March 12, 2000
Dallas Morning News, March 12, 2000
Knight-Ridder/Tribune Media Services, March 9, 2000
The new report of a Congressional commission that harshly criticizes the International Monetary Fund (IMF) will add fuel to the firestorm of controversy that has surrounded the institution since its mishandling of the Asian financial crisis two and a half years ago. Together with the unprecedented public dispute over the leadership of the institution, and Seattle-like demonstrations planned for April in Washington, DC, the IMF is under siege as never before in its 56-year history.
Much of the result will depend on how the media interprets the unfolding events. The new report, issued by an 11-member bipartisan congressional panel– the International Financial Institution Advisory Commission– unanimously called for the cancellation of the poorest countries’ debt. This is welcome news to advocates for the poor, who have long argued that it is unconscionable to bleed desperately poor countries for payments on a debt that everyone acknowledges as unpayable. For Sub-Saharan Africa, where many countries are spending more on debt service than for health care and education, these payments average more than a fifth of export earnings.
The majority of the commission also called for a vast downsizing of the operations of both the IMF and the World Bank. C. Fred Bergsten, a former Treasury official and a dissenting member of the commission, dismissed the majority’s recommendations as “extreme.” Yet Harvard’s Jeffrey Sachs, the commission’s leading expert on these matters, together with economist Allan Meltzer, the commission’s chair, supported the proposed changes.
Who is right? Let’s look at the evidence of the last few years. It is now clear that the IMF’s “reforms” in Asia were a major cause of the regional financial crisis that began in August of 1997. They created the conditions under which $100 billion of hot money could exit in a panic from South Korea, Indonesia, Thailand, Malaysia, and the Philippines. Then the Fund failed to provide the necessary credits to stem the panic in a timely manner, while the US Treasury department– which basically controls the IMF– prevented others from doing so. Among other mistakes, the Fund imposed unnecessarily high interest rates and budget austerity, worsening the regional economic damage.
In Russia, the last two years have highlighted the IMF’s failure to understand or help the process of economic transition there. In August of 1998 the Fund wasted billions of dollars trying to maintain the fixed and overvalued exchange rate of the Russian ruble. The money ended up in the hands of speculators and corrupt elements, and the ruble collapsed a couple of months later. But the IMF’s worst nightmare turned out to be good for the Russian economy, which was freed from having to feed a speculative financial bubble, while crippling the real economy with the exorbitant (peaking at more than 150%) interest rates necessary to defend the ruble. Russian industry rebounded and the trade balance was greatly improved, as the lower ruble reduced competition from under-priced imports.
In Brazil, too, the IMF turned out to be dead wrong in its efforts to maintain an overvalued exchange rate. The Brazilian real collapsed in January of last year, but only after the IMF had saddled the country with tens of billions of dollars of added debt in a futile attempt to prop up the currency.
In both the Brazilian and Russian cases, the Fund defended its actions, which have caused great suffering and economic damage, by arguing that these countries would face hyper-inflation if their currencies were to fall. The projected hyper-inflation failed to materialize.
But being the most powerful financial institution in the world means never having to say you’re sorry. The IMF’s failures, even when they are documented by prominent experts like Joseph Stiglitz– one of America’s leading economists and the former chief economist of the World Bank– have not led most policy-makers or journalists to question the organization’s competence.
This was evident in the ongoing dispute over who will lead the IMF. Stanley Fischer, currently the acting head of the Fund, was nominated. The fact that he has presided, as second in command, over some of the worst economic disasters in the Fund’s history, has gone unnoticed. Is failure at the IMF truly impossible?
The Congressional commission that issued today’s report was established as a condition of the IMF’s receiving an enormous $18 billion of US taxpayers’ dollars in 1998, as a step toward reform. The Clinton Administration will now attempt to discredit and bury its findings and recommendations. Will Congress and the press let them get away with it? Stay tuned.