Good Preventive Step by IMF

The world’s financial leaders, meeting in Washington this week, got off to a promising start by approving reserve funds for developing countries that fall into financial difficulties despite earnest efforts to reform their economies. The same helping hand should be extended to the poorest countries through agreement to ease the crippling burden of their foreign indebtedness. The officials are convened in separate meetings of the International Monetary Fund and the G-7, the richest nations.

The Contingent Credit Line plan, announced by the IMF over the weekend, will allow countries such as Brazil and Mexico to draw from pre-approved reserves provided they meet a set of sound economic criteria, including prudent debt management policies, banking sector integrity and financial transparency. Proposed by the Clinton administration last September, the plan was aimed at helping to prevent or contain financial woes of the type that hit Southeast Asia in 1997 and 1998.

The IMF plan has its limits, as its critics are quick to point out. Meeting the fund’s criteria, for example, will be particularly difficult for the countries that will need additional cash most urgently. More developed countries, which could more easily tap the reserves, are not likely to need it.

Nevertheless, the plan represents a significant initial attempt by the international financial institutions to deal with monetary crises before they happen, not after panic has spread. As a preventive step, it might be worth more than a dozen bailout packages stitched together after a country’s currency has collapsed and foreign reserves have dwindled. Rapid deployment of the funds would be assured by the system of pre-approved credits.

What makes the plan perhaps even more important is the incentive it provides to developing countries to pursue policies for economic growth.

Another preventive measure that’s ripe for approval would help the world’s poorest countries deal with economic reforms by writing off a good portion of their foreign debt. The finance ministers of the G-7 have before them several workable plans. They should agree on a package this week and adopt it at the G-7 summit in June. Debt relief conditioned on good economic governance has established unprecedented grass-roots backing from the world community. The issues have been discussed for years. Now is the time to act.

Neither plan is the final word in the effort to prevent a global financial crisis, but both represent as a good first step toward that goal.