The IMF Needs Real Reform, Not More Money


The IMF Needs Real Reform, Not More Money

May 5, 1998 35 min read
Edwin J. Feulner
Edwin J. Feulner is the founder and former president of The Heritage Foundation.

As the largest contributor to the International Monetary Fund (IMF), the United States accounts for about 18.25 percent of the IMF's total quota subscriptions--more than $36 billion, or $517 per American family.2 The President is asking Congress to appropriate another $18 billion for the Fund--which includes a $14.5 billion hike in our quota subscription and an additional $3.4 billion to fund a new credit line called the "New Arrangements to Borrow." President Clinton would like Congress to appropriate it immediately, in one lump sum, and with no real conditions attached.

This request, however, is about much more than the amount of additional money the President seeks for the IMF. More important, it concerns a vast expansion of the IMF's abilities and capabilities. This $18 billion appropriation--about half of the total amount of money we have given to the Fund over the past 50 years--is only our share of the IMF's worldwide solicitation, which should generate for the Fund over $85 billion in new resources. And this is only the beginning. Michel Camdessus, the French Socialist who now directs the Fund, stated his intention to increase the Fund's resources by about $160 billion, which means he will likely come back to Washington asking for more money in only a few years.3

This hearing was called to address the extent of America's influence in the IMF and whether that influence is great enough to impose reforms on that organization. To properly assess these issues, we need to take a critical look at the IMF's current lending practices and its track record in achieving economic recovery. Therefore, I will offer a few facts and a brief overview of the problems inherent in the International Monetary Fund before I discuss the best solutions to these problems.

This request is not really about helping Asia
Thus far, the Asian crisis and IMF replenishment have been inextricably intertwined. These two issues should be de-linked. The IMF had officially requested member-country participation in the New Arrangements to Borrow back in 1996, and replenishment issues were being discussed well before any hint of an Asian crisis. Claims that the Asian crisis spurred the funding requests, therefore, are false. The IMF, moreover, already has the resources it needs to meet its obligations in Asia. The fact is that the IMF and the Administration are not asking for money for Asia, but for future bailouts.

The issue before Congress, then, is not whether America should help bail out Indonesia, South Korea, Thailand, or Country X. The issue is whether Congress should endorse the Fund's self-styled role of international rescuer of failed economies and insurer of poor international investments. Analysts at The Heritage Foundation are on record as opposing any new funding for the International Monetary Fund. In fact, Heritage analysts have recommended repeatedly that the United States investigate the feasibility of withdrawing from this ineffective organization and applying for the full reimbursement of our existing contribution.4

The IMF is not facing a liquidity crisis
Administration officials and IMF representatives have implied that the IMF needs the requested $18 billion because the Asian bailout drained IMF resources and the organization is now critically short of liquidity.5 This is not the case. As stated above, the $18 billion request was decided well in advance of the Asian crisis. Information published by the IMF itself reveals that the Fund is not facing a liquidity crisis. In fact, the current and near-term liquidity of the IMF would allow it to conduct two bailouts equivalent in size to the one it extended to troubled Asian countries.

Specifically, as the IMF's own information shows:

  • The IMF had $85.62 billion in liquid resources available on April 30, 1997--nearly $8.6 billion more than it had the previous April.6

  • Best estimates indicate that the Fund will experience a $3.14 billion net decline in outstanding credits in its current fiscal year--May 1, 1997, to April 30, 1998--in addition to the Asian bailout (see Table 1).7

  • The IMF contributed over $36 billion to four countries affected by the Asian financial crisis.

  • Thus, even if the entire Asian bailout package is deducted, normal IMF activities would leave $46.44 billion in IMF resources at the end of 1997.

  • The Fund's 1997 annual report indicates an anticipated income of approximately $28.32 billion from loan repayments and repurchases by the end of the year 2000.8

  • With current resources and this near-term income, the IMF should have $74.76 billion in liquid resources available. This is over twice the amount committed in the Asian financial crisis.9

Past replenishments were debated at length
The President's demand that Congress provide $18 billion in additional funds to the IMF is outstripped in its audacity by the additional demand that Congress do so with little or no informed public debate. As Majority Leader Dick Armey aptly stated, "In any other context, a suggestion that we provide $18 billion in taxpayer money to anyone without an informed public debate, conditions on its use, or even the possibility of effective congressional oversight in the future, would be rejected out of hand."10

To put the issue in perspective, when Congress debated the last IMF quota increase of 50 percent in 1992 (the U.S. portion was $12.2 billion at that time), it debated the issue for 20 months, even though the amount then requested was only two-thirds of the current request. Congress debated the 1983 quota increase of 47.5 percent (the U.S. portion was $5.8 billion for a quota increase and $2.6 billion for the General Arrangements to Borrow) for eight months, even though the IMF liquidity ratio (the relationship between IMF liquid assets to loan commitments) in 1983 was only 35 percent, or 10 percent below the current IMF liquidity ratio of 45 percent.11 In both the 1992 and 1983 replenishments, the Fund's liquidity ratio was similar to its present level, but Congress carefully took the time to consider the requests for additional funding.

Critics of the IMF are not isolationists
Although critics of the IMF have been portrayed as isolationists or neo-isolationists who would lead the world into another Great Depression, quite the opposite is the case. Former Secretary of State George P. Shultz, former Treasury Secretary Wil-liam E. Simon, and Walter B. Wriston, former chairman of Citicorp/Citibank, recently called for the abolition of the IMF in a Wall Street Journal article. Nobel laureate Milton Friedman and former Vice Presidential candidate Jack Kemp have also urged Congress not to provide additional money to the IMF. None of these men can be described as isolationist. On the contrary, each is a longtime advocate of responsible U.S. global leadership. These experts understand that the IMF has done more harm than good through its actions, and that people would suffer less in the long term--and most likely in the short term as well--in a world without the market distortions created by the IMF. Like these men, critics of the IMF in general support sound economic principles and responsible international engagement.

Problems with the IMF

There are myriad problems--both institutionally and theoretically--with the IMF.

  1. IMF bailouts are more likely to cause financial crises than prevent or cure them. Congress should attend to the powerful yet indirect influence the IMF exerts in promoting financial and economic crises. The IMF's record of "rescuing" troubled economies invites governments to follow imprudent economic and monetary policies, since the political and economic costs of failure are reduced by the promise of a bailout.

Why? Just the possibility of an IMF rescue creates what economists refer to as a "moral hazard." Bailouts shield investors and politicians from the consequences of their poor decisions by "socializing" risks and reducing the cost of failure associated with an investment. Risks are socialized because everyone ends up paying for individual investors' errors. The costs of failure are reduced because, directly or indirectly, the IMF compensates investors when their investment plans fail. In other words, IMF bailouts encourage speculation of the sort that investors probably would avoid if the IMF were not there to shield them from failure. Bailouts send signals to governments that they will not have to bear the costs of failing to reform their economies: The IMF will be there to pay the price of their inaction. Thus, the IMF's actions will neither prevent nor cure financial crises--they will encourage them.

Indeed, evidence seems to indicate that IMF advice precipitated the very same Asian crisis that Treasury and IMF officials are invoking to strong-arm Congress into appropriating this additional $18 billion. According to The Wall Street Journal, "The IMF tripped this crisis by urging the Thais to devalue [the baht], then promoted contagion by urging everyone else to do likewise.... [P]utting more money into today's IMF is not likely to solve any crisis. It is more likely to cause new ones."12 Clearly, providing more gasoline--in the form of additional resources--for the IMF to start financial fires around the globe is not the way to promote economic stability.

Financial hardship and defaults occur every day in the U.S. economy. They are a necessary and natural reflection of free markets. Bankruptcy is the market's method of reallocating capital to more productive uses, or away from managers who failed to create wealth for investors or improve the well-being of consumers. As assets are purchased at a reduced rate by the highest bidder, both parties to an ill-considered lending or investment decision suffer a loss; but the overall economy profits because new, presumably better managers will now control the capital. In the international market, however, the IMF distorts this mechanism by rewarding inept managers with financial assistance.

Without the IMF, borrowers and creditors would be forced to resolve the situation in the Asian countries by renegotiating loans or seizing assets. A world without the IMF would have to observe the greater discipline of market forces. Banks and investors would be more cautious in assessing risk before investing or committing loans. Countries wishing to receive foreign loans and investment would have to adopt transparent economic policies that lower risk for lenders and investors. Specifically, they would have to create fair and reliable bankruptcy laws, employ transparent and internationally accepted accounting procedures, allow minimal government interference in the allocation of credit, exercise prudent oversight of their banking systems, and encourage rather than prevent domestic and foreign banking competition.

  1. The IMF lacks transparency. I congratulate the members of the committee for requiring truth in testimony, a policy The Heritage Foundation has long supported. This provision of the House rules was designed to ensure that Congress has access to all information on those who testify before its committees. This allows you to determine whether the information a witness presents has been biased or unduly influenced by the witness's supporters. Firmly embedding this transparency in the legislative process is vital.

Prompt, unbiased (or, at least, admittedly biased) information is just as important for international organizations such as the International Monetary Fund to perform their assigned duties. Indeed, Article VIII of the IMF Articles of Agreement, the "General Obligations of Members," specifically states that each member is required to provide information "as [the IMF] deems necessary for its activities, including, as the minimum necessary for the effective discharge of the Fund's duties."13

Yet, even though the IMF recognizes the necessity of timely, unbiased information to its successful operation, it fails to acknowledge the necessity of giving such information on its own organization and operation to its member governments and their citizens.

It is imperative that the IMF be forthright in providing information necessary to enable its member governments and the public at large to make informed decisions about the performance, record, and necessity of the Fund.14

Far from encouraging public inspection, however, the IMF refuses to release the vast majority of its information on economic policies, past performance, and internal meetings to the press or the interested public. In fact, the culture of secrecy is so inculcated in the IMF that it actively discourages and often prohibits public access even to public records. Anyone not employed by the IMF must apply for an appointment to gain access to its library, which is open only on Tuesdays and Thursdays. It can take up to six weeks for the IMF to process the application--and approval is by no means certain. Students are not allowed in the library at all.

Although this lack of public transparency is very disturbing, the Fund's refusal to grant congressional offices free access to its records is totally unacceptable. As described by Representative Jim Saxton of New Jersey, Chairman of the Joint Economic Committee, the IMF will withhold any information it wishes from its member governments--and the U.S. Congress, which may wish to conduct an informed debate on the organization--while simultaneously demanding that those governments contribute billions of dollars to its coffers.

The U.S. Department of the Treasury, which oversees membership in the IMF through the U.S. Executive Director of the IMF, seemingly is a willing co-conspirator in this culture of secrecy and exacerbates this lack of transparency. Indeed, the Treasury Department offered Chairman Saxton a copy of IMF documents only on the condition that he keep the documents and their contents confidential and hidden from public scrutiny.15 This incident, following the IMF's historical pattern, led the Joint Economic Committee to conclude that:

Both IMF and U.S. Treasury bailout policies remain overly secretive, ambiguous, and ill-defined. Because these policies are seldom explained to the public, unnecessary misunderstanding, resentment, and opposition often result. A good deal more transparency is called for from both of these taxpayer-financed institutions. Explicit specification of the IMF's objectives, for example, should be accompanied by clarification of the procedures and practices by which it accomplishes these objectives. At a minimum, full explanations of the conditions, lending terms, subsidies involved, and the rationale as to why such lending is necessary are essential. Additionally, those entities actually receiving taxpayer subsidies should be identified.16

This sentiment is echoed by Jack Kemp, who stated in a recent letter to Representative Armey, "I urge you to put off a vote in the House on any additional funding for the IMF at least until that organization complies with all outstanding congressional information requests."17

  1. IMF loans provide massive subsidies to borrowing countries. The IMF has a number of different facilities for extending financial assistance to its member countries. They range from the extremely short-term Stand-by Arrangements, which are typically extended over 12 to 18 months and repaid within five years, to long-term assistance, such as the Enhanced Structural Adjustment Facility (ESAF), which is repaid over ten years and includes a five-year grace period. All IMF assistance is extended at conditional, or below-market, rates. The Stand-by Arrangements are charged a slightly below-market rate of 4.5 percent; the ESAF loans are nearly free, with an annual interest rate of only one-half of 1 percent (0.5 percent).18 Even the most creditworthy nations cannot receive such interest rates on the private financial markets; the United States must pay around 5.5 percent on government bonds of similar maturity.

The highly subsidized interest rates on IMF bailouts and structural adjustment loans are equivalent to a massive transfer of wealth from American taxpayers and other countries. For example, the IMF extended most of its loans to Indonesia, South Korea, and Thailand at subsidized rates (between 4.5 percent and 4.7 percent). These same countries were required to pay 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."19

Interest rates usually are determined by the borrower's risk and creditworthiness. The IMF ignores these factors. In fact, it actually rewards high-risk countries with 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.

Requiring the IMF to charge market-determined interest rates on its loans would ensure that IMF loan recipients are held to the same standards for its loans as are private individuals and companies. 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 government-subsidized loans. Moreover, this provision would minimize market distortions. It would reinforce market perceptions of risk and eliminate the backdoor transfer of wealth from Americans to the governments of countries that made unwise economic decisions.

  1. IMF policies lead developing countries to economic stagnation and recession and foster dependency on foreign aid. Data collected over the past three decades demonstrate conclusively that most less-developed countries receiving IMF loans have the same or lower per capita wealth today that they had before they received the loans. Many actually are worse off. For example:
  • Of the 89 less-developed countries that received IMF loans between 1965 and 1995, 48 are no better off economically today than they were before receiving IMF loans;

  • Of these 48 countries, 32 are poorer than they were before receiving IMF loans; and

  • Of these 32 countries, 14 have economies that are at least 15 percent smaller than when they received their first IMF loans.

Even a reformed, transparent IMF that recommends economic policies encouraging long-term growth would not deserve more funding. The Fund is ineffective in forcing countries to adopt reform and therefore cannot prevent future financial crises. Furthermore, the IMF repeatedly enters agreements with countries that have a history of violating their previous contracts with the Fund. For example:

  • Peru made 17 different arrangements with the IMF between 1971 and 1977, and it continues to receive money from the IMF. The only results of these loans have been increased sovereign debt.

  • The United States and the IMF bailed out Mexico four times since 1976. Each bailout followed a national election and was larger than the previous package. It is premature for the IMF to claim Mexico as a success story until at least after that country's next election. Recent high growth is no indicator of success; the last time Mexico had growth rates similar to today's levels was in 1982, before the Latin American debt crisis that was spurred by Mexico's repudiation of its debt.

  1. Examination of IMF activities reveals that the organization is not functioning as a lender of last resort, as IMF and Treasury officials claim. Instead, it acts as a lender of first resort. The IMF had financial arrangements worth over $38 billion with 58 countries as of January 31, 1998.20 In other words, the IMF currently is giving financial assistance to a third of its entire membership--indeed, over a quarter of the world's nations. Are we seriously to believe that every one of these 58 countries is in such dire financial straits that it is unable to secure private loans or investment, obtain foreign exchange through exports, or cut government expenditures sufficient to meet its debt obligations? Or that they are incapable of negotiating debt terms with their creditors? Of course not. The very fact that they are in debt indicates that they were able to secure credit. Moreover, if a quarter of the world's countries were indeed in such financial straits, global financial problems would be far beyond the capacity of the IMF to solve.

  2. The IMF claims that it must act to help the people of a troubled country. This is false. Providing money to a government merely allows that government to meet its own debt obligations to both public-sector and private creditors. On one hand, an IMF bailout allows a government to pay its debts to large international banks; on the other, it allows a country to meet its short-term obligations to public-sector creditors, such as the IMF and the World Bank. In effect, therefore, instead of helping people in the country improve their economic condition, part of the IMF assistance is helping the country to pay off its debt to the IMF itself.

IMF rescues help neither the economies of recipient countries nor the majority of their citizens. In the wake of the Mexican bailout in 1995, for example, the Mexican people suffered a sharp decline in their standard of living, large increases in unemployment, and an overnight erosion of savings. Investors, however, escaped with minimal losses. This scenario has been replayed time and time again. Indonesia, South Korea, and Thailand all have experienced similar hardships despite IMF-led rescues. As in Mexico, the current IMF financial package in Asia salvages the profit margins of international lenders and large borrowers by guaranteeing their loans. Meanwhile, the citizens of these countries pay the tab on the rescue package through IMF-mandated higher taxes or currency devaluation (which reduce purchasing power and savings) in the hope that increased exports will provide the foreign exchange to pay an increased foreign debt.

  1. IMF policies promote political instability. When confronted with the problems associated with IMF bailouts, defenders of the organization claim that all of the immense problems--including financial instability on a global scale, lack of transparency, massive transfers of wealth from U.S. taxpayers to Third World elites and international investors, and retarded economic development--are tolerable if IMF assistance can quell social or political instability.

Thus, it is no surprise that arguments in support of the International Monetary Fund usually are couched in the language of international crisis. Advocates of the IMF insist that without IMF guidance and assistance, countries would flounder inextricably in the "tar pits" of financial and political chaos. Nowhere, in fact, do we see a more consistent and zealous application of the view that developing countries are bound to fail, flounder, and decay without third-party assistance than at the IMF and at the other international agencies that complement its efforts.

Those who champion this argument:

  • Fail to recognize the role IMF policies play in causing political instability. IMF bailouts aid international investors, well-heeled domestic businessmen, and others with connections to the ruling party. The typical citizens experience a sharp decline in their standard of living, large increases in unemployment, and an overnight erosion of savings. Moreover, the citizens of these countries pay the tab on the rescue package through higher taxes or currency devaluation (which reduce purchasing power and savings) in the hope that increased exports will provide the foreign exchange to pay a drastically increased foreign debt. This situation can do nothing but increase social and political instability in the countries being bailed out.

  • Do not appreciate that IMF bailouts lead to successive blows to developing economies whose cumulative damage may exceed the damage of political instability. Simply put, the very existence of the IMF encourages imprudent--though, perhaps, not irrational--risk-taking by governments, big business, and their financial backers. The IMF's penchant for repeatedly intervening in financial crises and expanding the largesse of its bailout programs quite naturally means that the costs of risk-taking to the governments of those countries will be much lower than they would be otherwise. In fact, a reasonable assurance of IMF intervention most likely will mean that "subsidized" economies will collapse more quickly and powerfully than they would have without those assurances, leading to more frequent and intense political upheaval.

  • Refuse to accept that IMF bailouts perpetuate the political power of administrations that have proven themselves short-sighted and inadequate managers.

  • Fail to realize that many of the countries achieving successful economic and political development have done so largely without IMF assistance. In fact, most successes occur once countries are free from the central planning, high levels of taxation, and financial micromanagement advocated by international agencies such as the IMF. The United States achieved its political stability and economic prosperity without the aid of international bailouts from the IMF, despite economic setbacks as bad as those striking Asia. The more recent successes of Hong Kong, Singapore, and Taiwan likewise owe little or nothing to the IMF or its economic advice.

Solving the Problems: U.S. Influence in the International Monetary Fund

The only authority over the IMF is its governing bodies, established in its Articles of Agreement. In fact, the Articles of Agreement specifically state that the assets, archives, and employees are immune from searches and requirements demanded by judicial or legislative bodies of IMF member states. The Executive Board, which has 24 representatives, oversees the daily affairs of the IMF and the extension of financial assistance. The five largest contributors to the IMF (France, Germany, Japan, the United Kingdom, and the United States) appoint one representative each to the Executive Board. The remaining 19 directors are elected by different coalitions of countries and cast the cumulative votes of the coalition.

The Administration has steadfastly opposed any restrictions on U.S. funding or participation in the IMF. Instead, the Administration has reluctantly supported legislation contained in the Senate supplemental appropriations bill. Replacing earlier demands that the IMF implement reforms in exchange for access to U.S. funds, the Senate language only requires the Secretary of the Treasury to certify that the world's seven largest economies--the so-called Group of 7 (G-7) nations--agree to use their influence to push two specific reforms in IMF policies.21 These reforms would require countries to eliminate government subsidies and adhere to conditions outlined in trade agreements to which the country is party. These measures would largely reiterate previous legislation, would not address key issues (such as the disruptive impact of IMF subsidized loans), and would be unenforceable.

Congress should not fall victim to this facade of reform. It has attempted to implement desired reforms in the IMF through the "voice and vote" of the U.S. Executive Director for two decades with little or no change in IMF policy. These requirements have been largely ineffective. Consider the following:

  • The Bretton Woods Agreements Act requires the Secretary of the Treasury to instruct the U.S. Executive Director of the IMF to "work in opposition to any extension of financial or technical assistance" from the IMF to any country permitting "entry into the territory of such country [of a person] who has committed an act of international terrorism [or] fails to take appropriate measures to prevent any such person from committing any such act outside the territory of such country."22 Despite this legislation, five of the seven countries listed by the U.S. State Department as sources of state-sponsored terrorism are members of the IMF and all but Sudan are fully eligible for IMF assistance.23 In fact, Iraq owes the IMF some $42 million in delinquent payments dating back to 1990. Sudan, which has benefited from U.S. taxpayer money contributed to the IMF (including two IMF loans during the 1980s), currently owes $1.6 billion.24

  • The Bretton Woods Agreements Act requires the Secretary of the Treasury to instruct the U.S. Executive Director of the IMF to "actively oppose any facility involving use of Fund credit by any Communist dictatorship."25 However, this restriction has been largely ineffective. During the height of the Cold War in the 1980s, Communist regimes in the People's Republic of China, the Hungarian People's Republic, and the Socialist Federal Republic of Yugoslavia, among others, received substantial financial assistance from the IMF.

  • The International Financial Institutions Act lists in exhaustive detail reports on human rights abuses and lists the conditions under which the U.S. Executive Directors of the international financial institutions (including the IMF) should oppose financial assistance to countries "in gross violation of internationally recognized human right standards."26 However, these instructions did not stop countries with dismal human rights records from receiving IMF assistance. For instance, the last two countries in the world that tolerate slavery, Sudan and Mauritania, are members of the IMF and have received hundreds of millions of dollars in assistance over the past 15 years--part of which was contributed and subsidized by American taxpayers.27

  • The International Financial Institutions Act instructs the U.S. Executive Directors of the international financial institutions (including the IMF) to promote a policy of requiring governments to reduce excessive military spending.28 Yet, according to Russian affairs expert J. Michael Waller, vice president of the American Foreign Policy Council, the $20 billion in IMF financial assistance given to Russia since 1992 has funded Russian military activity in Chechnya, facilitated a sixfold increase in high technology and strategic weapon research and development expenditures, and contributed to the development of the next generation of Russian attack submarine--the Yuri Dolgoruki.29

The problem is not a lack of legislated directives. Indeed, the two reforms outlined in the current Senate legislation would largely duplicate past legislation. As noted by Senator Mitch McConnell (R-KY), "section 14 of the [Bretton Woods Agreements] Act says it is U.S. policy to promote the removal of trade restrictions. Sections 44 and 49 tell our directors to work to eliminate agricultural subsidies."30 So, since the very beginning of the international financial institutions, the United States has advocated a set of policy directives that have been largely ignored by the IMF.

How to Enforce Congressional Demands

Experience shows that attempts by Congress to reform the IMF or alter its policy through legislative directives to the U.S. Executive Director of the IMF are ineffective because:

  1. Only in limited circumstances can the United States use its voting power to block IMF actions. Because of the IMF's voting structure, even the United States, which controls the largest block of votes in the IMF (17.78 percent), can block only those actions in the IMF that require an 85 percent majority, such as expansion of the quota subscriptions and amendments to the IMF Articles of Agreement.31

The United States is essentially unable to push through fundamental reforms unless it gains an additional 52 percent to 63 percent of the votes. It cannot prevent the organization from extending financial assistance, which under normal circumstances requires a simple majority of votes cast, unless it has garnered the support of an additional 33 percent of the votes.32 This means that the IMF can extend loans over the objection and negative vote of the United States.

  1. Congressional instructions to executive branch officials are ineffective. The U.S. Executive Director is technically not bound by Congress's instructions on how to vote or speak in his official capacity. Congressional instructions are more like suggestions or guidelines than ironclad rules. Through the constitutional division of powers, the President can countermand congressional instructions to executive branch employees. Congress's directives are enforceable only within its sphere of constitutional powers, such as the power of the purse.

For example, Congress is within its power to restrict access to authorized or appropriated funds on condition of certain actions. Hence, the provisions in H.R. 3331. However, past legislative efforts to reform the IMF through instructions to the U.S. Executive Director have been undermined by the lack of congressional authority to require that official to take specific actions. Moreover, congressional instructions are often weakened further through waivers, such as a national security waiver, that allow the President to circumvent congressional guidelines.

  1. Existing legislation contains no absolute requirements to encourage the IMF to adopt reform. I would like to congratulate Representative Bernard Sanders (I-VT) of this committee on his foresight in requesting the Congressional Research Service to compile a report on past legislative efforts to reform the IMF. Over 30 different requirements on IMF activities, IMF reforms, and instructions to the U.S. Executive Director of the IMF on how to use his "voice and vote" have been passed by Congress and signed by the President in the past two decades, according to the report.33 The problem is not a paucity of instruction; it is a lack of enforcement. Past legislation to reform the IMF or its activities has lacked any meaningful enforcement measures or consequences if the legislation is ignored. As noted by Senator McConnell, "We do not need to pass more legislation urging the administration to use our voice and vote to assure a loan meets a congressional mandate. Instead, we need to see the IMF Executive Board or the Board of Governors pass and implement resolutions agreeing to standards already enunciated in the U.S. law."34 If Congress is serious about reforming the IMF, it must attach palpable and effective enforcement mechanisms to its requirements.

Congress must rely on its constitutional powers, specifically the power of the purse, if it wishes to enforce certain actions. Specifically, Congress must demand that desired reforms are implemented before funds are distributed, and require annual confirmation of required reforms to maintain access to previously appropriated funding. One bill that would implement these safeguards is H.R. 3331, the IMF Transparency and Efficiency Act of 1998.

H.R. 3331 orders the Secretary of the Treasury to submit a written certification to the Senate Committee on Banking, Housing, and Urban Affairs and to this committee, the House Committee on Banking and Financial Services, on the status of the reforms specified in the legislation six months after the enactment of the bill. Once the Secretary of the Treasury submits the certification, Congress must enact a joint resolution verifying and approving it before the funds are made available.

This provision would ensure that Congress has an opportunity to examine and review IMF actions and confirm that the reforms stipulated in the bill have 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 fails to submit the certification, or if Congress finds fault and fails to pass a joint resolution supporting the certification, H.R. 3331 forbids any "officer, employee, or agent of the United States [to] directly or indirectly, provide Federal funds to the International Monetary Fund." This provision is 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 already in the IMF coffers.


Many policy analysts, private investors, economists, and Members of Congress have recognized that IMF bailouts have had enormous counterproductive effects on financial markets and economic development. For nearly two decades, Congress attempted to mitigate these effects by instructing the U.S. Executive Director of the IMF to use his "voice and vote" to reform the organization or to prevent specified activities. In nearly every instance, these instructions have been ignored or, when followed, have been ineffective in implementing reform or opposing undesirable actions.

If Congress truly wishes to address the many institutional and theoretical problems of the IMF, it must use its constitutionally mandated power of the purse to withhold all U.S. funds--past, present, and future--from the IMF unless its conditions of reform are met. Anything short of this firm stance will merely be a repetition of past ineffective attempts.

Edwin J. Feulner, Jr., Ph.D., is President of The Heritage Foundation.


1. Testimony presented before the Subcommittee on General Oversight and Investigations, Committee on Banking and Financial Services, U.S. House of Representatives, April 21, 1998.

2. A quota subscription is the amount of money a country has committed to the primary account, or General Resources Account, of the IMF. Voting stock is directly linked to a country's quota subscription as it relates to total quota subscriptions. For example, since the United States is the largest contributor to the IMF (committing over $36 billion or 18.25 percent of the Fund's quota subscriptions), it controls the most voting power, with 17.78 percent of the vote. The IMF uses its own unit of account, the "special drawing right" or SDR. The value of the SDR fluctuates in relation to the U.S. dollar. All figures in this testimony use the value, stated in the 1997 IMF annual report, of 1SDR = US$1.36553.

3. House Majority Leader Richard K. Armey, "The IMF and the Clinton Doctrine," April 3, 1998, available at  

4. Article XXVI of the IMF Articles of Agreement states that a member of the IMF can initiate withdrawal procedures through a written notice of intent. A repayment schedule can be negotiated between the IMF and the former member. Otherwise, a repayment schedule is outlined in the IMF Articles of Agreement.

5. The primary account of the IMF, called the General Resources Account, is funded by the quota subscriptions (or assessed dues) of its members. The Account contained $198 billion as of April 30, 1997. A 45 percent increase in the quota assessed has been approved by the IMF and would increase total resources to $287 billion. International Monetary Fund, Annual Report 1997, Washington, D.C., and the Budget of the United States Government, Fiscal Year 1999, Appendix, pp. 969-970.

6. "IMF Position Improves," IMF Survey Supplement on the Fund: Liquidity, September 1997; available on the Internet at   IMF claims of illiquidity would indicate the extension of some $86 billion since April 1997.

7. This figure was reached by calculating the annual change in outstanding Fund credit from 1990 to 1997 and taking the average of the annual figures. Estimate based on information provided in IMF, Annual Report 1997, Table II.9, p. 172.

8. Ibid., Financial Statements, p. 245.

9. This amount does not include the $25.26 billion in emergency credit available to the IMF through the General Arrangements to Borrow. Including this amount would raise total liquidity to $100.02 billion. Moreover, the entire $36.04 billion included in the Asian package will not be disbursed at one time, so it is a bit misleading to include it as an absolute liquidity loss in this list. In addition, the bailout was extended as a three-year arrangement and should be repaid within three to ten years, depending upon the facility used to extend assistance to these countries from the IMF and scheduled disbursement of the funds.

10. Armey, "The IMF and the Clinton Doctrine."

11. Information on 1983 liquidity ratio data from comments made by Senator Mitch McConnell in "Hearing of the Foreign Operations Subcommittee of the Senate Appropriations Committee on the IMF Supplemental Request," March 3, 1998. Current IMF liquidity ratio data from "IMF Quotas and Quota Reviews," International Monetary Fund, April 1998, available at  

12. "The IMF Crisis," The Wall Street Journal, April 15, 1998, p. A22.

14. Its Articles of Agreement place the IMF and its employees beyond the authority of national governments. Article IX, "Status, Immunities, and Privileges," states in Section 3 that the "Fund, its property and its assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process." Sections 4 and 5 establish the immunity and inviolability of its property, assets, and archives from "search, requisition, confiscation, expropriation, or any other form of seizure by executive or legislative action." Section 6 states that countries are forbidden from placing "restrictions, regulations, controls, and moratoria of any nature" on the property and assets of the Fund. Fund employees are similarly immune from legal procedures on actions directly relating to IMF business.

15. Representative Jim Saxton, "Treasury Offers IMF Documents to JEC on Condition of Secrecy--Committee Insists on Transparency," Joint Economic Committee press release, February 13, 1998, available at  

16. Representative Jim Saxton, "IMF Financing: A Review of the Issues," Joint Economic Committee, 105th Cong., 1st Sess., March 1998, available at  

17. Letter from Jack Kemp to Majority Leader Richard K. Armey (R-TX), April 10, 1998.

18. International Monetary Fund, "The IMF at a Glance," April 1998, available at  

19. David Sachs and Peter Thiel, "The IMF's Big Wealth Transfer," The Wall Street Journal, March 13, 1998, p. A16.

20. IMF, "The IMF at a Glance."

21. These reforms would obligate recipients of IMF assistance to (1) end government subsidies and directed lending and (2) comply with international trade agreements. The 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 are the seven largest contributors to the IMF and control 44.82 percent of its votes, according to the 1997 IMF annual report.

22. 22 U.S.C. Sc. 286e-11.

23. Of the seven countries designated by the U.S. State Department as state sponsors of terrorism (Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria), all but Cuba and North Korea are members of the IMF. Indeed, only Sudan is under any kind of voting sanctions or restriction on borrowing, and only because the country is delinquent in repaying IMF loans. While Iraq is also delinquent, it retains voting and borrowing privileges along with fellow stalwarts of the international community Iran, Libya, and Syria.

24. IMF, Annual Report 1997, p. 133-134.

25. 22 U.S.C. Sec. 286aa.

26. 22 U.S.C. Sec. 262d.

27. Mauritania is a member of the IMF in good standing and is currently benefiting from a $60 million IMF loan, despite a human rights record characterized as "poor" by the 1997 State Department Country Reports on Human Rights Practices. Abuses included murders committed by government troops, fraudulent elections, and widespread slavery. Moreover, the IMF loan is extended through the Enhanced Structural Adjustment Facility, which typically charges only 0.5 percent interest on its loans. American taxpayers contributed and subsidized nearly $250 million in seven IMF financial arrangements extended to Mauritania in the past 15 years. Sudan is also a member of the IMF, although it has had its voting rights suspended for failing to repay past loans. The 1997 State Department Country Reports on Human Rights Practices characterized Sudan's record on human rights as "extremely poor." Sudan earned this rating through government-sponsored murder, torture, kidnapping, forced labor, slavery, and forced conscription of children. U.S. taxpayers contributed to two loans from the IMF to Sudan during the 1980s worth over $350 million, which it has yet to repay. When or if Sudan repays these delinquent loans, presumably it, too, will be eligible again for IMF assistance. Information from International Monetary Fund annual reports, 1983 to 1997.

28. 22 U.S.C. Sec. 262o-1.

29. J. Michael Waller, "IMF and the Russian Missiles," The Washington Times, January 23, 1998, p. A21.

30. McConnell, "Hearing of the Foreign Operations Subcommittee of the Senate Appropriations Committee."

31. International Monetary Fund, Articles of Agreement, Article III, Section 2(c).

32. IMF, Articles of Agreement, Article XII, Section 5(c): "Except as otherwise specifically provided, all decisions of the Fund shall be made by a majority of the votes cast."

33. Patricia A. Wertman and Pamela Hairston, "The IMF and `Voice and Vote' Amendments: A Compilation," Congressional Research Service, Economics Division, April 15, 1998.

34. McConnell, "Hearing of the Foreign Operations Subcommittee of the Senate Appropriations Committee."