Strengthen -- Don’t Scrap -- the IMF

May 17, 2000

Washington, D.C. – The failure of developing country governments and international financial institutions to adapt to changing markets helped trigger some of the world’s recent financial crises. That is the conclusion of a new report from top business leaders who today outlined a unique package of reforms to put the international financial system on a more stable footing.

Arguing that global finance is “more susceptible to crisis than it need be,” a new report from the Committee for Economic Development (CED) targets both developing and developed countries and the IMF as being in serious need of reform to prevent future breakdowns.

Improving Global Financial Stability finds that financial problems in Asia, Russia, and Brazil were largely “home grown.” The report endorses international standards to be adopted by developing countries, and hails private-sector participation and resources as vital to building an accepted set of best practices.

Strengthening – not scrapping – the IMF is central to the CED reform package. When international financial crises occur, a strong international backstop is needed. “In pointed contrast to recent radical proposals to reinvent the IMF, our report instead offers a set of improvements that build on its successes. We would rather strengthen the IMF than tear it down or severely cripple its ability to stem crises,” stated the report’s co-chair, George F. Russell, Jr., Chairman, Frank Russell Company.

The report concludes that mandated private-sector bail-ins are misguided. “It makes little sense to encourage countries, on the one hand, to put in place policies that are meant to attract foreign capital and, on the other hand, to repel that capital through imposing additional costs on it,” the report states. CED also argues that granting the poorest countries relief from official debt is important to achieving widespread reform; the world’s poorest countries, with little access to foreign capital, lack the resources and incentives to adopt market-based policies while burdened with debt they cannot repay.

Recent studies on international financial stability by the Council on Foreign Relations and the International Financial Institutions Advisory Commission (the Meltzer Commission) have recommended methods of crisis resolution that rely more on regulation and pre-qualification than market principles. “As business people, we take a more pragmatic approach based on our direct experience. Improving Global Financial Stability recommends incremental changes that rely on the power of markets to improve the functioning of a system that is fundamentally sound,” added the project’s co-chair, Kathleen Cooper, Chief Economist and Manager, Economics & Energy Division, Exxon Mobil Corporation.

Specifically, the CED report recommends that:

o Developing Country Governments can help prevent crises by
increasing the openness, transparency, and accountability of both public- and private-sector institutions, and by adopting international standards and best practices in accounting, banking regulation, bankruptcy, and corporate governance. Developing countries can also maximize the benefits and minimize the risks of participating in the global economy by establishing comprehensive social safety nets; moving towards flexible exchange rates (in most cases); building sufficient reserves of foreign currency; establishing private lines of credit to be called upon in crises; and using temporary taxes, if necessary to control short-term capital inflows, as they strengthen their financial systems.

o Developed Country Governments must remain committed to a
market-based global financial system and the international institutions that support it. To help prevent crises, developed countries should grant relief from official debt and provide other forms of financial and technical assistance to the world’s poorest countries, since these countries cannot adopt better policies until their debt burden is lifted. In crisis resolution, governments should not mandate private-sector bail-ins or collective action clauses in international bond contracts, but should leave these decisions to market participants.

o The IMF should place greater emphasis on preventing crises by
becoming more transparent and accountable to its members and the
international public; requiring that countries release information
developed in Article IV consultations with the IMF; and monitoring and investigating the use of its funds to ensure they are not siphoned off in fraud and corruption. When a crisis occurs, the IMF should restore confidence as its first priority, and act as a neutral “crisis manger,” neither bailing in nor bailing out foreign lenders.

“Our recommendations are founded on the belief that markets will reward countries with institutions and policies that engender confidence, attract private capital, and allocate capital efficiently, ” the report states. “We recognize both the need for developing country governments to help themselves and the indispensable role of the IMF in preventing financial crises and stabilizing afflicted economies if prevention fails.”

CED is an independent, nonpartisan public policy organization of more than 200 business and academic leaders committed to promoting economic growth and greater opportunity for all Americans. Elliot Schwartz, Vice President and Director of Economic Studies at CED, directed the International Financial Stabilization project.

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Improving Global Financial Stability is available from the Committee for Economic Development, 477 Madison Avenue, New York, NY 10022, telephone - (212) 688-2063 (dial ext. 274 to order), fax - (212) 758-9068. The full text of the report will be available on our website, www.ced.org, after the release.