Panel Recommends Curbs on IMF, World Bank

A U.S. congressional commission said the International Monetary Fund’s influence on developing economies must be reined in and called for the World Bank to halt its lending to most nations.

The recommendations, in a report by the bipartisan commission, are fueling a debate about the expanding reach of the two institutions, which lend tens of billions of dollars to more than half the world’s economies.

The commission echoed complaints by members of Congress and many economists that IMF-led financial rescues encourage reckless policies among borrowers and that much of the World Bank’s financing can be done by private lenders.

Although the U.S. is by far the largest shareholder in both the IMF and World Bank, it is unclear whether the panel’s recommendations will ever be adopted.

“It’s a neo-isolationist view of the world” that says “let’s retreat,” said Thomas Bernes, a Canadian who represents his own country, Ireland and 10 Caribbean nations on the IMF’s executive board. Most board members believe the IMF needs “to do some things differently and better,” though they are seeking “changes on the margin, as opposed to amputation,” Bernes said.

U.S. Treasury Secretary Lawrence Summers and others have offered their own proposals to scale back the two lenders and stop the IMF from encroaching on long-term development lending that has traditionally been World Bank’s domain.

Yet Wednesday’s recommendations by the 11-member International Financial Institution Advisory Commission, headed by Carnegie Mellon University professor Allan Meltzer, a Republican, go far beyond most of those proposals.

The panel called on the IMF to cease all long-term lending, cut off financing after four months, and lend only at “penalty rates”--margins above private lending levels. It also said the IMF should cancel its loans to the world’s poorest nations, stop getting involved in development financing and set stringent “preconditions” for lending.

“Crises don’t usually last longer” than four months, Meltzer said. We need the IMF “to take care of the crisis when the market doesn’t operate.”

Its recommendations for the World Bank were no less sweeping, saying the lender should withdraw from Asia and Latin America and replace much of its lending with grants.

The report was mandated by Congress during a 1998 legislative battle over whether the U.S. should contribute $18 billion to the IMF’s coffers. Many Congress members, especially Republicans, balked at handing over the money, criticizing the IMF for its handling of the financial rescues it organized for Indonesia, South Korea, Russia and other countries since 1997.

Defenders of the IMF say the lender must revise some of its practices, yet they argue that it’s still the best vehicle for ensuring global financial stability.

“Nobody says reform is not needed,” Timothy Geithner, U.S. Treasury undersecretary for international affairs, told a House panel discussing a World Bank program to combat AIDS. “Our focus is to make sure that the IMF and the World Bank can continue to completely address their core mandates”--responding to financial crises and development.

U.S. House Minority Leader Richard Gephardt said “the report takes a slash-and-burn approach.” It would “undermine the stability of the world financial system” if the “onerous new criteria” for IMF lending were adopted, he said.

House Majority Leader Richard Armey acknowledged at a news conference with Meltzer and other commission members that the Congress has no power to “mandate” changes at the institutions, although he said it can “encourage” reform.

The U.S. wields about 18% of the IMF board’s weighted voting power, enabling it to veto many key policy decisions. Still, it can’t force policy changes if other representatives don’t support them, said Jerome Levinson, a professor and a Democratic commission member who disagreed with the panel’s recommendations, saying they “would be devastating.”