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International Finance Makes Strange Bedfellows

Could banks do a better job providing capital to emerging markets than the IMF?

April 12, 2000

Could banks do a better job providing capital to emerging markets than the IMF?

In politics, it is said, the right and the left are sometimes positioned in such extreme manners that they unexpectedly end up standing side by side.

A perfect case in point is the series of U.S. Congressional reform proposals to reshape the work of the IMF and the World Bank. It is widely interpreted as the work of the Republican right.

One would therefore have expected that think tanks supposedly sympathetic to the financial needs of developing countries would be vehemently opposed to the tough medicine advocated by the so-called Meltzer Commission. The commission would turn over many of the international financial institutions’ lending responsibilities to private capital markets — generally a no-no for left-leaning think tanks and other development-oriented non-governmental organizations (NGOs).

But when we spoke with the leader of a prominent NGO, we found that instead of rejecting Professor Meltzer’s recommendations flat out — many NGOs have actually embraced the professor’s ideas.

The reasoning goes like this: “Nobody — especially the IMF — should be telling these countries what to do. Meltzer’s proposals mean an end to conditionality, which we find highly objectionable. In fact, it is an assault on a country’s sovereignty.”

There undoubtedly are problems with the sometimes extreme reaches of conditionality. For example, it is dubious to proscribe to developing countries that they must open their markets for luxury goods.

Consider that even France — which is definite not a developing country — has long had a tax regime that discouraged consumption of luxury items.

But what is truly astounding is to have the political left in the United States make the argument that the LDCs are better off with capital markets than with the IMF. “They have evidently never worked in the capital markets and seen how conditionality there is often not negotiated, as the IMF still does, but simply imposed unilaterally,” commented somebody who has been around those markets.

“And,” he added, “at least the Bank and the Fund try to help these countries in establishing internal structures that help them at a technical level to meet the outlined goals. Capital markets aren’t so helpful.”

The sudden discovery of the virtues of markets by certain U.S. NGOs leaves some Europeans wondering. Could it be that these NGOs are part of a charade — fronting, in effect, for the interest of investment banks, while claiming to defend the interests of developing countries?