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Jewish World Review July 14, 2000 /11 Tamuz, 5760

Amity Shlaes

Amity Shlaes
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A convenient punchbag for America's leaders

It suits the Treasury and Congress for the IMF to relieve them of direct responsibility for solving the world's economic crises


http://www.jewishworldreview.com -- AMERICANS love political theatre, and one of the best Washington shows this year was about the International Monetary Fund.

The fun started with a damning attack on the Fund by a commission appointed by Congress. Its chairman, the economist Allan Meltzer, said IMF policies had "failed" Indonesia and its intervention in Mexico had been "disastrous". Next came hearings at which experts enumerated IMF failings in the Latin American, Asian and Russian economic crises. The Treasury got in on the act, allowing the "need to reform in important ways".

But by June, it became clear that no steps would be taken. A sense of relief dominated the final Senate hearing, as lawmakers hurriedly drew the curtain on IMF reform and moved to domestic business.

The drama exposes the core of the IMF problem. Its critics tend to focus on the fund itself - its arrogance, the wrong-headedness of its economic prescriptions, the moral hazard its lending may introduce to markets.

But the much-maligned IMF is a multilateral body, and the servant of its member countries - the dominant one being the US. It has its own agendas and economic policies, many questionable. It also has a burning desire - universal to bureaucracies - to survive. Still, the IMF is less a grand power than the expression of various political impulses from its member countries.

And, in spite of their protestations, the two US entities in a position to alter IMF actions, the Treasury and Congress, find the status quo convenient. The Treasury likes the IMF because it tends to execute Treasury commands without the Treasury having to take direct responsibility. Congress wants reform, but likes having a punchbag even better.

In other words, the much-discussed moral hazard in public-sector lending - a lack of accountability - is not confined to the recipients of international loans. The lenders have their own moral hazard: no individual entity in Washington or other capitals is responsible for the consequences of those loans. This diffusion of responsibility means a consensus-driven policy that often yields strikingly poor results in the countries affected. A prime example is Russia, where western billions flowed directly into the pockets of Russian kleptocrats.

Even Mr Meltzer, hardly known an IMF sympathiser, makes this point. "The Treasury uses the language of reform to protect the status quo - to use the IMF as its own slush fund. The Congress likes to rail but it doesn't want to take responsibility for agreeing to finance particular actions."

Consider Russia. Back in the early and mid-1990s, some IMF economists were sceptical about big loans for Russia, divining that Russia lacked the economic structure to stop the cash going down a black hole. But the US administration felt it was imperative to stabilise the post-Soviet state through massive cash infusions.

It knew Congress was not going to create a new spending programme without a fight, so it leant on the Fund to supply the billions. Many considered the action inappropriate - after all, the IMF's original Bretton Woods mandate is to ease balance of payments problems, not to buy global political stability. But the Treasury pushed, and the IMF went along.

Congress took advantage of this arrangement. It felt free to attack the IMF Russia policy, charging that the IMF's focus on tax collection - rather than lowering tax rates - was an error. It pointed out the danger implicit in throwing cash - in all about $25bn (16.5bn) from IMF and World Bank - at Russia's corrupt enterprises.

In 1998, when the time came to replenish the IMF's funds, Congress had an opportunity to fight to cut off the IMF. It would perhaps have been a losing battle, but one consistent with its criticisms. Instead, it allowed the quota increase. Its only condition was the establishment of the Meltzer commission. The commission's fiery report, in turn, supplied Congress with material for the spring 2000 show trials.

In the calculus of US politics, this all made sense. Many voters like watching Congress beat up an administration-backed project. They care much less about accomplishing difficult reform at what is, to most of them, an obscure multilateral agency. Republicans who desired IMF reform, among them Senator Connie Mack of Florida and Dick Armey, the House majority leader, in the end decided against the enormous expenditure of political capital needed to force reform.

Today, just about everyone involved regrets what happened in Russia. As Joseph Stiglitz, formerly the World Bank chief economist, wrote in the New Republic, "the IMF and Treasury had laid the groundwork for the oligarchs' plundering". IMF officials talk sorrowfully about the big loans. They even rue some of their economic formulas. The IMF has now dropped its high-tax policy and is openly backing the Putin government's plan for a 13 per cent flat-rate income tax, provided the government also eliminates tax exemptions and cuts spending. It is a striking shift.

Yet such change has come late, because there is now a large residue of distrust in Russia. Many Russians say the IMF's past work dims their country's prospects. "Having effectively spoiled Russian society with practically unlimited financial support," Andrei Illarionov, a Putin adviser, wrote recently, "the international financial institutions have made the transformation of the Russian economy significantly more difficult."

Worse, there is little sign Washington will adjust in time for the next crisis. Reformers, mostly Republicans, hope a Bush administration will lead change. But the IMF remains a low item on the agenda. And Washington's IMF story is a reminder that governments concerned about accountability in far off lands might do better to do scrutinise their own accountability first.


JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.

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