Dissenting statement of Jerome I. Levinson

Dissenting statement of Jerome I. Levinson,
Democratic Appointee, Congressional Advisory Commission on International Financial Institutions


I join with Commissioner Bergsten in his statement and recommendations with respect to a revised role for the IMF and the World Bank. The majority proposal (Hereafter Majority), in contrast, effectively eviscerates the IMF, the World Bank, IDB and the ADB; it does not discuss, much less make recommendations, as to whether core worker rights (and environmental protection) ought to be incorporated Into the main body of the WTO agreement, despite the fact that extensive testimony was taken on this issue.

This separate dissent to the Majority is to (i) elaborate in greater detail the implausibility of the Majority proposal for the IMF and World Bank (ii) register my disagreement with the Bretton Woods institutions one-sided labor market intervention policies; and (ii) propose the need for core worker rights and environmental protection to be incorporated into the main body of the WTO agreement.

I make four specific recommendations for consideration by the Congress:













The Majority recommendations are based upon two propositions, both of which are of dubious validity: (a) the 1995 Mexican bailout circumvented the Congress and encouraged “moral hazard”, leading directly to the 1997 East Asian financial crisis; (b) access to IMF resources is too attractive and easily available for member countries. Based upon these two propositions, the Majority conclude that the IMF should continue to exist, but only with a much reduced mandate: that of a quasi-lender of last resort for countries that are pre-qualified and can therefore automatically draw upon IMF resources for short- term financing by paying a “penalty” rate of interest and providing collateral for the resources drawn.

The IMF would be divested of discretionary judgment; it would be barred from imposing conditions on its financing designed to address the balance of payments problems which occasioned the need for IMF financing. Article IV consultations with member countries, by which the IMF informs itself and advises member countries as to economic issues relating to the balance of payments, would continue but not as a basis for “conditions” related to IMF financing.

1. The Mexican Bailout: Circumventing the Congress?

The Administration, initially, sought a $20 billion authorization of funds from the Congress to fund the Mexican bailout so as to avoid that crisis spreading to other emerging market economies. The Congressional Leadership of both political parties supported the proposal, but when it became evident that the funds would be used primarily to payoff the investors, including wealthy Mexicans, in short-term Mexican bonds– tesobonos– the Congress balked. Then U.S. Secretary of the Treasury, Robert E. Rubin, resorted to the Exchange Stabilization Fund (ESF) and requested the assistance of the IMF. (Sanger).

After an initial burst of Congressional criticism, that criticism dissolved. Constituents had invested in the emerging market funds that had promised a higher rate of return than they could then realize on more conventional U.S. investments. As Congresspersons began to hear from these constituents, a tacit bargain emerged: the Congress would mute its criticism of the Administration’s actions and the Administration would ask nothing specific of the Congress. The bailout would go ahead but without explicit Congressional authorization. Investment by ordinary American citizens in emerging market funds had transformed the domestic politics of international finance.

The tesobono investors were overwhelmingly American investors. European Central Bank officials were openly skeptical of the contagion effect of the Mexican crisis, but they agreed to participate in an international effort which eventually amounted to $50 billion. The United States no longer had at its disposition a ready source of foreign aid funds as it did in the decade of the 60s; nor was there the urgency of the Cold War with the former Soviet Union to scare Congress into action. The Treasury, and the other Finance Ministers of industrialized countries, “raided” the IMF and World Bank funds for the Mexican, East Asian, and Brazilian 1990s bailouts because that’s where they could find easily accessible money and there was no chance that the U.S. Congress and Parliaments of other countries would appropriate money for these purposes.

In an ideal world, such a raid on the funds of the IFIs for the purpose of bailing out imprudent lenders and investors, would not have been necessary. But we do not live in such a world. The Administration did not circumvent the Congress; on the contrary, it did the responsible thing in first seeking direct Congressional funding of the bailout. Both the Administration and the Congress understood the political reality that such funding was not going to happen. The raid on the funds of the IFIs reflected that reality.

2. Moral Hazard:Mexico Leads to East Asia?

Nor is the accusation of increasing moral hazard any better founded. In contrast to the tesobono investments, the East Asian commercial bank lenders were primarily Japanese and European banks, not American. It stretches credulity to believe that the Japanese and European banks engaged in their East Asian lending in expectation that, on the basis of the Mexican tesobono experience, if those loans turned sour, a similar bailout would be organized on their behalf. They must have been well aware that their own government authorities were the ones most skeptical of the claim that the fear of contagion justified intervention in the Mexican case. There is no smoking gun memo from within any of the banks which as yet has surfaced, one which states, in effect, that, based upon the Mexican experience, if the borrowers cannot repay, the banks can count on an IMF led bail out sim
ilar to what occurred with Mexico.

The Chairman states that, in 1997, the Thai finance Minister, knowing that he lacked sufficient funds to support the value of the currency, nevertheless, committed himself to do so; he must have expected, like the Mexicans, that Thailand would also be bailed out by the IMF. (Meltzer Tr. Feb 2, pp.135-139 ). But this is speculation; no evidence is cited in support of the Chairman’s statement. If the banks in Thailand expected to be bailed out, why did they pull their loans as rapidly as they did when the crisis commenced? (Council on Foreign Relations Task Force ( hereafter CFR), p. 9). It is not unprecedented for finance ministers to hope that the mere statement that they will not devalue their currency will be sufficient to stop a run on the currency. That is what the Mexican Finance Minister did in December 1994, knowing full well, like the Thai Minister, that his country was hemorrhaging reserves. The result was equally futile.

After first detailing the efforts of U.S. officials to pry open Asian capital markets for the benefit of American firms, Kristof and Sanger summarize the responsibility for the East Asia short-term banking fiasco:

“Responsibility can be assigned all around: not only to Washington policymakers, but also to the officials and bankers in emerging market countries who created the mess; to Western bankers and investors who blindly handed them money; to Western officials who hailed free capital flows and neglected to make them safer; to Western scholars and journalists who wrote paeans to emerging markets and the Asian century.” (Kristof with Sanger).

Stanley Fischer, Deputy Managing Director of the IMF, candidly noted: “I see very little sign that the capital flows to East Asia bore any relationship to what happened in Mexico….nobody, including me, believed that those [the East Asian ] countries, which had been growing at 8 to 10 percent, were structurally weak.” (Fischer, Tr. p. 218).

Unable to establish with any degree of certainty that the Mexican bailout led to the East Asian crisis, the Majority assert that in Mexico, Asia and Russia, the IMF “did little to end the use of the banking and financial systems to finance government favored projects, eliminate so-called “crony capitalism” and corruption , or promote safer and sounder banking and financial systems.” But, until the 1997 crisis, South Korea had “graduated” from IMF and World Bank funding; the World Bank East Asia Miracle report had praised the Korean credit system; Korea had followed a development model based upon the Japanese experience of directed credit by the government to foster specific industries. “Crony capitalism” only made its appearance as an explanation of the Korean problems in the aftermath of the 1997 crisis.

It is true that the Russian and Mexican banking sectors represent two of the greatest asset steals of the century:

” In his bid to increase capital inflows, [Mexican President Carlos] Salinas [de Gortari] has put state banks on the block at three times their book value and often more…But in exchange for high prices, Salinas offered their buyers sweet regulatory deals and long term promises of fabulous riches through Nafta, which would soon allow some of the new owners to sell their monopolies corporations at record profits…Through a policy of “directed” or selected liberalization, Salinas paved the way for the formation of more than a dozen monopolies that would control industries such as copper mining and telecommunications. (Oppenheimer, p. 91).

John Lloyd describes a privatization process in Russia similar to what occurred in Mexico (Lloyd, p. 35). To attribute to the IMF responsibility for the corruption and favoritism that characterized the banking scandals in Mexico and Russia is either naive or cynical. The distribution of bankingassets to favored players was an integral part of the political power system in both countries. The IMF could no more stop that process than King Canute could part the waters. What it is fair to say is that uncritical praise for Mexico’s reforms and Russia’s progress in achieving a “market” economy provided a mantle of legitimacy for a thoroughly corrupt process in both countries of privatization of state assets, but the IMF was hardly alone in its failure to blow the whistle: virtually all of the industrialized country officials looked the other way. The geo-political stakes in both cases were simply too great. To blame the IMF alone in both Mexico and Russia for the outcome is wrong. It is a reflection of the schizophrenic approach of the Majority to the IMF: it is either too interventionist or did not intervene effectively enough.

3. The IMF: Too Easy?

Equally implausible is the Majority assumption that countries are tempted to resort to the IMF for financing because such resort has been made too attractive for them. This assertion is as plausible as asserting that someone goes to the dentist to have root canal work done on his mouth because he enjoys it. Countries, more often than not, resort to the IMF too late because they fear that IMF conditions will be too burdensome.

4. IMF Conditions

The Chairman set forth the central belief of the Majority that the conditions imposed by the IMF do not advance democratic governance:

” We believe that the interests of developing democratic government abroad, that the first step in that procedure must be to get the country to take responsibility for doing things that are in its own best interest. And that those can’t be imposed from abroad and shouldn’t be imposed by any international institution, even though we recognize that there’s a useful role for advice.” (Meltzer, Tr. Feb 2, pp. 200-1).

The Chairman is certainly right that if conditions are perceived in a country to have been imposed from without, they are unlikely to be effectively implemented. But the conditions that accompany IMF financing must be agreed with the country. It is the country that submits a letter of intent to the IMF, stating the country’s proposed program. In practice, the content of the program incorporated in the letter of intent is negotiated with the IMF staff before it is formally submitted to the IMF. It is also true that countries, particularly small countries, desperate for assistance, may too easily agree with IMF staff suggestions. If that program departs too radically from what the political traffic in the country will bear, the program will certainly fail. The fact that a program is agreed with the IMF does not, by itself, undermine democratic government.

It is not unreasonable for the international financial community, in providing financing for a country with balance of payments difficulties, to want some assurance that the conditions that led to the need for such financing will be addressed. It is the content of the program that more often than not is the subject of dispute: is there an accurate diagnosis of the source of the problem? Is the burden of adjustment equitably shared within the society and between external creditors and the debtor country? These are contentious, but inevitable issues that accompany IMF assistance.

Mr Fischer was asked to speculate as to what would have happened had the IMF not intervened in 1997/8 in the East Asia:

” I believe that the crises would have been bigger, not smaller. That is, each country, at the moment the crisis broke out, would not have had the external financing available…would have had to stop external payments. I do not believe that could have been done in an orderly way.. And I think you’d have turned off financ
ing for developing countries all over the world…In addition, I believe that without the international assistance effort, the policymaking solutions, responses, in those countries would have been much weaker….” (Fischer, Tr. p. 217).

There is plenty of room to differ as to whether the IMF analysis as to the source of the problem in the East Asian countries was mistaken (Fischer, LA; Sachs, American Prospect); and whether the burden of adjustment was equitably distributed among creditor banks, debtor countries, and within both debtor and creditor countries. Rather than confront these issues in the future, the Majority has opted for an impractical and implausible solution.


(a) Who Certifies as to Pre-qualification?

The Majority does not identify who is to certify that a country has met the pre-qualification criteria. The Majority do not wish to entrust this responsibility to the IMF staff; there is no indication that the Bank for International Settlements (BIS) has the capability or the desire to assume this task. Nor is it likely that an international consulting firm could perform this function. Countries are unlikely to accept a foreign firm, with other international clients, having access to sensitive national financial data.

(b) Opening to Foreign Banks

The Majority states that, among other criteria, a borrowing member country of the IMF would have to agree to open its banking system to foreign banks: “eligible member countries must permit freedom of entry and operation for foreign financial institutions in a phased manner over a period of years.” Fernao Brasher, a former Brazilian central bank president who now heads a Sao Paulo bank with Austrian shareholders, though majority owned by Brazilians, urges the Brazilian government to limit the entry into Brazil of foreign financial institutions: ” The richest countries of the world are wise enough to realize that national interests coincide with a strong, domestically led financial system…Why should Brazil, a developing country, be run rough-shod over?.” Domestically owned Brazilian banks,

” tend, in some instances, to support the stability of the financial system in times of crisis. For instance, in the tumult that followed the devaluation of the currency nearly a year ago, some foreign banks counseled their clients to avoid purchasing Brazilian government bonds and other securities, citing the risk of default.” (Romero,a ).

Despite Brazil having a strong domestic banking sector, if it were to impose limitations upon foreign ownership of domestic banks, under the Majority criteria, Brazil would be ineligible for future IMF funding. It is a technocratic approach. There is no room for national interests.

(c) Countries Most in Need Ineligible for IMF Assistance

If only countries that are pre-qualified are eligible for IMF funding, the Majority would cut off those countries that are probably most in need of such funding. Often, the crisis itself is what precipitates needed reform. Yet, the Majority would bar the IMF from conditioning its funding upon the implementation of a program designed to address the conditions that led to the crisis.

(d) Short Term Finance

The Majority assumes that a country which has resorted to IMF financing will quickly (weeks or months) regain voluntary access to the financial markets. (Majority, Ch. 2 p. 18). But what if it does not? What if the measures necessary to restore credibility in the market require legislative action, a time consuming and difficult process? The Majority assumes an almost automatic restoration of credit access in the private markets, but for countries for whom such access is, to begin with, already fragile, such an assumption might not be warranted.

Divested of any discretionary judgment, the IMF doesn’t need a prestigious Managing Director, but a high level clerk, a couple of disbursing officers and a few lawyers to draw up the necessary legal documentation.


(1) The Financing Scheme in Detail (Chapter 3).

With respect to the World Bank, and the regional development banks, the Majority concludes that development financing displaces private market financing and, consequently, should be substantially curtailed. The World Bank would convert itself primarily into a non-financial development agency, with two tasks: (a) coordinating donor aid by individual countries and non-governmental agencies; (b) addressing issues not now being adequately addressed by any of the international agencies in the United Nations complex and without, finding innovative solutions for seemingly intractable problems.

The Majority recommends that poverty reduction programs and infrastructure projects be financed exclusively with grant funds. The grantee would not receive or administer the funds; the development banks would disburse directly to a vendor selected by the grantee. Loan funding would be confined to structural adjustment lending. In order to create an incentive for implementing agreed reforms, repayment of principal, under a structural adjustment loan, can be deferred for as much as ten years, provided that an independent third party certifies that the reforms have been implemented in a satisfactory manner, or, are still in place. If such a certification is not forthcoming, repayment of principal recommences.

The World Bank would cease operations (lending or grant) in its borrowing member countries in Latin America or Asia; that responsibility would be delegated to the IDB and ADB:

“The World Bank should become the principal source of aid for the African continent until the African Development Bank is ready to take full responsibility. The World bank would also be the development agency responsible for the few remaining poor countries in Europe and the Middle East.”

However, the IDB and ADB would only be able to extend assistance (structural adjustment loans or grants) to countries without capital market access (as denoted by an investment grade international bond rating ), or with a per capita income less than $4,000; starting at $2,500 levels, official assistance would be limited.

It proposes that, the “World Bank’s role as lender would be significantly reduced.” Repayments on the World Bank’s existing IBRD portfolio will amount to $57 billion (49 % of loans outstanding) over the next 5 years and $102 billion (87 % of loans outstanding) over the next ten years.” In vague terms, it proposes, “[s]ome of the callable capital should be reallocated to regional development banks, and some should be reduced in line with a declining loan portfolio.” In other words, it should be returned to the shareholders; in the case of the U.S., it would be returned to the Treasury and would require Congressional appropriation for other uses.

Since the Majority recommends discontinuing World Bank lending in Latin America and Asia, the bulk of the repayments from borrowing member countries of the Bank in these regions will not be compensated by new loans from the World Bank; it is highly unlikely that the regional development banks will realize a commensurate increase in resources to be able to make-up for the loss of World Bank resources. There is likely to be a net loss of development resources for these countries. For five major borrowers of the World Bank–Argentina, Brazil, Mexico India and Indonesia–net repayments (that is amortization and interes
t less World Bank disbursements) over a five year period will be an estimated amount slightly in excess of $20 billion. (Salop/Levinson). Under such circumstances, repayment by borrowing member countries of the World Bank is almost certain to meet domestic political resistance. It is not in the interest of the United States to force a confrontation with major World Bank borrower countries in Asia and Latin America, many of whom have deep internal social unresolved problems.

(1) Displacement of Private Financing

The charge that the World Bank financing is concentrated in countries that have been market eligible and displaces private market financing is misleading. The Majority lumps all forms of foreign capital together, but Ernest Stern notes,

” a very large part of private flows is directed to foreign investment, which is very important but serves a somewhat different function. A substantial portion of the rest is trade…and short term bank credits…You have a third element…which is portfolio equity investment and finally you have…long term debt financing…and it’s only that part you can reasonably compare with the flows of the World Bank, because that’s the same objective, sovereign Government borrowing on medium term.” (Stern, Tr. pp. 111-112).

It is true that World Bank financing (and IDB lending) has been concentrated in the larger countries, many of which, at various times have been able to directly access the international financial markets. Those markets, however, have been highly volatile. Between 1983 and 1989, countries in the Western Hemisphere borrowing member countries of the World Bank experienced a cumulative net outflow of $ 116 billion. (Folkerts-Llandau and Ito, p. 2). Only after the March 1989 Brady debt reduction initiative, did capital in significant amounts return to Latin America. In the period 1990 to 1994, Western Hemisphere countries received a net inflow of $200 billion albeit in a form different than syndicated bank loans: On average since 1990, 41 percent of capital inflows to all developing countries has been in the form of portfolio investment in tradeable bonds and equity shares, and 37 percent has been FDI. (Folkerts-Landau and Ito, p. 2).

The portfolio investments have, during the decade of the 90’s, been particularly unstable, reversing course at the first sign of trouble. Over $220 billion of public resources in the decade of the 90’s has had to be mobilized to bailout imprudent investors and lenders. A significant part of those resources has come from the development banks. The Majority, as does the CFR, rightly questions the desirability of use of the resources of the development banks for bailout purposes. But, given the fact that those resources were mobilized for this purpose, it is not surprising that, for the past two decades, the lending portfolio of the World Bank and the IDB, in particular, have tended to concentrate in their larger borrowing member countries. (That concentration is also a consequence of the limited implementation capacity of the smaller countries).

The displacement argument also misconceives the nature of development finance. President James Wolfensohn of the World Bank testified from his own personal experience as to the difference between commercial or investment banking and development financing:

” I used to raise money for lots of countries…And I can tell you that I never had a discussion with them about their social policies or their economic policies…When we go in from the [World] Bank we go in on the basis of trying to look at what’s happening to the country and what’s happening to the people in the country and what’s happening to social stability and what’s happening on issues like governance, on openness of financial systems…Can you imagine the head of Goldman Sachs or Merrill competing for business, going in and talking to them about whether they should have a bigger education program?” (Wolfensohn, Tr. pp. 240-1).

In order for advice to be credible to the country authorities, it must be coupled with financing. (Wolfensohn Tr. p. 241; Stern, Tr. pp. 94/95). That dialogue between the Borrower and the development bank depends upon a relationship of trust and confidence, which is expected to continue over an extended period of time. The Majority proposed disbursement scheme, in which the borrower is divested of responsibility for administering the financing evidences a distrust of public sector officials that is not compatible with that relationship. It also largely defeats the purpose of development financing: that financing is not only concerned with achieving physical targets; equally, if not more importantly, it is concerned with policy and leaving the borrower institutionally stronger when the relationship ends. Not trusting the borrower with administration of the financing undermines this objective. (That distrust does not reflect my own experience, over a thirty year period, in dealing with high level officials throughout the Latin American region).

The private markets are not a dependable source of development finance. The development banks, in contrast, provide such a source of long-term finance for high value human capital investments. However, it is also true that for many of the more advanced middle income countries, it is time for the World Bank (and regional development banks) to begin, with them, to plan for reduced access to development bank resources, but that planning must be coordinated with market access experience over the next decade and take into account the financial consequences for both countries and institutions.

(2) Structural Adjustment financing

With respect to structural adjustment financing, the Majority rightly observes that reform is most effective when the country has made the political decision to undertake such reforms; it cannot be bribed from outside, or forced by “conditionality”, to do it. And yet, the Majority proposes to do just that with a financing scheme that is both impractical and unwise. It is proposed that the borrower be given an “incentive” to carry out its obligations under an agreed structural adjustment program: deferral of repayment of principal for as much as ten years, provided that an independent third party, on an annual basis, certifies that the reform program is being implemented, or is still in place. If reform lags, or backslides, then, repayment resumes. Again, discretion is vested in an “independent” third party that would have the responsibility to determine whether the government is complying with its reform obligations, and enjoy the financial advantages of deferral of repayments, or must resume such payments. As with the IMF, the World Bank and the regional development banks, are divested of discretionary judgment for determining compliance.

Who are the “independent” third parties that are vested with such extraordinary powers? Foreign accounting, consulting firms, academics? What borrowing member country of the World Bank is going to cede such discretionary power to foreign consultants or academics? The proposal is justified on the basis of creating an” incentive” for the country to comply with its reform commitments. It is conditionality by another name, but it is not even necessary. The incentive for the borrower complying with its commitments, as the Majority originally wisely said, is its decision that the reform is in its own interest, and the prospect of future funding from the IFIs.

(3) A World Development Association?

The World Bank changes its name to the World Development Association, a symbol of the diminished role of development financing. It may be true that not enough is being done in areas of public g
oods identified by the Majority, but it is hard to see why the new Association, largely divested of its financing function, should be any more effective as a coordinator of aid than the UN Development Agency. Or, why, for example, it should be more effective in addressing tropical disease research than the World Health Organization.

(4) Relationship to Regional Development Banks

The Majority is preoccupied with duplication between the functions of the World Bank and the regional development banks. Undoubtedly, there is some overlap, but each of the development banks arose out of a specific history, often, as was the case with the IDB, in reaction to the priorities of the World Bank. That conflict has largely dissipated, but it is undesirable, as the IDB itself recognizes, to return to a situation where only one institution is the basis for assured long term development financing. Such monopoly breeds arrogance. The institutions do a pretty good job of working out priorities among themselves. The Majority’s preoccupation with duplication is exaggerated. (Stern, Tr. pp. 102-3).

(5) Repayments and Grant Financing

The World Bank (and the IDB) are now, in their ordinary operations, on a self sustaining basis, that is present levels of lending for the foreseeable future, can be financed out of earnings and loan repayments by their borrowers. The proposal to return World Bank loan repayments to the shareholders, and to substitute grant financing for this self sustaining revolving loan fund, is a reckless gamble. The majority members of the Commission are not naive. President Wolfensohn testified as to the historic difficulty in obtaining Congressional appropriations for IDA financing (Wolfensohn, Tr. p. 234). The Clinton Administration abandoned any attempt to obtain from the Congress modest amounts of funds for the IDB soft loan fund. To return World Bank loan repayments to the shareholders and expect some substantial part of those repayments to reemerge from the domestic legislative processes as grant financing for the development banks is not credible. Whether intended or not, the return of capital to the shareholders can have only one result: undermine, discredit and ultimately terminate the World Bank, the IDB and the ADB. The Congress should reject the Majority proposal.



And yet, the Majority has a point. Like an archeological dig, layer upon layer of often competing and conflicting policy mandates have been imposed upon the Bretton Woods institutions: from limited and well defined functions in the first three decades of their existence, they have been: (i) entrusted with overseeing the debt workout of the 80s; (ii), the arbiters of internal structural reform within their borrowing member countries; (iii) the front line agencies of the international financial community in combating world poverty; (iv) entrusted with the responsibility for guiding into market economies the former Soviet Union and Eastern European countries ; (v), the lead agencies, particularly the IMF, in the decade of the 90s, in dousing the successive financial crises that appeared to threaten the stability of the international financial system.

They are, to a very great extent, the victims of their own success for, they are perceived by their major shareholders to be the only international institutions competent enough to be entrusted with these tasks. It makes sense to reconsider these multiple, and too often, conflicting mandates.

The first issue with respect to the IMF is should it continue to be a financial crisis manager, or should future crises be resolved by the market? Eichengreen and Portes are candid as to the risks involved in a market strategy:

” Clearly life would go on in the absence of the IMF (or with a greatly reduced role for IMF lending). Lenders would still lend; borrowers would still borrow. But to say debt problems would be resolved by the consenting adults involved without additional costs being imposed on the principals and innocent bystanders is a leap of faith…without other institutional innovations that reduce the pain…” (Eichengreen and Portes pp. 15-16).

Eichengreen and Portes are equally candid in their paper as to the difficulties involved in accomplishing the institutional innovations to which they refer. A continued crisis managing role for the Fund is the most likely outcome, but that role has to change.

Secretary Summers states , ” The basic principle is clear: programs must be focused on the necessary and sufficient conditions for restoring stability and growth. Intrusion in areas that are not related to that goal carries costs that exceed the benefits.” (Summers, 1999). The CFR notes that the IMF “is still needed to see that balance of payments problems, be they under fixed or flexible exchange rates, are resolved in ways that do not rely on excessive deflation, competitive devaluations , and imposition of trade restrictions, and to respond to liquidity crises when neither private capital markets nor national governments can handle those problems well on their own.” (CFR p. 115). And it is still more specific as to the limits of IMF conditionality: ” The IMF should limit the scope of its conditionality to monetary, fiscal, exchange rate, and financial-sector policies.” (CFR p. 116).

This more limited mission is contrary to the expansive terms in which the IMF has conceived its mission. In addition to the traditional concern with fiscal, monetary and exchange rate policy, the IMF also reviews,

“the growth and welfare implications of a country’s macroeconomic and structural policies have increasingly been taken into account, since they may strongly affect the credibility and sustain-ability of a country’s overall macroeconomic policy. In addition, social, industrial, labor market, and environmental issues have increasingly been taken into account if these have significant implications for macroeconomic policies and performance.”(IMF Survey, 1995).

It is difficult to see what element of domestic policy would not be a proper subject of IMF conditionality. The difference between the more limited role outlined by the Secretary and the CFR and the expansive mandate conceived by the IMF is the difference between night and day. It is reasonable to require of the IMF that as it assesses a country’s proposed program, it make a judgment as to whether the program allocates the burden of economic adjustment equitably, and, if not, to negotiate for changes in the program. In more recent years, that is what the IMF has been doing. But it is unreasonable to expect the IMF, on a continuous basis, to be actively engaged in poverty reduction programs. It is not consistent with the more limited role envisioned for the institution by the Secretary. The IMF should continue to defer to the World Bank and the regional development banks with respect to poverty reduction programs.


With respect to the World Bank, the CFR recommends: “The Bank should concentrate on the longer-term structural and social aspects of economic development. It should expand its work on social safety nets. But it should not be involved in crisis management, in emergency lending, or in macro-economic policy advice.” (CFR p. 116). These are sensible general principles, but it is unlikely they can withstand the heat of actual crises such as the successive ones that occurred in the decade of the 90’s. Absent an identified alternative source of public financing, which does not now seem to be on the horizon, the temp
tation will remain to do what every U.S. Treasury Secretary (and his counterparts in the other industrialized nations) has done since the 1982 Mexican default: resort to the Bretton Woods institutions as sources of funds and as crisis managers.

The issue, then, is how can these institutions carry out this function in a more equitable way than has been the case to date? In 1998, the IDB, as part of the Brazil bailout package, loaned Brazil $4.5 billion, one half of the IDB $9 billion annual lending program. The IDB coupled its financing with a commitment from the Brazilian government to maintain an agreed level of funding for human capital development in education and health. The linking of the IDB financing with the Brazilian Government’s financial commitment for these two sectors was a way for the international financial community to say that the economic adjustment program that it supported should not sacrifice investment in the human capital of the country.


(a) The Successive Financial Crises

Like the movie Ground-Hog Day, the essential elements of the successive crises of the past twenty five years repeat themselves so that we seem to be reliving the same experience again and again. The syndicated bank lending of the decade of the 70’s, the tesobono and East Asian financing fiascos, all have common characteristics: in each instance, banks and investors, awash with liquidity, seek a higher financial return than they can obtain in their home bases; without “due diligence”, they invest (tesobonos), or loan (East Asia, 1970’s, syndicated bank loans) to governments or banks and corporations in the developing countries; much of the resources are not used for productive investments; a combination of external and internal shocks leads to an international financial crisis, which is perceived to put at risk the international financial system.

The IMF and the World Bank are charged with overseeing the workout; the financial institutions, who were equally responsible for the crisis by their imprudent lending or investing, are bailed-out and rewarded: they are enabled to buy into local banks and financial institutions at bargain basement prices (Mexico and East Asia); the debtor countries are counseled to export their way out of the crisis, which, in practice, means flooding the U.S. market with goods and services because that is the only market that is effectively open to them; and, in order to make their goods more internationally competitive, the IMF and World Bank require governments in the debtor countries to adopt labor market flexibility measures–making it easier for companies to fire workers without significant severance payments, weakening the capacity of unions to negotiate on behalf of their members, all for the purpose of driving down labor costs and benefits.

Workers in both the industrialized and developing countries, particularly in the unionized part of the labor market, bear a disproportionate part of the burden of adjustment. (U.S. workers may, as consumers, have benefited from lower prices as a consequence of lower cost imports, but that benefit is likely to be ephemeral; the increasing U.S. trade deficit, as both former Secretary of the Treasury, Rubin and Secretary Summers have repeatedly said, is not, economically, or politically, sustainable; manufacturing jobs lost to imports or FDI, are not likely to return).

Professor Joseph Stiglitz, former Chief Economist at the World Bank, observes:

“[e] ven when labor market problems are not the core of the problem facing the country, all too often workers are asked to bear the brunt of the costs of adjustment. In East Asia, it was reckless lending by international banks and other financial institutions combined with reckless borrowing by domestic financial institutions-combined with fickle investor expectations-which may have precipitated the crisis; but the costs in terms of soaring unemployment and plummeting wages were borne by workers.” (Stiglitz).

Professor Stiglitz’s comment is an apt summary of not only the East Asia crisis but of each of the successive financial crises of the past twenty five years.

It should be a requirement in the future that before public funds are disbursed, the financial institutions involved in such crises must make a substantial commitment to the resolution of the crisis. Bondholders are not accustomed to such a requirement and, in contrast to the syndicated bank lending of the decade of the 70’s, there are legal and practical problems in obtaining such a commitment. (Bucheit, Tr. pp. 460-74). But it is also true that a stated policy by the Bretton Woods institutions would put such bondholders on notice that in the future they cannot assume that they will be bailed out by the official financial community. The fear that such a requirement will retard market access for developing countries is exaggerated. The story of the past twenty five years is that, in the financial markets, greed trumps all other considerations. Indeed, the Latin American debtor countries only regained substantial voluntary access to the financial markets after the markets perceived a greater credit worthiness on their part after the Brady debt reduction initiative of March 1989.

(b) Labor Market Intervention

Joanne Salop, Vice President, Operations Policy and Strategy, World Bank, explains that, “with respect to freedom of association and the right to collective bargaining, the Bank is in the process of analyzing the economic effects in order to form an informed opinion.” (Salop/Levinson). Robert Holzmann, Director, Social Protection, the World Bank, in a seminar jointly sponsored by the IMF and the AFL-CIO, elaborates on the Bank’s reservations with respect to core worker rights, particularly the right of freedom of association:

” And on both accounts we have a problem with some of the core labor standards, in particular, one which deals with freedom of association which concerns an important human right which has economic dimensions, but most importantly , also has a political dimension. This political dimension, which prevents us from simply using it as an instrument during our programs and to impose it on countries, because this would be considered as a breach of our rules.” (Holzmann).

The “political” argument invoked by Mr Holzmann is a bogus argument: it is based on the idea that World Bank intervention for the purpose of addressing abuses of the right of freedom of association contravenes the provision of the Articles of Agreement that prohibits taking into account “political considerations” in the Bank’s decisions”. (Article IV, Section 10 of the IBRD Articles of Agreement).

To claim that result is required by Article IV, Section 10 of the Articles of Agreement, is a blatant distortion of the intent of the authors of the Charter, John Maynard (Lord) Keynes and Harry Dexter White. (Levinson). The Bank feels no such inhibition with respect to intervention in a country’s labor market to condition its financing upon a member country taking measures-labor market flexibility– that make it easier for firms to fire workers, weaken the capacity of unions to negotiate on behalf of their members and drive down urban unionized wages. Nothing is more politically charged than such a one-sided labor market intervention that so blatantly favors the interests of employers.

Holzmann continues:

“The second one has to do with the economics of core labor standards, in particular again, the freedom of association, because while there are studies out-and we agree
with them that trade union movements may have a strong and good role in economic development-there are studies out that also show that this depends. So the freedom by itself does not guarantee that the positive effects are achieved.” (Holzmann).

The Bank appears to be reopening in the year 2000, the debate, which we thought had been settled in the 1930s, about the desirability of allowing workers the right to form unions of their own choosing as a means of equalizing bargaining power between the individual worker and the enterprise.

Professor Stiglitz summarizes his experience with the labor issue in the World Bank:

“I am just completing serving three years as Chief Economist of the World Bank. During that time, labor market issues did arise, but all too frequently, mainly from a narrow economics focus, and even then, looked at even more narrowly through the lens of neo-classical economics; a standard message was to increase labor market flexibility-the not so subtle sub-text was to lower wages and lay off unneeded workers.” (Stiglitz).

We would not accept as a basis for domestic labor policy in our own society, at least the great majority of Democrats would not, the “narrow neo-classic economic lens” to which Professor Stiglitz refers. We should not accept it within the World Bank. The U.S. Executive Director (USED) should have read a clear and forceful statement in the Board of Executive Directors of that institution stating that the United States considers settled the right of workers to freedom of association and collective bargaining. (In the protocol of these institutions, reading a written statement signals that it carries the imprimatur of the Treasury, not just the USEd).

Mr Fischer denies that the IMF is one-sided in its labor market intervention. In Indonesia, in 1998, after the fall of the Suharto Government, Fischer observes, the IMF intervened with the new government to press for adoption of core worker rights, including the right of freedom of association and collective bargaining; Nazi Germany would not, he notes, on political grounds be eligible for IMF assistance. (Fischer, Tr. p 189). (The IMF Charter does not have a “political” clause, but the IMF has previously invoked, by means of a legal opinion, the same inhibitions as are asserted for the World Bank ).

Mr Fischer’s assertion of IMF intervention to assure freedom of association in Indonesia, and candid acknowledgment that there are limits to political tolerance, is a welcome departure from the continued invocation of the political section of its charter by the World Bank as a basis for failing to address labor market abuses; but there was also a disturbing aspect of Mr Fischer’s testimony: he was relieved that the De La Rua government, elected in Argentina in 1999, has submitted its own labor flexibility measure legislation and therefore, a potential conflict with the IMF had been avoided.

The IMF intervention with respect to the Argentine labor market is, according to the IMF, a consequence of the Argentine currency regime that prevents the Country from using the exchange rate as a means of adjusting relative international prices. ( IMF Submission, p. 21). The IMF— and successive Argentine Governments— seek to make Argentine goods more competitive in international markets by lowering labor costs. Achieving that objective, requires diminishing the social and economic gains of workers, and that requires weakening the unions that won those gains for their members.

The labor relations system in a country like Argentina is more than a question of optimum economic efficiency considerations: the union movement in that country is a result of a long history of social conflict; it is an essential component of the social compact of Argentine society. Any change in that compact ought to be negotiated within Argentine society free of pressure by the IMF or the World Bank. It should be no part of the “conditionality” of either institution in Argentina, or anywhere else in the world. It is not in the national interest of the United States to be associated with a policy that involves such a one-sided labor market intervention on behalf of employers. It is creating an increasingly alienated and embittered urban working class in both Argentina and other countries.