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1999 In Review: IMF Faces Pressure For Change

  • Andrew Tully



The International Monetary Fund (IMF) is ending 1999 under great pressure to change its mission radically. In the words of some, it is being urged to restore its original mission. RFE/RL economics correspondent Andrew Tully looks into the new U.S. position on the IMF's role, and the crucial function the Fund continues to play in some former communist countries.

Washington, 22 December 1999 (RFE/RL) -- For years, critics of the IMF have demanded that the Fund get out of the business of medium- and long-term loans and focus its attention on responding to emergencies.

The administration of U.S. President Bill Clinton has defended the IMF's current course against complaints from both the right and the left. But in a recent speech, Clinton's treasury secretary called for the same changes sought by the Fund's traditional critics.

In a speech before the London Business School on December 14, Lawrence Summers said the IMF had strayed from its original purpose of only providing aid to countries facing currency crises.

He said long-term, developmental funding should mostly come from the private sector, and he noted that such financial aid already is the province of the World Bank.

As Summers put it, "The IMF must be a last, not a first, resort."

The new U.S. position will carry weight, especially as the IMF searches for a successor to its managing director, Michel Camdessus, who has announced that he will be retiring in February.

Traditionally, European IMF members choose the next managing director, just as the U.S. decides on the presidency of the World Bank. But Washington's influence in the selection could be great: The U.S. is a 17 percent shareholder in the IMF's capital of about $300 billion.

If there were to be such changes in the IMF mission, it would take years to implement, and likely would have little immediate impact on countries in Central and Eastern Europe and the former Soviet Union. Analysts say even Russia, Ukraine and Romania, which rely heavily on the Fund, would get long-term aid from the IMF's sister organization, the World Bank, and -- as Summers suggested -- from private lenders.

Economic analysts interviewed by RFE/RL tend to support Summers' call for a more tightly focused IMF.

Robert Dunn, a professor of economics at George Washington University, says money is getting scarce as the IMF and the World Bank are competing for the same dollars to do essentially the same thing. He approves of a sharper focus for the IMF.

"It might not be a bad idea, given the shortage of funds, to re-establish a somewhat cleaner delineation between those two institutions and get the IMF back to its traditional role of short-term crisis lender."

Robert Solomon, a guest scholar in economic studies at the Brookings Institution, a Washington think tank, is more enthusiastic in his support for Summers' proposal. He says the IMF's assistance to Russia during its 1998 economic crisis was a good example of how the Fund should focus its efforts.

"Russia was in a crisis. It fits the Summers proposal. Russia -- the Russian financial crisis of a few months ago had a contagion effect all over the world."

The IMF issued a statement after Summers' speech saying only that the U.S. treasury secretary "has touched on a number of critical areas that need to be considered."

These calls for change in the IMF come as the Fund presses for change in Romania, Ukraine and Russia. These countries depend on the IMF to maintain financial stability.

The chief problem in Romania is persuading the government's private-sector creditors to defer payment on debts they are owed. Otherwise, any loans that the IMF, for instance, may give to Romania will simply be used to pay off private debt. So far, according to one Fund official, the private creditors have n-o-t been cooperative.

The IMF has committed 550 million dollars to Romania. But the next installment on that loan has been held up in part because of the lack of cooperation from private creditors. The amount of the installment, and when it will be released, will depend on this cooperation, as well as other issues.

Ukraine faces the same private-creditor issue, but its primary challenge is to overhaul an economic system left over from the communist era. President Leonid Kuchma says he wants to reform the Ukrainian system, but does not have enough support in parliament to carry this out.

In the meantime, the World Bank is delaying the release of a loan installment worth $100 million. And talks on the next, $300-million tranche from the IMF and further installments of the loan will continue in January, when IMF Managing Director Michel Camdessus is expected to visit Kyiv.

As a measure of the importance given to the need for economic reforms in Bucharest and Kyiv, the presidents of Romania and Ukraine in mid-December nominated respected central bankers to become prime ministers. In Ukraine, Viktor Yushchenko, backs radical market reforms and has been a key figure in talks with international financial organizations.

Mugur Isarescu's appointment in Romania is seen by Western correspondents as a signal of the country's commitment to reviving the economy and boosting its chances of starting accession talks with European Union next February.

Russia, too, needs to bring its banking system up to Western standards, and make other reforms, including equitable tax collections. Until such changes are made, the IMF is withholding a loan installment of $640 million. Camdessus also has said the military campaign in Chechnya threatens the release of the funds.

John Odling-Smee, the director of the IMF's department dealing with the former Soviet Union, says the best way for countries to move ahead on fundamental reforms is through strong governance. He says this means governments need to demonstrate moral authority and the strength to impose the rule of law, collect taxes, pay their own bills, and establish clear and stable rules for market participants.

As for the World Bank, it sees economic improvement -- for the near term, at least -- in Eastern Europe and the countries of the former Soviet Union, despite persistent problems in Russia, Ukraine and Romania. Ironically, it is growth in troubled Russia that will drive this improvement, according to its annual report, "Global Economic Prospects and the Developing Countries: 2000."

Eastern European states suffered a loss of economic growth during 1999 mostly because of declining trade. Financial troubles in the European Union stalled trade to the west. Russians, meanwhile, could not afford imports from Eastern Europe because of the ruble's weakness, so trade to the east fell, too.

But this prompted growth in Russia during 1999. Mick Riordan, a senior economist with the World Bank who is co-author of the bank's economic prospects report, notes that Russians turned to domestic manufacturers in increasing numbers.

Riordan said the World Bank had anticipated a decline of five and a half percent for Russia during the past year. Instead, the bank now anticipates growth of seven-tenths of one percent.

But Riordan and others wonder how long this growth can last. Robert Dunn of George Washington University takes an even more pessimistic view.

"It's still hard to see how the Russians will do well until they really get on with reorganizing -- privatizing -- agriculture, and until they begin imposing a modicum of civil order in the place by getting control of crime."

Indeed, the World Bank report says the long-term prospects for Eastern Europe and the countries of the former Soviet Union are questionable. Previously, the Bank expected growth of about five percent a year from 2002 to 2008. That forecast now has been reduced to 4 percent a year.

As Russia helped drive the economies of Eastern Europe and the former Soviet Union, it also can help slow them down, the report says. The World Bank notes that Russia is rich, but inefficient in exploiting its natural resources. Meanwhile, real progress remains stalled, due largely to the combination of pervasive organized crime and a poorly developed financial infrastructure.

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