IMF reform initiative isn't coming from Summers

By Caroline Baum

NEW YORK (Bloomberg): The Group of Seven (G-7) meeting came and went without incident. Or substance.

The communique was deadly dull. Everyone shared the Japanese pain over the strong yen and respected the European desire to keep their wretched currency out of the public eye.

The group issued a report card for the various members. The United States needs to save more, Europe and Japan to grow more. The latter two need to implement structural reforms. Japan's growth must be strictly "domestic-demand-led."

When it comes to revamp the global financial architecture, the G-7 is looking forward to the recommendations of a lot of acronym-designated committees on a lot of subjects. Among them is the reform of the International Monetary Fund (IMF) and World Bank.

It came as something of a surprise late last year when U.S. Treasury Secretary Larry Summers, the numero uno bailout architect, started talking about the need for IMF reform. Summers wants to limit the fund's role to emergency lending, leaving long-term structural lending to its sister agency, the World Bank.

That, of course, was the fund's original mission. When the world changed -- when floating exchange rates obviated the need for the IMF's short-term lending to offset temporary balance-of- payments outflows -- the fund reinvented itself as a global lending agency and adviser. Last year, the fund even played Red Cross, providing disaster relief to Turkey following a major earthquake.

Lest you think that Summers arrived at this enlightened position on his own, consider this: It's not hard to take the initiative when someone is about to put your head in a vise.

When Congress approved an US$18 billion increase in the U.S. quota for the IMF in late 1998, the approval was premised on future IMF reform.

Usually, once an institution gets the money it needs, any conditionality falls by the way side.

Not this time, however. Congress authorized a committee (the funding came in 1999) to propose recommendations for reforming the IMF, the World Bank and its regional underlings (Asian, European, Inter-American and African Development Banks), the Bank of International Settlements, and even the World Trade Organization.

"There's a broad, emerging international consensus that the IMF needs reform," says Edwin Feulner, president of the Heritage Foundation and a member of the International Financial Institutions Advisory Commission.

The commission is comprised of six Republicans and five Democrats and is chaired by Alan Meltzer, professor of political economy at Carnegie Mellon University.

On the domestic front, the IMF's standing in Congress is "as low as it's ever been," says Chris Frenze, chief economist to Vice Chairman Jim Saxton of the Joint Economic Committee. "After the GAO report, which exposed certain facts the IMF would rather have hidden, it has become very difficult for the Treasury to present a brave face and claim that the IMF `doesn't cost the taxpayer a dime."'

In a September 1999 review of the IMF's financial operations, the General Accounting Office, Congress' official auditor, exposed some awful truths about the fund's financial operations. Among them:

-- the IMF exaggerated its dire financial position during the quota-increase debate, claiming it was broke when in fact it had $19 billion in reserve that had not been used for over 20 years;

-- the lost interest on part of the U.S. quota contribution comes to a cumulative $2.7 billion, or $150 million annually;

-- the United States contributes 26 percent of the fund's usable resources, not the 18 percent previously touted by the Treasury and IMF;

-- half of the IMF's 182 members immediately withdrew their quota contributions, payable in hard currency, in early 1999 and replaced them with their national currencies, which are unusable for lending purposes.

The commission has been hard at work since September and hopes to release a preliminary report with its recommendations on about March 10, according to Chairman Meltzer.

"It was a true bi-partisan experience," he says. "These are not left/right issues: the idea of making these institutions more effective, of doing a better job of relieving poverty, of making economies more stable. Who's not for that?"

The commission looked at the current state of things and then imagined what they would do if they could wipe the slate clean.

"We had all these financial institutions doing different things: It was chaotic, they overlapped, and the charters didn't provide limits to what they could do," says Charles Calomiris, professor of economics and finance at the Columbia Business School. "It was like a slush fund for political use."

The commission quickly agreed on some basic principles that would guide their consideration of the bonafide mission of the various agencies.

First was separation. "With overlapping responsibilities, no one has responsibility," Calomiris says.

Second was focus: no broad mandate for any of them. Third was finding a mechanism to deliver the desired results instead of "throwing cookies at the government," he says. Fourth was accountability: a public record.

While the commission still has two more meetings, at which experts present papers on relevant topics, the commission's recommendations for the IMF are pretty much decided, according to Calomiris.

"The IMF should focus on providing liquidity to solve a liquidity crisis in emerging market countries when markets fail," he says. "The IMF should not get into structural reform. It should not get into poverty lending. It should not pass out cookies."

Another commission-approved function for the IMF is macro- economic advice, although not the kind that dangles money in exchange for reforms.

The third legitimate function, according to the commission, is the collection and dissemination of information: a clearing house of last resort.

How will these recommendations sit with Congress, not to mention the IMF?

The IMF said it would have no public comment, seeing as how Stanley Fischer, the fund's deputy managing director, is scheduled to testify before the commission Wednesday.

"I expect the IMF to resist," Meltzer says. "Fischer's speeches don't suggest that reforms of this kind of are needed."

While Fischer may agree with the concept of a lender of last resort, "he's not anxious to see the function taken away from the IMF," Meltzer adds.

One of the best things the IMF can do is encourage countries to develop sound financial systems and sound financial practices. That means ceasing and desisting in its current role of bailout doctor.

"You create good incentives by not creating bad incentives," Calomiris says.