December 20, 1999

A Focused Role for the I.M.F.

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    Treasury Secretary Lawrence Summers proposed last week that the International Monetary Fund begin to move away from making long-term loans to developing countries and focus instead on one key mission: lending to countries in temporary financial crisis. That sensible proposal will attract bipartisan support in a Congress that has grown increasingly hostile to the fund's perceived failures in Russia, Brazil and elsewhere.

    Indeed, Mr. Summers knows that a Congressionally appointed commission will soon propose trimming fund missions along the lines he suggests. The commission, led by Prof. Allan Meltzer of Carnegie Mellon University, has tentatively decided to recommend eliminating the fund's programs to promote development in poor countries -- a responsibility it thinks should be solely the World Bank's. The commission would also eliminate fund programs that promote the transition of the former Soviet Union to markets. Mr. Summers's speech not only pre-empts the commission's recommendations, but also helps insulate Vice President Al Gore from Republican criticism of the fund's failed bailout of Russia, which was undertaken with the Clinton Administration's vigorous support.

    Some countries wind up borrowing from the fund for 30 or 40 years with no decisive results. Many of these countries, Mr. Summers points out, could tap private capital markets instead.

    Yet Mr. Summers's speech did not go nearly as far as critics of the fund would have liked. He suggested that the fund continue to lend to the poorest countries to combat poverty, thus watering down his call for narrowing its mission. He embraced the tools by which the fund currently lends money during crises whereas Mr. Meltzer says his commission will propose major improvements.

    Mr. Summers disappointed some critics by issuing only a half-hearted call for the fund to lend to distressed countries even when they owe money to foreign banks. Many economists object to the fund's current practice of requiring that banks be paid in full before the fund steps in -- guaranteeing that the banks walk away unscathed while workers suffer the full brunt of economic collapse.

    After the fall of the Soviet Union, the fund was the only international financial institution willing and able to help the former Communist countries move to markets, but its ability to sway the destiny of these economies is quickly receding. The World Bank is better positioned to fight poverty in poor countries that cannot attract private capital. That leaves emergency lending as the one mission the fund is best equipped to handle. Mr. Summers does not go that far. But he has at least put the United States in position to start shoving the fund in that direction.

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