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Show Hinckley Journal of Politics Spring 2000 just to do whatever it thinks is right, particularly when its track record shows that it has done a lot of things that are not right If there is going to be an IMF, it seems to me there ought to be a look at its basic charter, and there should be some statement about what this organization is for, and what it is not for. It is not an all purpose organization, but it is operating that way (Shultz 1998, 6). To combat these problems and allegations the IMF is trying to reform and resolve its transparency issues. In a press release on November, 6, 1998, Rep. Saxton said, Over the last year the outside pressure on the IMF to become more transparent has intensified, resulting in some progress that has been long overdue. The long process of congressional debate, hearings, and financial legislation on these IMF reforms do seem to be having a positive effect. Only yesterday, the IMF published for the first time its most relevant monthly data on its financial position. This release will include some information reflected in the IMF operational budget, which the IMF treats as a classified document. Though the IMF still has a long way to go, it appears that it is taking the first steps to implement the new reforms. Still, Britain's Prime Minister Tony Blair insists, '"There is a need for greater openness and transparency in international dealings and there needs to be a greater promotion of the transparency of information regarding member countries' economic data and policies'" (quoted in Fidler and Peston 1998; Platt 1998). IMF Loans Provide Massive Subsidies to Borrowing Countries The IMF has a number of different facilities for extending financial assistance to its member countries. They range from extremely short-term Stand-by-Arrangements, which are typically extended over 12 to 18 months and repaid within five years, to long-term assistance, such as the Enhanced Structural Adjustment Facility (ESAF), which is repaid over ten years and includes a five-year grace period. IMF assistance is usually extended at a conditional, or below-market rate of 4.5 percent; the ESAF loans are nearly free, with an annual interest rate of only one-half of 1 percent (IMF 1998). The IMF extended most of its loans to Indonesia, South Korea, and Thailand at subsidized rates (between 4.5 percent and 4.7 percent). These same countries were required to pay approximately 14.5 percent on comparable government bonds to access credit in the private sector (Fuelner 1998, 7). David Sachs of the Independent Institute and Peter Thiel of Thiel Capital International LLC estimate that because of IMF subsidies, "over three years, South Korea, Thailand, and Indonesia will have received a direct wealth transfer of at least $35 billion, mostly from U.S. and Western taxpayers" (Sachs and Thiel 1998). Interest rates usually are determined by the borrower's riskiness and credit worthiness. However, the IMF does not seem to consider these factors when making lending decisions. In fact, it actually rewards high-risk countries with poor credit records. The IMF reverses the normal banking stan- dards of good lending and "rewards failure and punishes success. It rewards poor governance and excessive risk taking by investors" (Fuelner 1998, 7). Vasquez (1998) says, the Fund's money goes to governments that have created the crisis to begin with and that have shown themselves to be unwilling or reluctant to introduce necessary reforms. Giving money to such governments does not tend to promote market reforms, it tends to delay them because it takes the pressure off of governments to change their policies. Rep. Saxton said in a press release on October 8, 1998, an end to IMF interest subsidies in its standard loans would be a good beginning in IMF reform. A thorough IMF reform would combine an end of interest subsidies, limits on loan maturities to under one year, collateral requirements for borrowers, a requirement that countries establish minimum capital standards for IMF membership, and the elimination of intrusive and often counter productive loan conditions. IMF Policies Lead Developing Countries to Postpone Real Reforms, and to Incur Economic Stagnation and Recession According to Edwin Fuelner, data collected over the last 30 years demonstrate that most-less developed countries (LDC) receiving IMF loans have per-capita wealth today that is the same as or lower than they had before they received the loans. Many are actually worse off. For example: Of the 89 LDC's that received IMF loans between 1965 and 1995, 48 are no better off economically today than they were before receiving IMF loans. Of these 48 countries, 32 are poorer than they were before receiving IMF loans. Of these 32 countries, 14 have economies that are at least 15 percent smaller than they were at the time of their first IMF loans (Fuelner 1998, 7). The IMF continuously enters agreements with countries that have a history of violating their previous contracts with the Fund. Once again we can look at Mexico as an example of this. We can also look at the recently troubled Russian economy. As we have seen with Russia over the past several years, a country that does not stick to IMF conditions risks having its loans suspended. When these loans are cut off, the recipient governments tend to become more serious about reforms. The IMF then encourages misbehaving governments to introduce reforms by cutting loans off; it is the cutoff of credit that induces policy change. Unfortunately, when policy changes do come forth, the IMF resumes lending. Indeed, it has a bureaucratic incentive to lend. "It [IMF] simply cannot afford to watch countries reform on their own because it would risk making the IMF appear irrelevant. The resumption of financial aid starts the process over again and prolongs the period of reform" (Vasquez 1998, 3). The Fund's pressure in order to keep borrowers current on previous loans and able to ask for more money is well documented. "The IMF's bureaucratic incentive to lend is also well known by both recipient governments and the IMF itself, making the Fund's conditionality that much less credible" (Vasquez 1998, 3). Although the IMF sets conditions for its 1$ |
