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Hot air and paltry ideas at IMF, World Bank indabas
There will be much talk of global financial reform at this week's annual meetings, but all the blathering will not lead to much
NOBODY wants to be seen fiddling while markets burn. So it is no surprise that world leaders are full of plans for global financial reform before the annual meetings of the World Bank and the International Monetary Fund. Thus Tony Blair, Britain's prime minister, talks grandly of building a "new Bretton Woods for the next millennium". Gerhard Schröder, Germany's new chancellor, wants "target zones" for the world's main currencies. The French want to "endow international financial institutions with genuine political legitimacy". The Japanese want a special fund to help southeast Asian countries, and are mumbling about controlling capital flows. President Bill Clinton has a six-point plan for solving the world's financial mess. The result, as one insider says, is a "cacophony" of suggestions. Not much will emerge from the din. Behind these ideas are almost no details; and almost none looks workable. The grandest notions - such as the German call for target zones or the French idea that other regions should emulate Europe's single-currency block - are simply fanciful. Other less grandiose ideas are motherhood and apple pie: more transparency, better regulation of financial markets. Still others mistake process for progress. The French want to beef up the IMF's "interim committee", the group of finance ministers that controls the IMF. The Americans are wary of boosting a committee they regard as "constipated" and dominated by Michel Camdessus, the IMF's (French) boss. Better, they think, to bolster the G22 - an informal grouping of 22 rich and emerging economies organised by Washington - that has spent six months working on international financial issues. Since bureaucrats love committees, this week's discussion could be dominated by just such blather. A pity, perhaps, but hardly surprising: in truth, nobody has a good recipe either for getting out of this crisis or for preventing another. Although many pundits like to blame the IMF for mishandling the crisis in emerging markets, that is about all they agree on. Some say fixed exchange rates caused today's mess; others blame devaluation. Some suggest crony capitalism brought Asia's demise; others criticise the IMF for pushing too many structural reforms. In public, the IMF is confronting its critics; in private, it is bickering with other agencies less than before. A consensus on immediate priorities is forming, at least in Asia. This week the World Bank, at one time critical of the IMF, published a report on the Asian crisis that advocated lower interest rates and looser fiscal policies. The report had been prepared in consultation with the fund. The real arguments now concern longer-term reform. Academics who criticise the IMF have produced few specific proposals. In an uncharacteristic display of modesty Paul Krugman - who has made capital controls fashionable - admits that he "is not exactly clear" about what a new financial architecture should look like. Radical plans do exist: John Eatwell and Lance Taylor, two economists who have supposedly influenced Blair, want a World Financial Authority. Some others want to shut the IMF down altogether. And some want to create a global central bank. But none of these ideas is likely to win much support. Today's international financial system has the rhetoric but not the reality of a lender of last resort. Today's private capital flows are too big for the IMF to do the job properly. Something like a lender of last resort (with vast coffers) could be created, or markets could be left to fend for themselves; but both prospects are remote, so bureaucrats must debate the feasible. This boils down to three issues. Should capital flows be curbed? Should there be more public money for dealing with financial panics? And how can the private sector play a bigger role in crises? Disagreement is greatest on the first question. Although everybody now agrees emerging economies must be careful about liberalising capital flows, there is a division between those who emphasise the benefits of capital freedom and those who rail at the costs. The issue of more public money is equally thorny. How big should the public piggybank be, and how should it be structured? Inside the US Treasury, for example, there are discussions about how to create new sources of liquidity. But the dilemma of stemming unwarranted panic without creating too much moral hazard is far from being solved. What of greater involvement by the private sector? This week working groups of the G22 will publish suggestions for transparency, financial regulation and crisis management that are likely to provide the basis for the week's discussion. They suggest, for instance, that the IMF should sometimes lend money to countries that have suspended payments to private creditors, and argue that bondholders must be brought into the discussion. These are not big ideas, nor are they exactly new. But at least they have been honed by discussion. The problem is, however, that incremental progress is not what politicians look for. The Americans, scarred by policies that have failed, are shy of grandiose, superficial ideas. The others, especially the Europeans, see the mess as a chance to push their own proposals. Unfortunately, few make sense. - © The Economist Newspaper Ltd, London 1998.
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