Committee on Banking
and Financial Services
James A. Leach, Chairman
|For Immediate Release:|
|Thursday, March 23, 2000|
Of Representative James A. Leach
Chairman, Committee on Banking and Financial Services
Hearing on Proposals for a New International Financial Architecture
On behalf of the Committee, I would like extend a warm welcome to Secretary Summers, as well as our second panel representing members and staff of the International Financial Institution Advisory Commission. Unfortunately, the Chairman of the Commission, Allan H. Meltzer, could not be with us because of a scheduling conflict, but I am confident the views of the majority will be well presented, along with the views of those who dissented.
The chief purpose of this hearing is to examine ongoing efforts to improve the "architecture" of the international financial system. In the IMF quota increase provisions contained in the Omnibus Appropriations Act for FY 1999, the authorizing language of which stemmed from this Committee, Congress laid the groundwork for active and ongoing oversight of the IMF and the emerging issue of international financial reform. The Act called for specific IMF reforms in a number of areas and included a requirement for an annual report and testimony by the Secretary of the Treasury on progress made in reforming the institution; on efforts to strengthen the international financial system; and on the compliance of countries that have received IMF conditioned assistance.
The Omnibus Appropriations Act also provided for the establishment of the International Financial Institution Advisory Commission to consider the roles of several international financial institutions, including the International Monetary Fund and the World Bank, and report its findings to Congress and the Executive Branch. That report was received on March 8, 2000. It was statutorily stipulated that the Executive Branch would have 90 days in which to respond.
As we all recall, just 18 months ago the world was jolted by the worst international financial crisis in decades. Certain high-flying economies of East Asia were grounded by plunging exchange rates and stricken by over-extended enterprises, the financial contagion spread to Russia and Latin America, and the resulting confidence crisis was reflected in the demise and rescue of the worlds largest hedge fund, Long Term Capital Management.
With the global outlook at the dawn of the 21st century increasingly stabilized, it would appear to be a particularly propitious time for the U.S. to review our policies toward the international financial institutions.
By historical background, representatives of some 44 countries met in Bretton Woods, New Hampshire, in 1944 as World War II was drawing to a close to review the causes of the collapse of the international economic system, which had helped lead both to the Great Depression and the second world war of the 20th century. The three Bretton Woods institutions that came into being -- the IMF, the World Bank, and the General Agreement on Tariffs and Trade (GATT) -- were designed to help rebuild Europe, to address the causes of the depression and, most significantly, to mitigate the economic causes and consequences of war itself.
Despite errors made, any reading of history would indicate that the IMF and its sister institutions have generally advanced U.S. interests in maintaining a stable international political and financial system that promotes global economic growth and open markets. Indeed, in the last two decades alone, world GDP has quadrupled and international trade has quintupled. While it would be a mistake to argue that the Bretton Woods institutions were principally responsible for this stunning increase in world trade, it is credible to suggest that they have generally played a constructive, stabilizing role in the evolving global economy.
Within the American economic community, there are skeptics about certain IMF policies, but there is an impressive degree of consensus among conservatives and liberals on many of the core elements that should come to characterize the international financial system for the 21st century. Among these are the following precepts: that appropriately liberalized financial markets offer compelling benefits to the world economy; that protectionism is economically and socially dangerous; that globalization and capital mobility are here to stay; that domestic and international financial issues are increasingly intertwined; and that when financial crises erupt, the International Monetary Fund (IMF) can, in certain limited circumstances, play a constructive role in helping contain systemic risks; and that the World Bank and the other multilateral development institutions have a role to play in the effort to spread economic opportunity and raise standards of living in developing countries around the world.
Likewise, common ground appears to have been established on the principle that the international financial institutions should focus their energies on the fundamentals - i.e., various core competencies. In the case of the Fund, this means dispensing macroeconomic advice, providing crisis management and encouraging the development of international standards for minimally acceptable financial practices and crisis management - rather than quasi-development lending in underdeveloped economies. In the case of the World Bank and the other MDBs, concentration on the fundamentals means focusing effective assistance aimed at promoting sustainable growth and poverty reduction.
To date, the Administration has advocated a gradualist approach to international financial reform. Others have made proposals that are more sweeping. In this context, I find some of the conclusions of the split Commission report credible, while others appear to go too far. For example, the recommendation to transfer the World Bank's Latin America and Asia programs to the regional development banks, and to end the Bank's role in private sector development, strike me as radical and contrary to the national interest.
But I would highlight three areas where the Meltzer Commission is in lockstep with this Committee: the notion that protectionism in finance is profoundly counterproductive to the development of a robust domestic economy and banking system; that the World Bank is well-placed to play a leadership role in addressing a variety of transnational problems and is uniquely positioned to lead at this junction in history in the battle against the scourge of AIDS; and that debt relief for heavily indebted poor countries is an economic and moral imperative that should proceed in a forthright and timely manner, which in my view should go forth without reference to other contentious issues.
In addition to reviewing these issues, the Committee will hear testimony today on allegations that disbursements by the International Monetary Fund to the Ukraine may have been improperly diverted by the National Bank of Ukraine (NBU) through Credit Suisse First Boston (CSFB) accounts in Cyprus, perhaps in an attempt by the NBU to mislead the IMF about the level of Ukraine's foreign reserves or for other reasons. In this regard, the Committee invited the outside auditor of the NBU -- PricewaterhouseCoopers (PwC) -- to testify on the results of previous and ongoing work with the NBU and the IMF. Unfortunately, PwC declined to testify, citing among other reasons client confidentiality.
These are extremely serious allegations that give rise to questions about the integrity of the National Bank of Ukraine, the role of a major international bank, and the credibility of the IMF. Analogous to the FIMACO scandal and problems of corruption in Russia, it also raises substantial doubts about the efficacy of U.S. and Western assistance policy.
It is true that a compelling case could have been made that the U.S. and other Western countries had a humanitarian and strategic interest in helping the newly independent states that emerged in the wake of the Cold War become viably democratic and market oriented, but at some point it became evident that in too many cases communism was replaced by "corruptionism." Instead of governments becoming of, for and by the people, several of these states appear too often to have come to serve served insider oligarchs. As kleptocrats have taken the place of communist aparatchiks, the question facing the peoples of these countries is whether corruption can be reined in before it becomes culturally endemic.
In Russia and the Ukraine, Western policymakers now face a catch-22. Absent a stemming of capital flight and forensic accounting of certain IMF transactions together with substantive progress on legal reform and anti-corruption initiatives, there can be little economic justification for further disbursements of IMF loans. But without additional official financing from the IMF and its sister institution, the World Bank, these countries in transition will be unable to meet their external obligations. In other words, the IMF may have to extend new loans in order to avoid default on credits previously extended. That is a bankrupt policy for the countries and for the IMF that cannot long continue.
In this regard, the Committee intends to continue its inquiry into whether western financial institutions wittingly or unwittingly aided and abetted money laundering and possible efforts by recipient countries to mislead the IMF and evade its conditionality.
The international community errors if it overreacts and radically withdraws support for internationalist approaches to burden sharing, but the IMF needs to revise aspects of its mission and gets its philosophical house in order if support for it is to be maintained in Congress. It would appear that the details of at least one of the suspect Ukrainian transactions -- the double counting of reserves -- was known to Fund staff, but the Board and perhaps Fund management may not have been fully apprised of the problem. The Fund has contracted with independent auditors, but legislatures, such as the Congress from countries that contribute resources are often prevented from seeing the results of their work because of a complex web of confidentiality agreements. For example, this Committee has requested but not yet received quarterly audits of the National Bank of the Ukraine done by PwC as a condition of previous IMF loans. This is intolerable.
Finally, while I supported the U.S. decision to back a qualified European candidate for the position of IMF Managing Director, it is self-evident that while the candidate who eventually emerged might be quite capable, the selection process itself lacked diplomatic sensitivity and, more importantly, thoughtful professionalism. Reform of the selection process would seem to be in order.
I look forward to comments of our panelists on these and other issues.