High-wire act that changed the Bank
Read my lips, says Jim Wolfensohn
World Bank turns to guarantees
The Mexican crisis, the Asian contagion, meltdown in Moscow and more recently the Brazilian turmoil each hit the financial community like thunderbolts. Naturally officials were expected to come up with an equally earthshaking fix. What emerged hardly suited the temper of the times. It was downright dull by comparison. And that turned into a bit of a problem for the powers that be.
The moment finally came for Bill Clinton to call on some heavy-hitters from far above the pay grades of finance ministers and central bankers. The US president did so during a speech last September to America's prestigious Council on Foreign Relations (CFR).
As a result, Peter Peterson, the New York financier and philanthropist who serves as CFR chairman, put together a team from the A-list of corporate chieftains, Wall Streeters, academics, labour people and politicians. That's the one thing that sets this task force apart from the rest of the "financial architecture" debate. "This is one of the most important and potent groups ever put together by the Council," says CFR president Leslie Gelb. Peterson and his co-chairman, Carla Hills, judged that the problem was far more than a technical one.
"Our feeling was that the results would be far more persuasive if the group included people who are not your usual suspects on this issue," says Peterson. He noted a widely held opinion that problems have arisen because certain people, though well-informed technically about events in various countries, may not have been so well briefed about the social, cultural and political phenomena that were taking place. "So it's very important that whatever reforms one comes up with have credibility that is informed by people who bring a different sensibility to this issue."
Peterson emphasized the need for contributions from corporate CEOs who understand the business implications and from people who have first-hand knowledge of congressional attitudes. Their roadmap, Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture, now circulates at a propitious time. The report came out on the eve of this month's IMF/World Bank annual meetings.
"I think that we have fairly substantial agreement on a fairly wide range of issues," says Princeton University's Peter Kenen.
The report is bound to raise eyebrows. It has recommended, for example, smaller IMF rescue packages for countries trying to fend off speculative currency attacks. That's surprising because several panel members who endorsed that approach helped to shape recent IMF and US treasury policies. David Lipton was one of the key figures on the Clinton team associated with big packages. Morris Goldstein, the project director, worked at the Fund for 25 years. Barry Eichengreen has been a senior adviser to the IMF, and Kenen often serves in the same capacity at the US treasury. The bottom line: these key people now think that it is time for change as a result of the moral-hazard problem.
"This is the only report I know of that has talked about a smaller Fund," says Goldstein, who has been involved behind the scenes in many G-10 and Basel Committee projects on such issues. But the group also wants to redesign how the Fund deals with systemic crises and goes out of its way to pay attention to the difference between such problems and less serious, but still potentially devastating, country crises. The report also takes a much harder line on burden-sharing with the private sector but does not try to cover everything. It is silent, for example, about the heavily indebted poor countries (HIPC) debt initiative.
There are seven major recommendations designed to bring greater stability to emerging-markets finance:
Good-housekeeping awards: the IMF should give a break to countries that do the right thing. The Fund should publicize its evaluations and should lend to members of this "club" on better terms.
Pegs are passé: the CFR group condemns fixed exchange rates as the root of much evil. It urges the IMF and G-7 to stop supporting "unsustainable" pegs.
Capital slows: torrents of private capital flooding into tiny emerging markets and then flowing out in rip-tide fashion have caused enormous damage. The CFR group wants countries to use tax measures, as Chile did, to moderate these flows.
Share the pain: the group calls for debt rescheduling as a condition for IMF lending in extreme cases. It also wants new rules in the form of "collective action clauses" for all sovereign bond contracts.
Less is more: the IMF should scale back. Officials have have been lending countries amounts many times their "normal quota limits", starting with the Mexican peso collapse of 1994-95.
Back to basics: the IMF and the World Bank should go back to doing what the founders set them up to do. The Fund was supposed to do macro, and the World Bank was supposed to do micro. The "Treaty of 19th Street" (the road that runs between the Bank and the Fund) reinforced this division of labour at the end of the 1980s. But matters have not been working out that way.
Crack the whip: the CFR group wants action. Finance ministers should convene a global conference to hammer out priorities, a plan and timetables.
Expensive lessons
The view coming out of officialdom is that the CFR group recommended important and useful approaches, even if they won't solve the problem. "I think that their commendations will help," says Michael Mussa, economic counsellor to the IMF. He expects significant progress over the next several years, particularly in coming to terms with problems in the financial sector. "People have learned some very expensive and bitter lessons," he says. Asian economies, for example, were accidents waiting to happen, particularly because their banks were in such bad shape. That in part is why they put off adjusting their exchange rates. They also could not jack up interest rates without inflicting severe damage. So their reserves just ran out of the door. Markets knew there was not much left by the time these countries devalued.