BUSH SHOULD DEMAND REFORMS IN IMF.
ARGENTINA has been in a recession for almost four years. Unemployment is 18 percent of the work force. Uncontrolled government borrowing has led to an accumulated debt of $141 billion that cannot be repaid.
What makes this dismal performance so remarkable is that it has occurred under the watchful eye of the International Monetary Fund.
It's time to reform the IMF, before more emerging economies suffer the same fate. The IMF has been underwriting Argentina's failed economic adjustment program for years. A $40 billion bailout package was approved in December 2000. The IMF added an extra $8 billion last August. In December, given the uncertainty surrounding Argentina's 2002 budget, the IMF decided to get tough and withheld a $1.3 billion loan disbursement.
The IMF should have stopped lending to the economically troubled country years ago.
By propping up Argentina, IMF lending muffled the incentives its leaders needed to get their fiscal house in order and institute market reforms that promote economic growth. Elected officials will not make these politically costly and tough economic decisions as long as cheap IMF funds are available.
The currency devaluation and continued economic stagnation will unfortunately haunt the Argentine people for the foreseeable future.
What's worse, Argentina is not alone.
Across the globe, the IMF has bailed out dozens of countries that have adopted questionable economic programs. Instead of promoting sound policies that lead to long-term economic growth, the IMF's low-interest loans have encouraged a dependence on fund bailouts. Many countries return time and again to offset bad economic polices with IMF loans.
Since the IMF's inception, 46 countries have borrowed between 20 and 30 times. An additional two dozen others have borrowed more than 30 times.
Argentina has arranged for more than 20 loans from the IMF. In return for these funds, the IMF specifies country economic adjustments that must be made, but either the fund is not following through on enforcing the terms of the loan or the policies are not working.
The repeated borrowing by so many countries suggests that IMF management is rather forgiving of poor economic management. In addition, the IMF's own review of its adjustment programs found little evidence suggesting that they improve a country's economic performance.
IMF loans have been a sweet deal for international lenders. With the IMF as global guarantor, banks and international lenders have been willing to make high-risk loans to shaky economies. These loans reward international lenders handsomely.
When an emerging economy sours, the IMF steps in with funds that help bail out lenders.
Can we expect the IMF to reform itself?
It would be naive to believe that the IMF is driven solely by a disinterested concern for global economic welfare. The IMF is an opportunistic bureaucracy.
Former Secretary of State George Shultz has called for abolishing the IMF. A phaseout of all fund low-interest lending is appealing, but is unlikely to emerge in the current economic environment.
The next best outcome would be implementation of the recommendations from the congressionally appointed International Financial Institution Advisory Commission.
Nearly two years ago, the commission had the foresight to call for limits on IMF lending. The commission suggested that all new loans be short-term, going only to pre-qualified countries facing liquidity problems. Rather than offering subsidized loans, the commission argued for above-market rates to discourage wasteful borrowing. To qualify, countries would be expected to open their financial markets to foreign review and competition, ensure adequate capitalization of banks, and agree not to peg their exchange rates.
Since the United States is the largest financial contributor to the IMF, it has substantial influence over IMF lending policies. The Bush administration has expressed concern over IMF lending practices.
The current problems in Argentina may serve, ultimately, as the much- needed catalyst for change. The Bush administration has signaled that it is time for Argentina (and international investors) to face financial reality. They did not object to the recent withholding of IMF funds to Argentina.
This is a good first step, as cutting off questionable IMF loans is the only way to provide incentives for concrete reform. While this decision is harsh, it can go a long way toward breaking the cycle of financial crises the world has experienced since the 1995 Mexican bailout.
President Bush must take the lead in pushing for reform. Agreeing to adopt the International Financial Institution Advisory Commission recommendations would be an important step in reforming the IMF and improving the international financial system.
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|Publication:||Daily News (Los Angeles, CA)|
|Date:||Jan 14, 2002|
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