THE MELTZER REPORT
International Financial Institution Advisory Commission
Funded by the Omnibus Budget Bill passed in October,1998 to review the IFIs
THIS IS A U.S. CONGRESSIONAL SPONSORED REPORT DESIGNED TO "REINVENT THE IMF AND THE WORLD BANK" TO CONFORM TO THE BRETTON WOODS ORIGINAL DESIGN TO
CONTROL AND MONITOR THE FINANCES OF THE WORLD AND TO TRANSFER WEALTH THROUGH A CONCEPT CALLED "DEVELOPMENT" Please see my report entitled: "The April 2000 Stock Market, Debt Relief, and the Reinventing of the IMF/World Bank"
Reason: --Large financial crises in Latin America, Mexico, Asia and Russia
Calls for additional capital for IMF to respond to crises raised questions
About how the fund uses resources
Repeated commitments to reduce poverty in the poorest nations have failed
Focused: Financial fragility
Inadequate banking regulation
Role of the Bank for International Settlements and its affiliated institutions
As a result of giving the IMF $18B, Congress est. commission to review: IMF/World Bank, WTO and BIS.
1. IMF, WB and regional development banks should write-off in entirety all claims
against heavily indebted poor countries that implement an effective economic
and social development strategy in conjunction with WB
2. IMF should restrict its lending to the provision of short-term lending. Extending
long-term lending should end.
The frequency and severity of recent crises raise doubts about the system of crisis management now in place and the incentives for private actions that it encourages and sustains. The World Bank, in evaluating its own performance has a 73% failure rate in Africa. Only one in four programs achieved satisfactory results.
The Commission wants the IMF/Bank and regions banks to become more accountable with a clearer focus.
the IMF should serve as quasi lender of last resort to emerging economies. Lending should be limited to the provision of liquidity to solvent member governments. Liquidity loans should have
-- short maturation
be made at a penalty rate (above borrower's recent market rate)
be secured by a clear priority claim on the borrower's assets.
Except in unusual circumstances, where the crisis poses a threat to the global economy, loans would be made only to countries in crisis that have met pre-conditions that establish financial soundness.
Proposed pre-conditions for liquidity:
1. Limit corruption and reduce risk by increasing portfolio diversification, eligible member countries must permit, in a phased manner over a period of years, freedom of entry and operation for foreign financial institutions.
2. Every country that borrows from the IMF must publish, regularly and in a timely manner, the maturity structure of its outstanding sovereign and guaranteed debt and off-balance sheet liabilities.
3. Commercial banks must be adequately capitalized either by a significant equity position, in accord with international standards or by subordinated debt held by non-governmental and unaffiliated entities. The IMF in cooperation with the BIS should promulgate new standards to ensure adequate management of liquidity by commercial banks and other financial institutions so as to reduce the frequency of crises due to the sudden withdrawal of short-term credit.
4. The IMF should establish a proper fiscal requirements to assure that IMF resources would not be used to sustain irresponsible budget policies.
5. The new rules should be phased in over a period of five years. If a crisis occurred in the interim, countries should be allowed to borrow form the IMF at an interest rate above penalty rate.
THE COMMISSION RECOMMENDS THAT COUNTRIES USE EITHER FIRMLY FIXED RATES USING CURRENCY BOARDS OR DOLLARIZATION OR FLUCTUATING RATES.
WORLD BANK GROUP
The World Bank group and its three regional counterparts employ 17,000 people in 170 offices around the world, have obtained $500 billion in capital from national treasurers, hold a loan portfolio of $300B and each year extend a total of $50B in loans to development members.
70% of World Bank non-aid resources flow to 11 countries that enjoy substantial access to private resource flows.
The regional institutions overlap with the World Bank in several ways:
a. Compete for donor funds, clients, and projects
b. Offices overlap and are in the same cities
c. The regional repeat the World banks organization structure with focuses on subsidized loans and guarantees to governments, zero-interest credits to the poorest members, and loans, guarantees and equity capital for private sector operations.
TO function more effectively, the development banks must be transformed from capital-intensive lenders to sources of technical assistance, providers of regional and global public goods, and facilitators of an increased flow of private sector resources to the emerging countries. The common goals should be to reduce poverty.
World Bank would be renamed the World Development Agency
New Functions of world Bank - World Bank Development Agency
1. Performance based grants
The provision of improved levels of health care, primary education and physical infrastructure, once the original focus for development funding should again become the starting points for raising living standards.
From vaccinations to roads, from literacy to water supply, services would be performed by outside private sector providers (including NGOs and charitable organizations) as well as public agencies.
2. Institutional Reform Loans - screws being tightened
Each government will present its own reform program. If the development agency concurs the country would receive a loan with a subsidized interest rate. The extent of the interest rate subsidy would range form 10% to 90% as in grant financing of user fees. Lending for institutional reform in poor countries without capital market access should be conditional upon implementation of specific institutional and policy changes and supported by financial incentives to promote continuing implementation. The progress would be reviewed by independent auditors
All country and regional programs in Latin Am. And Asia will be the primary respon. Of the a area's regional bank.
The World Bank should become the principal source of aid for the African continent until the African Development Bank is ready to take full responsibility.
EMPHASIS OF WORLD BANK DEVELOPMENT AGENCY
The World Development Agency should concentrate on the production of global public goods and serve as a center for technical assistance to the regional development agencies. Global public goods include treatment of tropical diseases and AIDS, rational protection of environment resource, tropical climate agricultural programs, development of management and regulatory practices, etc.
The World Bank would have less need for its current callable capital. It should be reallocated to regional development agencies and some should be reduced in line with a declining loan portfolio.
Income from paid-in capital and retained earnings should be reallocated to finance the increased provision of global public goods.
THE WORLD BANK AND REGIONAL DEVELOPMENT BANKS SHOULD WRITE OFF IN ENTIRETY THEIR CLAIMS AGAINST ALL HEAVILY INDEBTED POOR COUNTRIES THAT IMPLEMENT AN EFFECTIVE ECONOMIC DEVELOPMENT STRATEGY UNDER THE BANK'S COMBINED SUPERVISION.
THE UNITED STATES SHOULD BE PREPARED TO INCREASE SIGNIFICANTLY ITS BUDGETARY SUPPORT FOR THE POOREST COUNTRIES IF THEY PURSUE EFFECTIVE PROGRAMS OF ECONOMIC DEVELOPMENT. THE CURRENT LEVEL OF U.S. BUDGETARY SUPPORT FOR THE POOREST COUNTRIES IS ABOUT $6 PER U.S. CITIZEN OR $1.5b TOTAL (13)
BANK FOR INTERNATIONAL SETTLEMENTS
During its 70 year history the BIS has adapted well to large changes in the financial industry and central banking practices. Its adaptability to adapt was due largely to its limited and homogeneous membership. The Commission recommends that the BIS remain a financial standard setter. Implementation of standards and decisions to adopt them, should be left to domestic regulators or legislatures. The Basel Committee on Bank Supervision should align its risk measures more closely with credit and market risk. Current practice encourages mis-allocation of lending. (14)
The WORLD TRADE ORGANIZATION
The WTO has tow main functions (1) it administers the process by which trade rules change. Trade ministers negotiate agreements that national legislative bodies can approve or reject. (2) the WTO serves as a quasi-judicial body to settle disputes. Quasi-=judicial determinaiton, when coupled with the imposition of sanctions, can overwhelm a country's legislative process.
Rulings or decisions by the WTO, or any other multilateral entity that extend the scope of explicit commitments under treaties or international agreements must remain subject to explicit legislative enactment by the U.S. Congress, and, elsewhere, by the national legislative authority. 14
CHAPTER 1 INTRODUCTION
The mission of Bretton Woods was to promote monetary and financial stability, to reconstruct countries devastated by war, and to expand the reach of the market system by offering open trade and market access to all countries. Never before have the victors in war established a framework to promote growth, development, and global prosperity. 15
These institutions, and the U.S. commitment to maintain peace and stabiilty, have had remarkable results. Our former adversaries are now part of the expanding global market system. 15
the initial role of the IMF was to smooth balance-of-payments adjustment in a system of fixed but adjustable exchange rates. The Bank's original charge was to foster post-war reconstruction and to encourage economic development by lending to developing countries. Beginning in the 1960s, countries created regional development banks to supplement the Banks; work. (IDB in 1959), AfDB, 196, and ADB 1966 to provide loans and grants for development in their respective regions.
New Conditions, New Challenges
The pegged exchange-rate system, which gave purpose to the IMF, ended between 1971 and 1973, after President Nixon halted U.S. gold sales. The IMF now functions in an expanded role as a manager of financial crises in emerging markets, as a long-term lender to developing economies and former Communist countries, as a source of advice and counsel to many nations, and collector of economic data on its 182 member countries. 17
The crises in developing countries destroyed large parts of the wealth of their citizens. In an interrelated global economy, financial flows and trade declined, particularly U.S. and European exports and inter-regional exports and imports.
The Commission recognizes that financial crises have occurred throughout history and cannot be eliminated entirely. The IMF has given too little attention to improving financial structures in developing countries and too much to expensive rescue operations. Its system of short-term crisis management is too costly, .... 17
High cost and low effectiveness characterize many development bank operations also. The World Bank's evaluation of its own performance in Africa found a 73% failure rate. Only one of four programs, on average, achieved satisfactory, sustainable results. 18
Six reasons for the development banks' poor record in poverty reduction and institutions reform are:
1. By far the largest share of the Banks' resource flows to a few countries with access to private capital.
2. The amount of funds provided by development banks to their largest borrowers is small compared to the private-sector resources received;
3. The host government guarantee, required by all Bank lending, eliminates any risk between project failure and the Bank's risk of loss
4. Money is fungible so that any linkage between development bank resources and specific projects or policy changes is difficult to trace and often nonexistent
5. Countries do not implement reforms unless they choose to do so
6. Development projects succeed only if the recipient country has a significant interest in the project. 18
In the past the fund has worked to achieve growth and economy stability by making loans conditional on changes in monetary, fiscal, exchange rate, trade or labor-market policies. The world Bank has added other conditions. 18
A main reason for the IMF's modest success is that countries come to the IMF mainly when they have serious problems, often when they are in crisis. The IMF's relatively standard advice includes reducing domestic spending and permitting the country's currency to depreciation, reducing spending lowers incomes. Reduced spending and a depreciated currency typically improve the current account and may reduce inflation. 19
The Commission believes that the effectiveness of foreign aid and progress against poverty would increase and financial crises would be reduced in number, frequency and severity, if current programs of the IMF and the development banks change to focus attention on institutional reform, incentives for improved domestic arrangements and policies, greater transparency and accountability, reduced opportunities for corruption in developing and restructuring countries and the provision of global public goods. 20
Problems with the IFI's:
Overlapping missions and mission creep
Lack of transparency and accountability
Ineffectiveness, corruption in developing countries, and waste of resources
Commandeering of international resources to meet objectives of the US. Government or its Treasury Department
Failure to develop successful regional and global problems to confront transnational problems in agriculture, transportation, forestry, environmental and health care
Congress asked the Commission to report on:
changes in policy goals set forth in Bretton Woods Agreement and the IFI Act
--changes in charters, organization structures
additional monitoring tools, global standards, or regulations for, among other things, global capital flows, bankruptcy standards, accounting standards, payment systems, and safety and soundness principles for financial institutions
possible mergers or abolition of the IFI, including changes in the manner in which such institutions coordinate their policy and program implementation and their roles and responsibilities
The United States has a large role in the world economy. It is a leading exporter and importer of goods and services. U.S. citizens own, directly or through corporations and institutional investors, $2 to $3 trillion of foreign assets. 23
CHAPTER 2 - INTERNATIONAL MONETARY FUND
Two of the founder's key assumptions are not longer value:
1. World economy would remain on a system of fixed, but adjustable exchange rates tied to gold or the dollar with gold fixed at $35 per ounce.
2. After an initial postwar economic adjustment, payments for goods and services would be free of exchange controls
3. Capital account transactions such as lending, borrowing, investing, and repaying could be subject to exchange controls at the discretion of the home country government. 25
The oil shocks of the 1970s and the mistaken economic policies in many countries that produced large deficits and inflation increased the difficulty of achieving these goals and objectives. Nothing in the founding mission...of the IMF prepare it to deal with these evolving challenges.
In the 1980s and 1990s, the IMF took on long term role of IMF to support balance of payments. The IMF is currently involved in structural adjustment programs in some 70 countries. 28
4 countries borrowed from IMF 40+ years
20 countries borrowed from IMF 30+ years and 46 countries borrowed from IMF 20+ years
Transformation of the IMF into a source of long-term conditional loans has made poorer nations increasingly dependent on the IMF and has given the IMF a degree of influence over member countries' policymaking that is unprecedented for a multilateral institution.
Mexico $20B; Asia $100B; Russia $20B
The role of the IMF has evolved along with the changing nature, causes and size of the crises faced. While the IMF can point to some success, it has presided over, and fostered, a crisis-prone system. 25
The recommendations can be grouped into six core principles:
(1) Sovereignty - desire to ensure that democratic processes and sovereign authority are respected in both borrowing and lending countries
2. Separation the desire to define a set of tasks for the IMF that are distinct from the tasks of other multilateral agencies
3. Focus - establishing clear priorities and placing credible bounds on authority to ensure that the IMF does not continue to experience mission creep
5. Burden sharing ensuring that the burden of financing IMF operations is hared equitable among nations
6 Accountability and transparency - ensuring that the governance and accounting structure of the IMF provide accurate information about IMF actions, that IMF officials are accountable for their actions, and that reports are available.
NEW MISSION OF IMF
The commission recommends that the IMF be restructured as a smaller institution with three unique responsibilities would increase global stability, improve the functioning of markets, and help countries improve domestic and monetary fiscal policies:
1. Act as a quasi-lender of last resort to solvent emerging economies by providing short-term liquidity assistance to countries in need under a mechanism designed to avoid the abuse of liquidity assistance to sponsor bailouts and under a system that would not retard the development of those institutions within the recipient country that would attract capital from COMMERCIAL SOURCES.
2. Collect and public financial and economic data from member countries and disseminate those data in a timely and uniform manner
3. To provide advice relating to economic policy as part of regular "Article IV" consultations with member countries.
The IMF should be precluded from making other types of loans to member countries. The current practice of extending long-term loans in exchange for member countries' agreeing to abide by conditions by the IMF should end. 43
The commission recommends that long-term institutional assistance to foster development and encourage sound economic policies should be the responsibility of the reconstructed World Bank or regional development banks under a new mechanism. 43
The Commission recommends two types of restriction on the IMF's role as quasi-lender of last resort. Fist the central banks of large, industrial countries should continue to function as lenders of last resort for their own currencies and financial system. 44
The IMF does not have, and cannot be expected to have, resources to protect the payments systems of advanced industrial countries against an internal drain. 44
2. To be eligible to borrow in a liquidity crisis, a member should meet minimum prudential standards. Countries that meet the standards would receive immediate assistance without further deliberation or negotiation. 44
The IMFs role would be to provide liquidity, promptly in a financial crisis under strict rules.
Rules for IMF Lending
1. Limit corruption and reduce risk by increasing portfolio diversification,` eligible member countries must permit freedom of entry and operation for foreign financial institutions in a phased manner over a period of years. 44 Countries would benefit by diversifying their risks on the international financial marketplace. Countries would gain from increased stability, a safer financial structure, and from the management and market skills that global banks would impart. 45
2. Consistent with the Basel Committee's recent reform proposal, the Commission believes that bank regulation should incorporate market disciplines as a means of measuring and enforcing prudential capital standards. 45 To establish market discipline in the domestic financial sector and protector the soundness of financial institutions, commercial banks must be adequate capitalized. This can be achieved in different ways including a significant equity based and the issuance of uninsured of uninsured subordinated debt to non-governmental and unaffiliated entities. 45
3. To encourage prudent behavior, safety and soundness every country that borrows from the IMF must publish regularly the maturity structure of its outstanding sovereign and guaranteed debt and off-balance-sheet liabilities in a timely manner. 45
4. The IMF should establish a proper fiscal requirement to assure that IMF resources would not be used to sustain irresponsible budget policies. 45
THE RESPONSIBILITY OF LENDER OF LAST RESORT SHOULD BE TO THE MARKET, NOT TO THE INDIVIDUAL PARTICIPANT. 45 IN RECENT DECADES THE COLLAPSE OF PENN CENTRAL, DREXEL BURNHAM, AND RUSSIA HAVE BEEN MET BY LOANS TO THE MARKET AND SOLVENT BORROWERS.
TERMS FOR LENDING
the Commission envisions a liquidity mechanism. The IMF loans (1) should have a short maturity with only one allowable rollover, (2) should pay a penalty rate (a premium over tghe sovereign yield paid by the member country one week prior to applying for an IMF loan), (30 should specify that the IMF be given priority in payment over all other creditors, secured and unsecured. THE PENALTY RATE COULD INCREASE WITH THE LENGTH OF TIME THE LOANS REMAINS OUTSTANDING. 46
New rules to be phased in over 3 -5 years. If a new crisis occurs before the new rules are in plae in most countries, countries should be permitted to borrow at an interest rate above the penalty rate. The "super penalty rate" would give countries an additional incentive to adopt the new rules. 46
Ensuring Priority of IMF Claims on Sovereigns
ONE WAY TO ENSURE PRIORITY OF IMF CLAIMS IS TO REQUIRE SECURITY OR COLLATERAL.
1. There are some practical difficulties: commodity exports can serve as collateral. It may unintentionally encourage countries not to privatize important export-producing sectors (so that the government can retain control over exports to serve as collateral.).
2. "Negative pledge clauses" may prevent some governments from effectively subordinating existing creditors by pledging collateral on new loans. MANY EXISTING SOVEREIGN DEBT CONTRACTS SPECIFICALLY EXEMPT FROM NEGATIVE PLEDGE CLAUSES SHORT-TERM, DEBT TO FOREIGN MONETARY AUTHORITIES AND MULTILATERAL INSTITUTIONS, AND DEBT WHICH IS NOT PUBLICALLY OFFERED. 46
IMF advances can be treated as "exchange of assets," rather than as loans, to avoid the application of negative pledge clauses. Another approach in crisistake advantage of the grace period allowed before the enforcement of negative pledge clause violations (typically 90-120 days).
The most promising and simple approach to ensuring IMF seniority would be to require IMF members to agree to three debt management rules as part of the pre-qualification requirement for access to IMF liquidity assistance: (1) Member countries must specifically exempt the IMF from the application of negative pledge clauses in all new sovereign debts issued by the member countries. 47
(2) BORROWERS WOULD GIVE THE IMF EXPLICIT LEGAL PRIORITY WITH RESPECT TO ALL OTHER CREDITORS, SECURED AND UNSECURED (3) MEMBER COUNTRIES THAT DEFAULT ON THEIR IMF DEBTS WOULD NOT BE ELIGIBLE FOR LOANS OR GRANTS FROM OTHER MULTILATERAL AGENCIES OR BY MEMBER COUNTRIES 47
CREDIT LIMITS would be limited to to one year tax revenues. 47
The Commission recognizes that countries may need to borrow for reasons other than a liquidity crisis. Other vehicles: (1) Multilateral development bank (2) UN agency. 47
a. If political events lead some group of countries to determine that they wish to act jointly to provide foreign aid or loans to another nation, the leading countries should provide aid directly.
b. Ina financial crisis, a country will often find that ti wishes to undertake institution reforms, it may want to spread the burden differently.
The IMF should not be used as a "slush fund' to satisfy decisions of the G67 finaince ministers or other groups of powerful members.
The Commissions agrees with the conclusion of Stanley Fisher of the IMF that COUNTRIES SHOULD CHOOSE EITHER FIRMLY-FIXED RATES OR FLUCTUATING RATES. 49
Rigidly-fixed systems require large reserves or lines of credit. The acquire needed credibility gradually, often only after the country surmounts a crisis. To increase credibility, some countries, adopting a fixed exchange rate, have chosen to establish a currency board or, have taken a strong foreign currencysuch as the dollar or the Euroas their domestic money. The eleven countries that joined the European Central Bank have taken a different route, a common currency internally and a fluctuating exchange rate against the rest of the world. 49
THE COMMISSION RECOMMENDS THAT COUNTRIES AVOID PEGGED OR ADJUSTABLE RATES. The IMF should use its Article IV consultations
the Commission does not approve of the IMF's policies in Latin America in the 80s or Mexico in 1995. These loans protected U.S. and other foreign banks, financial institutions, and some investors at great cost to the citizens of the indebted countries. The loans delayed resolution of the 80's crisis by permitting lenders and borrowers to report the debt as fully serviced. 50
PROPOSALS FOR BANKRUPTCY COURTS, COLLECTIVE ACTION CLAUSES AND OTHER CONTRACTUAL CHANGES, OR OTHER ATTEMPTS TO SHARE LOSSES BETWEEN PRIVATE AND PUBLIC LENDERS AND INSTITUTIONS, RAISE MANY UNRESOLVED PROBLEMS. THE COMMISSION BELIEVES THAT THE DEVELOPMENT OF NEW WAYS OF RESOLVING SOVEREIGN BORROWER AND LENDER CONFLICTS IN DEFAULT SITUATIONS SHOULD BE ENCOURAGED BUT LEFT TO THE PARTICIPANTS UNTIL THERE IS A BETTER UNDERSTANDING BY DEBTORS, CREDITORS, AND OUTSIDE OBSERVERS OF HOW, IF AT ALL, PUBLIC-SECTOR INTERVENTION CAN IMPROVE NEGOTIATIONS. 50
FINANCE AND ACCOUNTING REFORMS
--THE IMF'S ACCOUNTING SYSTEM SHOULD BE SIMPLIFIED AND RATIONALIZED TO IMPROVE TRANSPARENCY.
--IMF ACCOUNTS SHOULD BE REFORMED TO MIMIC STANDARD ACCOUNTING PROCEDURES FOR REPRESENTING ASSETS AND LIABILITIES AND INCOME AND EXPENSES. LIABILITIES SHOULD BE SEPARATED FROM EQUITY.
--THE "SDR DEPARTMENT" ACCOUNTS SHOULD BE INCORPORATED INTO THE IMF'S OVERALL ACCOUNTS, RECOGNIZING COUNTRIES WITH SDR HOLDINGS ABOVE CUMULATIVE ALLOCATIONS AS NET SUPPLIERS OF CREDIT 51
----THE COMMISSION'S PROPOSAL WOULD MAKE THE IMF A STANDBY LENDER IN WHICH LENDING WOULD DECLINE. IN KEEPING WITH ITS REDUCED LENDING ROLE. THE IMF'S CURRENT RESOURCES SHOULD BE SUFFICIENT FOR IT OT MANAGE ITS QUASI-LENDER OF LAST RESORT RESPONSIBILITIES. 51
IN A CRISIS, THE FUND SHOULD BORROW CONVERTIBLE CURRENCIES AS NEEDED TO FINANCE SHORT-TERM LIQUIDITY LOANS. 51
DEBT OF HIPC COUNTRIES CANNOT BE REPAID UNDER ANY FORESEEABLE FUTURE DEVELOPMENTS. IMF OR OTHER LENDING TO MAKE DEBT SERVICE APPEAR CURRENT REPEATS THE MISTAKE MADE IN LATIN AMERICA IN THE 1980S. PRIVATE OWNERSHIP, OPEN MARKETS, AND THE RULE OF LAW ENCOURAGE GROWTH AND DEVELOPMENT. HIPC DEBT SHOULD BE FORGIVEN IN ITS ENTIRETY CONDITIONAL ON THE DEBTOR COUNTRIES IMPLEMENTING INSTITUTIONAL REFORMS AND AN EFFECTIVE DEVELOPMENT STRATEGY. 52
CHAPTER 3 - THE DEVELOPMENT BANKS
The entrance to the World Bank reads, "Our dream is a world without poverty." NEITHER THE WORLD BANK NOR THE REGIONAL BANK NOR THE REGIONAL DEVELOPMENT BANKS ARE MOVING RAPIDLY TOWARD THAT OBJECTIVE OR THE LESSER, BUT MORE FULLY ACHIEVABLE, GOAL OF RAISING LIVING STANDARDS AND THE QUALITY OF LIFE, PARTICULARLY FOR THE PEOPLE IN THE POOREST NATIONS OF THE WORLD. 55
WORLD BANK AND THREE REGIONAL BANKS EMPLOYS 17,000 PEOPLE IN 170 OFFICES AROUND THE WORLD AND HAVE OBTAIN $500b IN CAPITAL FROM NATIONAL TREASURIES, HOLD A LOAN PORTFOLIO OF $300b AND EACH YEAR EXTEND A TOTAL OF $50B IN LOANS TO DEVELOPING MEMBERS. 55
REVIEWS OF PERFORMANCE ARE SUBJECTIVE, BUT EVEN THE WORLD BANK'S SELF- AUDITED EVALUATIONS REVEAL AN ASTONISHING 50-60% FAILURE RATE TO ACHIEVE SUSTAINABLE RESULTS. 55
THE WORLD BANK...IN KEEPING WITH A MISSION TO ALLEVIATE POVERTY IN THE DEVELOPING WORLD, CLAIMS TO FOCUS ITS LENDING ON COUNTRIES DENIED ACCESS TO THE CAPITAL MARKETS. NOT SO; 70% OF WORLD BANK NON-AID RESOURCES FLOW TO 11 COUNTRIES THAT ENJOY EASY ACCESS TO THE CAPITAL MARKETS.55
THE WORLD BANK CLAIMS THAT FUNDING THEIR ACTIVITIES IS COSTLESS TO DONOR MEMBERS. THE COST TO MEMBERS REACHED $22 B A YEAR. WE FIND THAT BORROWERS IN THE AGGREGATE BENEFIT FROM A SUBSIDY OF AS MUCH AS $31b ANNUALLY, $13 BILLION ON INTEREST-BEARING LOANS. PRIVATE CAPITAL FLOWS NOW DWARF ANY FORESEEABLE VALUE OF FUTURE ANNUAL FLOWS FROM THE FOUR MULTILATERAL BANKS. 55.
FUTURE GOALS AND OBJECTIVES OF WORLD BANK
ONE NEW TASK IS PARAMOUNT IF THE POOREST NATIONS ARE TO BE EMPOWERED TO JOIN THE GLOBAL ECONOMIC COMMUNITY. 1) THERE MUST BE AN INTELLECTUAL INFRASTRUCTURE THAT BUILDS AND SUSTAINS AN ENVIRONMENT IN WHICH PRODUCTIVE INVESTMENT FLOURISHES, 2) WHERE GOODS AND LONG-TERM CAPITAL FLOW FREE ACROSS NATIONAL BOUNDARIES, AND 3) WHERE HUMAN AND PROPERTY RIGHTS ARE PROTECTED. 4) FUNCTIONING LEGAL SYSTEMS, 5) ACCOUNTING RULES, 6) CORPORATE AND FINANCIAL SYSTEM GOVERNANCE, AND OTHER INSTITUTIONAL REFORMS WILL MOBILIZE FUNDS MANY TIMES GREATER THAN ALL OF THE RESOURCES MULTILATERAL INSTITUIONS WILL EVER COMMAND. 56
THE COMMISSION RECOMMENDS A MAJOR RESTRUCTURING OF THE FOUR MULTILATERAL DEVELOPMENT BANKS AND THE DESIGN OF AID PROGRAMS. 56
Origin and Description of the Development Banks
They have their own song and dance about the history of the WBthen they state:
"the explosion of the financial markets botyh in scope and in willingness to assume risk challenged the comparative advantage of the Banks in resource transfer. In the space of 10 years, the international bond markets quintupled from $185b in 1988 to $977 billion in 1998. The single year 1998 witnessed 170 bond issues greater than $1 billion in value." 57-58
World Bank Lending
It continues to grow, rising from $1.8B in 1969 to $32.5 B current dollars in 1999. Adjusted for inflation, the bank has doubled in size in 30 years. 58
In practice, most WB lending goes to countries that borrow in the capital markets. These countries have access to capital at market interest rates. A review of the World Bank Group's 4,100 operations approved over the last 7 years reveals that almost 80% of resources went to countries with an international bond rating of B or better. Approximately 30%^ of resources flowed to nations with an invest grade rating (C) and an additional 50% to countries with high-yield ratings at the time the loan was made. The share of non-rated recipients in the WB's IBRD lending has fallen from 40% in 1993 to less than 1% in 1999. 60
ELEVEN COUNTRIES COMMANDED 70% OF TOTAL NON-AID RESOURCES OVER THE LAST 7 YEARS WHILE THE OTHER 145 DEVELOPING WB MEMBERS WERE LEFT TO DIVIDE THE REMAINING 30%. THE SHARE OF THE FAVORED GROUP GREW FROM 63% TO 74% BETWEEN 1993 AND 1999: CHINA RECEIVED 12%; ARGENTINA 10%; RUSSIA 9%; MEXICO 7%; INDONESIA 7%; BRAZIL 7%; KOREA 6%; INDIA 4%; THAILAND 3%; TURKEY 3%; PHILIPPINES 2%. TOGETHER THEY RECEIVED $13 BILLION IN NET NON-AID RESOURCES IN THE LAST SIX YEARS. 60
WB PROJECT EVALUATION - 59% failed
A World Bank evaluation of project performance for the 1990s shows "marginally satisfactory" outcomes as successes. Using their ratings, 59% of investment programs failed in 1990-99 while the vast majority of World Bank "successes" are concentrated in upper-income countries that have significant domestic resources and access to private- sector funding. Here, failure is in the 30-40% range. In contrast the poorest countries have failure rates between 65-70%. The same pattern is found regionally. The 40% failure rate in the strong economies of Est Asia contrasts with the 60-75% failure rate in South Asia and Africa. 80
BOTTOM LINE RECOMMENDATIONS:
1. THE DEVELOPMENT BANKS SHOULD BE RENAMED DEVELOPMENT AGENCIES
2. ALL RESOURCE TRANSFERS TO COUNTRIES WHICH ENJOY CAPITAL MARKET ACCESS - INVESTMENT GRADE (BBB) INTERNATIONAL BOND RATING OR PER CAPITA INCOME IN EXCESS OF $4,000 WOULD BE PHASED OUT OVER THE NEXT FIVE YEARS. At $2500 per capital, official assistance would be limited.
the bank should concentrate on the 80-90 poorest countries.
3. THE WORLD DEVELOPMENT AGENCY SHOULD CONCENTRATE ON THE PRODUCTION OF GLOBAL PUBLIC GOODS AND SERVE AS A CENTRALIZED RESOURCES FOR THE REGIONAL AGENCIES. GLOBAL PUBLIC GOODS INCLUDE:
Treatment for tropical diseases and AIDS
==rational safeguarding of environmental resources
inter-country infrastructure systems
development of tropical agricultural technology
creation of best managerial and regulatory practices 94
World Bank to Gather Data - to provide technical assistance on country management
Ann Krueger, former WB chief economist said, "Knowledge is costly to create but inexpensive to transmit". Gathering knowledge, subsidized by grants and revenue guarantees and shared in international forums, that a new and demanding role is found for the World Development Agency. 94
Technical and scientific knowledge must be produced for:
Environmental challenges of air, water, and earth
Sustainable management of natural resources
Diversification of agriculture in tropical climates
Restoration of the agricultural base in Africa
Forestalling health epidemics
Development of vaccines and treatments for AIDS and tropical disease
The design of best practices that will facilitate the flow of private sector Funds to the emerging world. The Bank should provide technical assistance on the creation of legal systems that support clearly defined property rights and fair judicial processes; transparent accounting, tax and public administration regimes, policies that promote the free flow of goods and long-term capital; and sound financial system regulation and corporate governance rules. 94-95
1. The IFC should be merged into the World Development Agency to more closely integrate its functions into the Bank's/Agencies activities in order to redefine it.
2. U.S. share of IFC's $5.3B capital is $1.3Bthis should be returned to the U.S.
3. MIGA should be eliminated
4. THE WORLD BANK AND THE REGIONAL DEVELOPMENT BANKS SHOULD WRITE OFF IN ENTIRETY THEIR CLAIMS AGAINST ALL HEAVILY INDEBTED POOR COUNTRIES THAT IMPLEMENT AN EFFECTIVE ECONOMIC DEVELOPMENT STRATEGY UNDER THE BANK'S COMBINED SUPERVISION.
THE U.S. SHOULD SIGNIFICANTLY INCREASE ITS SUPPORT OF EFFECTIVE PROGRAM TO REDUCE POVERTY. THE $6 PER CAPITAL CURRENTLY SPENT IS TOO MUCH FOR INEFFECTIVE PROGRAMS.
CHAPTER 4 - THE BANK FOR INTERNATIONAL SETTLEMENTS
THE BIS IS ONE OF THE WORLD'S OLDEST INTERNATIONAL FINANCIAL ORGANIZATIONS. IT STARTED OPERATING IN 1930 TO FACILITATE GERMANY'S REPARATIONS AFTER WWI. IT ALSO ACTS AS A BANK FOR CENTRAL BANKS AND PROMOTING CENTRAL BANK COOPERATION. [WHEN] THE BISES REPARATIONS MISSION ENDED AT WWII, IT UNDERTOOK NEW DUTIES. 101
CENTRAL BANKERS COMPRISE THE BIS MEMBERSHIP AND MEET MONTHLY TO DISCUSS MATTERS OF RELEVANCE TO ECONOMIC AND BANKING POLICY. THE SUCCESSDERIVES FROM THE SECRECY OF ITS MEETINGS AND THE TRUST CREATED AMONG CENTRAL BANKERS THROUGH THEIR FRANK DISCUSSIONS AT THE FREQUENT MEETINGS. 101
CENTRAL BANKS OWN 86% OF THE BANK'S ISSUED SHARE CAPITAL. PRIVATE SHAREHOLDERS OWN THE REST. THE BANK'S BOARD IS NOW COMPRISED OF THE GROUP OF 10 PLUS 9 ADDITIONAL COUNTRIES ADDED IN 1996. 102
THE BANK HAS NO LEGISLATIVE POWER; ITS COMMITTEES SIMPLY OFFER GUIDANCE TO FINANCIAL INSTITUTION AND THEIR SUPERVISORS. IT HAS THREE AREAS OF FUNCTION:
1) INTERNATIONAL MONETARY AND FINANCIAL COOPERATION
2) AGENT AND TRUSTEE ACTIVITIES
3) FINANCIAL ASSISTANCE TO CENTRAL BANKS
1) INTERNATIONAL MONETARY AND FINANCIAL COOPERATION
The BIS acts as secretariat for several committees: (10 Basel Committee on Banking Supervision, (2) Committee on Global Financial Systems (30 Committee on Payment and Settlement Systems, all of which participate in the financial Stability Forum.
THE COMMISSION RECOMMENDS THAT THE BIS REMAIN A FINANCIAL STANDARD SETTER. IMPLEMENTATION OF STANDARDS, AND DECISIONS TO ADOPT THEM, SHOULD BE LEFT TO DOMESTIC REGULATORS OR LEGISLATURES. THE BASEL COMMITTEE SHOULD ALIGN ITS RISK MEASURES MORE CLOSELY WITH CREDIT AND MARKET RISK. 105
THE COMMISSION'S SENSE THAT SOME STREAMLINING OF THE BIS ORGANIZATIONAL STRUCTURE WOULD BE DESIRABLE. 105
FT, 8, 4/14/00, "Kohler 'must step up dialogue" by D. Ibison
Kohler was warned that he must consult more closely with the world's largest financial institutions which are now responsibility for a far greater proportion of capital inflows into emerging markets. The IIF which represents the world's largest financial institutions said it expects the size of private capital inflows into emerging markets this year to double the IMF had a responsibility to consult financial institutions more closely and it urged the fund to "redouble its dialogue" with the institute's members.
FT, 4/12/00, "Brown argues for stronger IMF" - Ed Crooks and Martin Wolf
The IMF should be strengthened to improve its surveillance of the world economy so that it can develop "a more effective early warning system" to head off future financial crisis said Gordon Brown. He said the IMF/WB could win over all critics - Congress/protestors, by demonstrating a genuine commitment to reform. As evidence that the reform process was making headway he pointed to the Financial Stability forum, a new international group of financial regulators that reports to the IMF; the proposals for transparency of financial and economic data and codes of conduct of fiscal and monetary policy now being agreed by the IMF's member countries and the new independent evaluation unit of the IMF.
FT, 4/12/00, "Spring stirs rush to scale debt mountain" Alan Beattie p.6
The G-7 countries promised 100% debt relief on its bilateral debt. It also raised (japan) its contribution to the trust fund for relieving the debt owed to the World Bank and other multilateral institutions. This raised the possibility that the U.S. whose contribution to the trust fund is snarled up in Senate budget negotiations could be left behind. (It appears all of this is part of the Jubilee 2000 debt relief campaign)
the US's position finds private sympathy within the World Bank, the debt relief program goes hand-in- hand with a comprehensive new approach to development by the bank that many officials are unwilling to hurry.
FT, 4/12/00, 6, "Leaders of third world to reiterate debt plea" Pascal Fletcher
Olusegun Obsanjo, the Nigerian president opens a summit of third world leaders in Havana, stressed the importance of democracy and good government to achieve economic development. He has urged rich nations to help by extending debt relief to poorer states. The three day summit in Cuba is expected to be the largest gathering ever of heads of state/government from developing world. Which is called the Group of 77. Obasanjo stressed that developing countries like his own want to "do everything right" by advancing good governance, human rights, popular participation in decision-making and the rule of law. But he said that was "absolutely impossible" if poor countries faced crippling and unpayable foreign debt burdens. Hence the need for industralized creditors to grasp the importance of debt relief and forgiveness in helping to foster democracy in the third world. G-77 comprised of 133 countries.
FT, 4/14/00, the G7 and the Deficits, editorial
The world economy is in the midst of a strong recovery; out put rose 3.35 last year and is forecasted to rise another 4.2% in 2000. Larry Summers pointed out that the U.S. accounts for « of the G7's total GDP, the US has been a splendid locomotive. The question is how long before it runs out of fuel. Its current account deficit was 3.7% of gross domestic product last year. This is forecast by the IMF staff to rise to 4.3% in 2000. These deficits even exceed those of 1985 and 1986. The worry must be that a flight from US assets would drive down the dollar and raise inflation. This would create a dilemma for the Federal Reserve and maybe a hard landing for the economy. The Q. for the G-7 is how to minimize that risk. The answer, in theory, is to re-balance demand. What is needed is for demand in the euro- zone and Japan to grow faster than output while the reverse happens in the U.S. Yet since monetary policy is, in effect, the only available policy instrument there is a big difficulty: a relatively expansionary monetary policy in the euro-zone and Japan would tend to weaken their exchange rates against the would. This would work against the desired external adjustment.
Because fiscal policy is either unavailable, ineffective, or at the limits of its usefulness, the G7 lacks the needed policy instruments. The only sensible aim is for each of the big players to try and stabilize their own economies, letting the floating exchange rates take any strain. Meanwhile the central banks have to:
Bank of Japan: a strong expansionary monetary policy
European C. B.: A relaxed attitude to growth in demand
Federal Reserve: Has to bring growth in demand back to less unreasonable levels.
FT, 4/14/00, 16, "Where the buck stops" - ONLY STRUCTURAL REFORM WILL EASE THE IMBALANCE BETWEEN THE DOLLAR, YEN AND EURO THAT IS THREATENING TO DISRUPT THE GLOBAL ECONOMIC STABILITY
This weekend assorted collection of environmentalist, protectionists, isolationists and anti-capitalists will take part in the"Mobilization of Global Justice." Their aim will be to "reclaim the power to democratically determine our own future and realize a truly just society." A few blocks away the G-7 ministers are meeting: contemplating what they have in common with the protestors. Attention will be on the strength of the 3 main currencies. The bottom line is that four straight years of elevated growthin part the result of some important technological and other changes that have improved long-term U.S. prospects. They (Europeans) make little effort to disguise the fact that they see the US, and what they regard as its unsustainable, equity-driven economic exuberance, as now the principal cause of the global imbalances that pose a threat to financial stability.
the rapid US demand growth of the last few years has results in a large and growing current account deficitnow approaching 4% of gross domestic product. To compound the probable, faster US growth is causing a temporary optimistic view among international investors of the prospective returns on US assets, and that is what has been driving the dollar's strength against the euro.
AT SOME POINT, ON THIS VIEW, INVESTORS WILL TURN AROUND AND FLEE THE US DOLLAR AS AMERICA'S EXTERNAL LIABILITIES MOUNT TO UNSUSTAINABLE LEVELS. IT IS THIS CONTINUING PROCESS THAT, MORE THAN ANYTHING ELSE IN THE MAJOR ECONOMIC, MAY DISRUPT GLOBAL FINANCIAL STABILITY.
HOW TO ELIMINATE THIS CENTRAL GLOBAL IMBALANCE? in 1998 AND 1999, THE US HAD A POINT IN URGING EUROPE TO PROMOTE FASTER DOMESTIC GROWTH. THE U.S. WAS CLEARLY THE ENGINE OF GLOBAL GROWTH AND THE IMPORTER OF LAST RESORT" IN THE MIDST OF THE ASIAN ECONOMIC CRISIS. IN 1998 AND 1999, THE US ECONOMY GREW AT RATES OF SLIGHTLY MORE THAN 4% WHILE THE THREE MAIN EURO-ZONE ECONOMIES: Germany, France, and Italy, grew at 2.3% and 2% respectively.
THIS PLACES THE MAIN BURDEN OF REMOVING THE GLOBAL IMBALANCES ON THE US, WHICH MUST SLOW THE PACE OF ECONOMIC GROWTH AND CURB INVESTORS' IRRATIONAL EXUBERANCE THROUGH MORE AGGRESSIVE INTEREST RATE INCREASES BY THE FED RESERVE. U.S. OFFICIALS ACKNOWLEDGE THAT THE PACE OF THEIR DOMESTIC ECONOMIC GROWTHCURRENTLY ABOUT 5-6% A YEAR IS TOO FAST AND THEY POINT OUT THAT THE Fed is attempting to rein it in. The problem they say is no longer a cyclical oneasynchronous business cycles between the US, Europe and Japan that create short-term imbalancesbut a structural one.
The Clinton administration is discouraging public borrowing and encouraging private savings through tax and other measures. But more needs to be down as the US savings rate is practically zero.