The June 1999 Cologne summit still reflected the deep concerns about financial and economic stability that had been aroused by the Southeast Asian crisis of 1997 and the Russian crisis of 1998. Both crises had demonstrated the destructive force of shocks arising in the banking and financial sectors and in their external payments relations. In addition, there was lingering concern with the continued economic regress and extreme poverty in a number of countries, particularly in Africa.

Both concerns were addressed with several international-finance initiatives at the Cologne summit. Some of these dealt with precautionary or preventive strengthening or provisioning, others with remedial action. The most notable among these two kinds of programs were the Contingent Credit Lines (CCL) facility that had already been created at the International Monetary Fund (IMF) in April 1999 and the enhanced Heavily Indebted Poor Countries (HIPC) inititiative that was adopted by the members of the IMF in September 1999 after urgent review of the, by then, three-year old original HIPC initiative.

Because neither the CCL nor the enhanced HIPC initiative subsequently performed as promised or as generally expected, both came in for a major deconditioning at the Okinawa summit to drum up business. The initial disappointment with both initiatives has allowed new insights to surface both at the IMF and in the Report from G7 Finance Ministers to the Heads of State and Government on Strengthening the International Financial Architecture, issued at Fukuoka on July 8, 2000. Although these new insights so far have led to questions rather than answers, and to cautions rather than consequences, they may be harbingers of future change and thus fully deserve the analysis that follows.

The Fatal Flaw of the CCL

The IMF's response to the Asian crisis has involved the introduction of two new facilities, the Supplemental Reserve Facility (SRF) in 1997 for countries experiencing international financial crises, and two years later the CCL which is ostensibly designed to deter or prevent such crises. Having found no takers during its first year on offer, the latter facility has been recalled for price cutting at the Kyushu-Okinawa summit, with the rate of charge to be reduced below that under the SRF and with the commitment fee to be waived. The IMF has also created new focal points for its surveillance relating to the soundness of banking and financial infrastructure, matters which are most directly dealt with first by the Bank for International Settlements (BIS) and secondly by the OECD.

This comment will focus only on that flaw in the CCL whose outlines have come to be recognized in the Report of the G7 Finance Ministers. The Finance Ministers have become aware that, by precommitting an amount of funds equal to 3 to 5 times a country's IMF quota in the event capital flows and exchange relations should be destabilized by contagion, the IMF may subject itself to moral hazard. For no matter how tough the conditions for initially qualifying for CCL commitments, it will be politically very difficult for the IMF to withdraw that commitment from countries whose macroeconomic-policy conduct subsequently deteriorates. For withdrawing the IMF-bailout security blanket is bound to trigger a speculative attack on any country from whom the IMF is seen publicly to walk away.

The G7 Finance Ministers not only recognized the problem, but threw it back to the IMF by requiring that "a country should be required to exit the CCL when it becomes clear that eligibility criteria are no longer met," but that they "call on the IMF to develop an appropriate exit strategy for these cases." I submit that no such strategy is available because the IMF will never be able to threaten credibly to engage in conduct that would intentionally precipitate a major financial crisis for any of its members. Thus a bad new program that received a strong send-off in Cologne for moving the IMF from remedial actions after the outbreak of a crisis to prevention and advance deployment now has been found to be of little use for members and of high risk to IMF credibility.

Enhanced Debt Relief with Diminished Expectations

While the IMF's enthusiasm for the CCL appears to be cooling less rapidly than that of the G7, the situation is precisely the opposite in the area of debt relief. There the fund is displaying much more scientific skepticism and reserve than the G7 who appear to be falling all over themselves to push debt relief along with ever fewer questions asked. In discussing the slow take-up under the enhanced HIPC initiative, IMF Deputy Managing Director Aninat, himself from a developing country, has just given a very firm answer to the question of why debt relief is not proceeding any faster: "The reasons have been armed conflict, social unrest, governance issues, and major slippages in economic, social, and structural programs - not delays, I would submit, due to 'rigid or unreasonable conditions'." The occasion for this Daniel-in-the lions'-den statement was the high-level meeting of the UN Economic and Social Council on July 5.

The crucial role played by political and institutional adequacy for making debt relief productive for social welfare and economic growth has been developed with event more candor in the May 2000 issue of the World Economic Outlook (WEO, Chapter 4) which is one of the widely read and used IMF publications. The WEO points out that comparing health and education expenditures with debt service is willfully misleading by treating current expenses and debt service as comparable. Debt service, however, consists mostly of repayment of principal on the concessional loans made to developing countries by official creditors. Focusing on gross repayment charges is even more misleading because the countries involved rather consistently have received new lending in excess of their debt service. Furthermore, this new lending, much of it forced out of official creditors by threat of outright default, likely will decline after debt relief has been granted and the pressure for coercive lending has let up. The WEO goes on to note that social indicators have not consistently improved in countries with poor governance and high levels of corruption even after budgetary expenditures on health and education have increased.

Thus the IMF has found a new candor on what are the most obdurate and basic obstacles to economic development. It has spoken out on the need for political conditionality -- clean and efficient government -- before debt relief can help the poorest rather than their corrupt rulers. This candor is almost entirely absent in the official statements of the G8. Only faint traces of the basic insight, that bad government is at the root of many economic problems of developing countries, are reflected in calls for greater transparency in budgeting and other functions of government. The G7 Statement issued at the Kyushu-Okinawa Summit Meeting on July 21 also shows concern that "a number of HIPCs (currently 13, or almost one-third of their total number ) are currently affected by military conflicts which prevent poverty reduction and delay debt relief." But political conditionality is not extended to highly-corrupt countries not involved in such extreme situations as war. Instead impatience with the slow process of earning debt relief has led the G7 to try to get debt relief pushed out faster and to make it complete (until the debt problem grows back), rather than partial, with fewer questions asked. In this area, unlike in the case of the CCL, the IMF seems the wiser of the two.