THE INTERNATIONAL MONETARY FUND'S (IMF) PROPOSED QUOTA INCREASE: ISSUES FOR CONGRESS
CRS Report for Congress
The International Monetary Fund's (IMF)
Proposed Quota Increase: Issues for Congress
January 16, 1998
Patricia A. Wertman
Specialist in International Trade and Finance
Congressional Research Service ˜ The Library of Congress
The International Monetary Fund's (IMF) Proposed Quota
Increase: Issues for Congress
The International Monetary Fund (IMF) is the international lender-of-last-resort.
Each of the 182 members of the IMF have a "quota," which broadly reflects the size
of its economy and its relative position in the world economy. Among other things,
quotas determine the size of a country's contribution to the IMF's capital. Thus, they
provide the funds out of which the IMF makes its loans.
Under the IMF's Articles of Agreement, a general review of the adequacy of the
IMF's quota resources must be conducted at least every five years. The Eleventh
General Quota Review has just been completed with a recommendation that quotas
be increased by 45 percent. This would result in an SDR 66 billion increase (about
$88 billion) in total IMF quotas, to SDR 212 billion ($283 billion).
The U.S. quota would increase by SDR 10.6 billion ($14.2 billion), to SDR 37.1
billion ($49.7 billion). The U.S. share of total quotas would drop from 18.1 percent
to 17.5 percent. The United States, which would continue to have the largest quota,
would retain its veto over major decisions in the IMF. Under the Bretton Woods
Agreements Act, U.S. participation in the proposed quota increase must be authorized
by Congress. In addition, under a compromise formula reached in 1980, the
necessary funds must be appropriated.
Current proposals for funding the IMF — an increase in quotas and the "New
Arrangements to Borrow" (NAB) — raise a variety of serious issues, including:
!contagion: how to prevent the spread of financial difficulties from one market
and economy to others in an integrated world economy;
!moral hazard: whether "bailouts" and IMF financing, by sending the wrong
signals, encourage precisely the type of economic behavior that they were
meant to deter;
!conditionality: whether the economic policy changes and performance targets
that the IMF requires of its borrowers in return for a loan are appropriate and
!transparency: whether information on IMF program design, in particular, and
government economic and financial information and data, in general, are
accurate, timely, and widely available to the public, including investors, so as
to allow for more accurate assessment and greater accountability; and, finally,
!asymmetry: the relative lack of leverage of the IMF over its non-borrowing
members and the resulting limitation on its ability to prevent crises.
The crisis in Asia is eroding the IMF's financial base. Its "usable" resources are
estimated to be not more than about $38.4 billion, with a liquidity ratio of 79.1%, and
may be considerably less. Both are approaching historically low levels.
The Quota Increase Proposal: Some Background.......................2
The IMF's Need for Resources.....................................3
"Contagion" .................................................... 4
IMF Conditionality and U.S. Trade..................................9
The IMF and "Good Governance:" The Corruption Issue................11
"Transparency" and "Asymmetry:" IMF Programs, Country Data, and
U.S. Budgetary Treatment in Brief..................................13
Conclusions ................................................... 14
The International Monetary Fund's (IMF)
Proposed Quota Increase: Issues for Congress
The International Monetary Fund (IMF), founded in 1945, is the international
lender-of-last resort. Its 182 member countries may borrow from it when they are
experiencing economic and financial difficulties.
The IMF's loanable funds are derived from its capital subscriptions or "quotas."
Under the IMF's Articles of Agreement, the IMF must conduct a general review of1
the adequacy of its quotas every five years. If the IMF considers its financial
resources to be inadequate to meet anticipated loan demand, it may, with the approval
of its Executive Board, recommend an increase in its quotas. The IMF has recently
recommended that its quotas be increased by 45 percent.
U.S. participation in this proposed 45 percent increase must be authorized and
appropriated by Congress. The proposed quota increase is in addition to a proposal
that the United States participate in the "New Arrangements to Borrow" (NAB), an2
arrangement of medium-term credit lines that would provide supplemental financing
to the IMF in the event of an international financial crisis. U.S. participation in the
NAB is also currently under consideration by Congress.
The emergence of an international financial crisis in Asia in the late spring of
1997 has made both the quota increase and the NAB proposal extremely
controversial. The Asian crisis has resulted in large financial assistance packages for
Thailand, Indonesia, and South Korea. In the case of the latter two countries, these
have included commitments by the United States to provide backup contingency
financing. Moreover, the IMF's loan to South Korea is the largest loan ever extended
by the IMF, exceeding that provided to Mexico in the wake of the peso crisis of
December 1994, a crisis that in many important ways forms the backdrop for the
Past requests for increases in the U.S. quota have been the occasion for a
rigorous examination of the IMF, its operations, and its loan programs. This report
Article III, Sec. 2 (a).1
For more details on the NAB, see U.S. Library of Congress. Congressional Reserach2
Service. The International Monetary Fund's "New Arrangements to Borrow" (NAB), by
Patricia A. Wertman. IB97038. Updated regularly.
Details of the 1994 Mexican peso crisis and the response to it can be found in, U.S.3
Library of Congress. Congressional Research Service. Mexico's 1995 Economic Program
and the IMF, CRS Report 95-428 E; The Mexican Support Package: Overview and Analysis,
CRS Report 95-1006 E; and Mexico: Chronology of a Financial Crisis, CRS 95-1007 E, all
by Patricia A. Wertman.
is intended to provide an overview of selected major issues related to the proposal to
increase the IMF's quotas. Many of the issues raised here also pertain to the proposed
NAB. The report is not intended to be comprehensive. The order of presentation
does not imply any hierarchy of importance.
The Quota Increase Proposal: Some Background
Each IMF member country has a "quota," which broadly reflects the size of its
economy and its relative importance in the world economy. Quotas determine the
size of each country's capital contribution to the IMF, and, thus, represent the IMF's
basic financial resource. Quotas also determine voting rights within the IMF, access
to IMF loans, and shares in any distribution of "Special Drawing Rights" (SDRs).4
Under the IMF's Articles of Agreement, a general review of the adequacy of the
IMF's quota resources must be conducted at least every five years. The Eleventh
General Quota Review was scheduled to be completed not later than March 1998.
In September 1997, it was agreed, after intense negotiations, that a quota increase of
45 percent would be recommended. As the Asian financial crisis accelerated, the
IMF's financial base began to erode as it extended loans to the Philippines, Thailand,
Indonesia, and Korea in quick succession. The IMF's Managing Director Michel
Camdessus, revisiting an early position that the quota increase needed to be greater
than 45 percent, then asked the IMF's Executive Board to increase quotas by 70-80
percent. This would have raised total IMF quotas in an amount ranging between SDR
contribution that would have been increased by between SDR 18.6 billion and SDR
21.2 billion ($25-$29 billion). The U.S. and German governments quickly indicated
their opposition to the request for an expansion of such a magnitude. On December
23, therefore, the Executive Board proceeded with the originally agreed
recommendation to increase quotas by 45 percent.
The currently recommended quota increase would increase the IMF's total
quotas from SDR 146 billion ($195.5 billion, as of January 15, 1998) to SDR 212
billion ($283.9 billion). The U.S. quota would rise from SDR 26,526.8 million ($35.5
billion) to SDR 37,149.3 million ($49.7 billion), an increase of SDR 10,622.5 million
($14.2 billion). The U.S. quota, therefore, would rise by 40.0 percent, 5 percent less
than the target increase. This would be reflected in a decline in the U.S. share of total
quotas, which would drop from 18.141 percent to 17.521 percent. The veto power
of the United States over major IMF decisions would, therefore, be retained.
The SDR is an international reserve asset created by the IMF and used to denominate4
all IMF accounts. The value of the SDR fluctuates against the U.S. dollar on a daily basis.
It has recently been agreed that the IMF should make a new allocation of SDR 21.4 billion.
This would double the number of SDRs outstanding. The proposal to allocate SDRs, because
it would require an amendment to the IMF's Articles of Agreement, would require
congressional authorization. Because no U.S. funds would be involved, however, no
appropriation would be required. For more details, see U.S. Library of Congress.
Congressional Research Service. The IMF's Proposed Special Drawing Rights' (SDRs)
Allocation: A Background Paper, Patricia A. Wertman. CRS Report 97-738 E.
Under Section 5 of the Bretton Woods Agreements Act of 1945 (P.L. 79-171;
22 USC 286), U.S. participation in any IMF quota increase must be approved by the
The IMF's Need for Resources
The Asian crisis has substantially reduced the IMF's financial resources. IMF
loans are made from its pool of so-called "usable resources," that is, its holdings of
hard currencies and SDRs. According to the IMF, "[i]n assessing the adequacy of the
Fund's liquidity position, the stock of usable currencies and SDRs held in the GRA
[General Resources Account, the financial account from which the IMF makes most
of its loans] is reduced by the amount of resources committed under arrangements and
expected to be drawn, and is reduced further to take account of the need to maintain
working balances of currencies and of the possibility that the currencies of some
members in relatively weaker external positions would have to be removed from the
operational budget." (Italics added.)5
Near the end of November 1997, the IMF was reported has having $50 billion
(SDR 36.5 billion) in usable currencies by the Washington Post (Nov. 22, 1997) and
the Wall Street Journal (Nov. 25, 1997), a figure that was confirmed to CRS by the
IMF. The statement quoted in the preceding paragraph from the IMF's annual report
suggests that the SDR 15.5 billion ($21 billion) loan to Korea, announced on
December 4, would have immediately reduced the IMF's uncommitted resources by
the full amount, thereby reducing its usable resources to SDR 21 billion ($28.5 billion,
figured in SDR terms, using the exchange rate prevailing as of December 4, that is,
$1.35723 per SDR), less an undisclosed amount of working balances. This, in turn,
reduced the IMF's estimated liquidity ratio to 57.9 percent, from 100.6 percent6
IMF Deputy Managing Director Stanley Fischer stated, in his press conference
of December 5, 1997, that the IMF had $44 billion in usable resources after the
Korean loan. The first installment of the Korean loan, paid out immediately,
amounted to SDR 4.1 billion ($5.56 billion). Adding this amount to $44 billion
results in a total near to the $50 billion reported in late November. In essence, the
$44 billion appears to have represented money actually in the "till," that is, cash-in-
hand, rather than reflecting the full amount of the IMF's loan package to Korea.
The difference between the two numbers might, therefore, revolve around a
definitional or operational determination of what constitutes committed resources.
The IMF's commitment of funds might occur only after the IMF decides to disburse
a loan installment (usually quarterly) following its review of borrower performance,
IMF. Annual Report, 1997, p. 125.5
The IMF's liquidity ratio consists of the ratio of its usable resources to its liquid6
liabilities. The Fund's liquid liabilities are comprised of its members' reserve tranches and
thus, are equal to one-fourth of total quotas or SDR 36.3 billion. The reserve tranche is
considered to be part of a country's international reserves and may be drawn automatically and
unconditionally upon request. The liquidity ratio is, thus, a measure of the IMF's ability to
rather than when a loan package is agreed, as the language of the annual report
suggests to the outside analyst. Statistically, IMF loan arrangements are reported
showing both disbursed and undisbursed amounts of the total loan package, again
suggesting that the total package is committed up front.
The Korea loan is, in any case, being rapidly disbursed. The second installment,
amounting to SDR 2.6 billion ($3.58 billion), was disbursed on December 18,
followed by an emergency $2.0 billion that was announced on December 24 and
disbursed in early January. Considering only disbursements under the Korean loan
and starting with the $44 billion figure for usable resources, this would leave the
IMF with an estimated balance of cash-in-hand of not more than $38.42 billion, also
less an undisclosed amount of working balances. The IMF's liquidity ratio would
then be about 79.1 percent (using the SDR exchange rate of January 15.). IMF
resources and liquidity, thus, are falling rapidly by either definition.
By historical standards, the Asian crisis is reducing IMF liquidity to relatively
low levels. Since 1983, the IMF's liquidity position has ranged between 71.0% and
167.6% at the end of each of its fiscal years, which end on April 30. At the end of
April 1992, that is, immediately prior to the last quota increase, which became
effective on November 11, 1992, the IMF's liquidity ration was 81.6%. The Fund's
liquidity ratio has not fallen below 80% since 1986, in the midst of the international
debt crisis of the 1980s. Since 1978, the year that the United States made a reserve
tranche drawing, the IMF's liquidity ratio has been below 60% in only three years —
The resource needs of financially troubled countries always exceed what the IMF
is able or willing to provide. The IMF's role is to rebuild confidence, to be a
"catalyst" to private funding. It is only because the current packages have so far
largely failed to stem the current "run" that the adequacy of the IMF's resources is
even an issue.
Occurring as a major financial crisis continues to wash over the economies of
Asia, the proposed quota increase raises a number of serious issues. Among these is
the issue of "contagion." Contagion is, simply, the spread of a financial crisis from
one financial market or country to another. It raises the prospect that economies that
are mostly healthy can be dragged down by economies with serious financial and
economic problems. Ironically, it is the very success of Bretton Woods, specifically,
the increasing freedom with which trade and capital flows move around the world,
that allows for the emergence of this issue. It was a major concern of policymakers
as the late 1994 Mexican crisis unfolded, a concern that proved to be justified as the8
impact spread from Mexico to Argentina and Brazil and then to other emerging
IMF. Annual Report, 1994, p. 133.7
In the end, Mexico drew on its $17.8 billion IMF loan and a maximum of $12.5 billion8
of its $20 billion credit line from the United States.
markets in Asia. Nevertheless, within 3-4 months the Mexican crisis had largely been
The current crisis has sequentially rippled through Asia, beginning in Thailand
in late spring and spreading rapidly to Indonesia, the Philippines, Malaysia, Hong
Kong, Taiwan, and South Korea. The duration of the current crisis, the number of
countries involved, and the amount of funding and back-up lines committed — an
estimated $115 billion — are well beyond those experienced just two years ago.
Concerns about contagion as a characteristic of financial crises, thus, have been
heightened by the current crisis. Financial markets are demonstrably integated and are
likely to become more so in the 21st century. Enormous amounts of short-term cash
move at the tap of a computer key. The question is, therefore, raised as to just what
it takes to prevent the spread of financial crises. How much cash? What kind(s) of
response by the international community? Are current mechanisms adequate to do
the job? Would the crisis have unfolded differently if the "New Arrangement to
Borrow" (NAB) had been in place and activated?
A "moral hazard" is any action that encourages the very behavior that the action
seeks to prevent. Broadly, the question is whether "bailouts" per se reduce or
increase systemic risk. In terms of the current discussion, the moral hazard issue may
conveniently be divided into two parts: that applied to countries and that applied to
investors. With regard to countries, it is argued that governments engage in bad
economic management precisely because they know that they will be bailed out. In
the event, as the Mexican crisis of 1994-1995 demonstrated, countries are not spared
the consequences of imprudent economic policies. The real economies of financially
troubled countries and the people who inhabit them suffer the pain of a forced
economic adjustment. The public policy issue here is whether that pain is to be
somewhat mitigated by the provision of external financial support, especially because
concerns arise regarding contagion and because broader foreign policy and security
issues might well also arise, as they have with regard to both Mexico and Asia.
Many of the imprudent policies undertaken by governments occur in an electoral
environment or result from long-standing institutional or cultural arrangements or out-
moded developmental models. In these circumstances, outside suggestions that a
different course might be "wiser" are not likely to be well-received until a crisis brings
the point painfully home. Even after a crisis, "conditionality" attached to a financial
rescue package may well be viewed as an infringement of sovereignty. A related
policy question that arises here, thus, concerns how to put "teeth" in preventive
measures, notably, surveillance, data dissemination, and transparency, which are
discussed in somewhat more detail below.
Moral hazard also arises with regard to investors. Does the possibility of a
bailout encourage private investors to take on risks that they might otherwise shun in
an attempt to reap greater financial returns? At the time of the 1994 Mexican crisis,
private investors were made whole as result of the bailout. This, in essence, let the
private sector retain gains, but distributed the losses to the public sector.
Policymakers viewed this as an unfortunate by-product of a necessary policy action.
Many fear that the Mexican crisis set an undesirable precedent that is being
reinforced by the current crisis, where it appears that some countries are "too big to
fail." Additionally, it encouraged private investors to believe that similar support
would be available in the event future crises. As long as the profits rolled in,
investors, therefore, failed to undertake, or ignored, "hard-headed" internal analyses
of what represented a prudent risk — a view strongly suggested by the yields on
much emerging market debt prior to the current crisis. The policy question here is
how to restore market incentives to prudent risk-taking. Some believe that the only
way to do so is to stop providing bailouts to countries that get themselves in financial
trouble — whatever the cost to the domestic or international economy. In short, that
investors need to be aware or beware. From this perspective, the IMF would cease
its role as lender-of-last resort. In a totally different view, some suggest that some
form of capital controls, at least on an interim basis, might be appropriate. Finally,
still others argue that national security, foreign policy risks, and the threat to the
international trade and financial system outweigh concerns about moral hazard.
The issue of "conditionality" arises only after a bailout is already in progress.
Conditionality consists of the economic policy changes and the economic
performance targets that are attached as conditions (hence the term "conditionality")
for receiving IMF loans. It is probably safe to say that IMF conditionality has been
an issue almost from its first loan and has become more controversial as the years
have passed. This is, undoubtedly, due, at least in part, to the fact that the IMF's
conditionality has become more comprehensive and more intrusive over the years.
Much of this shift, in turn, may be attributable to a shift in the IMF's loan clientelle.
Initially, under the Bretton Woods fixed-exchange-rate system, the IMF's loans were
largely to the major industrial countries, including the United States. The remedy for
a balance-of-payments or liquidity problem was then largely limited to
macroeconomic policy changes, that is, changes in fiscal, monetary, and, sometimes,
exchange rate policy. Structural reforms were limited to those directly related to
macroeconomic policy, for example, tax reform.
Now, with the recent exception of South Korea, the IMF's loans are exclusively
to developing countries and to the "transitional" economies of Eastern Europe and the
former Soviet Union. At least since the announcement of the so-called "Baker Plan"
in 1985, at the height of the Third World debt crisis, therefore, the solutions to
external debt and liquidity problems have included structural (microeconomic) issues,
as well as macroeconomic issues. This tendency to focus on microeconomic issues,
along with the macroeconomic issues, has been considerably amplified by the need to
assist the formerly Communist economies. Issues, such as privatization, trade, and
financial liberalization, are now almost routinely a key part of IMF conditionality, with
the IMF often operating to harmonize its recommendations to the requirements of
other international bodies, such as the World Trade Organization (WTO) or the
World Bank. Most recently, the IMF, like the World Bank, has broadened its
concerns to what is essentially a political issue, the issue of good governence,
including corruption. While this makes good economic sense, it is also a major
departure in terms of the nature of conditionality.
The U.S. Congress has played an active role in the evolution of IMF
conditionality. Not infrequently it has instructed the U.S. Executive Director in the
IMF to use the "voice and vote" of the United States to bring about specific changes
in IMF policy, most especially including conditionality. Over the years, these
instructions have included, for example, encouraging the formulation of adjustment
programs that would foster sustained economic growth, not bailout banks, eliminate
the adverse impact on the poor and on the environment, work toward the elimination
of predatory agricultural practices, promote fair trade and the elimination of trade
restrictions, increase productive participation of the poor in the economy, reduce
military spending, and promote improvement in conditions for workers.
In the current crisis, the specific issue with regard to IMF conditionality is
whether the programs for Thailand, Indonesia, and South Korea are too austere. The
charge of too much austerity (or too little) in IMF programs, that they are "cookie
cutter" programs, has been a recurrent charge for many years. What gives this charge
resonance now is that, unlike Latin America in the 1980s, the Asian governments
with which the IMF has recently negotiated programs cannot be accused of fiscal
profligacy. According to the IMF's published numbers, Thailand had a projected
public sector deficit of -1.6% of GDP (1997); Indonesia, a projected central
government surplus of +1.2% of GDP (1996/1997); and South Korea, a central9
government deficit of -0.5% of GDP (1997). In 1998, the IMF is asking that
Thailand achieve a public sector surplus equal to +1.0 % of GDP; Indonesia, +0.8%
(1997/1998) and +1.0% of GDP (1998/1999); and South Korea, +0.2% of GDP.
These represent significant shifts in the fiscal balance of countries that have followed
In designing the economic programs for Asia, it appears that the IMF was
concerned about staunching the financial outflow, inflationary pressures stemming
from currency depreciation, the likely enormous costs of cleaning up severe structural
problems in the financial systems of the borrowing countries, and the decline in tax
revenues resulting from a slowdown in economic growth. As a result, it
recommended fiscal and monetary tightening, including increased interest rates, tax
increases, and budget cuts. Finally, the IMF maintains that its fundamental focus in
Asia is on structural reform, particularly in the banking sector.
Critics, including the IMF's sister-institution, the World Bank, which10
undoubtedly has the relevant IMF documents that provide detail on IMF
conditionality, fear that the resulting slowdown in economic growth will significantly
worsen the problem by forcing more companies into bankruptcy, further worsening
bank balance sheets, and increasing unemployment. Since balance-sheet problems in
both the corporate and the financial sectors have been politely overlooked for years
IMF Press Releases No. 97/37, No. 97/50, and No. 97/55.9
Davis, Bob and David Wessel. World Bank, IMF at Odds Over Asian Austerity.10
Wall Street Journal, January 8, 1998, p. A5, A6.
in these "crony-capitalist" societies, this is almost certainly an accurate assessment.
The issue is whether the IMF's fiscal, in particular, and monetary targets will unduly
aggrevate the problem, bringing about a debt-induced deflation, making it harder for
these countries to restart economic growth. Oddly enough, prior to the leaking of the
IMF's own confidential assessment, compared to the level of criticism toward IMF
austerity, there had been relatively little public criticism of the IMF's requirement to
close weak banks, an action that the IMF now acknowledges as having worsened
The Asian crisis has made the, often, sterile debate over IMF conditionality into
a debate of historic significance with serious consequences. Whether the fiscal and
monetary adjustments are too much or too little is likely to depend upon both the
extent to which the policies are actually implemented and on market perceptions. One
lies in the realm of politics; the other, in the realm of psychology. These are
inherently somewhat unpredictable. Running macroeconomic models may be beside
the point. Nevertheless, the IMF's competence and its credibility are being tested.
The risks of a miscalculation are, after all, substantial. Ultimately, a vigorous debate
on IMF conditionality in Asia is likely to result in better programs.
Economic reform is always a process, not an event. In particular, the fast flow
of events in the early stages of a crisis is likely to work against well-designed
programs. The speed with which market forces now move may simply outpace the
relative slowness of the political process, with the result that governments everywhere
and anywhere, inevitably, are likely to find it difficult to respond in a timely manner
with appropriate policies. Initial conditionality is, therefore, certain to be altered;
current programs are works-in-progress. Recommendations for a tight
macroeconomic stance are already being eased.
Adjustment and finance are inversely related: the more finance that is available,
the less the required economic adjustment; conversely, the less finance, the greater the
required adjustment. Assumptions about the size of a particular financing package
and, hence, the needed degree of economic adjustment, therefore, are tied to
assumptions about the availability and structure of external finance, especially private
finance. This includes, for example, an issue that has been particularly critical in the
Asian crisis, namely, the rolling over of short-term loans, including trade credit.
Market psychology, therefore, must be accurately gauged. Will investors hold or
fold? This requires a very difficult assessment that rests in the realm of uncertainty
rather than probability. It would appear certain that all concerned, including the IMF,
misjudged market sentiment. Certainly, this is the inescapable conclusion with regard
to South Korea, where an acceleration of the original "bailout" package was
announced on December 24. Political factors appear to have played a key role in this
In the end, the IMF has found, over the years, that those programs most likely
to be successful are those that the country "owns," rather than those to which the
country has reluctantly agreed. Ultimately, all liquidity crises are crises of confidence
For information on the IMF's report, see Sanger, David E. I.M.F. Now Admits11
Tactics in Indonesia Deepened the Crisis. New York Times, January 14, 1998, A1, D11.
that can only be reversed by implementing sound and credible economic policies. No
amount of conditionality can compensate for a failure of political leadership.
Countries are free to alter policies at any time — without IMF prodding — and work
toward restoring market confidence on their own. Indeed, as one writer has
suggested, conditionality is an attempt to make countries be wise in their own behalf,
but, if countries were wise in their own behalf, there would be no need for
IMF Conditionality and U.S. Trade
Within the United States, there is a specific concern regarding the conditionality
of current IMF programs in Asia and its potential impact on the U.S. trade deficit.
To examine this, it is first important to note the relationship between capital flows and
The balance-of-payments is a statistical statement that summarizes a country's
transactions with the rest of the world during a given time period, usually one year.
It is a form of double-entry bookkeeping whose balance is always "0." By
mathematical definition, therefore, the two largest components of the balance-of-
payments — the current account, which consists largely of the trade balance, and the
capital account — are equal (with an allowance for errors and omissions). They are
mirror images. For that reason, if a country has a surplus on its capital account, it will
have a deficit on its current account and vice versa. Also, by mathematical definition,
then, a large outflow of capital, such as is now occurring in Asia, will result in either
the reduction of an existing current account deficit or the emergence of a current
account surplus. This is brought about through changes in the exchange rate or in
income levels. This adjustment in a country's external balance will occur as a
consequence of the capital outflow, regardless of whether the government undertakes
any policy changes, including (perhaps especially including) whether or not it agrees
to an IMF program. Thus, as a direct result of the exodus of capital, Asian exports
will increase and Asian imports will decrease. U.S. companies are certain to face
greater competition both in the U.S. domestic market and abroad.
Beyond the autonomous shifts in external balances that are inevitable, the impact
of the present IMF programs in Asia is likely to have several contradictory effects,
reflecting both the fact of the program and trade-offs made in designing the program.
These are likely to be as follows:
!As noted previously, finance and adjustment are inversely related. The
financial support provided as part of the "bailout" packages, in and of itself,
will lessen the severity of the external adjustment that has to occur in the wake
of the capital outflows from Asia. In other words, the financially troubled
countries of Asia will have to increase exports and decrease imports to a lesser
extent than they otherwise would have had to in the absence of the financing
provided by the IMF and others, including the United States.
The author believes that the original source of this thought was Leonard Silk, writing12
in the New York Times.
!IMF programs have tightened monetary policy with the intention that raising
interest rates would induce investors, both foreign and domestic, to hold local
currency assets. The IMF was also concerned about the inflationary effects of
currency depreciation. To the extent that this strategy is successful — and, at
present, it is not clear that the strategy is succeeding — it encourages capital
inflows, reduces capital outflows, reduces pressures on the international value
of the local currency, and reduces the degree of adjustment needed in the
current account. This again implies a reduction in pressures to export and less
constraint on imports.
!In addition to tightening monetary policy, the IMF has also asked for budget
cuts to cover the costs of recapitalizing and restructuring the financial sector.
This fiscal tightening will slow domestic economic growth, having an impact
that moves counter to the those discussed immediately above. Specifically,
slowed domestic growth is certain to increase the incentive for Asian
producers to seek markets abroad aggressively. A reduction in demand by
Asian consumers is also likely to reduce the import of foreign goods and
!IMF programs are also seeking financial liberalization and trade liberalization.
Trade reforms are to be consistent with the rules of the World Trade
Organization (WTO). Both are likely to result in increasingly open markets,
leading to an inflow of both capital and goods. These changes will occur over
the long-run, however, in contrast to the more immediate effects that have
been discussed above.
Thus, it is perhaps accurate to say that the IMF is "working both sides of the street"
on trade issues. The mere provision of money eases trade adjustments that must, by
definition, follow a massive outflow on capital account. Indeed, this is one of the
primary purposes of the IMF. At the same time, in the short-term, this is likely to be13
offset, at least partially, by the fiscal and monetary austerity that most IMF programs,
including those in Asia, involve. Long-term liberalization efforts, on the other hand,
are likely to be much more positive. Above all, it is important to note the the size of
the U.S. trade deficit, as opposed to its country composition, is a function of U.S.
macroeconomic policies and capital flows.
Art. I, sec. v and vi.13
The IMF and "Good Governance:" The Corruption
At their annual meetings in September 1996, the World Bank and the IMF
adopted a declaration, the "Partnership for Sustainable Gowth." It identified the
importance of good governance as an essential element in promoting economic
growth, including "ensuring the rule of law, improving the efficiency and
accountability of the public sector, and tackling corruption." The IMF's involvement,
through both its policy advice and it technical assistance, is limited specifically to
economic aspects that are in the IMF's traditional purview and expertise. Thus, the
IMF is concerned with:
!institutional reforms of the treasury, budget preparation and approval
procedures, tax administration, accounting, and audit mechanism, central bank
operations, and the official statistical function;
!market reforms, focusing primaily on the mechanisms of the exchange, trade,
and price systems, and aspects of the financial system; and
!regulatory and legal reforms, including taxation and the tax code, banking
sector laws and regulations, and the establishment of free and fair market entry
(the commercial code).14
The key consideration for the IMF is whether poor governance would have "a
significant current or potential impact on macroeconomic performance in the short
and medium term, and on the ability of the government credibly to pursue policies
aimed at external viability and sustainable growth." In the case of corruption, the15
issue is to be raised if the macroeconomic implications are significant — even if they
are not precisely measurable. Even when this threshold standard is not crossed,
corruption may be addressed as part of the IMF's efforts to promote greater
transparency and remove unnecessary regulations and opportunities for economic rent
seeking. The IMF is not, however, an investigative agency.
The IMF is to address issues of governance in both its lending programs and in
its routine annual review of members' economic policies and performance (Art. IV
consultations.) With regard to its loan programs, issues of weak governance are to
be addressed early. More importantly, IMF loans may be suspended or delayed on
account of poor governance if the issue meets the test of having significant
macroeconomic implications and puts the successful implementation of the program
or the purpose for using IMF resources in doubt.
Based on press reports, this policy appears to have been applied just three times
since its inception in 1997. The IMF suspended a loan to Cambodia for six months
when revenues from logging concessions somehow did not show up in the budget.
IMF. The Role of the IMF in Governance Issues — Guidance Note. Electronic14
In Kenya, the IMF suspended a loan when court proceedings in a major scam
involving fictious gold and diamond exports collapsed and the country's top customs
official, who had a reputation for fighting corruption, was removed. The $220 million
in funds for Kenya that were delayed have still not been disbursed and will be the
subject of negotiation in February 1998. The IMF also persuaded Romania to cancel
a $1 billion purchase of 96 Cobra attack helicopters from Bell Helicopter, a U.S. firm.
The helicopters were intended to expedite Romania's entry into NATO, but would
have worsened Romania's budget and its external debt position. All three of these
countries are relatively small. The application of the corruption guidelines in Asia
would present a much greater challenge for the IMF.
"Transparency" and "Asymmetry:" IMF Programs,
Country Data, and Crisis Prevention
In addition to concerns about the substance of IMF policies, critics also charge
that a lack of transparency regarding the details of the IMF's programs have made
them difficult to evaluate, adding to market uncertainties about their likelihood of
success, and, thus, delaying the return of capital that has fled the region. In recent
years, the IMF, has, in fact, moved toward providing greater information about its
programs to the general public. Press releases announcing IMF loans used to be not
much more than a paragraph in length. Now they average about 2-3 pages and are
available on the IMF's web site (http://www.imf.org.) This allows some assessment
of the general thrust of IMF programs. Details, however, are not available from the
IMF, making a thorough-going review by outside experts impossible.
Countries themselves are free to and often do release details of their programs,
including letters-of-intent and memoranda-of-understanding that set out both policy
changes and performance targets. IMF staff assessments of a country's adherence to
its program are not made available by the IMF, but, as was recently the case with
South Korea, are on rare occasions leaked, sometimes selectively, from somewhere
in the member government. The yearly evaluation that the IMF makes of all its
members, the so-called Article IV consultations, which were formerly unavailable, are
now released, in an abbreviated and sanitized version, including on the IMF's web site,
if, and only if, the member country gives the IMF permission to do so. Some of the
reluctance to provide greater information, thus, can be traced as much to IMF
members as to IMF staff. The issue is perhaps best viewed as a subset of the broader
issue of transparency. The U.S. government has, as a matter of policy, pushed for
greater transparency both within the IMF and elsewhere.
A much more serious problem is the relatively widespread failure of the IMF and
others, including other international financial institutions, investors, banks, and credit-
rating agencies, to foresee the likelihood of a crisis, such as the current crisis in Asia.
Some of this may have been an unwillingness to see problems with the "Asian miracle"
as long as profits continued to roll in. The failure to accurately evaluate the state of
the Asian economies is more serious in the case of the IMF, the other international
financial institutions, and the private credit agencies. The IMF's focus on
macroeconomic performance may have caused it to overlook or underestimate
fundamental structural problems. A lack of transparency may again have been a
The failure of the Mexican government to release timely data on its international
reserve holdings in the months immediately preceding its late 1994 crisis was
considered a major factor in blinding investors to the potential for a crisis. This
omission led to a move to require more timely data from countries borrowing in
international capital markets, culminating in the IMF's "Special Data Dissemination
Standard (SDDS) and the Dissemination Standards Bulletin Board (DSBB). The
former are standards on the timely publication of economic and financial data. The
SDDS is aimed at countries that have, or seek, access to international capital markets.
Participation is voluntary. As of July 31, 1997, 42 countries or territories had
subscribed to the standard. There is a transition period for full compliance that lasts
until the end of 1998. The DSBB is the IMF's electronic bulletin board for the SDDR
(http://dssbb.imf.org). Countries participating in the DSBB are encouraged to
establish links (hyperlinks) to national sites for economic and financial data. Lastly,
the IMF has established a general data dissemination system (GDDS), which is aimed
at all IMF members and intended to be a "good-practices" standard for data systems
and dissemination. All of these are in the very early stages.
Recent experience with South Korean data on short-term debt show that there
is still substantial work to be done in the area of data accessability. Borrowing
countries themselves may be "behind the curve" or, possibly, duplicitous about their
financial data. Neither is unprecedented. Under these circumstances, program design
is severely hampered and investors are either ill-informed or misinformed.
In the end, even first-rate data and an accurate economic assessment may not be
sufficient to permit the IMF to prevent a crisis. Reportedly, both the IMF and the
U.S. Treasury warned Mexico about the possible consequences of its economic
policies in 1994. The IMF has little leverage with non-borrowing members, with
whom it is limited to "jaw-boning." This problem — its "asymmetrical" treatment of
borrowers and non-borrowers — has been recognized virtually since the establishment
of the IMF. While there have been improvements in "surveillance," that is, oversight,
of non-borrowers, the IMF has no preventative "teeth."
U.S. Budgetary Treatment in Brief16
Under current budgetary practice, U.S. quota contributions to the IMF:
!are considered an exchange of equal and offsetting financial assets,
!do not result in a net budgetary outlay,
!have no net effect on the budget deficit, but
For a detailed examination of the budgetary treatment of U.S. participation in the16
IMF, see U.S. Library of Congress. Congressional Research. U.S. Budgetary Treatment of
the International Monetary Fund, by Patricia A. Wertman. CRS Report 96-279 E.
!require an appropriation, and
!have been provided for by an allowed adjustment to the budget's discretionary
spending limits under Title X of P.L. 105-33, the "Balanced Budget Act of
Treatment of U.S. contributions to the IMF as an exchange of assets would
normally mean that no appropriation is required. Congressional practice since 1980,
however, has been to appropriate any funding intended for the IMF. This approach
was decided upon in order to meet congressional concerns about "back-door"
financing in an environment of rising budget deficits. The same budgetary treatment
applies to the "New Arrangements to Borrow" (NAB).
The IMF is requesting a major increase of 45 percent of its quotas, or capital
contributions, in the midst of massive financial crisis in Asia. This is not the first time
that a quota increase has been requested at an historic moment. The 1983 increase
occurred in the wake of the Latin American debt crisis; the 1992 increase, following
the emergence of Eastern Europe and the break-up of the Soviet Union. While quota
increases always trigger vigorous oversight by the U.S. Congress, those occurring in
a crisis environment ensure controversy.
Perhaps the three most prominent issues are "moral hazard", "contagion," and
"conditionality." Moral hazard suggests that bailouts, by distorting market signals,
may increase the risk of the very behavior that they are meant to deter. Investors have
not been forced to sustain losses. Instead, the costs have been moved into the public
sector and, by extension, to taxpayers. A desire to punish investors and, perhaps,
policymakers in the bailout recipient, is, however, pitted against concerns about
economic growth; international trade; and political, foreign policy, and security
interests. The integrated nature of financial markets, giving rise to contagion of
financial difficulties between markets and economies, suggests that the United States
is unlikely to be unscathed by the current crisis.
The IMF's competence and credibility are also on-the-line. By the time a country
reaches the IMF, there are no easy choices, only trade-offs. Seldom, however, has
the debate over IMF "conditionality" been so acrimonious. The very vigor of the
current debate may reflect a somewhat greater degree of openness by the IMF
regarding the design of its programs. In turn, it might also suggest that even greater
transparency would lead both to more criticism from informed analysts and to better
program design, in essence, greater accountability — an opportunity, not a risk.
The chief charge against IMF conditionality is that it is worsening the Asian crisis
by imposing too much austerity on countries that were already in a strong
macroeconomic position. In fact, IMF conditionality, particularly at the early stages
of this rapidly moving and widespread crisis, is not "chiseled in stone." The fiscal and
monetary austerity initially recommended in Asia, and so strongly opposed by IMF
critics, is already being eased somewhat. Economic reform is always a process, not
an event. Above all, in the end, market confidence can only be restored by a political
leadership that is willing and able to implement sound and credible economic policies
— with or without support from the IMF. In essence, the crisis begins and ends at
the top. This also implies that there will be other crises because some government
somewhere will make a policy miscalculation.
IMF resources alone are never sufficient. They do, however, act as a catalyst to
call forth other financing, particularly private financing. This is because IMF
programs have generally been viewed as the international financial equivalent to the
"Good Housekeeping Seal of Approval." By increasing the availability of external
finance, the IMF mitigates the pain of a forced economic adjustment, easing the
impact on economic growth and jobs, both domestically and internationally. This is,
in fact, one of the major purposes of the IMF. The current crisis is seriously eroding
IMF resources and liquidity. Its ability to undertake even routine lending in the future