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Wednesday, 14 March, 2001, 08:35 GMT
IMF: Problems brewing with Bush team?
Treasury Secretary Paul O'Neill (right) with President George W Bush
The Bush economics team led by Paul O'Neill might oppose plans for future IMF bailouts
As the International Monetary Fund (IMF) grapples with Turkey's financial meltdown and attempts to get a $5bn bail-out of Indonesia back on track, another problem is looming up much closer to home.

US President George W Bush has recently nominated several former IMF critics for key positions in his administration.

IMF voting power
US 17% of total votes
Japan 6%
Germany 6%
France 5%
UK 5%
178 other states 61%
Analysts say this might limit the IMF's ability to mount the kind of large-scale economic rescue packages it favoured throughout the 1990s.

While the IMF is no stranger to opposition from both the left - led by anti-globalisation campaigners - and the right - embodied by the US Congress's "Meltzer Commission" - having critics at the heart of the US government poses a real threat to its strategy.

This is because a complicated system of voting rights at the IMF gives effective control over decision making to the US government.

Under IMF rules, major decisions require an 85% majority vote.

Although the United States is just one of 183 IMF member states it has 17% of the votes - based on the size of its economy.

By contrast, 44 African states have just 4.4% of the votes between them.

Sympathetic

During the Clinton presidency, treasury secretaries Robert Rubin and Larry Summers were seen as sympathetic to the IMF and helped shape the organisation's response to financial crises in places such as east Asia, Russia, Brazil, Indonesia and Mexico.

The thinking behind the IMF's bailouts was that, without them, the human suffering from financial woe might be worse and relatively localised financial problems might spread.

IMF made mistakes with the best of intentions without an understanding of the consequences

Treasury Secretary Paul O'Neill

But the strategy was not without criticism in the US, with some arguing that IMF bailouts merely rescued big lenders and investors from the consequences of their mistakes but did nothing to lessen the likelihood of future financial crises.

Some said bailouts actually increased the risk of future shocks because they encouraged borrowers and lenders to behave recklessly - something many thought was behind the Asian crisis - in the belief they had a safety net.

Different agenda

Critics also said it was inappropriate for an organisation created to promote international monetary stability to be acting as what was effectively global lender of last resort.

Analysts say a different agenda is likely to emerge for the Bush economics team, which is being drawn substantially from industry - in the case of Treasury secretary Paul O'Neill among others - and from academia.
An aluminium rolling mill
O'Neill's background is in industry not finance

Aside from a general Republican dislike of intervention in markets, these backgrounds have little in common with the world of hedge funds and investment banks that have favoured, and benefited from, IMF actions in recent years.

In contrast, the Democrats' economic policymakers, notably Mr Rubin, tended to be drawn from Wall Street.

'Monstrosity'

The Bush White House's latest nominations were those of law professor Kenneth Dam as Treasury deputy secretary and fellow academic John Taylor - an economics professor - to be Treasury undersecretary for international affairs.

Mr Dam - set to become the Treasury's number two official - co-authored a book "Economic Policy Beyond the Headlines" in which he referred to "IMF-generated" problems that might create "an international monstrosity".

The book said emerging market borrowers and developed country lenders were now able to operate in a "Heads I win, tails you lose" environment.

Mr Dam has also been reported to favour reducing the scope of the IMF's operations and the size of its loans.

Mr Taylor - poised to fill the Tresury's top international post - once advocated abolishing the IMF, the Washington Post reported recently.

He has also derided the $50bn rescue package for Mexico in 1995, saying the country's economy didn't recover any faster than it would have done without the bailout.

O'Neill softpedal

Lawrence Lindsey, the new president's chief economic adviser, is also a known non-interventionist and critic of IMF bailouts.

Analysts say Mr O'Neill's stance is more difficult to interpret. A former boss of aluminium giant Alcoa, he is unlikely to sympathise with hedge funds and has criticised the IMF in the past.

He did, however, support the Mexican rescue.

In his Senate confirmation hearings in January, Mr O'Neill appeared to softpedal on the IMF, saying the Treasury needed to work harder at identifying problems around the world before they reached crisis proportions.

Exception

But he said the fund had had a "narrow view" of the world and that, although its intentions had been good, mistakes had been made "without an understanding of the... consequences".

Some seasoned commentators have already counselled Mr O'Neill against rushing to spell out his policy.

Sooner or later, they say, a case will emerge that demands an exception to be made.

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See also:

20 Feb 01 | Business
IMF policy comes under fire
14 Sep 00 | Business
The IMF's pragmatist
13 Apr 00 | Business Basics
The IMF and World Bank
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