Jim Hoagland

This selection first appeared in the Washington Post on 10 May 1998. Jim Hoagland is a columnist at the Post.

George Shultz would dismantle the International Monetary Fund, yesterday if he could. Paul Volcker would strengthen the fund to iron out the spreading wrinkles of global capitalism.

Indonesia's rulers defy, plot with, or ignore the fund, according to the moods and needs of the day. Their citizens riot against economic pain inflicted by the fund's rules.

In Birmingham, England, next weekend [16-17 May 1998], French and American leaders are likely to lock horns during the Group of Seven industrial nations summit over French ideas on giving the fund some supervision of private international investment flows.

After a half century of quiet labor on balance of payments problems, the secretive and staid IMF finds itself embroiled in controversy around the globe. Its critics come from virtually every point on the political spectrum, agreeing on only one thing:

The fund and the international financial system it heads have been woefully inadequate in dealing with the continuing Asian financial crisis.

Shultz and others even fear that the IMF and its ally in Asia, the U.S. Treasury, are actually contributing to Asia's problems and to more devastating capital crunches to come.

He voiced that fear in testimony to a congressional committee last week. The fund encourages investors and bankers to take imprudent risks by providing taxpayers' money to bail them out, he said. The man who was Richard Nixon's Treasury secretary and Ronald Reagan's secretary of state urged Congress to turn back "a pattern of escalation of ambitions of the IMF" so unhindered markets could resolve these problems.

Shultz goes too far. The IMF is a lightning rod for the financial storms kicked up in the reshaping of the world economy by the forces of technology, expanding capital markets, education, and democracy. Pushed by the United States, the fund stepped into the Asian crisis not because of ambition but because there was no one else to deal with the problem.

That--Shultz's demonstrated wisdom on other topics notwithstanding--is the real problem.

Asia's troubles show that in the four years since Mexico's currency debacle the world's most powerful political and financial leaders have taken no effective action to prepare the fund, or other international institutions, to deal with the financial consequences and vulnerabilities of globalization.

This is not even an Asian crisis, Volcker, former chairman of the Federal Reserve, said in a speech at Johns Hopkins University. The collapse of Indonesian, Thai, South Korean and other currencies and markets is "only the latest, and most dramatic, episode in a series of events that raise some basic questions about global finance and its implications for economic development."

Volcker then put those questions in considerable depth and breadth, endorsing the IMF as "the only vehicle we have to bring consensus and legitimacy to reform of the financial system on a global scale."

But that goes too far for the Clinton administration, which opposes broad reform of the world's financial system, led by the IMF or by anybody else.

Treasury secretary Robert E. Rubin argues that moments of crisis are the wrong time for monkeying with basic architecture. He favors incremental action--such as upping the U.S. contribution to the IMF by $18 billion, which will encourage other countries to add $65 billion to the fund's reserves--and opposes anything that would change a global status quo that America dominates.

But the incremental approach is in trouble here and abroad, as Asia's economies show signs of sinking once again.

Following Shultz's testimony, House Speaker Newt Gingrich was said to be leaning toward not scheduling a vote on the $18 billion request this year [1998]. Democratic leaders in Congress would use this retreat as ammunition for November, when they will run against an isolationist, do-nothing Republican Congress that imperils America's standing in the world.

But in their different ways Shultz and Volcker establish that a historic conflict of big ideas about market efficiency and economic justice in the era of globalization is under way, with the IMF serving as a catalyst. Rubin's voice is missing in that debate as he concentrates on technical fixes and warding off pressures to change a system created fifty years ago for different purposes.

That strategic absence, more than Republican isolationism, is the problem with Rubin's $18 billion request. It may now fail, both as legislation and as an election issue, unless the administration can quickly show that this new money is part of a new strategy for dealing with international financial problems that America's success in penetrating other markets has helped create.

Or, as Bill Clinton might have once put it, it's the global economy, stupid.