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US Treasury Secretary Larry Summers
"The private sector must do more"
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Wednesday, 15 December, 1999, 15:21 GMT
US calls for IMF reform

Brazil traders Financial panic swept developing countries last year

The US has called for major reform of the International Monetary Fund (IMF) ahead of the inaugural meeting of developing and industrial countries to discuss last year's financial crisis.

US Treasury Secretary Larry Summers says that the IMF should concentrate on emergency lending, and abandon attempts at long-term loans which cannot replace the role of the private sector.

To say the IMF is indispensable is not to say that we can be satisfied with the one we have now
US Treasury Secretary Larry Summers

That position is likely to cause controversy at the G20 summit in Berlin on Thursday, where many of the developing countries who received big IMF loans will be present.

The IMF has lent more than $100bn to countries like Brazil, South Korea and Russia in order to prevent a global financial meltdown.

US Treasury Secretary Larry Summers US Treasury Secretary Larry Summers wants change
Mr Summers' remarks might suggest that the US no longer supports the IMF's lending programme to Russia, which - until suspended - funded the Russian budget deficit rather than providing short-term assistance during a period of financial crisis.

In a speech at the London Business School, Mr Summers argued that the IMF should focus on its "core competencies."

Call for change

"The IMF cannot expect its financial capacity to grow in parallel with the growth of private capital flows," he said.

Private flows to developing countries
1990s: $1,300bn
1980s: $170bn
"It should not be a source of low-cost financing for countries with ready access to private capital, or long-term welfare that cannot break the habit of bad policies," he added.

"To say the IMF is indispensable is not to say that we can be satisfied with what we have," he added.

In the wake of last year's financial crises in the Far East, Russia, and Brazil, the IMF's lending ability was strained, leading it to call for an increase in its available capital.

IMF head Michel Camdessus Michel Camdessus sought to widen IMF's role
This ran into substantial opposition in the United States Congress, with many Republican Senators sceptical over the value of IMF lending.

The US administration struggled to get additional IMF funding through Congress, and this year has seen plans to sell IMF gold to help poor countries scaled back.

Argument over the private sector

In part the debate is about the role of the private sector in preventing financial crises.

With private sector flows of $1,300bn to developing countries in the 1990s, it was the rapid withdrawal of those funds that precipitated the crisis.

Critics would like the private sector, rather than public money from the IMF, to bear more of the burden of rescuing countries whose debts become too big.

But private sector lenders say any attempt to force them to contribute to rescue packages will mean that private lending will dry up.

The United States - and the UK - are pushing for greater transparency, so that the IMF publishes more information on the state of a country's finances, giving advance warning to creditors.

Who will run the IMF?

The intervention also comes at a crucial time for the future of the IMF, after managing director Michel Camdessus announced his intention to resign before his term comes to an end.

Mr Camdessus was closely identified with the IMF lending programme to Russia, which aimed to help speed up the transition to capitalism.

Mr Camdessus also wanted to extend the IMF's role in poverty reduction through its "extended structural adjustment facility" which gave long-term loans to countries, mainly in Africa, who had difficulty in attracting private finance.

This was seen as impinging on the role of the IMF's sister institution, the World Bank, which lends to countries to promote economic development.

By tradition, a European heads up the IMF, while an American runs the World Bank.

But the US has signalled its lack of enthusiasm for the candidate emerging as the favourite of the EU, Germany's deputy finance minister, Caio Koch-Weser.

Some sources suggest the US would prefer someone from the developing countries or Eastern Europe, for example the former Polish finance minister Leszek Balcerowicz.

The G20, which meets in Berlin on Thursday, includes Russia, Brazil, China Saudi Arabia and Mexico as well as the world's biggest industrial countries like the United States, Japan, and Germany.

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See also:
29 Sep 98 |  Business Basics
The IMF and World Bank
10 Nov 99 |  The Economy
IMF trouble-shooter steps down
30 Sep 99 |  The Economy
IMF crisis plan falters
24 Sep 99 |  The Economy
Reforming the IMF
24 Sep 99 |  The Economy
The IMF vs. the private sector
24 Sep 99 |  The Economy
Russia: The IMF's biggest failure

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