The future role of the International Monetary Fund (IMF) is today in
doubt. Former Treasury Secretaries George Shultz and William Simon
have urged that it be closed. President Clinton wants the IMF to
devote more attention to preventing crises rather than responding to
them. Even the IMF criticized its own recent operations in Asia for
protecting foreign lenders at great cost to borrowing countries and
their citizens. Protestors in the Asian countries and elsewhere
complain that the IMF is a lackey of the United States, doing the
U.S. government's bidding to the detriment of local populations.
Before agreeing to provide more money for the IMF as part of the 1998
budget agreement, Congress insisted on greater transparency in
decision making and higher interest rates on IMF loans. These changes
are first steps toward reform of international lending institutions.
Still, more fundamental reforms are needed to reduce the risks of
destabilizing crises that have become more frequent and more costly.
Even the losses suffered by bank depositors during the Great
Depression pale by comparison to recent losses in Mexico, South
America and Asia.
Five factors go a long way toward explaining why there have been so
many large financial and foreign exchange crises in developing
countries during the current period of sustained growth and
development in the world economy: weak banks; government interference
and direction of lending (part of crony capitalism); a large volume
of misdirected bank lending; domestic government and IMF bailouts to
protect foreign lenders and domestic oligarchs; and fixed,
unsustainable exchange rates.
