October 6, 1998 CONGRESSIONAL RECORD Ð Extensions of Remarks E1913 EXTENSIONS OF REMARKS IMF MUST LEARN FROM ITS PAST with exporters then paid in a mixture of for- porate governance, tax systems and other MISTAKES eign exchange and domestic currency. Any matters not germane to the short-run finan- country that contemplates such cial crisis. Moreover, the funds would be collateralized borrowing at some future time given out only gradually, as the countries HON. NEWT GINGRICH must embody such an arrangement in both made IMF-prescribed changes. Since this OF GEORGIA domestic legislation and international agree- policy meant the IMF would not provide the IN THE HOUSE OF REPRESENTATIVES ments well in advance. funds needed to repulse speculators, it A foreign-exchange facility of this sort caused excessive declines of currency values Tuesday, October 6, 1998 need not create moral-hazard problems for and required extremely high interest rates to Mr. GINGRICH. Mr. Speaker, the attached either the international lenders or the prevent further declines. emerging-market countries. Banks and bond IMF Managing Director Michel Camdessus op-ed by Martin Feldstein from The Wall has said that if the IMF had only wanted to Street Journal illustrates why the IMF must holders would still bear the risk that the companies to which they lend are incapable deal with the countries' liquidity and debt learn from its past mistakes. Feldstein sug- of repaying their loans. They would also not problems, it would by now have succeeded. gests that the IMF can redefine itself as a val- be protected against countries that become He then repeated his earlier statement that uable institution by narrowly defining the prob- internationally insolvent and cannot earn the Asian crisis was really a ``blessing in dis- lem, rebuilding market confidence, and main- the foreign exchange to meet their inter- guise'' because it gave the IMF the leverage taining growth while reducing the current-ac- national obligations. And high interest rates to force structural policy changes that the national governments would not otherwise would discourage the emerging-market coun- count deficit. I submit the op-ed to the CON- adopt. GRESSIONAL RECORD. tries themselves from any temptation to act This is a remarkable confession of the ar- imprudently. [From The Wall Street Journal, Oct. 6, 1998] rogance and inappropriateness of the IMF The availability of a credit facility could policies. Even apart from whether the IMF FOCUS ON CRISIS MANAGEMENT ... by itself repulse a purely speculative attack has any legitimate right to usurp these sov- (By Martin Feldstein) on a healthy currency. When the attack is on ereign responsibilities, the attempt to re- International officials and bankers assem- the currency of an economy with an over- make an economy in the midst of a currency bled in Washington for the annual meeting of valued exchange rate that causes an crisis made it likely that there would be nei- the International Monetary Fund and the unsustainable current account deficit, the ther fundamental restructuring nor a rapid World Bank are considering the failures of availability of credit must be combined with resolution of the currency crisis itself. By the past year and what the IMF should do a shift to an appropriate exchange rate and putting every aspect of these economies into differently in the future. a deflation of domestic demand to make flux, the IMF made it more difficult to make The fund made three key mistakes: under- room for increased net exports. the changes needed to regain access to inter- When crises do occur, the IMF should help mining the confidence of global leaders, at- national capital. Creating massive bank- by bringing together the creditors and debt- tempting unnecessary and radical changes in ruptcies and widespread political unrest is ors to work out orderly reschedulings of the basic economic structures of the debtor not conducive to attracting a return of for- international obligations. The lengthening countries, and imposing excessively eign investors. of debt maturities gives debtor countries the contractionary monetary and fiscal polices. MASSIVE RECESSIONS time to earn the foreign exchange needed to But the IMF should aim to do more than just meet their obligations. In the case of South While most of the target countries did need avoid these mistakes. It can play a positive Korea, the Fed took the lead and brought to contract domestic demand in order to re- role in future crises by coordinating the re- along the other major central banks. But duce imports and provide scope for more ex- scheduling of international obligations be- since the problem is inherently international ports, the IMF's policies of high interest tween creditors and debtors. rates and big tax increases were too and the adjustment process must be mon- The IMF can also help prevent future cri- contractionary in most countries. This IMF itored, this should be the primary respon- ses by creating a collateralized credit facil- implicitly acknowledged this when it relaxed ity that lends foreign exchange to govern- sibility of the IMF. The fund must also abandon the mistaken those policiesÐbut this easing came too late ments that are illiquid but internationally strategy that contributed to the past year's to prevent massive recessions. solventÐthat is, capable of repaying foreign The IMF should commit itself publicly to failures. Asia's ``crisis countries'' bear re- debts through future export surpluses. Presi- avoiding a repetition of its recent mistakes. sponsibility for causing their own problems dent Clinton's proposal to create an IMF Future IMF programs for crisis countries through unsustainable current-account defi- credit facility, though vague, may be useful should define the problem narrowly in terms cits and short-term foreign debts that ex- in refocusing the fund's activities. of the country's current-account deficit, the A rapid-payout credit facility can reduce ceeded their foreign-exchange reserves. But structure of its balance sheet and the sound- the risk of speculative attacks and induce these problems could have been solved less ness of its banks. The guiding concepts countries to maintain open capital markets painfully. These economies are fundamen- should be rebuilding market confidence, fo- and free trade. Leaders of emerging-market tally sound, with remarkable long-term cusing on the specific liquidity problems and economies see their national capital markets growth of both gross domestic product and maintaining as much growth as possible as small relative to the internationally mo- exports. With modest adjustments, they while reducing the current-account deficit. bile capital that can be arrayed against could easily have earned extra foreign ex- The world will be watching closely to see if them. They fear that even if they pursue change to repay foreign debts. The problem the IMF can redefine itself as a valuable in- sound long-run policies, they could suffer was temporary illiquidity, not insolvency. stitution. When these countries came to the IMF for from sudden global shifts of sentiment. Un- assistance, it should have seen its task as f less the global financial system changes to providing liquidity, supervision and nego- reduce their vulnerability, emerging-market tiating assistance. Instead, it publicly criti- INDIA SHOULD BE DECLARED A countries may respond by imposing a variety cized them as incompetent, corrupt coun- TERRORIST STATE of counterproductive capital controls, lead- tries with fundamentally unsound econo- ing to restrictions on foreign investment and mies. In doing so, it not only discouraged trade. HON. EDOLPHUS TOWNS any further lending or investment in these OF NEW YORK LEGISLATED DIVERSION countries but also undermined the con- IN THE HOUSE OF REPRESENTATIVES An international credit facility can work fidence of global lenders in emerging-market only if it provides credit rapidly, at an countries generally, thereby contributing to Tuesday, October 6, 1998 above-market interest rate that discourages the contagion the IMF wanted to prevent. Mr. TOWNS. Mr. Speaker, the August 14 unnecessary use and in exchange for good Although the IMF organized massive po- issue of News India-Times carried a very inter- collateral. A country can provide such col- tential loan funds for each of the Asian crisis esting story. Kuldip Nayar, a veteran journalist lateral by pledging a share of the foreign ex- countries, it did not use those funds to pre- change earned by its exporters. A country vent currency runs. On the contrary, it an- and former Indian Ambassador to the United that borrows from this facility would auto- nounced that these funds would be provided Kingdom who is now a member of the upper matically trigger a legislated diversion of all only if the country accepted the IMF's ad- house of India's Parliament, admitted that export receipts to a foreign central bank like vice about the radical restructuring of the India is a terrorist state. How long will it take the Federal Reserve or the Bank of England, entire domestic economyÐlabor rules, cor- for America to admit it? · This ``bullet'' symbol identifies statements or insertions which are not spoken by a Member of the Senate on the floor. Matter set in this typeface indicates words inserted or appended, rather than spoken, by a Member of the House on the floor. E1914 CONGRESSIONAL RECORD Ð Extensions of Remarks October 6, 1998 Mr. Nayar was quoted as saying that Paki- against the Indian nuclear tests. Does this Finally, Mr. Speaker, I wish to thank Alan for stan's attack on the village of Doda was an lobby stand for India's unity or does it wish his years of friendship and wise counsel, and act of retaliation for Indian massacres in the for its dismemberment? to wish him the best in his new position as a Nayar and his fellow co-conspirators will Pakistani state of Sindh.