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Show Hinckley Journal of Politics Spring 2000 United States is a solid financial regulatory system. This aspect is missing at the global, and in many cases, national levels. National financial systems are often at the center of financial problems so that when investor sentiments change, there is little systemic capacity to fall back on. The IMF cannot be a realistic replacement for sound national financial systems. For many, this fact argues for reevaluating both national and global financial systems and for finding alternatives to a strategy based on the IMF loans and reforms for countries that find themselves in very bad financial situations (Hornbeck 1998b, 4). In September 1998, Prime Minister Tony Blair suggested that the global economic and financial turmoil-which has spread from Southeast Asia to Russia and South America-highlight the shortcomings of the IMF. He says, '"The existing system has not served us terribly well. The Bretton Woods institutions are 54 years old and were set up when international capital flows were smaller."1 One of the ideas presented by the UK government stated that there should be a partial merger of different areas of the IMF and World Bank. This would allow a system in that there is no single institution in charge of supervising and regulating the world economic system, but three or more separate entities to keep each other in check (Fidler and Peston 1998). Solutions to the Moral Hazard Problem To address the problem of moral hazard, we need to let the economy work in the free market. Fuelner (1998) points out that financial hardship and defaults occur every day in the U.S. economy. Bankruptcy is the market's method of reallocating capital to more productive uses, or away from managers who failed to create wealth for investors or improve the well-being of consumers. As assets are purchased at a reduced rate by the highest bidder, both parties to an ill considered lending or investment decision suffer a loss; but the overall economy profits because new, presumably better managers will now control the capital. He also says, "a world without the IMF would have to observe the greater discipline of market forces." Countries would have to adopt transparent economic policies that lower risk for lenders and investors. Specifically, they would have to create fair and reliable bankruptcy laws, employ transparent and internationally accepted accounting procedures, allow minimal government interference in the allocation of credit, exercise prudent oversight of their banking systems, and encourage rather than prevent domestic and foreign banking competition (Fuelner 1998, 4-5). In finding solutions to the moral hazard problem, according to Ricki Heifer, "it is vital to distinguish whether a crisis is one of illiquidity (borrowers will be able to repay once any panic in the markets has dissipated) or of insolvency (economic fundamentals demonstrate that borrowers do not have the means to repay their debts)." In the case of illiquidity, temporary financing from a lender of last resort is very appropriate and should contain just a little moral hazard. When the problem has to do with insolvency, lending to borrowers will almost always lead to a moral hazard problem, which in turn can lead borrowing countries to ignore serious and persistent structural problems (Heifer 1998, 5). Bandow (1998) adds, "without an international bailout, countries like Indonesia would have to adopt all the changes necessary to reassure foreign bankers and investors." This would cause a reliance on the market's invisible hand and governments would have no one else to blame but themselves. Solutions for the IMF Lacking Transparency The IMF's lack of transparency surely needs to be changed. Calomiris (1998) seems persuasive in his argument that, IMF secrecy is contrary to its proper role as a source of independent, objective, and informed opinion about the economic performance and financial risks of member countries. In pursuit of its appropriate mission, any policies or conditions for assistance advocated by the IMF should be revealed publicly. That will encourage a lively debate about their merits, and permit critical evaluation of their effectiveness. Rep. Saxton says (1998a) that even though some progress has made the IMF more transparent to the public, much remains to be done. The IMF operational budgets need to be publicly released in order to allow public and private sectors to analyze them, and make any appropriate redactions if necessary. Transparency, market interest rate, and other reforms should be implemented in keeping with the letter of the law. In a statement given on October 13, 1998, he stresses the fact that how these reforms are actually implemented will be extremely critical in determining their success. "Close monitoring of their enforcement, implementation, and application will be needed in the months and years ahead" (Saxton 1998g). Rep. Saxton further argues that any new reform must provide for public release of important documents, including "letters of intent, memoranda of understanding [,] and also policy framework papers that are not currently routinely available to the public as a matter of policy." Although there are loopholes in regards to the release of minutes and documents, any effort to implement this reform will cause significant change in the culture of secrecy at the IMF (Saxton 1998f). Solutions to the IMF Providing Massive Subsidies to Borrowing Countries The third problem listed above is that the IMF loans provide massive subsidies to borrowing countries. Rep. Saxton argues in an October 9, 1998, press release that, "low interest rates are economically inefficient and exacerbate the moral hazard problem." Instead the IMF should be required to lend at rates that will be comparable to current market rates. This would allow a rate at which the borrower could borrow shortly before the onset of a financial emergency, plus an adjustment for risk. Along with this a floor provided would ensure that 21 |
