Mr. Chairman, I welcome the opportunity to testify before your subcommittee today on reform of the International Monetary Fund.
We reached a strong, bipartisan consensus last year on a series of important objectives for change at the IMF. That consensus on reform, and the substantial replenishment of the IMF's resources it made possible, made a significant contribution to our efforts late last year to address the risks to U.S. interests presented by the global financial crisis.
I am pleased to report on the progress we have made in encouraging the IMF to implement the reforms called for in the legislation.
The Mission of the IMF
It is useful to start by reviewing the core mission of the IMF, and the broad objectives that have guided our efforts to improve its effectiveness.
When the IMF was created more than 50 years ago, its founders gave it two key roles:
As the world economy and financial system have changed over this period, member countries have supported a wide range of changes to how the IMF carries out these two missions. The IMF's surveillance process has been expanded to promote a broader range of open, market-oriented economic reforms and institutional arrangements -- strong financial systems, for example -- that are important to how economies perform. The IMF's financial facilities have been expanded and adapted to meet the more complicated mix of challenges that its members face in today's world. The reforms outlined in the legislation support both these objectives.
In the past two years, the United States has strongly supported the IMF as the central institution in the effort to resolve the financial crises that began in Asia. The IMF is the right institution to be at the center of this effort for three important reasons. First, it has the expertise to shape effective reform programs. Second, it can obtain reforms in crisis countries that no assisting nation could obtain. Finally, the IMF internationalizes the burden.
But, it is important to recognize that there are limits to the IMF's mission and powers. The IMF does not have the power to compel its members to adopt and implement the policies necessary to avert crisis. And although the Fund can have considerable influence over the policies countries pursue as a condition for financial assistance, it cannot by its actions alone ensure that countries are able to restore confidence and growth. Furthermore, when countries experience crises, the IMF cannot fully insulate these countries from the disruption that necessarily accompanies economic adjustment.
The IMF can make an important contribution, often decisive in some respects, to how economies fare in our more integrated world economy and financial system. Ultimately, however, sovereign governments are responsible for the decisions that shape the performance of their economies.
The 1998 IMF legislation, passed in October, outlined a number of important reforms to the IMF,
and we have already begun to make some progress in advancing these reforms. Let me focus on
our efforts in the following three broad areas:
1. Transparency and Accountability
When the IMF was founded in 1945, its operations were largely cloaked in secrecy. The basic approach which the Fund followed for most of the past 50 years is no longer tenable today. In recent years, largely at U.S. urging, significant changes have taken place that make the IMF a more transparent and accountable institution. Let me highlight the most important ones.
These changes are important because they will subject both the IMF and the policies of its member governments to much greater scrutiny by the citizens of its member countries, by the academic community, by the taxpayers of those countries which are the major creditors to the IMF, and by the financial markets. As these changes become policy in the institution, analysts everywhere will be able to assess the quality and effectiveness of the IMF's advice and the degree to which governments deliver on the commitments they make as a condition for IMF assistance. These changes will make Congressional oversight much easier than it has been in the past. And we believe they will make the IMF a stronger and more effective institution, with broader support and appreciation for its role in the international financial system.
2. More Market-Based Terms for IMF Financial Support
As the world economy has grown and the scale of the global financial markets has expanded, it was both necessary and appropriate for the IMF to develop the capacity to provide finance exceptionally on a larger scale than had been possible in the past.
To help reduce the risk that the availability of exceptional amounts of official finance could discourage governments from pursuing prudent economic policies, we believe it is important for the terms of such finance to be more expensive relative to the IMF's normal lending terms. The IMF legislation reinforced this objective, stating that in cases where exceptional amounts of IMF assistance are provided, the terms of that finance should be designed to limit recourse to that support and to encourage an early return to the private markets.
In the fall of 1997 the United States led an important innovation in this area with the creation of a new IMF facility -- the Supplemental Reserve Facility. This marked a fundamental change in the terms and conditions of IMF lending -- financing on shorter terms at premium rates of interest.
Since the creation of this new capacity, a substantial portion of all IMF lending in large programs has been provided on so-called "SRF terms" -- interest rates that are at least 3 percentage points above short-term market interest rates, and maturities of 2½ years or less. In the three large programs that came after this facility was established, for Korea, Russia, and Brazil, 62 percent of IMF assistance carried these terms. I expect that this will be the case in future large programs as well.
Looking ahead, any use of the new contingent credit line for combating financial market contagion, which the U.S. and the G-7 proposed last fall, will also carry premium rates of interest and short maturities.
3. Improving Design of IMF Policies and Programs.
The IMF funding legislation also set out a number of important objectives for changing the design of IMF programs. The committee's letter of invitation to this hearing asked me to address the extent to which IMF programs in a number of recent cases reflected these and a list of other objectives.
The legislation included various provisions aimed at encouraging the liberalization of restrictions on trade in goods and services, consistent with international agreements.
In fact, the IMF has moved quite substantially on this front, both with respect to broad policies that encourage trade liberalization and in specific programs. Let me cite a few examples of how the IMF has supported trade and investment liberalization in the key countries cited by the Committee.
Notwithstanding this progress, the IMF continues to search for ways to go further. Many analysts
have felt that the IMF at times was prone to accept trade restrictive actions, such as import duty
hikes, as a means of protecting fiscal positions. On February 3, 1999 the Executive Board held a
seminar to consider its approach to trade reform and its fiscal ramifications. The Board's
discussion revealed a fairly strong consensus on the benefits of trade liberalization. Indeed, the
Board noted that there was ample empirical evidence that trade liberalization was not correlated
with lower trade tax revenues, that the presence of adverse revenue consequences from trade
liberalization should not delay trade reform, that the actual revenue costs of trade reform have not
proven overly burdensome, and that countries needed to act to complement trade reforms with
growth supporting domestic tax reforms and macroeconomic policies.
The IMF legislation called for policies aimed at eliminating the systemic practice of government-directed lending on noncommercial terms and of subsidies. Some examples of progress in this area include:
The legislation included provisions aimed at promoting bankruptcy reform -- to be precise, a
legal basis for nondiscriminatory treatment in insolvency proceedings between domestic and
foreign creditors, and for debtors and other concerned persons. The IMF is sharpening its efforts
in this area, focusing on the development of effective, nondiscriminatory bankruptcy laws and
procedures. For example:
It is important to recognize, however, that merely passing new laws is not enough to create an
effective bankruptcy regime. This also requires institution building, a process which the IMF,
the World Bank, and regional development banks are also working to support.
Reduction of Unproductive Spending
The so-called voice and vote provisions of the IMF legislation called for, among other objectives, the curtailing of excessive military spending, and the reduction of spending by governments on "show-case" projects. The United States has strongly urged the IMF to devote increased attention and effort in this area, and we are seeing some indications that our efforts are paying off:
There are also specific examples of the USED using the voice, and the vote, of the United States
to oppose unproductive spending. For example, on January 14 the United States abstained on a
review of Pakistan's ESAF program in part because of concerns over the composition of
government spending, including military spending.
Privatization of State-Owned Enterprises
The IMF legislation called for progress in a number of areas intended to enhance the
establishment of market-based economies, for example through privatization of state-owned
enterprises. Privatization figures prominently in many IMF programs as part of the Fund's
efforts to help countries restore fiscal stability, rationalize the role of government in the
economy, and expand the scope for private-sector led growth. A full accounting of the IMF's
efforts in this area, strongly encouraged by the United States, would take much more time than
we have today, therefore, I would like to cite just a few recent examples:
The Social Dimension of IMF Programs
The IMF legislation recognized, appropriately, the importance of ensuring that IMF programs
take into account, in ways consistent with the IMF's mandate, the social dimensions of economic
adjustment. We have pushed hard, with some success, to encourage the Fund to pay greater
attention to the composition of fiscal spending in countries and to the need to cut unproductive
spending and shift resources toward the most vulnerable segments of society. We have also
emphasized that the fiscal adjustments countries make as part of IMF programs should be
structured in a way that does not undermine environmental protection, enforcement of labor laws,
or come at the expense of the most vulnerable members of society. That means not only
strengthening social safety nets for those in greatest need and promoting core labor standards
around the world, but also increasing investment in education and health care, where there are
high social rates of return, to provide all citizens with the requisites for economic success.
The IMF programs for Indonesia, Korea and Thailand reflect some success in these areas. As
the severity of the crisis became apparent, fiscal deficit targets agreed to between these countries
and the IMF were substantially eased in order to allow for greater government social spending on
social safety net programs designed to alleviate poverty and protect the unemployed. The World
Bank and Asian Development Bank have played a critical role in designing and helping to fund
these programs. Indonesia is the best example of this. It had broadly maintained a balanced
fiscal position for decades. As the depth of the crisis and its massive toll on poverty became
evident growth may have contracted 15% in Indonesia last year with poverty shooting up by as
many as 6 million people the Fund helped redesign Indonesia's fiscal strategy and mobilize
international support to allow for a large fiscal deficit that accommodated basic social spending
for the poor, including subsidies for basic goods such as rice, oil, and fuel. More recently
Indonesia has developed a massive targeted program to provide rice to the truly needy.
Labor rights and environmental concerns have also been addressed in the IMF's discussions and programs with these Asian countries. For example, in response to the urging of the international community, particularly the United States and the IMF, the Indonesian government released a prominent independent union leader, Muchtar Pakpahan, from prison, ratified International Labor Organization (ILO) conventions on Freedom of Association, and announced its intention to ratify conventions on forced labor, employment discrimination and child labor. In coordination with the World Bank, the IMF program has also included a number of critical environmental policy measures, such as introducing special resource taxes, drafting of a new environmental law, and raising stumpage fees.
The IMF programs for Brazil have also reflected concerns over the environment and labor issues.
Assessment of IMF Programs in Asia
It should be clear from the forgoing review that the programs are broadly consistent with the
objectives of the IMF reform legislation passed in October 1998, despite the fact that the
programs for the Asian countries were initially drafted in 1997. While the IMF has recently
completed and publicly released its own assessment of its programs in Asia, I would like to note
several key issues as we reflect on the appropriateness and success of these programs.
Recent IMF programs have been broadly consistent with the key agenda items reflected in the IMF reform legislation, and they have been reasonably successful in helping countries take the difficult steps to recover from their economic crises. Nonetheless, the Treasury will continue to strengthen the process by which we identify opportunities to advance the agenda outlined in the IMF reform legislation, coordinate with other U.S. government agencies, and attempt to build consensus internationally for this agenda.
In terms of international cooperation, we are working hard to strengthen and, over time, expand
the consensus exemplified by the October 30, 1998, statement by G-7 Executive Directors on
reforms set out in section 601 of the IMF funding legislation. Our basic objective in this regard
has two dimensions:
-- at a general level, to continue to advance and refine our arguments in the IMF policy-making
process with the goal of bringing appropriate proposals to the IMF Board and management for
-- an incremental case-by-case approach whereby we try to further our progress in specific
programs to encourage a more systematic application of these reforms.
We take the issues before us today seriously and will continue to work hard to advance the
reforms set out in the legislation. We have made significant progress in a number of areas. The
cumulative impact of the changes that are taking place is quite meaningful and probably more
significant in scope and importance than anything that has happened in the IMF for some time.
In many ways, however, we are still at an early stage of the process. I think we can take
encouragement from the fact that the IMF has shown a willingness and capacity to adapt. I also
believe that current IMF management is making a good-faith effort to work with us, as are our
G-7 partners and a number of other IMF members. We hope to build on that foundation.
Thank you. I would be happy to try to answer questions.
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