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Show International Monetary Fund Reform Corbin Cowley Allan Meltzer, a professor with Carnegie Mellon University and member of the American Enterprise Institute (AEI), argues that the global moral hazard encourages potential borrowing countries to pursue policies that make them more vulnerable to currency runs. IMF rescues have played a major role in the nearly 90 to 100 banking crises that have occurred in the developing world in the last 15 years. He claims that without these rescues, banks would have '"behaved far more prudently"1 (quoted in Heifer 1998, 2). We have also seen this moral hazard problem in the past just as we are seeing it today. For example, with every election cycle, Mexico has experienced a currency crisis caused by irresponsible monetary and fiscal policy. Each time, the U.S. Treasury and the IMF have performed bailouts while increasing the amounts loaned. Unfortunately, in Mexico, everybody has come to expect a financial rescue at the end of each presidential term. Even though the IMF and the U.S. Treasury claim that the last bailout of Mexico was a success, its legacy has been the Asian crises of today. The Mexican bailout was a signal to the world that if anything went wrong in emerging economies, the IMF would come to investors' rescue. There is no other way that we can explain the near doubling of capital flows to East Asia in 1995 alone (Vasquez 1998, 2). Calomiris (1998) claims that the "explanation for this new instability is the roller coaster of risk produced by the choices of banks in developing economies [,] choices that are the byproduct of government subsidies." "The presence of moral hazard tends to increase dangerous risk taking in the private sector" (Eatwell and Taylor 1998). Governments in Asia were not discouraged from maintaining flawed policies as long as lenders kept the capital flowing. Lenders behaved imprudently with the knowledge that government money would be used in case of financial troubles. That knowledge by no means meant that investors did not care whether a crisis erupted, but it led to the mis-pricing of risk and a change in the investment calculation of lenders. Thailand, Indonesia, and South Korea shared some common factors that should have led to more investor caution, but unfortunately did not. Some of those factors included borrowing in foreign currencies and lending in domestic currency under pegged exchange rates; extensively borrowing in the short term while lending in the long term; lack of supervision of borrowers; balance sheets by foreign lenders; government-directed credit; and shaky financial systems. "The financial crisis in Asia was created in Asia, but the aggravating effect of moral hazard was extensive" (Vasquez 1998, 2). The IMF Lacks Transparency "Prompt, unbiased (or at least, admittedly biased) information is ... important for international organizations such as the IMF to perform their assigned duties" (Fuelner 1998, 5). Article VIII of the IMF Articles of Agreement, on the "General Obligations of Members," specifically states that each member is required to provide information "as [the IMF] deems necessary for its activities, including . . . the minimum necessary [financial information] for the effective discharge of the Fund's duties." Even though the IMF recognizes the necessity of timely, unbiased information to its successful operation, it fails to acknowledge the necessity of giving such information on its own organization and operation to its member governments and their citizens. The IMF refuses to release the vast majority of its information on economic policies, past performance, and internal meetings to the press or the interested public. In fact, the culture of secrecy is so inculcated in the IMF that it actively discourages and often prohibits access even to public records. The Fund's refusal to grant congressional offices free access to its records is totally unacceptable (Fuelner 1998, 5). Representative Jim Saxton (R-NJ), Chairman of the U.S. Congress' Joint Economic Committee, says that the IMF will withhold any information it wishes from its member governments-and the U.S. Congress, which may wish to conduct an informed debate of the organization-while at the same time demanding that those governments contribute billions of dollars to it. The U.S. Treasury Department, which seems to be a co-conspirator, offered Chairman Saxton a copy of IMF documents only on the condition that he keep the documents and their contents confidential and thus hidden from public scrutiny (Saxton 1998h). This incident led the Joint Economic Committee to conclude that: Both the IMF and U.S. Treasury bailout policies remain overly secretive, ambiguous, and ill-defined. Because these policies are seldom explained to the public, unnecessary misunderstanding, resentment, and opposition often result. A good deal more transparency is called for from both of these taxpayer-financed institutions. Explicit specification of the IMF's objectives, for example, should be accompanied by clarification of the procedures and practices by which it accomplishes these objectives. At a minimum, full explanations of the conditions, lending terms, subsidies involved, and the rationales as to why such lending is necessary are essential. Additionally, those entities actually receiving taxpayer subsidies should be identified (Saxton This complaint was also emphasized by Jack Kemp in a letter written to Representative Dick Armey (R-TX) saying, "I urge you to put off a vote in the House on any additional funding for the IMF at least until that organization complies with all outstanding congressional information requests" (Kemp 1998). Secretary Shultz, in a hearing before the Joint Economic Committee about the IMF and international economic policy, specifically declared, You have an organization without any real restrictions in a charter that says, here is what you are supposed to do. It nominates itself to do various things. . . and it seems to me a real question whether we want to put in place an international bureaucracy with that much leeway and that much money 18 |
