by C. Fred Bergsten, Peterson Institute for International Economics
Testimony before the Subcommittee on International Trade and Finance Committee on Banking, Housing, and Urban Affairs
United States Senate
June 8, 2000
This is my third appearance before this Committee to discuss the findings and recommendations of the International Financial Institutions Advisory Commission (IFIAC). Hence you are well aware that I, along with three other members of the Commission, both agreed with a number of proposals made by the majority and dissented from a number of its suggestions.
Today's hearing addresses the role of the multilateral development banks (MDBs) and I would stress at the outset that our minority's strongest disagreements with the IFIAC majority relate rather to its proposals regarding the International Monetary Fund—as discussed before the Committee on April 27. I and my fellow dissenters believe that the majority also goes much too far with a number of its proposals regarding the MDBs and hence we oppose those as well. However, we also believe that the majority makes a more persuasive case with respect to this set of institutions and that some of its proposals, if properly modified, could point in the direction of useful reform. I will briefly spell out these differences and similarities in my statement.
The Minority's Disagreements
I and my fellow dissenters believe that the IFIAC majority errs substantially in its criticisms of the World Bank and the other MDBs.1 As a result, we believe that it goes much too far with four of its key recommendations for the MDBs.
First, the majority wants to end all nonconcessional lending by the World Bank. They propose to replace its $20-25 billion of annual credits to some unspecified extent with similar nonconcessional lending by the regional development banks, private lending and—for the poorest countries—grant aid. There is no indication of whether these offsets should be total or partial, or of what the replacement mix should or could be.
Each part of the proposed replacement pattern raises problems. The majority provides no reason to believe that the regional banks would do a better job than the World Bank; most observers in fact believe they are both less efficient and more politicized. Both the volume of flows in the private markets and their terms are of course highly volatile, providing ample (even excessive) credits in good times but drying up just when they are most needed. We support a shift to grant aid for the poorest countries but doing so would require a sharp increase in appropriated funds from the Congress and other parliaments around the world; hence it is not likely to be a practical prospect.
Our minority thus believes that it would be a huge mistake to shut down the nonconcessional lending program of the World Bank—though I will note in a moment our support for a more modest movement in the direction proposed by the majority. It would also be a mistake to shut down the International Finance Corporation (IFC) and the Multilateral Investment Guaranty Agency (MIGA), which the majority recommends without offering any rationales whatever, because they help promote direct investment and equity flows to developing countries—the most desirable and most stable types of private capital flows from a development standpoint.
It should be noted that the majority's proposals would result in the return of at least some of the capital of the World Bank, IFC and MIGA to the United States and other donor nations. Those liquidations would in essence be financed by the repayment of existing loans by developing countries. Hence the majority is suggesting a strange kind of "reverse aid" that makes little sense either economically or politically.
Second, the majority would stop all MDB lending to countries that had obtained access to the private capital markets. They want to do so even if those countries were still very poor and even if their private borrowing could take place only on "junk bond" terms. There are numerous problems with this approach:
Third, the IFIAC majority wants the more advanced developing countries to rely wholly on the private capital markets. The same problems cited above pertain. Moreover, tens of millions of the world's poorest people live in Brazil, Mexico and other countries in this category. It would be a mistake to cut them off, fully and abruptly, from the benefits of MDB credit.
Fourth, as noted above, the majority would henceforth rely wholly on appropriated grant aid to support development in those poorest countries that retained access to MDB funding. To its credit, the majority is logically consistent in its call for a substantial increase in such aid; its members have courageously called on Congress to provide such increases as part of their proposed reform package. The problem, of course, is that the Congress—and other parliaments around the world—are highly unlikely to do so.
Hence the likely result of the IFIAC majority's proposals, in the real world, would be a sharp cutback in resource transfers to the developing countries, including the poorest of the poor. This result would be compounded if members of this Committee, and of the Congress more broadly, were to insist on linking completion of the HIPC debt relief program to implementation of the IFIAC majority's proposals for reform of the IMF. Such linkages will almost certainly be rejected by a majority of the Congress, and would certainly be rejected by the Administration, so the tragic result would be further delay of debt relief—which all members of the IFIAC support—rather than reform of the IMF or anything else. To their great credit, the members of the IFIAC majority have disavowed any such linkage. The practical reality, however, may again place them in the position of unwittingly undermining their own stated goals.
A Modified Reform Program
Our minority's disagreements with these extreme proposals of the majority do not, however, mean that we reject the view that reform is needed in the MDBs (as well as in the IMF). Indeed, we indicated our full support for several recommendations of the majority in the first paragraph of our dissent: clear delineation of the responsibilities of the IMF and World Bank, full write-off of the HIPC debt to all of the international financial institutions, increasing orientation of MDB lending to the poorest countries, and growing reliance on grants rather than loans for that same set of countries. I will briefly address each of these issues.
As noted, it would be a mistake to shut down the noncommercial lending of the World Bank. However, the Bank should speed up its program of graduating higher income developing countries. There is little or no excuse for continued Bank lending to Argentina, for example, with a per capita of about $9000.
Moreover, the Bank should not re-enroll borrowing countries as it did—to the tune of $5 billion—with Korea during the recent Asian financial crisis. Korea had completely graduated a number of years earlier, and had indeed become a donor to IDA, but it suddenly received a huge infusion of long-term development loans from the World Bank (and the Asian Development Bank) in response to its liquidity crisis in early 1998. Such a step was totally unnecessary, in addition to being totally inappropriate, as demonstrated by the fact that Korea's foreign exchange reserves have now reached $85 billion barely two years after its crisis. All members of the IFIAC agree that the IMF should stay out of long-term development lending but it is equally important to keep the World Bank (and the other MDBs) out of short-term crisis lending.
Acceleration of the MDBs' graduation programs could enable them to start reducing their total loan levels. The proceeds from the net loan repayments that would result could then be transferred to IDA, either to increase its quasi-grant lending and/or to reduce the need for future appropriations of IDA funding by donor countries. New IDA loans could then more easily be made on full grant terms. The Congress and the other World Bank member countries would of course have to approve such programmatic changes; they could not simply be decided by the US Administration, as implied by the IFIAC majority.
Finally, one of the most contentious issues in the current reform debate has been the increasing role of the IMF in longer-term, quasi-development lending via its Poverty Reduction and Growth Facility (or PRGF, which replaced the earlier Extended Structural Adjustment Facility and is the institutional locus for the Fund's central role in implementing the HIPC debt relief initiative). All of us on the IFIAC agreed on the need for a clear delineation of the future roles of the Fund and the Bank but we in the minority were uneasy over the further reduction in resource transfers that would be implied by abolishing the PRGF, as the majority proposed.
An idea has surfaced, however, that could resolve the problem: transferring the PRGF from the Fund to the Bank rather than shutting it down.3 The IMF would still provide advice on macroeconomic policy in the recipient countries and the World Bank would have to insist that the countries took the Fund's advice seriously even though the Fund was no longer making the loans itself. The Bank would also have to exercise effective conditionality on the use of both the PRGF funds and the resources transferred for debt relief. If these considerations could be satisfactorily resolved, transfer of the PRGF to the Bank could resolve one of the thorniest issues in the current reform debate.
Such a compromise, if accepted by the Chairman of the full Committee and other key members of the Congress interested in IMF and MDB reform, and subsequently by the Administration and other countries, could resolve the problems cited above that threaten to block completion of the HIPC debt relief program. I believe it would meet the objective of IMF reformers, including all of us on the IFIAC, "to get the IMF out of longer-term lending." I also believe it would be acceptable to most of the developing countries that receive funds from the PRGF and through debt relief. I commend it to the Committee and hope it could help pave the way toward constructive reform of both the IMF and the World Bank, in a manner that would be politically feasible would help resolve at least part of the current reform issue.
1. For effective rebuttals of most of the majority's analytical arguments see Joanne Salop, "Lies and Exaggerations," The International Economy, May/June 2000 and "Development Effectiveness at the World Bank: What is the Score?" in OED Research, World Bank Operations Evaluation Department, Spring 2000.
3. To my knowledge, the idea originated in a report on reform to the G-24 of developing countries by Montek Ahluwalia, former Finance Secretary and Commerce Secretary of India; see "The IMF and the World Bank in the New Financial Architecture" in International Monetary and Financial Issues for the 1990s, vol. XI (New York and Geneva, United Nations, 1999). The idea was endorsed in the recent report of the Overseas Development Council, The Future Role of the IMF in Development (Washington, 2000).