Ministers,
Central Bank Governors and lesser officials walk
the corridors of the International Monetary Fund
and the World Bank in subdued contemplation. They
assembled for their annual meetings at a time of
disquiet and uncertainty.
The
global economy is in the doldrums. Prospects for economic
recovery in the United States are far from bright.
West European conditions are worse and Japan shows
scant sign of escaping its long slump. The threat of
war over Iraq adds to the economic concerns. Then,
Argentina is in default and Brazil has stumbled. Net
private capital flows to emerging markets are at their
lowest level in a decade.
Adding to the discomfort is the constant
buzz of security threats around the meetings
and the strident voices of the anti-globalizers,
who ooze criticism of one and all, but provide
no hopeful alternatives for a world of unacceptable
poverty, disease and environmental degradation.
And then there is corporate malfeasance.
The corporate scandals, starting with Enron,
have comforted all the protesters who have
long argued that big business could not be
trusted. The crisis of confidence in capitalism's
leaders has damaged the stock markets and
intensified the difficulties that the top
financial policy officials now confront.
What has gone wrong and how can it be fixed?
Fundamentally, the political will has been
lost among the world's most powerful industrial
nations to work in close cooperation to formulate
policies to revive the slumping world economy.
Each of them needs to enter into a mutual
set of bargains where they undertake to move
forward with tough measures.
They need to jointly agree to abandon their
protectionist policies, open their markets
to the products of the developing world and
move ahead with world trade liberalization
talks. They need to stimulate business investment.
They should spare no effort to promote energy
conservation and thereby become far less
dependent on Middle East oil. They must act
to curb the greed of business leaders. They
must do far, far more to directly assist
the developing world to secure growth and
counter immediate humanitarian crises, notably
HIV/Aids.
But, they must also fix finance to emerging
market economies. Globalization offers substantial
benefits to countries that can attract significant
inflows of foreign private capital from around
the world. Millions of new jobs have been
created by the hundreds of billions of dollars
that have gone into these economies. The
cash has enhanced prospects for development.
This year net private capital flows are
unlikely to exceed $123 billion, which is
the same total seen in 1992 and the lowest
in a decade. It compares with the annual
average level over the last 10 years of $187
billion and the record seen in the middle
of the decade of over $330 billion. The collapse
in flows adds to the difficulties of developing
nations.
Mexico went
into a crisis in 1995, then East Asia followed
on the same path in 1997
and thereafter we have seen major crises
impacting Russia, Turkey, Argentina and Brazil.
The cumulative impact of these crises on
investor confidence has been substantial
and compounded by the overall gloom that
now engulfs the worldís economy. Investors
have lost their appetite for financing most
emerging market economies.
The International Monetary Fund, which should
be steering global finance on a stable line,
has no silver bullets to fire. Its leadership
seems transfixed with the notion that the
world awaits a complex statutory system that
will formally allow countries to declare
bankruptcy. This is not a humorous diversion.
Quite the contrary.
The IMF is determined to build support for
a system that would lead to an international
bankruptcy court for nations. Here the IMF,
largely at its discretion, could pull the
plug on countries and, by declaring them
unable to deal with their creditors on a
voluntary basis, override the rights of investors
and creditors. If the IMF decided not to
lend to a country that was in crisis, then
the country would probably be forced to hurl
itself upon the mercy of the new international
bankruptcy court. Even the distant specter
of such a system sends shudders down the
spines of international investors and adds
to their mounting aversion to buy the bonds
of emerging market economies.
The IMF scheme is motivated by a sense that
it needs to find a way to stop leaving the
impression that it is bailing-out banks at
times of crisis and that there are ways to
force the banks, and all other creditors
to developing countries, to take losses at
times. So the IMF scheme offers a means to
override investor rights and in so doing
it is bound to make investors see the bonds
of Brazil, Mexico and many other leading
developing countries as even more risky than
they are now. The result will be even less
investor interest in these countries and
higher borrowing costs to them and to all
other developing countries.
The IMF cure
is far worse than the malady in part because
the scheme can only be launched
if there are changes in the IMFís
basic charter. This would open the charter
to full-scale review by parliaments across
the globe, most notably the U.S. Congress
which might well use the opportunity to increase
U.S. power in the IMF and thereby, of course,
start a real crisis over IMF governance.
This is not the time to even contemplate
such a scene.
Yes, there is a problem in restructuring
current sovereign bonds when the debtor cannot
pay. The way the bonds are written demands
unanimous agreement by all bondholders to
restructure the debt. But, the answer is
not to build a vast new bureaucratic mechanism
with a court and new IMF powers, but to change
the bond clauses. The British have had clauses
for over a century in bonds that enable a
large majority (but not absolutely all) of
creditors to force a restructuring. The European
Union is considering such clauses. Emerging
market debt should also include them and
many people in private finance, despite the
IMF, are pressing for this. It is time that
finance officials from developing countries
and the OECD told the IMF to ditch its counterproductive
plans.
The bottom line is that the world's richest
governments are not willing to sharply boost
official finance for the world's developing
countries and the emerging market economies
of Eastern Europe and so, if these countries
are to grow, then they must be able to access
very significant amounts of private international
capital. To do this does not require vast
bail-outs of banks, it requires concerted
international efforts to create a broad environment
that generates investor confidence. That
environment must include stronger prospects
of economic recovery in Western Europe, the
U.S. and Japan as well as sound policies
in the borrowing countries. It must also
include international financial mechanisms,
like revised bond clauses, that private investors
are willing to embrace without raising the
costs of borrowing to emerging market nations.
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