Lawrence Summers

This selection first appeared in the Wall Street Journal on 27 March 1998. Lawrence Summers is deputy secretary of the U.S. Treasury.

Congress is currently engaged in a high-stakes debate about whether the United States will continue our long-standing commitment to the International Monetary Fund. This issue takes on special urgency in the wake of the Asian financial crisis, which has depleted the IMF's resources. And it is crucial to the future of this country. Congress needs to support the IMF because a well-funded IMF is critical to promoting American workers' interest in strong export markets, American savers' interest in stable financial markets, and all Americans' interest in the spread of market-based democracy, which is central to our national security. Meeting U.S. obligations to the IMF also maximizes our ability to bring about much-needed changes in the way it and the international monetary system operate.

Economists and historians will be debating the causes of the Asian financial crisis for a long time. What is clear now is that a central element in spurring the crisis was a loss of confidence on the part of both these countries' own citizens and foreign investors. Confidence eroded for many reasons, including the belated recognition of severe policy errors, the accumulation of large debts, and the changing global economic environment. The approach the IMF has taken on behalf of the international community--conditioning financial support on strong domestic policy measures to restore confidence--is the right one. And it has had important successes. A potentially catastrophic default in South Korea has been avoided, Thailand has seen its currency appreciate nearly 30 percent since its low in mid-January [1998], and a crisis that once seemed likely to go global has so far been contained.

Challenges Remain

To be sure, important policy challenges remain, particularly in the uncertain environment of Indonesia. But without the support the IMF provides in these situations, we would probably now be dealing with a great deal worse: debt moratoriums in some countries, a generalized withdrawal of capital from the developing world, and potentially large consequences for our export industries and our financial markets. The history of the 1930s is instructive. There is little debate among economic historians that the international system's failure to respond to the spreading financial problems that occurred in the wake of the Austrian Credit Anstalt failure did far more to perpetuate the economic misery of the 1930s than the Smoot-Hawley tariff did.

Insurance against the spread of the Asian financial crisis would be reason enough for the United States to support the IMF. But there are others reasons:

• IMF and sister World Bank programs, not just in East Asia but in India, Latin America, Central Europe, and Africa, have led to more systematic trade liberalization than our bilateral or multilateral negotiations have ever achieved.
• IMF financing and conditions have been the primary external mode of support for the dramatic changes in Russia's economy over the past five years, changes that have seen it move from a state-dominated hyperinflating economy to an economy with stable money and a lower share of public employment than in much of Europe.
• The IMF has further promoted U.S. interests by supporting stabilization in Poland and other Central European nations, preventing the spread of the Mexican financial crisis through strong support for Argentina, and supporting economic reform in the states of the former Soviet Union.
• U.S. security has surely been enhanced by the IMF's success in inducing program countries to reduce military spending, to around 2 percent of gross domestic product by 1996 from an average of more than 5 percent in 1990.

Looking back a few years, it was IMF financial support that played the central role in containing the threat to the American banking system posed by the Latin American debt crisis of the 1980s. Then, as now, every dollar the United States put into the IMF leveraged four of five dollars from the rest of the world.

Providing funding for the benefits the IMF provides does not cost taxpayers anything. And it does not add to the federal deficit. That is because the United States supports the IMF by providing a line of credit in return for which we receive a rate of return that roughly matches our borrowing cost. The IMF's credit is good: It has not had a major default in fifty years, and its loans are substantially backed by gold.

So the IMF is indispensable and without expense. Yet its critics have raised important and legitimate issues--issues that the administration and the Federal Reserve believe are best addressed by funding and changing the IMF rather than abandoning it. The IMF should be more transparent and accountable to its member countries and more open in its reaching of agreements with countries. It should allow for external evaluation of its procedures and the results they bring. And it should develop ways of sharing the information it has with those in the markets. It has come a considerable distance here, but it is not yet at the finish line.

Transparency is necessary but not sufficient for preventing crises. There is also a need for improved surveillance techniques to focus more on capital flows and the health of key financial institutions. There is a need for better regulation of banking systems around the world and more rigorous monitoring of implicit government subsidies for risks taken by financial intermediaries. And there is a need for better dialogue with countries that--like Mexico in 1994 and Thailand in 1997--are heading for serious difficulty. Without a strong IMF or something very much like it, it is hard to see how the United States could go about fulfilling any of these needs.

There is also the moral hazard concern: that too-ready IMF financial support may encourage imprudent lending and borrowing. This is why the IMF has, at U.S. behest, begun charging penalty interest rates on extraordinary loans. It is why we sought in late December [1997] to condition further IMF support for South Korea on actions by its creditors to roll over and extend their loans and why IMF programs in Asia have included conditions requiring the adoption of bankruptcy statutes and preventing government bailouts of private corporations or their creditors.

There is no question that, as Treasury secretary Robert Rubin and Fed chairman Alan Greenspan have often said, the international community has to devise new procedures to reduce the likelihood that policymakers will again have to face the kind of choice they faced last fall [1997]--between large-scale financial support on the one hand and contagion and possible chaos on the other. Again, it is difficult to see how any such procedures could operate without an international institution very similar to the IMF we have today.

Important Lessons

The content of IMF programs will be a matter of continuing debate and evolution. The past few years have taught important lessons: that mismanaged devaluations can have catastrophic consequences; that the quality of deficit reduction matters as much as the quantity; that macroeconomic reforms can be ineffective unless economies are liberalized and trade barriers and corruption are reduced; and that the success of reforms depends on their being carried out in a way that protects a country's workers rather than a privileged elite, to name just a few. In part because of the efforts of U.S. representatives, these lessons are increasingly being reflected in the advice the IMF gives and the conditionality it imposes. But there is more to be done.

If the United States does not contribute to the IMF, we risk losing the opportunity to help shape its approach to economic policy around the world. Like a decision not to take out insurance, the decision to delay funding for the IMF could work out just fine. But at a time when markets in many countries are fragile and looking for confidence from the world's only superpower, it is a gamble that's not worth taking.