Fixing the IMF.

• Position: International Monetary Fund

Professors Calomiris and Meltzer have proposed sweeping changes in the IMF and, indeed, in the international monetary system ("Fixing the IMF", Summer 1999). Before commenting on these changes, and to illustrate the complexity of implementing their suggestions, I had occasion recently to discuss with a U.S. Treasury official a very slight change in the IMF Articles of Agreement that would allow the IMF to borrow in various currencies. The institution is now restricted (sadly) to borrowing only in securities denominated in SDRs, unless it wants to assume an exchange risk. Dollar and other hard currency borrowing without an exchange risk would vastly increase the Fund's ability to tap private and other markets in times of dire need.

The official at the Treasury was skeptical of my suggestion, because of the extreme difficulty in getting the 183 member nations - not to mention members of Congress - to agree on any changes. If such a small change is so difficult to implement, what of the authors' suggestions that the IMF could not lend to any country that had not adopted the severe new banking standards outlined by them, and that member governments must contribute marketable bonds to the IMF as a method of funding?

The authors further state that their proposals "would prevent the IMF from giving ad hoc foreign assistance to insolvent financial systems", and that "the IMF would lose. . . its power to demand policy changes as a condition of its loans." I may be missing something here, but it is my firm belief that we desperately need the IMF to offer temporary assistance to faltering economies, and that it is the only instrument we have to enforce worthwhile changes as a condition of its loans.

Other suggestions by Calomiris and Meltzer include abolishing the Treasury's Exchange Stabilization Fund (ESF) and using World Bank loans "to strengthen [commercial] banks' capital structures." But without the collateralized ESF loan, Mexico, for example, might not have recovered from its currency crisis. The articles of the World Bank state that the Bank must lend to development projects, and that loans must be guaranteed by a member government. But it would be highly unwise to divert the resources of the World Bank for such purposes.

It is regrettable that the authors have chosen not to join us in the real world. Instead, they have proposed steps to alter the world economy and to effect changes at the IMF that are unsound and that will be impossible to...