The financial crisis in Asia is not over, nor are its consequences. It could still infect other economies. As part of the international effort to contain it, the Clinton Administration is asking Congress for additional borrowing authority for the International Monetary Fund (IMF), an association of 182 nations that serves as a de facto central bank for its members. This $18 billion request represents $3.5 billion for a new contingency fund and $14.5 billion for a regular dues increase that will serve as a capital infusion to reflect the growth of the global economy. This new borrowing authority should be approved without further delay. It is not a payment to the IMF; rather, the funds are deposited in a special U.S. Treasury bank account and actually earn interest. Congress, which left this crucial issue hanging all through its long winter recess due to Republican intransigence over unrelated international family planning programs, must act soon.

Restoring Stability and Confidence

The United States must support the only international financial institution capable of serving as a lender of last resort in the Asian crisis. Throttling the IMF's efforts now would send waves through the financial markets and destabilize not just the progress being made in Asia, but also economies in other areas, particularly Russia and Brazil. Coming on the heels of Congress' failure to renew fast track trade negotiating authority, such a step would trumpet a dangerous message of U.S. withdrawal from global leadership. More specifically, it would make it more likely that this financial crisis will mutate into an international security threat in a region vital to American interests. The current civil unrest in Indonesia is worrisome, to say the least.

Stable international financial markets are also a domestic imperative. It used to be that banks and insurance companies were the primary lenders to developing countries, trading high risk for high interest payments. Now it is also hedge and pension funds. Over 100 million Americans now own stock, where they have invested a record-breaking 28 percent of their assets. The Institute for International Finance's January 1998 report shows exactly what happened when fund managers got nervous about Asian growth in 1997: foreign investment fell over $100 billion in a matter of months, and the crisis was off and running.

While U.S. markets now seem to have discounted for the Asian crisis, we are a long way from being out of the woods. Rising imports, shrinking export markets, contracting economies of our principal trading partners in Europe (who are much more exposed to the Asian crisis), and continuing financial problems in Japan are still ahead of us. Restoring stability in Asia is about maintaining business for American companies large and small, but it is also about Mom and Dad's pension fund. A deepening recession overseas will eventually work its way around to Wall Street, no matter how rosy today's earnings.

Questions have been raised about whether the IMF structural adjustment formulas used with many developing countries with high debt and limited incomes are appropriate for the Asian tigers with fundamentally sound balance sheets and high savings rates. Unduly harsh or inflexible austerity programs risk creating not just a generation of bankrupt businesses but resentment at Western tactics. If the Asian debt is largely private sector debt, the public sector slash-and-burn tactics characteristic of IMF formulas in the past could make the situation worse. That is why the IMF's recent flexibility in Thailand is encouraging. We hope the IMF agreements being signed in other Asian countries will demonstrate strong differentiation between individual economies. It is important to recognize, however, that the IMF did not create this crisis: unsound, under regulated, and corrupt government and business practices did. IMF aid must be conditioned on structural reforms. But a more open IMF policymaking process will do much to reassure observers in the United States and in the affected nations that the ends justify the means.

Equally legitimate concerns are being raised about the "moral hazard" of insulating lenders, banks as well as funds, from the consequences of the crisis. To do so, it is argued, could undermine market discipline and encourage future imprudent investments. Investors must pay a price too. Bailouts may lead to more bailouts. Markets that are interfered with too much can never work well. All of these are real risks. We want to rely on market mechanisms to the greatest degree possible now and in the future, and no one wants to encourage further bailouts. But as many have acknowledged, distributing the pain at the same time the IMF is trying to stabilize currencies and capital flows, as well as encourage credit availability for viable businesses, is difficult. As the United States itself discovered with much pain in its own series of financial panics in the second half of the nineteenth century, there is a role for a central bank to step in to provide liquidity. That is why we created the Federal Reserve system. The IMF plays approximately the same role internationally. Pulling the financial plug on the IMF now is the wrong way, and hardly the only available option, to influence its policies.

Finally, many in Congress are calling for new conditions for IMF assistance, designed either to raise labor and environmental standards or to insist on new standards for human rights and democracy. Again, there are real concerns about the connection between democratic reform and sustainable economic growth. We share them. There are opportunities in this situation for linkage of political reforms to economic reform, but they are best addressed through parallel diplomacy and side initiatives. The IMF cannot become the direct instrument for changing foreign political regimes, or it will lose its ability to do its essential job of managing international currency flows. There is one area where structural changes are, however, important and necessary. The IMF must insist on greater market access and trade liberalization just as much as increased transparency of financial transactions. This will ensure more sustainable domestic growth in affected countries and at the same time benefit U.S. workers by ending import monopolies and other barriers to U.S. exports.

Returning to Bretton Woods

In 1944, representatives of 44 nations gathered at Bretton Woods, New Hampshire, to create the post-war international monetary system, including the International Monetary Fund and the World Bank. Their intent was to eliminate the sort of international monetary disorder that was rampant following World War I--a whole series of financial crises, devaluations, hyperinflations, and trade restrictions for balance-of-payments reasons--and by and large, they succeeded. They recognized that these financial crises were a continuing risk to international security as well as an impediment to post-war financial recovery. In fact, it would be fair to say that they created these institutions precisely for the day that a whole region would once again plunge into economic disorder and threaten a worldwide recession.

Since the first Bretton Woods conference, the international economy has grown and changed. In particular, public-sector development assistance has been gradually overwhelmed by private-sector investment for middle-income countries, a change for the good for the most part. In the past decade, these changes have accelerated. In 1990, private capital and official development assistance capital were nearly equal; today, private funds are nearly $250 billion while development assistance is under $50 billion. (The poorest countries receive little private-sector investment and meager amounts of development assistance, the worst of both worlds.) International systems must be updated to reflect this new reality. The question is not whether the IMF is needed to play the role of an international Federal Reserve bank--it is--but rather how it and its companion institutions should function in the future, and what private-sector financial regulation is now needed.

For all these reasons, we hope that prompt congressional action on IMF funding will be met by a commitment from the Clinton Administration to overhaul the international financial system by 2000. The status quo will not do. It is time to return to Bretton Woods. Treasury Secretary Robert Rubin recently called for "modernizing the architecture of the world financial system." Few details were available of what process he recommends for this reinvention effort, though there are encouraging reports that senior finance officials from 22 countries have been meeting to discuss possible actions.

If the idea of reform and modernization is to have any impact on the current debate about the IMF's role, President Clinton needs to make a clear, public commitment to a "Bretton Woods 2000" where government and private-sector roles in a 21st century system can be sorted out. This might start with an emergency meeting of the G-7 nations this year, as former Secretary of State Henry Kissinger suggested, or a 24-nation Global Economic Summit in 1999, as former World Trade Organization (WTO) director Peter Sutherland recommended at the recent economic summit at Davos, Switzerland. There are numerous proposals for change, from economist Henry Kaufman's call for a Board of Overseers of Major Institutions and Markets, to economist James Tobin's idea for a universal tax on currency transactions, to Chile's deposit requirements covering foreign investment to curb speculation. Financier George Soros has suggested a fee-based transaction system so that private financial institutions create a contingency fund to deal with future crises, making them look before they leap. Almost everyone has suggested stronger banking, insurance, and securities regulation. These are ideas worthy of serious consideration. It is time to start down the road to reform, with discussions at the highest levels, a reasonable date for decisions, and commitments to change. The best way to avoid future bailouts is to institutionalize these lessons soon.

The rapid growth of the Asian economies and their integration into the global trading system has been a welcome development in the post-Cold War world. This financial crisis can be a seminal event for modern Asia, for other emerging markets, and for the world system, just as the 1929 stock market crash was for the United States. But first we must get through the current situation without a financial meltdown. Out of this experience should come new and better behavior, new national and international institutions and practices, and a shared commitment to public policies that promote sustainable economic growth. The events in Asia demonstrate that the more global and integrated the economy becomes, the more we need rules and mechanisms that can govern an efficient, growing, worldwide marketplace. While we may in the future find other means to prevent or contain such situations, the IMF remains at present the best vehicle for the task at hand.

Supporting the IMF now would be an act completely in the tradition of the enlightened self-interest that has characterized American foreign policy since World War II. Thanks to the ingenuity of the IMF's design, it will cost the American taxpayer nothing to make these funds available. By stabilizing the Asian economies, we will not only help build sounder economic and political systems abroad, but ensure our own economic growth as well.

That is exactly why the United States must lead now in putting out the fire, and then lead again in modernizing the international financial system.

Edith R. Wilson is Director of the PPI Trade Project

Trade & International Economics Policy Library

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