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IMF Reform and the International Financial Institutions Advisory Commission

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In the fall of 1998, financial crises in Asia, Russia, and Brazil were unfolding, though in different stages, as the 105 th Congress was in the process of passing the Omnibus Consolidated and Emergency Supplemental Appropriations Act for FY1999 (H.R. 4328, P.L. 105-277). This legislation increased the U.S. quota of the International Monetary Fund (IMF), but attached a number of conditions to dispersal of the funds. Among them was creation of the International Financial Institutions Advisory Commission (the Meltzer Commission), which Congress chartered to evaluate and recommend future U.S. policy toward the global financial institutions, particularly the IMF.

The Commission released its report on March 8, 2000, calling for changes in the mission and operations of the IMF and the development banks. The 11 commissioners were unanimous only in generally recommending that: 1) the IMF restrict its lending to short-term liquidity needs, and 2) that it forgive debt to the poorest developing countries. The report makes the case for restructuring the IMF to reduce and define clearly its mission, and clarify obligations for members of the Fund, as well. At the heart of the proposal is a strong conviction that deep structural reforms, particularly of developing country financial systems, would go a long way toward reducing the potential for currency crises and the related need for large, costly IMF bailouts. It also focuses heavily on the role of moral hazard. These concerns led to specific policy prescriptions, not unanimously embraced, including requiring financial sector reforms as a precondition for IMF assistance, lending for no longer than 120 days (with one rollover period) and at "penalty" rates, and eliminating any long-term lending for structural adjustment or poverty reduction.

Four members of the Meltzer Commission dissented from the report. They supported the call to differentiate clearly the responsibilities of the IMF and development banks, the need for stricter banking systems in developing countries, greater transparency to mitigate abuse by all parties, and debt forgiveness for the poorest countries. They disagreed with the details listed above, arguing that they would conceivably worsen rather than improve the prospect for global financial stability and thereby undermine the fight against poverty and slow development.

A number of respondents to the Commission report also disagreed with what some consider its "narrow" prescriptions, including the U.S. Treasury and the Council on Foreign Relations, which offer alternative reform programs. In addition, financial crises have been a part of the international economic landscape long before the IMF was established, suggesting that too much emphasis on this one institution may not bring the desired stability to the international financial system. Still, the IMF is responsible for addressing the concerns raised by Congress and other government institutions around the world, which have served as a critical impetus for change. Continued oversight will be necessary to keep the reform process moving and more time may be needed to sort out precisely which policy options will suit the collective, but competing, needs of IMF member countries and the broader participants of the global economy.


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