A Good Start.

New IMF chief Horst Kohler is on the move, but landmines are everywhere.

What a difference half a year makes. While observing Horst Kohler, the new managing director of the International Monetary Fund (IMF) since taking office on May 1st of this year, an interesting question comes to mind: Did U.S. Treasury Secretary Larry Summers -- who was successful in blocking Caio Koch-Weser, the first-ever German candidate to head the IMF -- eventually get what he deserved? Namely, a strong, independent-minded, highly qualified, new managing director of the Fund from Germany, who will probably stand his ground against even the almighty U.S. Treasury. The new "MD" is also showing, in his first months in office, that he has "the stature, expertise, ability to command global support, and commitment to a process of ongoing reform."

That was the benchmark for the successor to Michel Camdessus, who stepped down on February 14th of this year, after nearly thirteen years of leading the most important multilateral institution. Summers listed these qualifications when he outlined his reform plan for the IMF in mid-December of last year in London. Only a central bank governor or a finance minister, so he said, would have the necessary qualifications to overhaul the International Monetary Fund.

It may be indicative that, after three months on the job and after sounding out part of the vast global IMF membership in Latin America, Asia, and Africa, Kohler talks for an hour about the new role of the Fund without mentioning either Larry Summers or Alan Meltzer, the Carnegie Mellon professor who coordinated the recent U.S. Congressional report that for a time dominated the discussion about the reform of the Bretton-Woods institutions.

Treasury Secretary Summers played a crucial role in blocking Caio Koch-Weser, who spent twenty-five years at the World Bank before assuming his post as Germany's Deputy Finance Minister last year -- a position that Kohler held under the former Kohl-government during the hectic years of German unification. The failed candidacy of the Brazilian-born Koch-Weser, who eventually got the support of all EU-member countries, looked at the time like a modern-day German Waterloo in the field of financial diplomacy. Most Germans felt that their candidate to head the IMF had gotten a bum rap from the Clinton administration. Some saw the Anglo-Saxon press practicing the art of professional destruction against a German candidate who may lack experience in central banking, but more than makes up for that with experience as a top manager and global development banker (see "Koch-Weser Gang Bang, The International Economy, March/April 2000).

Naming the 57-year old President of the European Bank for Reconstruction (EBRD) as Germany's and Europe's second choice to lead the IMF -- this seems to be a consensus developing in many capitals around the world -- may turn out to be a blessing in disguise. After being asked by German chancellor Gerhard Schroeder to take the important job, in lieu of Koch-Weser, Kohler was able to mobilize broad international support and, since assuming office, has made the right moves and said the right things.

"Kohler seems unfazed by the indignities surrounding his appointment, or by the maelstrom of controversy surrounding the IMF, "notes The Economist, a leading British authority on the international system. The Economist also lauds Kohler's "combination of candor, confidence, and pragmatism" that "is welcome in the corridors of international economic policy."

The new man at the top of the IMF is able to stand his ground, even against a major U.S. Treasury-led initiative of the Group of Seven. The leading industrial nations found this out when Kohler addressed the National Press Club on August 8th, in his first major public event in Washington since taking office. Commenting on the IMF Board's rejection of a G7 proposal to increase the cost of borrowing from the Fund by poor and emerging member countries, the new IMF managing director chided G7 finance ministers for announcing their desire to charge more for loans instead of working within the Fund to build a consensus on the issue. Kohler reminded the G7 finance ministers: "It is now a problem because a big group of countries within the Fund feels lectured by the presentation of these ideas." In an informal vote, only half of the IMF Board members supported a plan that G7 finance ministers presented at the meeting in Fukuoka, Japan, as a key element in reforming the Fund. But to implement the new higher cost of borrowing, 70 percent of support in the board is required. According to The New York Times, the opposition of the poor and emerging countries in the Fund is "dealing a blow to the campaign by U.S. Secretary of the Treasury Lawrence Summers, to change the lending agencies." Although Kohler thinks that increasing the cost of borrowing might be necessary, he disagrees sharply with pushing this through without careful consideration within the Fund's membership.

Kohler's agenda is clear: Talk to the different constituencies of the Fund and build a broad basis of support.

Kohler addressed the presidents and chairmen of the 100 largest commercial and investment banks at this year's International Monetary Conference (IMC), in Pads, at the end of his first month in office. His message was clear: that the future of the Fund will not be decided by a U.S. congressional committee coming up with radical solutions. Instead, under his stewardship the IMF will be reforming the institution in a practical way. "I see no need to turn the Fund upside down or to devise some new grand design for the IMF," he assured the world's top bankers. "But the crucial question for me is whether the IMF has yet sufficiently adapted to a world where financial markets have seen such phenomenal growth in size and sophistication. In this context, I assess the many reports on IMF reform as clearly helpful."

In Paris, Kohler impressed the top representatives of the global banking world by pointing out three broad considerations that should help find answers to the issue of more involvement of the private sector in the work of the Fund:

First, there should be no presumption about automatic bailouts, either of countries or of lenders. The primary responsibilities -- the first line of defense against crisis -- are the sound policies implemented by countries and good risk appraisals by investors.

Second, the framework for the "involvement of the private sector" should shift towards "constructive engagement" -- cooperation among borrowing countries, the private sector, and the official sector, especially during non-crisis times. This means a focus on crisis prevention, and a shift of emphasis away from the coercive or punitive approach that some market participants seem to perceive as the meaning of "private sector involvement."

Third, in crisis situations, solutions should not be seen as arbitrary. Although it may not be possible to devise a comprehensive set of rules guiding all such cases, broad principles that can be applied to avoid the perception of uneven treatment of creditors and countries will be necessary.

Kohler used his 100-day honeymoon to travel around the world to listen to his vast constituency. On the final leg of his fact-finding missions to Latin America, Asia, Africa, and Europe, he stopped over in Berlin on the way to Prague, the site of the forthcoming 2000 Annual Meetings of the Fund and the World Bank. There, the world's financial elite, including finance ministers and central bankers, will gather during the last week of September. In the modernized Prague Conference Center, shortly after the formal opening on September 26, Kohler will deliver his first annual address and spell out in more detail the reforms he intends to implement during the coming years.

I sat down with Kohler in Berlin's Four Seasons Hotel recently, for a preview of his emerging reform agenda. He seems to have developed strong opinions as to what the Fund should and shouldn't do under the new leadership. "Reaching out and listening to the IMF membership and the different constituencies in the last months was extremely helpful" argues the new MD, who visited four Latin American countries in mid-May (Brazil, Argentina, Mexico, and Honduras), five Asian countries in the first week of June (Thailand, Indonesia, China, South Korea, and India) and five African countries in the first week of July (Nigeria, Senegal, Mozambique, Botswana, and South Africa).

Kohler met with representatives of nineteen financial institutions from the United States, Europe, and Asia in New York on June 8th, and started a "much-needed closer dialogue" with the "Big Players" of the financial markets. Against the background of private capital markets playing the major role in promoting investment and growth around the world, industry groupings such as the 300-member Washington Institute of International Finance (IIF) -- which arranged the New York meeting with the new IMF boss -- could be very useful. Without much fanfare, the new MD visited central bankers and financial supervisors at their regular meeting in Basle. Meanwhile in Washington, Kohler says he is making progress in talking to key members of the U.S. Congress in order to get their views on the overhaul of the IMF and other multilateral institutions. Kohler draws two basic conclusions from the talks with policy makers and a broad segment of local representatives in Latin America, Asia, and Africa:

First, the strong economic growth recovery in crisis regions like Asia, Brazil, or Russia point to the fact that the Fund's policies and instruments have been, for the most part, effective.

Second, the Fund has to do more to help developing countries and emerging economies get a bigger share of global economic prosperity. 'The extreme imbalances in the world's income distribution are becoming a major source of political and social instability" warns Kohler. "Therefore the IMF has no alternative but to stay involved in the daunting task of poverty reduction." Kohler returned from his visits to Latin America, Asia, and Africa, encouraged for several reasons. First, in spite of criticism by member countries, the work of the Fund is highly appreciated. Second, market economy and democracy have taken roots in most developing countries and emerging economies in a major way. That is good news for economic growth and further inclusion in an open world economy. Third, there is a growing realization in the developing countries that only higher economic growth will lead them out of crisis and misery. Fourth, financial assistance by the IMF is regularly seen not as "hand-outs," but with conditions attached -- in particular the need for adjustment policies. Fifth, achieving an appropriate balance between conditionality attached to the use of Fund resources and the ownership of policy programs by member countries is needed. Conditionality -- the policy strings the Fund attaches to its loans -- should be more concise. The Fund should not burden countries with scores of specific conditions but focus on the most important ones. Less is more.

Returning from Africa, Kohler is making the point that a retreat of the Fund from the continent would have grave political and moral repercussions. Poor African countries trying to overcome their economic and social misery would see such a move as an act of political discrimination by the right countries dominating the world economy.

Kohler promises that the Fund and the World Bank will do their utmost to get twenty more highly indebted poor countries to the point at which they would qualify for the Poverty Reduction Growth Facility (PRGF) this year.

As for reforming the IMF, Kohler sees several crucial elements that should not be overlooked:

First, since the IMF is a truly global institution with a universal membership of 172 countries, the task of "how to organize discussions and cooperation in order to build global confidence must be key." Building confidence means avoiding ideologies and domineering stances, and working on balancing fairly diverging interests. This, in his view, is how to get along in the global world of the 21st Century. Due to increasing global interdependencies, there is no way to antiseptically separate the rich and poor countries anymore. "The problems of the poor are swapping over onto the rich in this one world. Therefore, creating a climate of confidence, partnership, and cooperation is a crucial element of any reform agenda. "In the past, IMF conditionality has been too much defined in terms of the interest of industrial countries and investors," says Kohler. "If we want to inject more credibility in conditionality of IMF programs, there has to be more ownership of the programs by the affected member countries."

A second element in IMF reform is "making the Fund as effective and credible as possible in realizing the objective of achieving prosperity worldwide," says Kohler. "We have to get away from the attitude that the IMF knows best and can do everything. Instead, the Fund has to identify clear priorities in its activities and be focused on its key competencies and look at macroeconomic stability as a prerequisite for growth, at appropriate finance and monetary policies, at workable exchange rate regimes, and at sound financial sector policies, in order to make sure that member countries have banking systems that could absorb capital inflows." The quest for efficiency also implies close cooperation with the World Bank and other multilateral financial institutions.

A third element, IMF surveillance, must play a key role in crisis prevention. Through its regular surveillance activity, the IMF has to watch over sound legal and regulatory systems, data transparency, and standards and codes. "One lesson we can draw from the recent financial crisis," says Kohler, "is that the IMF in the future will have to look closer at the implementation of standards and codes. The Fund has to help organize needed technical assistance."

The Fund's crisis management is a final element, Kohler says. "I think that the stability of the world financial system is greater today than three years ago. But nobody, not even the MD of the Fund, can say that we won't have another financial crisis some day. I think that future financial crises won't necessarily be larger and more severe. Consequently, there should not be a need for ever-larger financial support packages. It is part of today's bigger picture that we should not give the impression that there will be a steady monetary and economic expansion. The history of free markets shows that there are corrections from time to time. Since we cannot foresee such corrections, market participants have to prepare themselves in time to be able to respond to a new crisis with the needed flexibility. Kohler's message comes through, loud and clear: In a world of ever-larger private capital flows, the IMF cannot assume the role of "lender of last resort." There is no doubt that the IMF has the necessary facilities to cope with a major liquidity crisis. But it wouldn't make sense if the Fund tried to match the volumes of ever-expanding private capital markets by organizing ever-larger financial support programs. "The private sector has to cope with the consequences of its misjudgments."

Kohler keeps his powder dry as to the question of whether the Fund should push more elaborate pre-organized sharing schemes for inclusion of the private sector in future financial crisis resolution. He points to the fact that private investors and creditors incurred huge losses in Asia's financial crisis. And he warns that pre-organized standstills for one country could mean that other countries might experience heavy capital outflows because investors would react to by marking down a whole region due to higher risk.

Listening to Kohler's outline on the way to Prague, the seasoned observer could easily see future battle lines shaping up for the new IMF general.

First, Kohler has infuriated some European capitals by siding with Asian and African member countries in their request for larger voting and quota shares in the Fund, at the expense of the Europeans. There was sharp criticism from finance ministers at the recent EU Ecofin with the British. The German government was equally displeased when Kohler addressed this delicate issue before there had been thorough consultations with European finance ministers. On his stop-over in Berlin, Kohler was told by the German deputy finance minister, Caio Koch-Weser, to be more circumspect in the future on the issue of quota reform at Europe's expense.

Second, Kohler's emotional commitment for expanding Fund involvement in the fight against poverty, with emphasis on Sub-Saharan Africa, is putting him on a collision course with reformers in the U.S. Congress, who -- along the lines of the Meltzter Report -- want to trim the IMF down to a short term-oriented monetary institution.

Third, Kohler's strong support for an Asian Monetary Fund as a vehicle for increased Asian monetary cooperation and integration puts him at odds with the present, and possibly also the next, U.S. administration.

Fourth, Kohler's strong rejection of larger crisis support packages will be tested in times of crisis. Will he have more staying power than his predecessor, Michel Camdessus, who caved in when U.S. President Bill Clinton requested huge IMF lending packages for Mexico in 1994 and 1995, and for Asian crisis countries in 1997 and 19987

On the other hand, after only a few months in Washington, the former G7 veteran is mobilizing the "global support and commitment to a process of ongoing reform" that U.S Treasury Larry Summers was talking about. At the same time, he has been trying to deflect the critics of the IMF by admitting that "the Fund has made mistakes ... in particular, the Fund was not attentive enough to the changes in global financial markets and their repercussions on exchange rate systems and domestic financial sectors." And he is boosting morale and winning praises at the Fund for his achievements -- in particular, for his new openness and for being "part of the work force to secure shared prosperity in the world."

Under the old slogan, "trade is better than aid" Kohler is taking the big shareholders of the Fund -- namely the Europeans and the whole G7 -- to task for not opening their markets to the products of poor, developing countries. "I stick to the notion that in the end, trade is better than aid," he told the National Press Club in Washington. "Estimates of the potential welfare gains for developing countries from a 50 percent worldwide reduction in barriers to trade generally fall in the range of US$110 to US$140 billion per year."

There is one aspect of the forthcoming Prague meeting that worries the new IMF boss: Will the estimated 20,000 non-governmental protestors disrupt the meetings?

There might also be another spoiler at the Prague meetings: Larry Summers, who, after all, got what he deserved: "A strong, independent-minded, highly qualified, new managing director of the Fund" -- from Germany.

Klaus C. Engelen is the international correspondent for Handelsblatt in Dusseldorf, Germany.