Magazine article Foreign Policy in Focus

Problems with Current U.S. Policy

Magazine article Foreign Policy in Focus

Problems with Current U.S. Policy

Article excerpt

Key Problems

* The Treasury Department's reform proposal focuses on transparency and surveillance, while ignoring the problem of volatile speculative capital.

* Under the Meltzer Commission's recommendations, the IMF would terminate long-term assistance tied to structural adjustment conditions but would maintain tremendous influence by requiring that countries meet free market-oriented "preconditions" to qualify for emergency assistance.

* A country's failure to prequalify for assistance would likely provoke financial market jitters that would undermine the goal of stability.

Treasury Secretary Summers continues to defend the IMF as "among the most effective and cost-efficient means available to advance U.S. priorities worldwide." Commenting on the fund's response to the 1997-98 global financial crisis, Summers claimed that without the IMF, "the crisis would have been deeper and more protracted, with more devastating impact on the affected economies and potentially much more severe consequences for U.S. farmers, workers, and businesses."

Indeed, there have been signs of recovery among some of the countries hardest hit by the financial crisis. However, the economic indicators in many countries suggest that they have not fully recovered. Perhaps even more disturbing than the lingering effects of the financial crisis is the fact that little has been done to prevent such tragedies in the future. The Treasury Department's IMF reform plan is strikingly vague. It focuses primarily on improving the transparency and surveillance of member countries' economic indicators, ignoring the fact that the Asian countries had been following prudent economic policies prior to the crisis, and most had both low and falling inflation and budget surpluses. It was rampant speculation or "hot money"--not a lack of information--that set off the Asian crisis, and yet there is not a word in the Treasury's reform plan on the need to discourage speculative capital flows.

In the absence of a clear plan from the Clinton administration, much attention has focused on the more radical recommendations of the Meltzer Commission. Media coverage of the Majority Report of the Commission (signed by 8 of 11 members) has focused on the recommendation to terminate long-term IMF assistance tied to conditions. This was understandably welcomed by many critics of the orthodox structural adjustment conditions, which have caused suffering for so many millions of people around the world. However, while the commission would abolish the IMF's power to impose conditions on long-term assistance, it would still require that countries meet a list of rigid "preconditions" to be eligible for short-term (120 days maximum) crisis assistance. These "preconditions" include the following:

Freedom of entry and operation for foreign financial institutions

   This requirement would disqualify from emergency assistance countries such
   as Brazil, which announced in early 2000 its intention to place controls on
   foreign banks. Indeed in many countries, the growing influence of foreign
   banks is a volatile political issue, stemming from the fear that these
   global banks are not as committed as domestic financial institutions to
   meeting local credit needs or maintaining the host country's financial
   stability. … 
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