Dutch Uncle whose initials are IMF Savior: It's rich, hard-hearted and hated, but the International Monetary Fund is frequently the only remedy for countries in economic distress.

Sun Journal

December 04, 1997|By Mark Matthews | Mark Matthews,SUN NATIONAL STAFF

WASHINGTON -- Asia's financial turmoil has turned a global spotlight on a small, quiet but immensely powerful international agency whose mission is to tell governments and countries what they don't want to hear.

The International Monetary Fund acts as a combination cop, fireman, judge and doctor of the world's economies. In the past decade, Russia, Mexico, and lately Thailand, Indonesia and South Korea have bowed to its will, confessed their misdeeds and accepted the fiscal equivalent of cold baths, tightened belts, bitter medicine and broccoli.

They did so to get desperately needed bailouts and to avoid what seemed a worse fate: pariah status among international investors who, in an increasingly integrated world marketplace, can spell the difference between prosperity and poverty.

"The international community needs a financial institution that is able to move quickly to work with countries in trouble and to secure financial reforms that reassure the markets," says Robert B. Zoellick, a former high-ranking U.S. Treasury and State Department official in Republican administrations.

But with its rescue of three large Asian economies, the IMF is coming close -- some fear dangerously so -- to using up its pool of available capital, much of which is supplied by the United States, Japan, Germany, Saudi Arabia and Great Britain.

As it tries to refill its vaults, the fund faces skeptical questions from a tightfisted Congress and increasing demands from critics that it shed some of its secrecy and use more of its clout to help make the world safe for people other than just wealthy investors.

Little hint of this controversy is evident in the hushed, marble-walled lobby and multistoried atrium that greet visitors to the IMF's headquarters here. At least for the moment, the fund is riding high. Its newsletter's latest issue notes the fund's key role in Asia.

Its globe-trotting chief executive, Michel Camdessus, recently toured Asian capitals to deliver the message that things will get better -- after they get worse. A Frenchman in his third five-year term as managing director, Camdessus personifies a bureaucracy that has succeeded in reinventing itself and remaining indispensable long after its initial purpose has expired.

Established during the 44-nation conference at Bretton Woods, N.H., in 1944, the IMF was part of the response to the financial chaos that led to the worldwide Depression of the 1930s, created an opening for fascism and contributed to the outbreak of World War II.

Originally, the IMF supervised a system of fixed currency-exchange rates based on the gold standard. Since the world's currencies abandoned the gold standard in the 1970s, ++ the fund has taken on a variety of new jobs to insure stability in currency markets, thereby calming investors, and to encourage world trade.

First came the world oil-price increases of the 1970s, which forced Britain and Italy to seek the IMF's help, and a byproduct: petrodollars. Profits earned by oil-producing countries poured into private banks, which in turn lent them on easy terms to poor nations that were being forced to pay ever-higher prices for fuel.

The result was the debt crisis of the 1980s, with much of Latin America unable to pay back its loans. The IMF responded with loans conditioned on the kind of no-pain, no-gain economic reforms that are its trademark.

When communism collapsed at end of the 1980s, the former Soviet republics and their Eastern European satellites all were anxious to secure the benefits of capitalism, but they lacked market institutions.

The West couldn't afford huge amounts of aid. The new nations turned to the IMF, which offered strict advice on budgets and monetary policy and supervised loan packages totaling tens of billions of dollars. In 1995, the IMF was summoned again as the linchpin of a $40 billion bailout package for Mexico after the peso collapsed.

For the United States, the fund offers the convenience of providing foreign aid without an outright cost to taxpayers. The money flows out in loans from the fund's pool of member contributions or "quotas," which are to be repaid with interest.

The United States has the biggest quota -- 18 percent -- totaling $36 billion of the $200 billion total -- giving it proportionally the greatest say. The IMF also is entitled to borrow and relend additional sums from member countries.

Its track record so far has made countries anxious to win its seal of approval. Latin America and Mexico have largely recovered. Parts of Eastern Europe are doing well economically, and Russia pTC beginning to turn the corner.

But the fund often has left bitterness in its wake. By putting the economic brakes on countries that have overspent or over borrowed, it has caused at least short-term suffering among the poor and middle class.

And its economic prowess has been questioned. "I know this institution makes serious mistakes," says Jeffrey Sachs, director of the Harvard Institute for International Development.

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