- The Washington Times - Sunday, April 16, 2000

The International Monetary Fund is provoking a hotbed of controversy. The selection of Horst Kohler as the new managing director received grudging U.S. support. The March 9 report of the International Financial Institution Advisory Commission, chaired by Professor Allan Meltzer, evoked partisan debate, including House Minority Leader Richard Gephardt's characterization of the report as "extreme neo-isolationist." Antiglobalization demonstrators have been in the streets of Washington over the last week during the IMF and World Bank meetings.

These contentious events, however, mask the fact that a peaceful transformation already is well under way in the so-called international financial architecture that will result in a greatly reduced IMF role.

The IMF initially provided short-term loans to members defending against downward pressure on exchange rates fixed to the dollar, and the principal borrowers were the industrialized countries, who accounted for 60 percent of IMF loans in the 1950s and 69 percent in the 1960s. When the dollar went off the gold standard in 1971 and other industrialized countries adopted floating or more flexible rates, the need for IMF loans dropped sharply, and no industrialized country has taken out a major IMF loan in more than 20 years. In effect, nations making up more than 60 percent of world trade and investment have become IMF "graduates."

A similar if more disruptive experience occurred in the 1990s when a number of emerging market economies including Mexico, Thailand, South Korea, Indonesia, Russia, and Brazil experienced financial crises while trying to maintain a pegged rate to the dollar. The IMF moved into the breach and provided unprecedentedly large loan packages linked to longer-term economic reforms, with mixed and controversial results.

The final outcome, however, was for this grouping of countries also to float free from the dollar, with the expectation that they, too, will no longer have need for large IMF loans. Mexico floated through the 1997-1998 crises without further IMF loans. Looking ahead, the same should be true for South Korea, Thailand, Brazil, and others. China, Hong Kong and Taiwan, in any event, have such strong export sectors and extraordinarily high official reserve holdings that they will continue to operate without the need for IMF financial support.

The prospect is thus for more than 80 percent of international trade and finance soon to be among nations that are IMF graduates, with the IMF support role progressively oriented to the poorest countries, largely on the periphery of the international economic system.

This evolution in the international financial architecture was officially blessed by Treasury Secretary Lawrence Summers in his Dec. 14, 1999, speech in London, wherein he called for "a clear path toward graduation," with a historical perspective: "In 1976, people were not surprised when the U.K. turned to the IMF. Today it is inconceivable. The IMF's goal must be to mark a path for the graduation of the emerging market economies, so that they too will reach the point when calling on the IMF for financial support is unthinkable."

Even the residual IMF role of support for the poorest countries will likely be reduced substantially by limiting IMF support to short-term emergency relief loans, leaving longer-term development finance to the multilateral development banks and bilateral aid programs. This is where the IMF was through the 1970s, and there is now widespread and growing support for a return to this separation.

The Advisory Commission recommended it, by a unanimous vote of all 11 members, and Mr. Kohler, after appointment as managing director, stated: "In principle, it is right to refocus the IMF and go back to more short-term lending."

There is a new financial architecture coming into play, but it is no longer centered in the hallowed IMF halls in Washington. Rather, it is being built on the Washington/ Frankfurt/Tokyo triad foundation, with yet-to-be-developed hub-and-spoke relationships within and among the principal industrialized and industrializing regions. The IMF will continue as a multilateral forum for consultation on financial policies and technical assistance to poorer countries. Its lending program, however, which reached all-time highs in the late 1990s, is headed sharply downward.

Graduation should be a time for celebration of a mission accomplished and the readiness to take on new challenges. Mr. Kohler also said: "I feel the extension of markets and democracy over the past 50 years should be credited to the IMF." Somewhat overstated, perhaps, but nevertheless a good point of departure for declaring victory and moving on to the truly new, post-IMF financial architecture.



Ernest H. Preeg is a senior fellow in trade and productivity at the Manufacturing Alliance/MAPI in Arlington. This article is based on analysis from his forthcoming book, "The Trade Deficit, the Dollar, and the U.S. National Interest."

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