Calomiris on IMF reforms
Calomiris: There will always be an IMF. And a majority of the Meltzer Commission agreed there were bona fide reasons to have an IMF. So why don’t we just try to make it work better? This institution already starts from a pretty strong position in terms of having wellstated objectives and skilled economists who understand incentives and mechanism design. I am also very impressed by [IMF Managing Director] Horst Köhler. I don’t agree with him on everything, but he certainly seems to have a good sense for the right objectives.
Calomiris: Certainly, there’s no question about that. And my understanding is that Stan Fischer made a strong personal commitment to make that happen. But there’s one area where the IMF still needs to be more open—the Executive Board’s decisions need to be transparent and explained better. I support a policy of explicit recording and publishing of the Board’s votes. Is it really acceptable these days for a taxpayer-funded institution to operate with the kind of hidden processes that the IMF’s Board has used through the years? You could also move ahead on this front by making decisions based more on rules than on the exercise of discretion. If people see the institution more or less following rules they’ve already been told about, openness does not end up becoming such a big issue.
Calomiris: Yes, I was very impressed by the changes made in the reporting of the IMF’s finances. They are definitely a move in the right direction. What’s even more heartening is that the people in the Treasurer’s Department say they aren’t done yet. I think the critiques from the Meltzer Commission and others helped nudge along a process of reform that was already under way.
Calomiris: Oh, absolutely. Consolidating the lending facilities, increasing incentives for early repayment, trying to raise the interest rates at which you lend, all that makes sense to me. It’s fair to say, though, that all the real consequences of these changes remain to be demonstrated. Another problem is that your lending rates haven’t been increased as much as they should; they should be geared not to the lending countries’ cost of funds but to the borrowing countries’ (pre-crisis) cost of funds. Still, the streamlining of facilities does represent progress. And my sense from conversations with senior people at the IMF is that they want to move more in that direction, and that’s very constructive.
Calomiris: Because I find it difficult to defend poverty reduction as a core mission of the IMF. Why should the IMF be so involved in it? That’s what we have development banks for. I realize problems facing countries are intertwined, particularly in much of Africa. No one would be so naïve as to say that macroeconomics in Africa is unrelated to war and disease and other such causes of extreme poverty. But don’t we need to approach such problems with a different skill set than the one with which we approach monetary and fiscal and banking system problems? We should reform and recapitalize the development banks so that they can do more for these countries. It’s pretty clear that if they were reformed, the development banks could stand to have a much larger capital base and they could substantially increase their role in poverty reduction. The Meltzer Commission—even though we want to see regional development banks take the lead in providing much of poverty assistance—argued that the World Bank would have to play a key role in African assistance for a while because the African Development Bank might not right away have the resources or the institutional structure that would allow it to operate effectively.
Calomiris: Argentina needs reform a lot more than it needs funding. There are hard reforms ahead in the labor market, in trade, and in government expenditures—particularly in co-participation policies. I believe there would have been greater progress on these reforms without the Argentine government’s access to the multilateral institutions’ funding and imprimatur and, thereby, without the easier access to global capital markets. The buildup in sovereign debt since 1996 as a consequence of that access has been very great, and my view is that the IMF allowed itself to condone this loss of fiscal discipline. Part of the story in Argentina is one of reform fatigue. You could look at Argentina in the early part of the 1990s and say, “things have gone well.” You had the setting up of the currency board, the privatizations, and the banking sector reforms, which I was involved in personally. Now comes the hard part of solving the political economy problems of how to rein in the unions, how to change the labor laws, how to end protectionism and have real free trade, and how to change the revenue-sharing and expenditure-sharing policies between the central government and the regions. People argue that the agreements with the IMF buy time to carry out these reforms. But is more time good? Does more time make it more likely that you are going to have reform? Time also removes pressure. In Argentina, the pressure for reform has been reduced.
Calomiris: I believe that Turkey still has more foreign exchange reserves than its total foreign debt exposure. So I find it difficult to think that external sustainability is the main problem. The main problem seems to be one of internal sustainability, credible fiscal policy, ensuring good governance, and keeping politics out of business. So the real question is: Should the IMF offer loans to countries as an inducement to get them to carry out such internal reforms? Does that work? Will it work in Turkey this time after numerous previous attempts? What’s happening here is that the Group of Seven is providing fiscal subsidies to a politically important country using the IMF. I just don’t think that this model of what the IMF should be doing is right. If the program fails, some people will again fault the technical competence of the IMF’s programs rather than the inadvisability of using IMF money and advice to carry out internal reforms.
Calomiris: A facility based on the idea of prequalification—ex ante conditionality—is something that the Meltzer Commission was in favor of as well. But it concerns me that the CCL Facility remains unused and is structured in a way that it may not be used much in the near future. Having many lending facilities lowers the attractiveness of the CCL; eventually it seems to me you’d want to have one lending facility rather than multiple pockets that countries can draw from, each with its own multiple rules. Countries shouldn’t be able to arbitrage across different kinds of lending facilities—that undermines the whole purpose of setting conditions, whether ex post or ex ante conditions. And the facility should be a reliable source of credit, something like a line of credit from a bank. Countries should, if they meet certain (pre-)qualifications and subject to regular review, know that the money is going to be there when they need it and at the terms set in advance. The way I read IMF discussions is that you do want it to be along these lines but there’s also going to be a review of whether the country was an innocent victim. That makes it a somewhat less reliable source of credit from the country’s point of view.
I’ve also floated the idea of having a CCL Facility with multiple tiers, where as countries improve they see the advantages of access to a larger amount of potential liquidity on cheaper terms. I understand that designing these facilities correctly is not a simple matter, and I’m very sympathetic to the need for refinements. But not everything has to be invented from scratch based on long negotiations within the IMF; the IMF could learn more from the way private contracts are written. Not to mimic them exactly, but there are a fair number of examples of liquidity assistance provided in private markets.
Probably the simplest example, which goes back 30 years, is credit lines for commercial paper issuers, which are designed to deal with potential liquidity crises that might shut down the commercial paper market. These were designed after the Penn Central crisis of 1970. The goal was to prevent a Penn Central crisis from ever happening again by making it clear that there was liquidity assistance. And so far it’s worked. There hasn’t been another Penn Central crisis.
Isn’t it interesting? The private markets experienced a commercial paper crisis in 1970, decided they could come up with liquidity lines to prevent financial crises from happening, and did so immediately, and we’ve not had a crisis since. So, can’t we learn a little bit or benefit from the way that those facilities are designed or, generally, how other bank lines of credit are designed? They require borrowers to make certain warranties in advance, to agree to certain covenants. There is ongoing monitoring to make sure the borrowers’ warranties are true and the borrowers’ covenants are being enforced properly. And subject to that and subject to no very sudden adverse change in circumstances, borrowers have access to credit lines. Why is that not a good model for the IMF? It seems to me that it would be.