[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[Extensions of Remarks]
[Pages E2105-E2106]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E2105]]



                           IMF TRANSFORMATION

                                 ______
                                 

                           HON. NEWT GINGRICH

                               of georgia

                    in the house of representatives

                       Tuesday, October 13, 1998

  Mr. GINGRICH. Mr. Speaker, I want to recommend to my colleagues the 
following editorial entitled Perils of Globalism by former Secretary of 
State Henry Kissinger.
  Secretary Kissinger begins to tackle an issue that we, in Congress, 
have been debating for several months. In Secretary Kissinger's words, 
he eloquently states what many members believe, that the ``IMF must be 
transformed. It should be returned to its original purpose as a 
provider of expert advise and judgement, supplemented by short-term 
liquidity support. When the IMF focuses on multi billion-dollar loans, 
it plays a poker game it cannot possibly win; the `house', in this 
case, the market, simply has too much money. Congress should use the 
need for IMF replenishment to impose such changes.''
  Without proper reforms, the situation of insolvency within this 
organization will remain, and the backlash of improper management of 
funds, especially those of American taxpayers, will be felt across the 
globe.
  I strongly urge all of my colleagues to take time and read Perils of 
Globalism to gain a better understanding of problems the IMF is facing.

                          Perils of Globalism

       What began 15 months ago as a currency crisis in Thailand 
     and then spread across Asia now threatens the industrialized 
     world.
       No government and virtually no economist predicted the 
     crisis, understood its extent or anticipated its staying 
     power. A series of IMF rescue packages has not arrested its 
     spread and threatens the political institutions implementing 
     them. In Indonesia a regime tainted by cronyism has been 
     overthrown. But in Brazil, the crisis threatens one of the 
     most reform-minded governments in decades.
       What was treated at first as a temporary imbalance is 
     becoming a crisis of the world's financial system. In the 
     past 20 years, two Mexican crises, in 1982 and 1994, spread 
     to most of Latin America; the Asian crisis of 1997 has 
     already infected Eastern Europe, South Africa and Latin 
     America. Each crisis has been more extensive and has spread 
     more widely than its predecessor.
       Free-market capitalism remains the most effective 
     instrument for economic growth and for raising the standard 
     of living of most people. But just as the reckless laissez-
     faire capitalism of the 19th century spawned Marxism, so the 
     indiscriminate globalism of the 1990s may generate a 
     worldwide assault on the concept of free financial markets. 
     Globalism views the world as one market in which the most 
     efficient and competitive prosper. It accepts--and even 
     welcomes--that the free market will relentlessly sift the 
     efficient from the inefficient, even at the cost of periodic 
     economic and social dislocation.
       But the extreme version of globalism neglects the mismatch 
     between the world's political and economic organizations. 
     Unlike economics, politics divides the world into national 
     units. And while political leaders may accept a certain 
     degree of suffering for the sake of stabilizing their 
     economies, they cannot survive as advocates of near-permanent 
     austerity on the basis of directives imposed from abroad. The 
     temptation to seek to reverse--or at least to buffer--
     austerity by political means becomes overwhelming. 
     Protectionism may prove ineffective in the long term, but for 
     better or worse, political leaders respond to more short-term 
     cycles.
       Even well-established free-market democracies do not accept 
     limitless suffering in the name of the market, and have taken 
     measures to provide a social safety net and curb market 
     excesses by regulation. The international financial system 
     does not as yet have these firebreaks. Nor is there much of a 
     recognition that it needs them.
       Ours is the first experiencing a genuinely Crony 
     capitalism, corruption and inadequate supervision of banks 
     were serious shortcomings. But they did not cause the 
     immediate crisis; they were a cost of doing business, not a 
     barrier to it. Until little more than a year ago, Asia was 
     the fastest growing region in the world, its progress 
     underpinned by high savings rates, a disciplined work ethic 
     and responsible fiscal behavior.
       What triggered the crisis were factors largely out of 
     national or regional control. The various countries had 
     exchange rates linked to the U.S. dollar. When China devalued 
     in 1994, the dollar appreciated significantly starting in 
     1995, and the yen fell sharply. Southeast Asian exports 
     became less competitive and export earnings fell. At the same 
     time, the dollar pegs created unprecedented opportunities for 
     speculation. It was possible to borrow dollars in New York 
     and lend them locally for at least twice the cost of 
     borrowing--at no apparent currency risk. The borrowers 
     invested in real estate and excess plant capacity, creating a 
     dangerous bubble. Local currency became overvalued and local 
     currency holders converted into dollars, inviting speculative 
     raids--all without significant warnings from international 
     financial institutions.
       The U.S. Treasury, convinced that the matter could be dealt 
     with regionally and gun-shy after congressional reaction to 
     the bailout of Mexico, refused to participate in the first 
     round of the crisis. But when the crisis spread to Indonesia, 
     the largest country of Southeast Asia, the threat to the 
     global system could no longer be ignored.
       At U.S. urging, the IMF intervened in both situations with 
     its standard remedies, leading to massive austerity. 
     Thailand's democratic institutions have so far proved 
     relatively resilient. But for how long can it sustain 
     interest rates of more than 40 percent, a negative growth of 
     8 percent and a 42 percent devaluation of its currency?
       In Indonesia--a rich country with vast resources and an 
     economy that was praised by the World Bank in July 1997 for 
     its efficient management--the IMF, advised by an 
     administration afraid of being accused of having political 
     ties to leading Indonesian financial institutions, decided to 
     make its assistance conditional on remedying virtually every 
     ill from which the society suffered. It demanded the closing 
     of 15 banks, the ending of monopolies on food and heating 
     oil, and the end of subsidies.
       But when 15 banks are closed in the middle of a crisis, a 
     run on other banks is inevitable. The ending of subsidies 
     raised food and fuel prices, causing riots aimed at the 
     Chinese minority that controls much of the economy. As a 
     result, as much as $60 billion of Chinese money fled 
     Indonesia, or more than the IMF could possibly provide. A 
     currency crisis had been turned into an economic disaster.
       For a few months, a special Treasury representative worked 
     with the government and the IMF to ease the pressures. But by 
     April the IMF was back at the old stand. This time the 
     explosion swept away the Suharto regime. A currency crisis, 
     having been transmuted into an economic crisis, has become a 
     crisis of political institutions. Any real economic reform 
     stands suspended. The shortcomings of Suharto were real 
     enough, but to try to deal with them concurrently with the 
     currency crisis has produced a political vacuum in the most 
     populous Islamic nation in the world.
       Ours is the first period experiencing a genuinely global 
     economic system. Markets in different parts of the world 
     interact continuously. Modern communications enable them to 
     respond instantaneously. Sophisticated credit instruments 
     provide unprecedented liquidity. Hedge funds, the trading 
     department of international banks and institutional investors 
     possess the reach, power and resources to profit from market 
     swings in either direction, and even to bring them about. It 
     is market stability that they find uncongenial.
       Broadly speaking, direct foreign investment benefits from 
     the well-being of the societies in which it operates; it runs 
     the risks and is entitled to the benefits of the host 
     country. By contrast, modern speculative capital benefits 
     from exploiting emerging trends before the general public 
     does. It drives upswings into bubbles and down cycles into 
     crises, and in a time frame that cannot be significantly 
     affected by the kind of macroeconomic remedies being urged on 
     the political leaders.
       For example, when Asian creditworthiness began to fall, 
     financial institutions and fund managers holding the debt 
     were tempted to sell Asian currencies short, thereby 
     accelerating devaluation and compounding the difficulty of 
     repaying debt. Speculators were acting rationally, but the 
     result was a deeper, more vicious and more intractable 
     crisis.
       To maintain their overall performance, speculators, as 
     losses mounted in Asia, were driven to cash in their holdings 
     in Latin America and thereby spread the crisis. The capacity 
     of smaller countries to deal with these massive capital flows 
     is not equal to the temptations offered by the system. 
     Regulators in the United States, Europe and Japan have not 
     succeeded in dampening the increased volatility of the 
     market. And small and medium-sized countries are defenseless 
     in the face of it.
       The speculators will argue that they are only exploiting 
     weaknesses in the market, not causing them. My concern is 
     that they have a tendency to turn a weakness into a disaster. 
     If Brazil is driven into deep recession, countries such as 
     Argentina and Mexico, heretofore committed to free-market 
     institutions, may be overwhelmed.
       The crisis in Brazil is a case in point. Despite a reform-
     minded and, on the whole, efficient government, Brazil faces 
     a crisis

[[Page E2106]]

     partly because, as one of the largest and most liquid 
     emerging markets, it is one of the easiest from which to 
     withdraw. If these trends are not arrested, global flows of 
     capital will be impeded by a plethora of national or regional 
     regulations, a process that has already begun.
       The International Monetary Fund, the principal 
     international institution for dealing with the crisis, too 
     often compounds the political instability. Forced by the 
     current crisis into assuming functions for which it never was 
     designed, the IMF has utterly failed to grasp the political 
     impact of its action. In the name of free-market orthodoxy, 
     it usually attempts--in an almost academic manner--to remove 
     all at once every weakness in the economic system of the 
     afflicted country, regardless of whether these caused the 
     crisis or not. In the process, it too often weakens the 
     political structure and with it the precondition of 
     meaningful reform. Like a doctor who has only one pill for 
     every conceivable illness, its nearly invariable remedies 
     mandate austerity, high interest rates to prevent capital 
     outflows and major devaluations to discourage imports and 
     encourage exports.
       The inevitable result is a dramatic drop in the standard of 
     living, exploding unemployment and growing hardship, 
     weakening the political institutions necessary to carry out 
     the IMP program.
       The situation in Southeast Asia is a case in point.
       All this might make sense if the IMF programs brought 
     demonstrable relief. But in every country where the IMF has 
     operated, successive programs have lowered the forecast of 
     the growth rate, which, in Indonesia, is now a negative 10 
     percent, in Thailand a negative 5 percent and in South Korea 
     an optimistic positive one percent. It could be argued that 
     without the IMF program, conditions would be worse, but his 
     is no consolation to governments and institutions facing 
     massive discontent.
       The inability of the IMF to operate where politics and 
     economics intersect is shown by its experience in Russia. In 
     Indonesia the IMF contributed to the destruction of the 
     political framework by excessive emphasis on economics; in 
     Russia it accelerated the collapse of the economy by 
     overemphasizing politics. The IMF is, quite simply, not 
     equipped for the task it has assumed.
       The immediate challenge is to overcome the crisis in Brazil 
     and preserve the free-market economics and democracy in Latin 
     America. A firm and unambiguous commitment by the industrial 
     democracies, led by the United States, is essential to 
     buttress the necessary Brazilian reform program.
       An expanding American economy is the key to restoration of 
     global growth. Whether this is achieved by a cut in interest 
     rates or a major tax cut, a strong commitment is 
     reinvigorated growth is essential.
       Above all, the institutions that deal with international 
     financial crises are in need of reform. A new management to 
     replace that of Bretton Woods is essential. It must find a 
     way to distinguish between long-term and speculative capital, 
     and to cushion the global system from the excesses of the 
     latter.
       The IMF must be transformed. It should be returned to its 
     original purpose as a provider of expert advice and judgment, 
     supplemented by short term liquidity support. When the IMF 
     focuses on multibillion-dollar loans, it plays a poker game 
     it cannot possibly win; the ``house,'' in this case the 
     market, simply has too much money. Congress should use the 
     need for IMF replenishment to impose such changes.
       Further, the central banks and regulators of the industrial 
     democracies need to turn their attention to the international 
     securities markets, just as they did to international banking 
     after the debt crisis of the 1980s. Regulatory systems should 
     be strengthened and harmonized; the risks that investors are 
     taking should be mad more transparent.
       Finally, the private sector must learn to relate itself to 
     the political necessities of host countries. I am disturbed 
     by the tendency to treat the Asian economic crisis as another 
     opportunity to acquire control of Asian companies' assets 
     cheaply and to reconstitute them on the American model. This 
     is courting a long-term disaster. Every effort should be made 
     to work with local partners and to turn acquisitions into 
     genuinely cooperative enterprises.

     

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