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Show International Monetary Fund Reform Corbin Cowley there would no longer be any deep interest rate subsidies. This would help countries that have balance of payments problems under quite typical circumstances to borrow from the IMF at an interest rate that reflects an adjustment for risk (Saxton 1998f). Fuelner (1998, 7) suggests that requiring the IMF to charge market-determined interest rates on its loans would ensure that IMF loan recipients are held to the same standards for its loans, as are private individuals and companies. Moreover, this provision would minimize market distortions. It would help to reinforce market perceptions of risk and also eliminate the backdoor transfer of wealth from Americans to the governments of countries that made unwise economic decisions. how the imf can become a true lender of last Resort In regards to the problem of the IMF not acting as a true lender of last resort, reform ideas are broad. Wolf (1998) says, One coherent reform would be for the IMF to become a true lender of last resort, with resources to match. This could be justified only if potential borrowers accepted higher standards of external oversight and discipline than now. These standards would have to cover financial regulation, disclosure of information, macro economic policies and exchange rates. Only if countries abided by the standards would they become eligible for non-conditional lending, in a panic. Three changes are needed to overcome the problem. First, speedy and internationally accepted procedures are vital for calling a halt to the creditor "grab-race" and for implementing rescheduling, debt-write offs and corporate bankruptcy. Second, risk-creating lending by private financial institutions that are, in effect, guaranteed by the governments of rich countries, needs to be far more carefully policed and restricted. Finally, countries contemplating liberalization of debt-creating inflows must be clear about the risks and preconditions. They need a strongly capitalized banking system, with strict prudential controls over foreign liabilities and assets; access to substantial international reserves; and a strong fiscal position, with moderate inflation and either a fairly freely floating exchange rate or a politically and economically robust currency board (Wolf 1998). A country must either be able to live within the norms of an integrated global financial system that possesses no lender-of-last resort, or it needs to limit the inflows that create the greatest risks. Since access to IMF resources cannot appreciably lower these risks, countries should design their policies as if those funds did not exist (Wolf 1998). In a morning breakfast meeting at the Hotel Washington in Washington, DC, September, 1998, the author attended an address given by Lord John Eatwell, President of Queens' College, Cambridge, England, and Lance Taylor of the Center for Economic Policy Analysis, on their ideas for a new global monetary system. They called it the World Financial Authority (WFA). This organization would be complementary to the World Trade Organization (WTO). A central task of the WFA would be the development of policies to manage systemic risk. The objectives of the WFA would include the requirement to pursue policies to maintain high rates of growth and employment. The WFA would develop rules which would ensure, where appropriate, the intemalization of externalities, and to oversee the development of a credible and effective guarantor and lender-of-last-resort function. The WFA would be not only a body that develops and imposes regulatory procedures, but also a forum within which the rules of international financial cooperation are developed and implemented. The goals of an efficient international financial policy can be achieved by effective coordination of the activities of national monetary authorities. The problem is that the means of achieving that coordination are at the moment very limited. The WFA would fill that gap. It would have the responsibility to ensure that once national policies have been agreed to by the WFA, states support each others' national policies. That mutual support is the key to success. The WFA would also be given the responsibility of ensuring transparency and accountability, on the part of international financial institutions such as the IMF and the World Bank. There is no present systematic evaluation of the activities of the Bretton Woods institutions. For this reason, the Bretton Woods institutions accountable to the WFA would introduce a "safety valve" of evaluation and accountability that would make the IMF more effective (Eatwell and Taylor 1998). The IMF should be reorganized to take responsibility on behalf of the WFA for coordinating and partially funding international rescue operations when the need arises. There should be explicit consideration of how the IMF should be developed to deal with the problem of liquidity, and the development of a lender-of-last-resort function. Bailouts should be based on prompt injections of liquidity, instead of the current disastrous policy of prolonged attempts to restructure national economic systems, using conditionality-laden credit disbursements as bait (Eatwell and Taylor 1998). In their paper, "A Checklist for IMF Reform," Bryan T Johnson and Brett D. Schafer give three ideas on what types of reforms should be made. The first is that "no U.S. agency, official, or agent should be allowed to transfer any money to the IMF until the reforms specified by Congress are enacted." The second idea is that "the IMF must adopt mandatory voting on all financial and procedural decisions and make the voting record available to the legislative branch of its member countries and the public at large." The third is "all IMF documents are made available to the public" (Johnson and Schaefer 1998). Sebastian Edwards (1998) has created a scheme in which three institutions should be formed to cover the IMF. The first would be a Global Information Agency whose role would be to provide timely and uncensored information on countries' financial health. The second institution would help prevent crises, by playing an active role in the world financial system, rather than a reactive one as the IMF currently does. This would be called the Contingent Global Financial Facility. It would provide sizeable contingent credit lines to 22 |