[Congressional Record Volume 144, Number 138 (Tuesday, October 6, 1998)]
[Extensions of Remarks]
[Page E1913]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E1913]]



                 IMF MUST LEARN FROM ITS PAST MISTAKES

                                 ______
                                 

                           HON. NEWT GINGRICH

                               of georgia

                    in the house of representatives

                        Tuesday, October 6, 1998

  Mr. GINGRICH. Mr. Speaker, the attached op-ed by Martin Feldstein 
from The Wall Street Journal illustrates why the IMF must learn from 
its past mistakes. Feldstein suggests that the IMF can redefine itself 
as a valuable institution by narrowly defining the problem, rebuilding 
market confidence, and maintaining growth while reducing the current-
account deficit. I submit the op-ed to the Congressional Record.

              [From The Wall Street Journal, Oct. 6, 1998]

                    Focus on Crisis Management . . .

                         (By Martin Feldstein)

       International officials and bankers assembled in Washington 
     for the annual meeting of the International Monetary Fund and 
     the World Bank are considering the failures of the past year 
     and what the IMF should do differently in the future.
       The fund made three key mistakes: undermining the 
     confidence of global leaders, attempting unnecessary and 
     radical changes in the basic economic structures of the 
     debtor countries, and imposing excessively contractionary 
     monetary and fiscal polices. But the IMF should aim to do 
     more than just avoid these mistakes. It can play a positive 
     role in future crises by coordinating the rescheduling of 
     international obligations between creditors and debtors.
       The IMF can also help prevent future crises by creating a 
     collateralized credit facility that lends foreign exchange to 
     governments that are illiquid but internationally solvent--
     that is, capable of repaying foreign debts through future 
     export surpluses. President Clinton's proposal to create an 
     IMF credit facility, though vague, may be useful in 
     refocusing the fund's activities.
       A rapid-payout credit facility can reduce the risk of 
     speculative attacks and induce countries to maintain open 
     capital markets and free trade. Leaders of emerging-market 
     economies see their national capital markets as small 
     relative to the internationally mobile capital that can be 
     arrayed against them. They fear that even if they pursue 
     sound long-run policies, they could suffer from sudden global 
     shifts of sentiment. Unless the global financial system 
     changes to reduce their vulnerability, emerging-market 
     countries may respond by imposing a variety of 
     counterproductive capital controls, leading to restrictions 
     on foreign investment and trade.


                          Legislated Diversion

       An international credit facility can work only if it 
     provides credit rapidly, at an above-market interest rate 
     that discourages unnecessary use and in exchange for good 
     collateral. A country can provide such collateral by pledging 
     a share of the foreign exchange earned by its exporters. A 
     country that borrows from this facility would automatically 
     trigger a legislated diversion of all export receipts to a 
     foreign central bank like the Federal Reserve or the Bank of 
     England, with exporters then paid in a mixture of foreign 
     exchange and domestic currency. Any country that contemplates 
     such collateralized borrowing at some future time must embody 
     such an arrangement in both domestic legislation and 
     international agreements well in advance.
       A foreign-exchange facility of this sort need not create 
     moral-hazard problems for either the international lenders or 
     the emerging-market countries. Banks and bond holders would 
     still bear the risk that the companies to which they lend 
     are incapable of repaying their loans. They would also not 
     be protected against countries that become internationally 
     insolvent and cannot earn the foreign exchange to meet 
     their international obligations. And high interest rates 
     would discourage the emerging-market countries themselves 
     from any temptation to act imprudently.
       The availability of a credit facility could by itself 
     repulse a purely speculative attack on a healthy currency. 
     When the attack is on the currency of an economy with an 
     overvalued exchange rate that causes an unsustainable current 
     account deficit, the availability of credit must be combined 
     with a shift to an appropriate exchange rate and a deflation 
     of domestic demand to make room for increased net exports.
       When crises do occur, the IMF should help by bringing 
     together the creditors and debtors to work out orderly 
     reschedulings of international obligations. The lengthening 
     of debt maturities gives debtor countries the time to earn 
     the foreign exchange needed to meet their obligations. In the 
     case of South Korea, the Fed took the lead and brought along 
     the other major central banks. But since the problem is 
     inherently international and the adjustment process must be 
     monitored, this should be the primary responsibility of the 
     IMF.
       The fund must also abandon the mistaken strategy that 
     contributed to the past year's failures. Asia's ``crisis 
     countries'' bear responsibility for causing their own 
     problems through unsustainable current-account deficits and 
     short-term foreign debts that exceeded their foreign-exchange 
     reserves. But these problems could have been solved less 
     painfully. These economies are fundamentally sound, with 
     remarkable long-term growth of both gross domestic product 
     and exports. With modest adjustments, they could easily have 
     earned extra foreign exchange to repay foreign debts. The 
     problem was temporary illiquidity, not insolvency.
       When these countries came to the IMF for assistance, it 
     should have seen its task as providing liquidity, supervision 
     and negotiating assistance. Instead, it publicly criticized 
     them as incompetent, corrupt countries with fundamentally 
     unsound economies. In doing so, it not only discouraged any 
     further lending or investment in these countries but also 
     undermined the confidence of global lenders in emerging-
     market countries generally, thereby contributing to the 
     contagion the IMF wanted to prevent.
       Although the IMF organized massive potential loan funds for 
     each of the Asian crisis countries, it did not use those 
     funds to prevent currency runs. On the contrary, it announced 
     that these funds would be provided only if the country 
     accepted the IMF's advice about the radical restructuring of 
     the entire domestic economy--labor rules, corporate 
     governance, tax systems and other matters not germane to the 
     short-run financial crisis. Moreover, the funds would be 
     given out only gradually, as the countries made IMF-
     prescribed changes. Since this policy meant the IMF would not 
     provide the funds needed to repulse speculators, it caused 
     excessive declines of currency values and required extremely 
     high interest rates to prevent further declines.
       IMF Managing Director Michel Camdessus has said that if the 
     IMF had only wanted to deal with the countries' liquidity and 
     debt problems, it would by now have succeeded. He then 
     repeated his earlier statement that the Asian crisis was 
     really a ``blessing in disguise'' because it gave the IMF the 
     leverage to force structural policy changes that the national 
     governments would not otherwise adopt.
       This is a remarkable confession of the arrogance and 
     inappropriateness of the IMF policies. Even apart from 
     whether the IMF has any legitimate right to usurp these 
     sovereign responsibilities, the attempt to remake an economy 
     in the midst of a currency crisis made it likely that there 
     would be neither fundamental restructuring nor a rapid 
     resolution of the currency crisis itself. By putting every 
     aspect of these economies into flux, the IMF made it more 
     difficult to make the changes needed to regain access to 
     international capital. Creating massive bankruptcies and 
     widespread political unrest is not conducive to attracting a 
     return of foreign investors.


                           Massive Recessions

       While most of the target countries did need to contract 
     domestic demand in order to reduce imports and provide scope 
     for more exports, the IMF's policies of high interest rates 
     and big tax increases were too contractionary in most 
     countries. This IMF implicitly acknowledged this when it 
     relaxed those policies--but this easing came too late to 
     prevent massive recessions.
       The IMF should commit itself publicly to avoiding a 
     repetition of its recent mistakes. Future IMF programs for 
     crisis countries should define the problem narrowly in terms 
     of the country's current-account deficit, the structure of 
     its balance sheet and the soundness of its banks. The guiding 
     concepts should be rebuilding market confidence, focusing on 
     the specific liquidity problems and maintaining as much 
     growth as possible while reducing the current-account 
     deficit. The world will be watching closely to see if the IMF 
     can redefine itself as a valuable institution.

     

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