrict U.S. funds for
international organizations that lobby other countries to
liberalize their abortion laws. The Administration refused to
accept that language and vetoed the IMF funding package, ending the
possibility of IMF funding in 1997.
As
the Asian crisis worsened in 1997 and 1998, the IMF began to lend
more money to countries in financial turmoil, such as Indonesia,
South Korea, and Thailand. These massive bailouts (the IMF portion
alone was over $36 billion) caused the organization's resources to
dwindle rapidly. In February 1998, the IMF announced it was short
of funds and demanded that its member countries provide enough
money to increase its main account by 45 percent ($89 billion). The
U.S. portion of this increase came to $14.5 billion. The Clinton
Administration again announced its support and requested that
Congress appropriate $17.9 billion for the IMF ($3.4 billion for
the NAB and $14.5 billion to fulfill the members' "quota" increase)
in a supplemental appropriations bill for FY 1998. The
Administration cited the Asian financial crisis as justification
for haste.
Originally, the Senate considered two
supplemental appropriations bills: one that included international
funds for arrears to both the IMF and the United Nations and one
with funds for U.S. peacekeeping and domestic disaster relief.
Senators Chuck Hagel (R-NE) and Mitch McConnell (R-KY) recognized
that the first supplemental bill might have trouble passing and
successfully attached the IMF funding to the peacekeeping and
disaster relief supplemental bill. The attachment passed 84-16 on
March 24, 1998.
The
House of Representatives passed the peacekeeping and disaster
relief in an emergency supplemental bill, but did not include
funding for the IMF. The House also voted against a motion to
instruct House conferees to yield to the Senate language on the IMF
funding offered by Representative David Obey (D-WI), thus ending
the possibility of IMF funding in a supplemental appropriations
bill for FY 1998.
The
Clinton Administration included the $17.9 billion for IMF funding
in its FY 1999 budget request presented to Congress on February 2,
1998. With the defeat of IMF funding through a supplemental
appropriations bill, supporters of the IMF funding had no choice
but to seek funds through the normal appropriations process.
IMF Reforms in the 1999 Omnibus
Appropriations Bill
Because the House did not approve IMF
funding before leaving for the August recess, it became clear that
IMF funding would become a bargaining chip with the White House in
the appropriations negotiations at the end of the session. Eager to
focus on the upcoming elections, congressional negotiators accepted
language calling for much weaker IMF reforms than those sought by
many Members of Congress.
On
October 20, 1998, Congress passed the 1999 Omnibus Appropriations
bill with $17.9 billion in funds for the IMF. These funds will
become available 15 days after the Secretary of the U.S. Treasury
and the Chairman of the Federal Reserve Board certify that the
Group of 7 (G-7) major industrial democracies have agreed to
urge the IMF to support three specific reforms:
-
IMF loan conditionality
The IMF must require borrowers to eliminate government
subsidies and directed lending, reduce restrictions on trade, and
enact bankruptcy laws that "treat foreigners fairly."
-
IMF transparency
The IMF must release to the public edited summaries of
three IMF documents--the Letter of Intent, the Policy Framework
Paper, and Article IV Economic Consultations--and the meetings at
which these documents are discussed within three months of the
completion of each document or the conclusion of the
meeting.
-
A minimum IMF interest rate and
a reduced repayment schedule on some IMF loans
IMF loans extended to countries that experience
difficulty in making their balance of payments because of a loss of
market confidence would carry a higher interest rate and a
requirement to be repaid more quickly than other IMF loans.
Specifically, the IMF is required to charge an interest rate that
is at least 3 percent above its cost of funds and not less than the
average market rate of financing for its largest members (France,
Germany, Japan, the United Kingdom, and the United States) plus 3
percent. The loans must also be repaid at the end of one to
two-and-a-half years from the disbursement of each tranche.
In
addition, the Omnibus bill outlines a number of actions that must
be taken by the Secretary of the Treasury and the U.S. Executive
Director at the IMF prior to funding, such as:
-
Preventing subsidies from going
to U.S competitors in South Korea. The Secretary of the
Treasury must certify that no IMF money is being used to aid South
Korean industries that compete with U.S. industries.
-
Advocating 33 additional
specific policies. The Secretary of the Treasury must
instruct the U.S. IMF Executive Director to "vigorously promote"
through voice and vote 33 specific policies that range from
supporting trade liberalization to encouraging borrowers to
establish a social safety net. The language expands an existing
list of legislated instructions that the U.S. Executive Director
must advocate in IMF discussions and votes.
-
Establishing an 11-person
International Financial Institution Advisory Commission to
study the international financial system and the appropriate role
for international financial institutions, which would report to
Congress six months after it is established.
-
Facilitating access to IMF
materials for an annual audit by the U.S. General Accounting Office
(GAO). The Secretary of the Treasury must certify that the
U.S. Executive Director at the IMF is instructed to "facilitate
timely access by the [GAO] to information and documents of the
[IMF] needed by the Office to perform financial reviews of the
[IMF]."
Starting on June 30, 1999, the GAO is required to incorporate this
information in an annual report on (1) the IMF's current financial
condition; (2) an amount, disbursement schedule, repayment
schedule, and interest charge for all loans approved in the
preceding year; (3) the trade policies of borrowers, especially
policies that negatively impact U.S. exports to that borrower; (4)
the export policies of borrowers, such as those that result in
greater exports to the United States or that adversely affect
American businesses, farmers, or communities; (5) any IMF
conditions not met by the borrower, the reasons they were not met,
and the actions taken by the IMF, if any, in response; (6) the
loans in which the disbursement schedule, repayment schedule, or
conditions of the loan were renegotiated, and the reasons behind
it; and (7) the cumulative total of loans since the IMF's inception
through the current year, the number of loans in default, and the
amount of outstanding loans.
Shortcomings of the IMF Reforms
Although the outcome of the congressional
debate produced new requirements that the IMF alter the way it
conducts business, the product of these measures will fall far
short of significant long-term reform. The very fact that the
Secretary of the Treasury and the Chairman of the Federal Reserve
Board were able to meet the requirements necessary to release the
IMF funds less than two weeks after Congress passed the
appropriations legislation is testament to the requirements'
weakness.
The Omnibus reform package suffers from many shortcomings, such
as:
-
Insufficient enforcement
mechanisms. The IMF language in the Omnibus bill does not
require concrete actions or reform on the part of the IMF. It
merely requires certification that the IMF's "major shareholders"
agree to
use their influence to push specific reforms or that the Secretary
of the Treasury has instructed the U.S. Executive Director to
support congressional reforms. A rhetorical commitment to pursue
reform is a small sacrifice in exchange for receiving $17.9 billion
in additional money. Moreover, certification is a one-shot deal.
Unlike certification legislation contained in other IMF reform
bills, the Omnibus language offers Congress no opportunity to
analyze progress through annual certification requirements. Once
Congress accepts the certification, the IMF funds are released--and
the organization and G-7 can ignore Congress's demands.
-
Limited transparency
requirements. If the G-7 countries are successful in
imposing transparency requirements, these provisions would require
the IMF to release written summaries of its Letters of Intent,
Policy Framework Papers, and the Economic Reviews and meetings at
which they are discussed. Although these provisions are an
improvement in that the IMF currently is not required to release
any information, they will not make the IMF or its operations
transparent. Written summaries of meetings are no substitute for
full transcripts or for the mandatory release of documents
discussed. Moreover, the IMF and countries are allowed to edit the
summaries to delete any "sensitive" information, including
information that involves national security, proprietary
information, and information deemed "market-sensitive."
A proper and effective transparency
requirement would require public release of all IMF documents,
internal memos, and meeting transcripts with no redacted
information. The excuse that countries seeking IMF aid should be
shielded somehow from public scrutiny of their economies is absurd.
If countries are eager to receive IMF aid, the donors and
underwriters of that aid (that is, U.S. taxpayers) should be able
to obtain information about their economies. Any country that is
unwilling to make such information public should not receive IMF
aid.
- Interest rates on loans that do not
reflect market rates, and a lengthy repayment period.
Unfortunately, the interest rate reform provision is unlikely to
alleviate the destructive impact of IMF subsidized loans. First, it
applies only to a select number of loans, and essentially allows
the IMF to continue its current subsidized interest rates for every
loan outside the bill's narrow definition.
Second, to fulfill its requirement, the
IMF would not necessarily need to change existing practices. A
current IMF loan facility--the Supplemental Reserve Facility
(SRF)--would meet and even exceed the requirements laid out in the
bill. The SRF was created "for member countries experiencing
exceptional balance of payments problems owing to a large
short-term financing need resulting from a sudden and disruptive
loss of market confidence reflected in pressure on the capital
account and the member's reserves," almost exactly the wording in
the Omnibus bill. SRF loans have a much shorter repayment window
(one to one-and-a-half years from the date of each purchase) than
do other IMF loans and charge an interest rate that is 3 percent to
5 percent above the normal IMF loan rate.
Third, although the interest rate is
higher than before, it still is highly subsidized. Instead of
paying 0.5 percent to 4.7 percent interest on IMF loans, the bill
reform would result in interest rates between 5 percent and 9
percent on selected loans. Many of the countries likely to receive
these loans, however, such as Russia, had to pay between 50 percent
and 200 percent on government bonds in order to attract private
buyers. Thus, even though IMF interest rates on certain loans will
be higher than before, they will remain much lower than
market-determined rates.
Finally, the decreased repayment period is
likely to have little effect because of the IMF's propensity to
roll over debt. In the past, it renegotiated loans to extend the
repayment periods, and it is under no pressure to end this
practice.
- Ineffective instructions for the U.S.
Executive Director to the IMF. For two decades, Congress
has attempted to implement reforms in the IMF by using the "voice
and vote" of the U.S. Executive Director to the IMF. Congress has
passed over 30 different requirements on IMF activities, IMF
reforms, and instructions to the U.S. Executive Director on how to
use his "voice and vote"--which were signed, too, by the
President--with little or no change in IMF policy. The problem is
not a paucity of instruction; it is the lack of enforcement. Past
reform legislation lacked meaningful enforcement measures or
specified the consequences of ignoring the legislation. The Omnibus
bill continues this trend of passing new "voice-and-vote"
requirements without the means to ensure that the IMF implements
them.
The
GAO study required by the Omnibus bill would be particularly useful
in determining the efficacy of IMF assistance. It would reveal
information on IMF activities that the IMF has been hesitant to
release in the past. But this requirement also lacks an enforcement
mechanism to ensure compliance.
Other requirements, from creating an
International Financial Institution Advisory Commission to
examining the effects of globalization, trade, and capital flows on
financial institutions, as well as the role these institutions play
in contemporary economics, may prove useful. But they do not
address the immediate problems of the IMF and its negative impact
on the global economy. Congress should be commended for its
forethought in establishing these potentially useful instruments,
but they are not a replacement for much-needed reform.
What's Next?
In
1996, when asked how much of a funding increase the IMF would seek
in the Eleventh General Review of Quotas, Managing Director Michel
Camdessus replied, "At least something between 50 and 100
percent." Because of political concerns,
however, the IMF requested only a 45 percent increase. Camdessus
indicated then that the IMF felt its liquidity ratio (the amount of
uncommitted, useable IMF resources available in relation to liquid
liabilities) should be at least 70 to 80 percent. The IMF justified
its demands for the last quota increase because its liquidity ratio
had fallen to about 34 percent.
If
all IMF members provided funding for the NAB and the quota increase
at the same time as the United States, the IMF's liquidity ratio
would have been 98 percent. The IMF, however, has been disbursing
rapidly the additional funds Congress approved: It contributed $18
billion to the $41 billion bailout of Brazil and approved $210
million in loans to Bangladesh, the Dominican Republic, and Sierra
Leone.
As a result, the IMF's liquidity ratio is just over 80 percent and
falling.
The
dismal financial prospects of many countries around the world,
coupled with the IMF's practice of acting as a lender of first
resort, suggests that IMF lending practices will continue for the
foreseeable future. As the IMF's liquidity ratio worsens, it is
likely to seek an increase in members' quotas to the amount
Camdessus originally envisioned, along with a request for
additional funding in the near future of at least the amount just
approved by Congress. Clearly, before those requests are made,
members of the 106th Congress can look at the lessons learned from
the endeavors of the 105th Congress to develop an agenda and
strategy for the future.
Framing Future IMF Debates
Although many former U.S. officials,
economists, and policymakers are on record as stating that the IMF
should be eliminated eventually, a national and international
consensus to do so has not yet materialized. Before the Clinton
Administration and the IMF make additional requests for funds,
Congress should analyze the debate over the past two years and
understand that:
-
A reactionary strategy is
ineffective. Throughout the debate provoked by past IMF
requests for funding, the opponents of new funding found themselves
reacting to the statements and activities of IMF supporters.
Although this strategy delayed IMF funding for over a year,
revealed many harmful IMF practices, and succeeded in getting some
flawed and incomplete reforms passed, it proved largely
ineffective. The failure to rally disparate allies around common
concerns to counter the claims of funding proponents undermined the
efforts of opponents. This strategy, too, proved largely
ineffective. Those who seek IMF reform should cooperate,
coordinating their efforts in preparation for the likelihood that
the IMF will request additional funds in the near future.
-
"Voice-and-vote" instructions
are ineffective. For more than two decades, Congress has
instructed the U.S. Executive Director at the IMF to use the "voice
and vote" of the United States to support over 30 specific
policies, ranging from human rights to free trade. This strategy
has had little effect on IMF activities because votes rarely occur
and because there are no consequences for IMF inaction on those
issues.
The Omnibus bill extends the "voice-and-vote" strategy by asking
U.S. officials to certify that the G-7 countries use their voice
and vote to support the United States on three specific policy
changes. But Canada, France, Germany, Italy, Japan, the United
Kingdom, and the United States collectively control fewer than 45
percent of the voting stock within the IMF. Approving an IMF loan
requires a majority of the voting stock, and amending the IMF
Articles of Agreement requires 85 percent of the voting stock and
the approval of at least 60 percent of IMF member countries. Thus,
the 55 percent of the voting stock controlled by the other
countries (who also are the largest beneficiaries of IMF aid) can
be mustered to block U.S.-led reforms--even when the seven largest
contributors to the IMF actively support those reforms.
-
U.S. contributions to the IMF
should be used as leverage to force changes in harmful IMF policies
and actions. Policymakers err in their belief that
Congress can change the operations and management of the IMF
directly, as if it were a U.S. agency or department. Congress can
dictate how the U.S. Agency for International Development is
managed, is organized, and operates because U.S. law binds it. U.S.
law does not bind international organizations like the IMF,
however. The most effective means for Congress to achieve
substantial change in IMF policy is to use its "power of the
purse," withholding IMF funding until the organization provides
evidence that it has altered its policies and is in compliance with
congressional demands.
-
IMF funding should not be tied
to domestic economic benefits. Lobbyists representing U.S.
agricultural and manufacturing exporters and the U.S. financial
industry have used scare tactics to convince many Members of
Congress that IMF funding is necessary to save their industries
from the effects of the economic crisis. The IMF, they reason,
could help to revive faltering overseas economies and negate the
ill effects of the crisis by providing indirect subsidies through
its assistance. In other words, IMF funds would allow countries to
pay their debts to U.S. financial institutions and enable them to
continue buying U.S. products. IMF opponents did little to fight
these claims. In the future, opponents of additional IMF funding
must put forth the ample evidence that IMF lending (1) may cause an
economic crisis to occur; (2) often makes existing crises worse;
(3) makes U.S. exports more expensive due to IMF conditionality,
which frequently requires recipient countries to devalue their
currencies; and (4) prevents countries from achieving long-term
economic reform.
What Congress Should Do
The
conditions Congress passed in the Omnibus appropriations bill are
not only desirable; they also are better than any previously
required IMF reforms. But they fall substantially short of the
actions needed to prevent damage to the global economy caused by
IMF meddling. It would be a mistake for Members of Congress to
conclude that their work is done and that they have addressed IMF
reform sufficiently. Instead, policymakers during the near term
should build on the measures in the Omnibus bill and establish
short-, medium-, and long-term goals.
In
the short term, Congress should ensure that the reforms outlined in
the Omnibus bill are implemented. The Chairman of the Federal
Reserve Board and the Secretary of the Treasury already have
submitted the certifications necessary to release the IMF funds,
and the funds could have been available to the IMF as early as
November 19, 1998. Congress should not accept these
certifications at face value; it should monitor the IMF and demand
that the Secretary of the Treasury and the Chairman of the Federal
Reserve Board provide regular updates on the progress of the
reforms. It also should hold hearings and conduct further studies
to determine if any reforms implemented by the IMF meet Congress's
demands and address the problems it has identified, such as the
need for transparency and the moral hazard of the IMF's lending
practices.
In
the intermediate term, Congress should correct the failings of the
Omnibus reform package through future appropriations for the IMF or
by restricting transfers of currently appropriated funds from the
U.S. Treasury to the IMF. Congress should seek reforms that
specifically address:
- Enforcement. Congress must
create effective enforcement mechanisms in order to ensure that the
IMF implements the legislated reforms. Congress should demand that
reforms be implemented before additional funds are distributed, and
it should require annual confirmation that the required reforms
have been implemented to maintain the IMF's access to previously
appropriated funding.As noted by Majority Leader Richard Armey
(R-TX),
No
IMF reform is real IMF reform unless the IMF adopts it before it
receives any additional money from the US. This, in my judgment, is
plain common sense. We don't give away $18 billion of our
taxpayers' money on the strength of promises or assurances.
-
Interest rates. The
current language requires the U.S. Executive Director to support,
at a minimum, interest rates that are 3 percent above the IMF's
cost of funds and not less than the average market rate of
financing for the largest IMF members, plus 3 percent on certain
IMF loans. Currently, this would require a minimum interest rate of
6.74 percent. This is greater than typical
interest rates (of 4.7 percent), but far less than market rates.
For example, Indonesia and Russia had to offer interest rates of
between 50 percent and 200 percent during their respective crises.
If the object is to eliminate the moral hazard of access to cheap
IMF loans, then IMF interest rates should mirror rates in the
private sector. If a country is unable to secure private funds at
any rate, the IMF rate should be as punitive as possible--not
lower than the interest rate on most credit cards.
-
IMF loan coverage. The
Omnibus bill requires the G-7 to support increased interest rates
and shorter repayment periods for IMF loans extended to countries
"experiencing balance of payments difficulties due to a large
short-term financing need resulting from a sudden and disruptive
loss of market confidence." This description would apply to
most recent IMF bailouts, but it would not apply to most of the
loans the IMF negotiates. For example, the IMF negotiated 26
Stand-by, Extended Fund Facility, and Enhanced Structural
Adjustment Facility loans between October 19, 1997, and October 19,
1998.
Only one of these loans, a $6.6 billion (which is 36 percent of all
arrangements made that year) Stand-by arrangement to Indonesia,
would have been subject to the reforms outlined in the Omnibus
bill. In order to be truly effective, reform requirements should
apply to all IMF loans.
-
Transparency. The
Omnibus bill requires the IMF to release written summaries of only
three IMF documents and summarized minutes of meetings in which the
documents are discussed. Moreover, IMF and member countries can
censor those documents beforehand. Written summaries of meetings
are no substitute for full transcripts or the mandatory public
release of the documents. A proper and effective transparency
requirement would require public release of all IMF documents,
internal memos, and meeting transcripts with no redacted
information.
Over
the long term, Congress should press the Clinton Administration to
bring a new Bretton Woods-type conference together. The IMF and the
World Bank were established during negotiations at Bretton Woods in
1944, but the world economy has changed dramatically since that
time, making Bretton Woods-designed organizations badly out of
date. It is time to hold a new discussion on the role of these
organizations, if any, in the modern global economy. Such
negotiations must be conducted with an open mind, however, and
those institutions that are deemed harmful or unnecessary should be
dismantled. In a sense of Congress resolution, policymakers should
express their support for a new Bretton Woods conference.
Both
the IMF and the World Bank have indicated they will request
additional money from their member states in the near future.
Congress should refuse to provide additional funds to these
organizations before the conclusion of a second Bretton Woods-type
conference. Giving additional funds before a consensus is reached
on the role of these institutions, if any, only reinforces
activities that Congress may wish to end; at worst, it would
provide billions of taxpayer dollars to organizations that harm
developing countries and the global economy.
Conclusion
With
passage of the IMF reform language in the Omnibus Appropriations
bill, Members of Congress must not err in their belief that they
have won the IMF debate or that the issue is resolved. The reforms
included in the bill are the first step in a process that should
end with the elimination of the IMF as it exists today. To
accomplish this, Congress should implement current IMF reforms,
strengthen these reforms, and ultimately establish a framework in
which the IMF eventually can be abolished.
-- Bryan T. Johnson is a former Policy
Analyst for International Economic Affairs in The Kathryn and
Shelby Cullom Davis International Studies Center at The Heritage
Foundation. Brett D.
Schaefer is Jay Kingham Fellow in International Regulatory
Affairs at The Heritage Foundation.