Statement of Marijke Torfs* to the Subcommittee on General Oversight and Investigations

Committee on Banking and Financial Services

US House of Representatives, April 21, 1998

Mr. Chairman, Members of the Committee, thank you for the opportunity to testify before you. I am Marijke Torfs, Director of the International Department at Friends of the Earth, an international environmental advocacy organisation with 58 affiliates around the world. Friends of the Earth is pleased to have the opportunity to testify about the policies and operations of the IMF, its effectiveness in addressing the Asian financial crisis, the impacts of IMF policies on people and environment and the IMF's implementation of US legislative requirements.

I. A DECADE OF ENVIRONMENTAL ADVOCACY AND LEGISLATIVE INITIATIVES

Starting in 1983, Friends of the Earth has worked with environmental and development organizations around the world to reform the IMF in order to increase the effectiveness of its operations and ensure that economic stabilisation does not happen at the expense of people or the environment.

Since 1989, Congressional approval of funding for the IMF has been linked to legislative language requiring the US Executive Director (ED) to the IMF to use voice and vote in order to promote specific policy and procedural changes at the institution. In 1989, the Congress urged the US ED to promote: 1) the addition to the IMF's staff of natural resource experts, and development economists trained in analysing the linkages between macroeconomic conditions and the short- and long-term impacts on sustainable management of natural resources; 2) the establishment of a systematic process to review in advance projected impacts of each IMF lending agreement on the long-term sustainable management of natural resources, the environment, public health and poverty; 3) the creation of criteria to consider concessional and favourable lending terms to promote sustainable management of natural resources. This last requirement specifically refers to the reduction of the debt burden of developing countries in recognition of domestic investments in conservation and environmental management.

In 1992, the US Congress passed even more comprehensive legislation demanding the US ED to promote regularly and vigorously in program discussions and quota increase negotiations the following proposals: 1) Poverty alleviation, reduction of barriers to economic and social progress, and progress toward environmentally sound policies and programs; 2) Policy audits; 3) Policy options that increase the productive participation of the poor; and 4) procedures for public access to information.

In order to prevent any ambiguity about the interpretation of these overall objectives, the 1992 legislation provides a detailed list of specific policy recommendations that should be implemented by the IMF to ensure these objectives are met. Among the policy changes are: 1) all IMF programs should consider poverty alleviation and the reduction of barriers to economic and social progress; 2) all Policy Framework Papers (PFPs) should articulate the primary poverty, economic, and social issues that borrowing nations need to address; 3) all IMF programs should incorporate environmental considerations; 4) the IMF should help nations to implement systems of natural resource accounting in their national income accounts; 5) the IMF should assist and cooperate fully with the statistical research being undertaken by the OECD and the UN in order to facilitate development and adoption of a generally applicable system for taking account of the depletion and degradation of natural resources in national income accounts; 6) the IMF should conduct periodic audits of all its programs, on a country-by-country basis, to determine whether the IMF's objectives were met and to evaluate the social and environmental impacts; and 7) PFPs and the supporting documents prepared by the IMF's mission to a country are examples of documents that should be made public at an appropriate time and in appropriate ways.

While both laws were very specific in their policy recommendations and reporting requirements, this important congressional action did not lead to any substantive changes of IMF operations or policies. The only noticeable shift was reflected in the IMF's managing director rhetoric, emphasising the importance of achieving high quality growth without hurting people or the environment in all IMF programs. The IMF also changed the job description of one of its senior economists, Mr. Ved Ghandi, to include environmental issues.

The call for high quality growth did not result in any real policy changes at the country level. Neither did the existence of an environmental expert in a senior post help the cause of the environmental community. In fact, Mr. Ghandi's main tasks seemed to focus on writing papers explaining why the IMF should not be concerned about or engaged in environmental issues. After two years of analysis by Mr. Gandhi, he concluded that macroeconomic stability would lead to environmental stability but that sustainable environmental management was not critical for macroeconomic stability. While Mr. Ghandi has moved on from this position, the IMF continues to support the notion that microeconomic policies, such as environmental resource management policies, do not affect the macroeconomic outlook of a country.

In 1994, the US Congress attached the Sanders-Frank Amendment to the Foreign Operations Appropriation Bill (PL103-306) which required the US ED to use voice and vote to urge international financial institutions (which includes the IMF): 1) to adopt policies to encourage borrowing countries to guarantee internationally recognised worker rights in all policy dialogue; 2) in developing labor policies, to use the relevant conventions of the International Labor Organisation (ILO), including the right of association, the right to organise and bargain collectively, minimum labor standards, a prohibition to use any form of forced labor, acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health; and 3) to establish formal procedures to screen projects and programs funded by the institutions for any negative impacts on the rights referred to in (1).

The Treasury department was supposed to report on its progress in promoting these reforms at the institutions after one year. It took almost three years for the Treasury to send its report to the Congress. Instead of explaining why the U.S. Executive directors had failed to promote any of the legislative requirements, the report offered ideas on how to begin the process of implementing the Sander-Frank amendment. As an example, the report provided an outline of what a possible screening process could look like. It also cited general steps the IFIs have undertaken to reform labor markets as evidence of efforts to guarantee internationally recognised labor rights. As stated by Terry Collingsworth, general council at the International Labor Rights Fund: "Not all labor market reforms have to do with improved labor rights. Instead, many of these reforms contribute to the denial of labor rights. Collingsworth summarises the report as "lacking in any real, substantive action or assessment that address the express requirements of the law."

Finally, as part of the same 1994 Appropriation Bill, and frustrated with the lack of IMF responsiveness, the US Congress passed another law cutting the proposed $100 million US contribution to the Enhanced Structural Adjustment Facility (ESAF) by $75 million. In the Conference report attached to this Bill, the conferees expressed their hope that the IMF and its member countries would work with the US government to end IMF secrecy. To deal with the problem of IMF secrecy, the Congress urged the US Treasury Department to urge for a reform of the IMF's disclosure policies. Congress asked for the release of several IMF documents to the public including the Recent Economic Developments and program documents. Other documents are owned by the countries themselves, their publication depends on the willingness of the national government. As most of these documents are prepared by IMF staff and critical for the understanding of the programs, the legislation required the IMF to strongly encourage governments to make these documents available to the public. These documents include: Article IV Consultation, the Letter of Intent, and the Policy Framework Papers. To conclude, the conference report states: "To determine when and whether to recommend the remainder of the $100 million requested by the Administration for ESAF, consideration will be given to the progress made on the disclosure of the above information.

The 1994 This legislation was effective in forcing the IMF to provide access to information because Congress changed its approach from urging the US ED to use voice and vote to withholding the U.S. contribution. This approach has been critiqued by many, not in the least IMF management. Opponents argue that the IMF is a multilateral institutions which has to listen to and reflect the priorities of all its member countries. Therefore, it should not be expected nor is it appropriate to use the US legislative process to open up the IMF to public scrutiny or force it to deal with social and environmental issues.

Unfortunately, the IMF has not given the public, here in the U.S. or anywhere else throughout the world, any other choice than to go through our legislative body. The IMF does not provide regular and meaningful avenues of communication with the public both at the level of the country and at an institutional level. And, as shown above, the IMF is extremely reluctant to change. The only time, we have seen a serious opening for discussion about the effectiveness of the IMF programs, the lack of accountability of its staff and the IMF's excessive secrecy, is after the Congress conditioned future funds for the IMF on its progress on disclosure of information. Before then, the institution pretended not to hear Congress' concerns. Until the IMF presents the public with an alternative effective mechanism to convey our concerns and change the institution, conditioning the public's financial contribution to the IMF

is the only approach we can take.

1. Access to Information

The 1994 legislation resulted in increased access to information at the IMF, making the REDs publicly available and posting summaries of the Article IV Consultations, Program Information Notices (PINs) on the IMF web site. While the REDs provide useful overall macroeconomic information, the PINs provide virtually no substantive documentation of IMF programs as they are shorn of the technical details needed for serious professional evaluation.

Despite these recent reforms, the International Monetary Fund (IMF) remains one of the most secretive public institutions. The level of secrecy surrounding the IMF continues to be disturbing because it shields the IMF from adequate accountability for its policies and programs. As a result of the Mexican peso crisis, for example, the IMF was criticised for its failure to detect the impending crisis. However, there has never been a satisfactory discussion regarding the extent that the IMF's policy prescriptions contributed to the crisis. It is difficult to determine the role of IMF policy advice in the Mexico peso crisis since none of the loan documents were ever made available. The IMF did conduct an internal evaluation after the Mexico crisis, looking at why the institution failed to see the impending problem and what lessons were learned. Unfortunately, this report, as important as it seems, is confidential and not published, therefore once again, shielding the institution from any

public accountability and responsibility for the effectiveness of its programs and operations.

The Congressional requirements with regard to IF transparency have not been met yet. While we understand the need to maintain some confidentiality of information, particularly regarding immediate financial plans and certain economic data, there is a great deal of information that should be made publicly available. ( For a list of the documents, see appendix 1)

2. Accountability and Independent Evaluation

Cutting the US contribution to the IMF also boosted previous legislative requirements such as the need for systematic evaluation of IMF programs. Last year, IMF management agreed to an independent review of ESAF programs to be conducted parallel to the IMF's own ESAF review.

3. Public Participation

Public participation in borrowing country stabilisation or adjustment programs is not possible under Article 5, section 1, of the IMF's articles of Agreement. According to article 5, the IMF mission people shall only interact with representatives from the finance ministries or the central banks. This means that other ministries, such as health and education, are not necessarily consulted in program design. Even if finance ministries allow public consultation, crucial details of IMF programs remain confidential. With limited knowledge of the program details, the extent to which people affected be these policies can provide informed input is limited. In most cases, even national parliaments have little choice but to "endorse" an IMF agreement without serious discussion, input or understanding of the programs. The power of the IMF knows few democratic limits. This was obvious in South Korea, where the IMF insisted that all presidential endorse the IMF bailout agreement.

Public participation in program discussion is a critical aspect of increasing the IMF's effectiveness in stabilising economies and ensuring that its programs do not undermine long term sustainable development strategies as pursued by civil society. IMF program staff lack the necessary detailed knowledge of a country's specific social and economic structure and environmental resource management conditions. Only through the participation of experts in the country can the IMF ensure the design of a balanced and effective economic reform strategy.

 

II. NGO PROPOSALS FOR CHANGE: putting people and sustainable development first

Over the past decade, the IMF has been losing its legitimacy with the public as issues around secrecy and the lack of accountability remain largely unaddressed. Furthermore, NGO concerns and activities have expanded as different public constituencies join the IMF reform campaign. September 1997, prior the World Bank/IMF annual meeting, more than 90 environmental, poverty, church and labor groups from 27 countries around the world sent a letter to Mr. Camdessus. The groups urged the managing director to follow up on a range of institutional reforms as a condition for public support for the IMF quota increase.

The specific reforms required by the NGO coalition included: 1) public participation in the design and evaluation of all structural adjustment programs; 2) establishment of a comprehensive information disclosure policy; 3) establishment of independent audit department staffed with poverty, labor, gender, and environment experts, as well as economists, that would systematically review the policy prescriptions advocated and implemented by the Fund; 4) immediate and significant debt relief for heavily indebted poor countries; 5) harmonisation of IMF policies with internationally recognised worker rights; 6) integration of environmental costs and benefits in national income accounting; and 7) systematic social and environmental impact assessments prior to all adjustment loans approval.

These reform proposals are based on a strong believe that sound macroeconomic policies need to go hand in hand with long term natural resource management policies, labor rights protection and long term social sector investments. Civil society does not expect, nor does it want, the IMF to hire additional macroeconomists with experience in poverty reduction and environmental resource management. Our aim is to open the institution's decisionmaking process and ensure that it incorporates the input of national poverty and environmental experts and labor union representatives in the design of all its stabilisation and structural adjustment programs.

The NGO community never received a response from Mr. Camdessus addressing these concerns or indicating steps the IMF is undertaking in order to prevent negative impacts of IMF programs on the poor, labor, and the environment. The IMF has paid no more than lip-service to the World Bank's debt reduction initiative (HIPC, Highly Indebted Poor Countries). Its financial contribution has been absolutely insufficient and its insistence on harsh conditionality attached to the programs have undermined the potential beneficial effects. This lack of responsiveness of the IMF to public concerns indicates the IMF's unwillingness to engage in a serious debate with an ever-growing public constituency that the IMF paints as "unfair critics" of the institution. As the IMF does not provide avenues for public debate, the public will continue to create its own mechanisms to influence IMF policies and programs.

 

III. IMF Proposal for Change: IMF Amendment of Articles of Agreement seeks unprecedented power over national capital controls

Not only is the IMF busy searching for extra funds to expand its financial operations, the institution is also actively, be it very privately, negotiating a major expansion of its jurisdiction. Recognising the profound changes in the global economy, the IMF is working on an amendment of its Articles of Agreement to promote capital account liberalization. During the IMF's annual meeting in Honk Kong, 1997, the Deputy Managing Director, Stanley Fisher, presented his arguments in favour of such a amendment of the Articles of Agreement. According to Fisher the IMF should promote and control capital account liberalization because: "1) the benefits of liberalising the capital account outweigh the potential costs; 2) countries need to prepare well for capital account liberalization: and 3) an amendment of the Articles of Agreement is the best way to ensure that capital account liberalization is carried out in an orderly, non-disruptive way."

According to Fisher, liberalization of the capital account provides benefits to governments and banks which then can borrow on more favourable terms in more sophisticated markets, leading to more rapid and sustainable growth. In order to promote an orderly liberalization of capital movements, the IMF board of directors is seeking an amendment of Article VIII and XIV of the Articles of Agreement. Today, these articles apply to the current account and oblige members, when they are ready, to refrain from imposing restrictions on the making of payments and transfers for current international transactions. Until then, countries are not to impose any restrictions on the making of payments and transfers for current international transactions without IMF approval and they will pursue policies that would obviate the need for such restrictions.

In the case of capital accounts, countries would have to commit to fully liberalise their capital account in the future. Until they would be ready to do so, the IMF would be able to dictate the extent of the controls the countries would be allowed to maintain, the rate of capital account liberalization process and the required macroeconomic policy changes. Making the IMF the ultimate authority on capital account liberalization, the institution would be able to develop its analysis and evaluation of different kinds of capital controls and design optimal methods of liberalization.

At a time that the IMF is being criticised for having outlived its purpose, this new mandate would not only justify its existence but enormously expand its power and control over economic policy decisions in emerging markets, countries in transition and developing countries. In the past, the IMF has pursued capital account liberalization as part of its traditional stabilisation and adjustment programs. By making it a general obligation, all 182 member countries will need to commit to full capital account liberalization. All member nations would have to relinquish their decision making power over degree of capital movements to the IMF. They would have to negotiate with and abide by the IMF's targets for capital account liberalization and the policy changes required to promote further liberalization. If a country chooses not to follow IMF advice, the country would lose its access to IMF funding and, therefore, would never have access to future financial assistance as part of an IMF stabilisation, structural adjustment or bailout program. Furthermore, losing the IMF stamp of approval severely limits access to private capital.

Extending the IMF's power over the design of the macroeconomic policy framework for capital account liberalization is supposed to reduce the risk that inappropriate government policies would shock market confidence and lead to an exodus of money out of the country. Only the IMF would be able to prescribe the right policies in order to avoid these market swings. According to Fisher, countries would need to follow IMF advice and targets in pursuing sound macroeconomic policies, strengthening the domestic financial system and phasing capital account liberalization.

Emphasising the need for transparency, the IMF's new Special Data Dissemination Standard and the associated Dissemination Standard Bulletin Board on the Internet get a promotional boost. The DSDS requires governments to provide better and more timely information to the markets which would lead to earlier and more appropriate market behaviour. It is, therefore, another critical contribution the IMF would make to a more orderly liberalization of capital movements. The IMF's surveillance function would need to be strengthened in order to detect warning signals of future crises. These discussions would continue in secret as the market tends to overreact to IMF concerns.

Last but not least, the IMF's budget would need a vast expansion. In Fisher's words: "no matter how much information is provided to markets, surveillance is strengthened, prudential regulations are refined, and the government policies will improve, crises will happen." What Fisher is referring to is that markets do not always act appropriately, they tend to act too late, too early or excessive. Contagion effects are all too common, irrational and the result of herd behaviour or an inaccurate appraisal of the underlying economic situation. In these cases, it is the role of the IMF to help governments "correct maladjustments in their balance of payments without resorting to measures destructive of national and international prosperity." As mentioned before, an important side effect of the budget increase is that it strengthens the IMF's power in requiring policy changes as future bailouts will depend on the governments willingness to implement those policies.

 

IV. WINNERS AND LOSERS: WHO WILL PAY THE PRICE OF IMF BAILOUTS

Discussions about enhancing the mandate of the IMF happen behind closed doors. While the public is supposed to finance the required budget increase, it has no right to participate in the debate. Except for the occasional speeches and press releases, no substantial information is available with regard to the data and assumptions underlying IMF discussions and decisions. The IMF is wrong not to consult the public.

To deal with the increasing volatility of speculative capital flows, the IMF is demanding more and faster capital account liberalization. Thereby, the IMF is asking the governments to do more of what created the problem in the first place. This is not an unusual approach for the IMF. Over time, the IMF has made out of what used to be a neoliberal economic theory a neoliberal economic religion. As a result, it has become sacrilegious to question the fundamental principles upon which this new religion is build. When things go awry, it is because we don't believe enough. When macroeconomic policies don't work it is because governments have not liberalised and deregulated fast enough.

But even then, when governments agree to further liberalization of capital movements, the IMF perceives continuing problems ahead and is calling on people both in the North and the South to subsidise the bill. The U.S. public is not happy to be called on to bail out reckless investors and bankers under the disguise of assisting governments with balance of payment difficulties. Speculators in Asia knew very well that they were reaping great profits from house-of-cards schemes, deals that were based not on solid business fundamentals but on cosy government-business ties and the likelihood of a Mexico-style bailout should a meltdown occur. People are aware that the situation in Asia and other "emerging markets" offers a cushy deal for corporations and investors, but leaves little incentive for lenders to evaluate risk fully and little hope that the taxpayer won't be called upon repeatedly to rescue failing economies.

Bailing out commercial banks, the IMF has made the countries' debt official. This means that, in the case of East Asia, foreign loans of private companies are now guaranteed by the government, even though these loans were privately contracted. The private sector's foreign debt that can no longer be serviced have become the government's debt. Without the IMF bailout, foreign banks would have had to absorb some of the losses, now international banks escape any financial responsibility. Furthermore, debt to the IMF can not be renegotiated, sold at a discount on the secondary market, reduced, or forgiven. Every dollar of foreign a loan has to be repaid. The IMF required stamp of approval ensures that governments pay back their loans on time at the appropriate rate.

The official debt will be paid back through an economic reform program subsidised by the local people who did not assume the financial risk. In fact, the IMF "solution" has ensured that foreign lenders, the actors that assumed the financial risk, face no losses while squeezing the East Asian population for repayment of IMF loans. Through this approach, the IMF is violating Article I of its Articles of Agreement, which mandates the IMF to help member countries in need so that they won't have to resort to "measures destructive of national and international prosperity." Measures promoting, job loss, economic depression, and destruction of natural resources are destructive of national prosperity.

V. CONCLUSION

With its new mandate, the IMF seems to have switched toward protecting the prosperity of international bankers rather than protecting the sustainability of the economy and the well- being of people living in countries under speculative attacks. Instead of endorsing this shift in the IMF's mandate, it is time to take stock and to look at institutional and regulatory systems needed to decrease the volatility of the global financial market. Friends of the Earth does not support a laissez-faire ideology, contending that free markets are self-sustaining and market excesses will correct themselves, provided that governments or regulators don't interfere with the self-correcting mechanism. We believe that a regulatory framework is critical to correct and contain the current system's deficiencies. Some of the most obvious deficiencies include, the increasing gap between rich and poor, concentration of wealth and abuse of power, the volatility of the financial system, the lack of consideration for better quality of life and environmental sustainability.

We cannot afford to let the financial market rule society. The market is driven by profit, society has a broader range of social values that we need to maintain and protect. The current faith in solution of more market and less government is therefore risky, we stand to lose important values such as overall well-being, altruism and betterment of the society as a whole, fairness and justice, and protection of the future world of our children. As a public institution, the IMF should be bound by societies' values and not only by the market's values. It should, therefore, look at alternative options to curb the volatility of international capital flows which would contribute both to market stability and the values of society as a whole.

Among those proposals, aimed at decreasing the volatility of the financial market and rejected prematurely by the IMF, is the idea of the Tobin tax, developed by Nobel price winner James Tobin. In 1971, Mr. Tobin proposed to establish a tax on all currency transactions in order to make the international exchange system more stable. The tax would need to be the same wherever a transaction takes place, and would need to be agreed upon internationally. Tobin envisioned that such a tax system would be administered by the IMF, while the funds collected would be retained by the national governments. Some of the proceeds could be devoted to international purposes for which it is increasingly hard to obtain public financing. While this tax would be a deterrent to short-term speculation, it would have little impact on commodity trading and long-term productive investments.

Among the other people who presented alternative proposals is George Soros, the world's largest currency speculator today, who proposed the establishment of an international credit insurance cooperation to guarantee international loans. Economist, Walter Russell Mead proposed the creation of an international central bank as the principal instrument for cooperative global efforts to manage demand. While Soros' proposal is new, many of the other proposals have been around for a long time. Especially, the Tobin tax proposal has found broad public endorsement. The IMF has rejected the proposal off hand as it would throw sand in the wheels of the free market. According to the IMF, more freedom of international transactions is always good, regulation that would impede that freedom is always bad.

Instead, the IMF is asking the public to finance the expansion of its resources so it can intervene when a national currency is under a major speculative attack. The IMF is proposing a $90 billion expansion of its $200 billion capital. Together with all the reserves of all the central banks, which amount to about $640 billion, the IMF could scrape together $930 billion which is about half of what gets traded every trading day. At the current rate of about $2 trillion in currency trading per day, it is hard to imagine how the reserves of the IMF or any other government institution will be able to intervene successfully. It will only expand the extend of the moral hazard problem as international banks and speculators will know that they can count on even larger bailouts in future crises.

The public is not supposed to question the IMF's rational. We are to provide the money and buy into the theory that the US Congressional approval of the $14.5 billion is critical to protect the world from any future global financial crisis. In an attempt to intimidate any Congressional opposition, the US Administration has labelled a vote against this appropriation as anti-American and anti-internationalist. This is unfortunate. It would seem more prudent to slow down the legislative process and start a serious discussions about: 1) proposals to make the IMF more effective in maintaining global monetary stability; and 2) regulatory and other options to reign in the power of the financial market. Until that broad public debate has happened, the IMF should not get its budget increase and neither should the board of directors decide upon any changes of the Articles of Agreement that would change its mandate and enhance the institution's power.

* Director, International Department, Friends of the Earth