FINANCE-POLITICS: IMF Hearings – A Spectacle on Capitol Hill

By IPS Correspondents Reprint | | Print |

Analysis - Abid Aslam

WASHINGTON, Mar 1 2000 (IPS) - US Treasury Secretary Lawrence Summers’ latest defence of the International Monetary Fund (IMF) before its Congressional critics has left it unclear whether he intends to praise or bury the global economic watchdog.

The world would have fared far worse than it did during and after the “Asian financial crisis” of 1997-98 had it not been for the IMF and its Bretton Woods sibling, the World Bank, Summers told the powerful Foreign Relations Committee of the US Senate Tuesday.

“These institutions help promote a more stable world,” he said. “They can help to promote vital humanitarian objectives and – let there be no doubt – they promote changes that are central to our nation’s economic and commercial future.”

But what the Treasury chief giveth, he also taketh away.

Summers appeared to chide the IMF, saying that the Asian crisis had underscored the need for the agency to monitor members’ economies better and deal with problems before they grow up to become full-fledged crises.

“The IMF needs to focus much more attention on financial vulnerabilities such as those that played such a role in causing the crises in Asia,” he said. “This will mean, in particular, a greater focus on the strength of national balance sheets.”

The administration of President Bill Clinton has been under pressure from Congress and other sections of US society to push for reforms at the 182-nation IMF, the popularity of which has ebbed since the Mexican peso crisis of 1994-95, when the agency took charge of the first in a series of increasingly expensive international financial rescues for borrowing countries.

Therefore, to some extent, Summers was playing to the gallery.

Nevertheless, the suggestion that the IMF had fallen down on its job and that the United States was trying to right it will sting a number of ears at the agency’s headquarters in downtown Washington, a few minutes’ walk across the White House lawn from the US Treasury.

Fund staffers recall that the United States led efforts to push the Asian “tigers” along the path to open markets, including in banking and investment, then turned a deaf ear to warnings of trouble.

Asian officials supported the reforms but complained that they were proceeding too fast, increasing their countries’ vulnerability to volatility. And they fretted aloud that their regulatory agencies simply couldn’t keep up.

The response from the US Treasury, reported only after trouble struck, was to sidestep the Asians’ fears in a bid to win as many opportunities as possible for US banks, brokerages and insurance companies.

South Korean officials complained in the early and mid-1990s that market opening was proceeding too fast to be safe. The US Treasury – then headed by Robert Rubin with Summers as deputy – responded by dangling the carrot of membership in the wealthy nations’ Organisation for Economic Cooperation and Development (OECD) if Seoul stayed on course.

Thai central bank officials wrote in early 1997 to warn Western finance officials of the coming storm and to ask them to restrain their private financiers. Germany took note but the US Treasury blandly advised Thai officials to leave the market to sort itself out.

This behaviour earned Summers and his boss, Rubin, a reputation in the press as “the dynamic duo of free capital.”

Nearly three years after the Asian debacle began, many at the IMF appear persuaded that countries should be permitted to liberalise at their own pace. Some Fund staffers even agree that countries should include certain capital controls in their policy arsenal.

Some Treasury officials have softened their stance, too, but Washington stands firm that the goal of capital liberalisation remains non-negotiable.

Summers appears to have reaffirmed that position by pushing proposals to overhaul the IMF – and curb its role.

“Our plans for reforming the IMF start from a single framing new reality of the global financial system today, that the private sector is the overwhelming source of capital for growth,” he said.

Flows of private capital to the developing world had far outstripped official aid, he noted, and “we believe the IMF must increasingly reflect that change with a great focus on promoting financial stability within countries, a stable flow of capital among them and rapid recoveries following any financial disruptions.”

The latest US proposals for IMF reform would narrow the Fund’s remit and therefore appear at odds with the agency’s own plans and a drive by non-governmental aid groups to give the Fund’s lending operations a development-oriented face.

These proposals – until recently supported by US officials – have been seen by both supporters and critics of the IMF as giving the agency a broader mandate than it already had ascribed for itself.

Nevertheless, Summers’ plan clearly has failed to satisfy Senator Jesse Helms, bellicose chairman of the Senate Foreign Relations Committee.

“The IMF, as it now functions, is a destructive institution which usually does more harm than good to countries it is purporting to help,” Helms said. “There is growing sentiment that perhaps the time has come to simply abolish the IMF.”

Thus, Summers’ appearance on Capitol Hill provided two spectacles: First, the US Treasury chief hanging the IMF out to dry even as he defended it. And second, Helms – leading standard- bearer in a homespun crusade against international organisations, including the United Nations, as affronts to US supremacy and supporter of US tobacco companies’ efforts to expand Third World markets – invoking the interests of the IMF’s borrowing countries.