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World: Analysis From Washington -- Transparency And Tensions

  • Paul Goble

Washington, 23 June 1999 (RFE/RL) -- New financial rules intended to reduce volatility in global markets appear likely to have the unintended consequence of exacerbating tensions between wealthy and poor countries.

The new collection of rules was generated by G-7 and IMF policy makers in response to the increasing number of problems developing countries and Western investors in them have faced over the last several years.

Specifically intended to limit the negative impact of rapid capital flows without depriving developing countries of the opportunities foreign investment can provide, the new rules are likely to go into effect soon now that they have been praised over the weekend by the G-7 summit at Cologne.

While they almost certainly will bring greater order into the international financial marketplace, three of these rules are likely to generate political problems even as they solve economic ones.

First, one new rule would allow the IMF to punish countries which fail to provide full and accurate information about the state of their economies by lowering their credit rating, something lenders want but that borrower countries may find both intrusive and offensive.

This call for more information reflects the difficulties the international investment community has had with South Korea and Thailand, two countries whose governments hid data about the difficulties their economies faced until things reached a crisis point.

Greater transparency will certainly contribute to more accurate assessments by the international community, but it is almost certain to anger many governments by requiring them to provide information to outsiders that they often have been unwilling to provide to anyone.

Second, another new rule is intended to keep developing countries and emerging markets from trying to defend a fixed exchange rate at times of economic turmoil, an approach lender countries generally reject for themselves and thus one that borrower states may find offensive.

According to the G-7 draft, the IMF will enforce this by generally refusing to provide large rescue loans to any country "intervening heavily to support a particular exchange rate level."

This rule has one escape clause: countries can try to maintain rigid exchange rates if they have currency boards, official bodies which have sufficient dollar reserves to back the currencies involved.

Not only are some governments likely to view this new rule as creating a two-tier system of countries in terms of currency rates, but many of them are certain to object to IMF efforts to force a currency board on them as part of the price of getting new loans.

And third, another new rule seeks to discourage Western investors from putting money into emerging markets without due diligence on the expectation that the IMF views some countries as too important to fail and thus will bail out both these countries and those who invest in them.

A response to sometimes reckless Western investment in the Russian Federation after the collapse of communism, this new rule will certainly reduce the willingness of Western firms to invest there until Moscow takes action on a number of fronts.

Many Russians are thus likely to view this as directed solely at them because they will be the first victims of declining foreign investment. But they may not be the last.

If Western private investment in Russia declines, Moscow is certain to appeal to Western governments for government to government assistance. And such appeals, again couched in the notion that Russia is too big to fail, could end up subverting the intent of this rule. Not only would that anger many Western taxpayers, but it almost certainly would infuriate other countries which lack the status to make such demands on Western governments.

For all these reasons, governments of countries which need aid are likely to view the new rules much as they have often viewed the old ones: as protections for lenders rather than assistance to those who need to borrow.

Because that is the case, at least some governments are likely to try to build their authority by standing up to the new IMF rules. Some other states are likely to try to organize this anger against the West. And international financial institutions are likely to continue to grapple with how best to manage the new global economy.