[Congressional Record Volume 144, Number 1 (Tuesday, January 27, 1998)]
[Extensions of Remarks]
[Pages E18-E20]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  ``THE ROLE OF THE UNITED STATES AND THE IMF IN THE ASIAN FINANCIAL 
                                CRISIS''

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                       Tuesday, January 27, 1998

  Mr. LaFALCE. Mr. Speaker, in the coming weeks, the U.S. Congress will 
be debating the role and policies of the International Monetary Fund 
and how or whether the United States should support this international 
institution. The context will be the Administration's request for $3.5 
billion for the New Arrangements to Borrow and $14.5 billion for an IMF 
quota increase, or capital replenishment.***HD***Background
  Before turning to the heart of this debate, a brief background is in 
order. First, the New Arrangements to Borrow, or NAB, came about 
subsequent to the Mexican peso crisis of 1994-95. The United States led 
that rescue effort, with the assistance of the international 
institutions and other concerned nations. At U.S. urging, the G-7 Heads 
of State at the Halifax Summit in June 1995 called on the G-10 and 
other countries with financial capacity to develop a financial program 
that would have the capacity to handle future crises in the 
international financial system. Exactly one year ago today, the IMF 
Executive Directors approved the proposal for the NAB with 25 initial 
country participants. These countries potentially committed about $49 
billion in lines of credit to be made available on an emergency basis 
if IMF ordinary funds need to be supplemented in a crisis. The U.S. 
contribution of $3.5 billion is equivalent to 19.74 percent share of 
the NAB.
  Second, the proposed $14.5 billion U.S. contribution to the IMF's 
capital base (about $200 billion)--composed of member-countries 
subscriptions or quotas--is necessary for two reasons. First, IMF 
usable quota resources available to member countries has dwindled to 
about $43 billion. With the current IMF Stand-By programs committed to 
Asia--Korea, $21 billion (total package $57 billion); Indonesia; $10 
billion (total package $43 billion); Thailand, $4 billion (total $17 
billion); Philippines, $1 billion--IMF resources will be nearly 
depleted.
  These Asia commitments underscore the second reason for the quota 
increase. When the IMF was established in 1944, its quotas and capital 
base were much larger relative to the size of the global economy. As 
the global economy has expanded, the IMF's resources have not kept 
pace, thus eroding its financial effectiveness. If we want the IMF to 
continue its role as the world's principal monetary authority with the 
responsibility of stabilizing the international financial system, it 
must have sufficient resources to credibly do so.***HD***The Risks of 
U.S. Inaction Far Transcend The Risks of Action
  In determining how it will respond to the Asia crisis, the U.S. faces 
a pivotal choice. We can either use our central role in the 
international economic community to restore economic stability in Asia 
and safeguard the potential for economic growth there and at home. Or 
we can stand by as regional financial crisis blights the economic 
prospects of affected countries and their people, and simply hope it 
will not spread.
  There are risks both in interceding, or in doing nothing, and letting 
the market dictate the consequences. I believe the risks of inaction 
are far greater.
  Inaction would be contrary to what should be a central tenet of U.S. 
and IMF policies--halting the precipitous decline of Asian, and other 
regions', currencies. Continued currency depreciation will only 
exacerbate the deteriorating Asian domestic economies. Inevitably, that 
pain will spread to our own economy, in the form of lost export sales 
and investments, market turmoil, and increased unemployment. Absent 
intervention, competitive devaluations are much more likely to occur, 
doing further damage to the global trading system. If we are to protect 
that system, currency stabilization--and even appreciation of some of 
these currencies, which have plunged to all time lows against the 
dollar--is an imperative.
  Inaction also carries the risk of spreading economic upheaval to 
other regions, including Latin America, Russia, and Eastern Europe. 
Many of these countries are already struggling to maintain economic 
growth and stability. In many cases, they have initiated reforms with 
IMF assistance, and are making serious progress. The spread of the 
Asian financial turmoil could prove enormously costly to them as well.
  Inaction carries the risk not only of economic turmoil, but of 
significant social and political disruption. To a limited extent, this 
has already begun. A further economic free-fall could precipitate 
political and social chaos.
  The social impact of declining economies is most severe, not on the 
affluent or well-connected, but on the middle-class and poor. To be 
sure, inappropriately austere economic stabilization programs--whether 
IMF-sponsored or not--can also hurt a broad spectrum of society, 
bringing lost jobs, closed businesses, higher interest rates, and lost 
purchasing power. But allowing an economy spiraling downward to take 
its natural course without remedial action could cause far, far greater 
hardship.
  The final risk of inaction is the unacceptable abrogation of U.S. 
influence and leadership in Asia. The United States has argued that its 
geo-political and economic interests lie in considerable part in Asia. 
It has repeatedly sought to demonstrate its commitment in a variety of 
fora--such as the Asia Pacific Economic Cooperation platform--despite 
Asia's perception of a U.S. preoccupation with Latin America and 
Europe. We can now either affirm our commitment to Asia, or give the 
lie to these previous efforts.
  With U.S. leadership, international institutions have been 
established to respond to global military crises, such as the United 
Nations role in Iraq, Bosnia, etc. When global economic crises arise, 
the International Monetary Fund is the institution empowered by the 
international community to take action. Just as the United States 
expects the United Nations to take action when military threats to 
world peace emerge, we must do our part to support the International 
Monetary Fund--the only available institution that can act when the 
threats to global stability are economic. In a time of world economic 
crisis, the United States cannot default on its economic 
leadership.***HD***The Political Challenge
  Convincing the Congress and the American people that continued 
support for the International Monetary Fund is essential will be a 
difficult political challenge.
  Our challenge is to make clear to U.S. taxpayers and public officials 
the economic consequences of not supporting the IMF. If the IMF does 
not intervene, U.S. taxpayers, business and labor will face serious 
consequences: further falling Asian currencies and a further rising 
U.S. dollar; a still greater tide of imports and larger trade deficits; 
and further falling stock-market prices, affecting pensions, savings, 
consumer behavior, etc.

  Critics of the IMF--including both Democrats and Republicans in 
Congress--also contend that IMF programs are ``excessively austere,'' 
with harsh impacts on citizens; that IMF program results are 
questionable, since countries return to the IMF for repeated reform 
efforts; and that IMF programs lack discernible development progress. 
Some of these criticisms are warranted. But legitimate complaints can 
be lodged against almost any institution. A narrow focus on these 
problems ignores the stark reality that we need some international

[[Page E19]]

institution to cope with stresses in the global financial system, and 
we need that institution now.
  The IMF may not be a perfect tool, but it is the only tool we have. 
It needs fixing, but not junking. And we cannot fix the problems of the 
IMF in the midst of a crisis. We must use the IMF as constructively as 
possible to respond to the crisis in the short term. As the crisis 
abates, we can then accelerate the discussion and debate about the 
nature of the institutional changes that might be necessary in today's 
global economy.
  The United States' responsibility does not end with its participation 
in resolving the current crisis. We must continue to exert our 
influence and leadership among the 182 countries of the IMF. As the 
world's largest economy, greatest military power, and foreign-policy 
leader, the United States has the potential to use both its voice and 
its vote to make the IMF a more effective international institution in 
the new century. But the United States cannot expect to shape an 
institution we abandon at the first sign of crisis.
  In re-examining the IMF, the key questions we must consider are how 
to best shape the IMF for its role in a globalized society, and how the 
IMF should work with member countries when economic adjustments are 
needed. In the present financial crisis, the Fund's central tool is so-
called conditionality, the IMF's ability to require specific reforms of 
the country seeking IMF support.
  I believe there are at least five core elements of conditionality 
that the U.S. and IMF should promote in the context of the current 
crisis.
  1. Currency stabilization is critical. The markets may have over-
reacted to economic conditions in Asian countries with such extreme 
depreciation of currencies. The Asian economies are fundamentally 
sound, and with corrective policies they should rebound. Compared to 
the Latin America economic crisis in the 1980s, when macroeconomic 
indicators were negative, Asian economies have benefited for over a 
decade from strong GDP growth; have current-account surpluses or small 
deficits relative to GDP; have strong savings rates--35 percent in 
Korea; have had low inflation, most often between 4-9 percent; have 
high investment rates; and have no or relatively small public-sector 
debt problems. It is therefore critical that the IMF's primary goal 
should be to stabilize currencies. Surely, agreement should be reached 
to avoid competitive devaluations that will further destabilize the 
international financial and trading systems.
  2. The IMF must also seek vast improvements in the financial services 
sectors of countries using IMF Stand-By instruments. The IMF should 
seek agreement from the affected countries to reform the laws and 
regulations governing their domestic financial institutions so that 
they meet generally accepted international standards. This would 
include laws to ensure adequate capital and reserves, adequate 
oversight, and standards for transparency. Lack of transparency is a 
contributing factor to the current Asian crisis--making unavailable 
accurate debt data, information regarding conglomerate-banking ties, 
etc.
  I offer one caveat regarding this element of conditionality, however. 
We must demand significant improvement in the operation of financial 
institutions in the affected countries. However, we should not require 
troubled institutions to improve totally and immediately--or die. Nor 
should we judge the success of a reform program by the number of 
institutions closed. Such shock therapy could lead to a country's 
economic convulsion. What we do need is deliberate speed. And we need 
significant, measurable and constant improvement leading in a short but 
reasonable period of time to the standards we agree upon.
  3. The economies of these countries must be open. The IMF must insist 
on economic reforms that open economies to both internal and external 
competition. Assisted countries must be open to competition, trade, 
investment, and capital flows--domestically and internationally. Small 
domestic businesses and international companies must not be excluded 
from open market competition because of collusion among conglomerates, 
governments, and financing institutions. The use of overt trade and 
investment barriers, or indirect regulatory schemes, to exclude outside 
competition must not be tolerated. The IMF should insist on fundamental 
reforms that create the environment for open and fair competition.
  Moreover, the U.S. should insist that the IMF put maximum pressure on 
other industrial countries to import more from Asia during this crisis. 
The U.S. cannot be expected to substantially increase its imports 
unless others are willing to bear a comparable burden.
  4. The economic prescriptions for each country must be appropriate to 
each country. One size will not fit all. The IMF has been criticized by 
both the left and the right for imposing draconian fiscal policies and 
conditions that hurt the citizens of the country who are least able to 
cope with the consequences. These are difficult judgment calls. 
Sometimes, the IMF-imposed conditions have been well advised; other 
times, they may have been misguided. Each country must be dealt with 
differently.
  Thailand was to have a budget surplus of 1 percent of GDP by the end 
of March 1998, but the continued decline of the baht forced Thai 
authorities to request adjustment of this IMF condition. Similarly, 
fiscal conditionality required Indonesia to reach a budget surplus of 
1-1.5 percent of GDP and a current-account deficit reduced to 2 percent 
of GDP. This requirement was changed to a budget deficit of 1-1.5 
percent in the agreement most recently announced by IMF Managing 
Director Camdessus on January 15. In Indonesia, the IMF admitted in a 
confidential report on January 13 that its tactics--in this case, 16 
bank closings--backfired, and deepened rather than helped the crisis.
  When developing fiscal requirements as part of the IMF 
conditionality, one formula cannot fit all countries. And the Asian 
case differs from most previous IMF Stand-By situations in that public 
profligacy has largely not been the source of the problem. Most 
governments have maintained a reasonable balance between expenditures 
and revenues.
  Under such circumstances, the IMF must be careful not to impose tax 
increases or budget cuts that are not warranted. Although some 
officials may characterize a budget surplus requirement of 1.5 percent 
of GDP as ``modest,'' the impact on citizens could be considerable. 
Consider the impact of cutting the U.S. budget deficit by 1.5 percent 
of GDP in five months. I doubt that we could comply, economically, 
socially, or politically.
  We must all keep in mind that economies exist for people, not the 
other way around. The IMF should be especially cautious about imposing 
fiscal constraints on a government when the ``fiscal imprudence'' has 
been centered in the private sector, not only in the countries needing 
IMF support, but in the private financial sectors outside that country, 
whether in Japan and Germany--whose banks are most exposed in Asia--or 
in the United States.
  5. Finally, existing creditors should be expected to bear an 
appropriate financial burden. While the U.S. cannot and should not 
attempt to legislate those IMF requirements, nonetheless that should be 
the policy of both the U.S. and IMF. Public perception that IMF 
assistance will privatize creditors, profits and socialize their losses 
will erode public and Congressional support faster than anything else. 
And that is understandable. It simply does not appear fair or 
legitimate to use IMF resources to hold banks and investors harmless, 
or to shield them from the consequences of poor judgment in loans and 
investments.
  To a certain extent, assisting creditors is inherent in any policy of 
intervention. However, historically, the United States has insisted 
that creditors sustain meaningful sacrifices or losses as part of any 
rescue package, whether in the New York City rescue, the Chrysler loan 
guarantee, the Brady bonds, etc. Brady bonds, e.g., were deeply 
discounted in the secondary markets.
  This is where the IMF can be very useful. The Fund can and should 
play a legitimate role as intermediary in private-sector creditor-
debtor discussions. The IMF has the capacity--and experience--to serve 
as a facilitator and honest broker during debt negotiations. Nor would 
this be a new role for the Fund.
  During the 1980's debt reschedulings with Latin America, the IMF did 
help broker the terms of the deals. In a situation such as Asia's, the 
IMF could play a similar role. In fact, public statements of support 
for that concept would assist countries, such as Korea, attempting to 
guarantee future loans. The application of this policy could 
significantly mitigate the ``moral hazard'' of intervention; and also 
help in garnering political support for U.S. participation in the IMF.
  In the 1980s, I proposed establishing an International Debt 
Management Facility, and included it as part of the Omnibus Trade Act 
of 1986. Unfortunately, President Reagan vetoed that bill, in part 
because of that provision. The concept would have allowed for voluntary 
disposition by creditors of loans to heavily indebted sovereign 
borrowers in a way that would enable purchase at a discount in 
secondary markets. It may be timely to inject the principles of this 
original proposal into a new role for the IMF as a de facto referee in 
bankruptcy--a facilitator of a rearrangement of the debtor-creditor 
relationship.***HD***Political Support for the IMF--High Level Outside 
Effort Required
  In the current political environment, it will not be easy to pass 
legislation that provides new funding for the IMF. To accomplish this, 
I believe that the White House must launch a concentrated political 
effort, as it has in past high-profile and critical legislative 
efforts. Eminent persons of both Democratic and Republican backgrounds 
should co-chair a campaign to pass IMF funding legislation. If 
possible, individuals such as former Treasury Secretaries

[[Page E20]]

James Baker, Nicholas Brady, Lloyd Bentsen and William Miller might be 
appropriate candidates.***HD***Reaching Out to Both Business and Labor 
for Support
  As part of its concentrated effort, the Administration must reach out 
to both the business and labor communities.
  The deteriorating economies of Asia will necessarily impact U.S. 
corporations and the economic climate in which they operate. Many U.S. 
companies are already reducing their earnings projections because of 
anticipated fall-out from the Asia situation.
  Countries in Asia that are currently in crisis both buy U.S. products 
and services, and compete to provide them. Economic instability and the 
depreciating currencies that accompany it will ultimately have an 
adverse impact on U.S. exports, increase the trade deficit, and put a 
brake on the economic growth we have been experiencing, all to the 
potential disadvantage of U.S. firms. It is in the business community's 
interest to get this crisis under control, and the Administration 
should seek strong and visible business support in that effort. That 
support must be significant, it must be broad-based, and it must be 
now--before opposition to IMF funding grows.
  The Administration must also reach out to labor--either for overt 
support, or at least acquiescence. Labor has a divided approach to the 
IMF with respect to the Asia crisis. In the short term, labor is 
concerned that currency depreciation will cause export ``dumping'' in 
the U.S. as the only healthy economy that can take more goods. The U.S. 
trade deficit could soar to $300 billion this year as a result of the 
currency crisis. As we have seen with the weakening Japanese yen, the 
U.S. auto industry has suffered: Ford's sales to Japan have dropped 40 
percent.
  U.S. labor wants the IMF to stabilize currencies as a means to avoid 
job losses resulting from trade imbalances. The Administration must 
demonstrate to labor that it understands these concerns. It must 
publicly exhort other nations to accept Asian imports as well. The 
Administration must also make clear to labor that it will enforce U.S. 
trade laws and support ``escape clause'' action that would provide 
relief in the form of temporary tariffs or quotas if imports in 
particular industries flood the U.S. market.
  Labor has a different outlook on the IMF in regard to medium-term 
issues, however. It opposes what it views as extreme IMF-imposed 
austerity that slows down economies, closes businesses, and creates 
mass unemployment in societies. U.S. workers ultimately suffer when 
U.S. businesses lose overseas contracts, exports dwindle, and stock 
markets fall. Already, the U.S. has lost orders--Boeing had four 
aircraft canceled--and Stone and Webster Engineering had their contract 
for a refinery project in Indonesia canceled. U.S. labor must be 
assured of our government's commitment to help find the proper balance 
between necessary reform and continued economic expansion.
  The Administration must also take a more active and high-profile role 
in promoting international labor standards. To be sure, the Clinton 
Administration has done more than past Administrations to promote 
international labor rights. But it has not done nearly enough. The 
Administration should be promoting international labor rights in every 
forum possible, and at every opportunity.
  I believe that we must either help the people of the world bring 
their standards up, or their lower standards will eventually bring ours 
down. For that very reason, commitment to an improvement of 
international labor standards is essential if we are to achieve any 
domestic political support for either the IMF or future trade 
agreements.
  In pressing this issue, however, the U.S. would have far greater 
credibility if we first ratified more of the International Labor 
Organization's Conventions. The ILO has adopted 175 Conventions; the 
United States has ratified but 11. All but one of the 11 relates to 
technical or maritime issues. By comparison, the typical member of the 
European Union has ratified 70 ILO Conventions. At a minimum, the 
President should propose that Congress ratify those Conventions 
relating to employment discrimination, child labor, the right to 
organize, and the right to bargain collectively. If the Administration 
demonstrated its commitment to international labor standards through 
specific strong actions, it would be better able to persuade labor to 
support its effort to fund the International Monetary Fund and future 
trade agreements.***HD***Conclusion
  It is no exaggeration to say that the U.S. reaction to the Asia 
crisis and to the IMF's pressing needs will be a defining moment in our 
global economic and political leadership. If we behave as we did when 
the League of Nations was being formed--hold back, quibble about the 
fine points, and eventually refuse to participate--we risk the same 
result. We may again see the fatal crippling of an international 
institution that is currently essential to the economic and political 
functioning of an increasingly interdependent world.
  It is not just U.S. leadership in the abstract that is at stake. If 
the U.S. does not respond pro-actively and responsibly to this crisis, 
the economic well-being of U.S., Asian and other countries' citizens 
will be put in serious jeopardy as the global economic climate 
deteriorates. We live in an interdependent global economy in which the 
economic crises of other countries cannot be neatly compartmentalized 
and held at bay.
  Politically, philosophically and practically, the U.S. and its 
citizens have a great deal to lose if we permit regional economic 
problems to reverberate around the globe unaddressed. It is incumbent 
upon this country's political, business and labor leadership to do 
everything possible to ensure the situation does not deteriorate to 
that point.

                          ____________________