BBC News | BUSINESS | Growing row over IMF role

But US Treasury Secretary Lawrence Summers - who testified to Congress on Thursday - argued that it would be mistake to narrow the IMIF's remit, which could leave too many countries in difficulty without recourse to its funds.

Mr Summers acknowledged that the IMF had made mistakes in the past, particularly in supporting loans to central banks in Russia and the Ukraine without a clear notion of where the money was going.

The new head of the IMF, Hans Koehler, has also expressed his doubts about the radical changes proposed by the report.

On an earlier visit to Washington, Mr Koehler declined to express support for the US commission's proposal that the IMF cancel debts owed to it by the world's poorest countries.

"I have a bit of a concern that this discussion of debt relief and debt reduction is not strongly enough combined with reform and macroeconomic stability," he said.

Growing controversy

The growing controversy about the role of the IMF, which has also struggled to find a new leader, comes in the wake of the world financial crisis of the last two years.

Critics have argued that the IMF, whose role is to ensure the stability of the world financial system, failed to prevent the Asian crisis spreading to Russia and Brazil.

They also argue that the IMF's suggested help came with inappropriate remedies which made the existing crisis worse.

As private investors fled from Asian markets, the IMF asked countries to tighten their belts further, increasing poverty, while their bail-outs protected the banks against any losses, they argue.

Pre-qualifying for help

The US Congress, responding to some of these criticisms, established a commission headed by Professor Meltzer to examine the future of the IMF as a precondition for increasing its lending ability.

Now the Meltzer Commission has reported.

It wants the IMF to abandon its prescriptions for what countries should do in a crisis as a condition for getting loans ("conditionality").

Instead, it says that countries should have to "pre-qualify" for aid before a crisis hits - by reforming their financial systems, establishing sustainable exchange rates, and opening their markets to foreign banks.

The "pre-qualified" countries would get automatic help in a crisis.

But countries that did not pre-qualify would not be helped - or, if they were, it would be at a penal rate of interest and the requirement of a huge collateral payment.

Mr Meltzer says that "conditionality" does not work and is anti-democratic.

But his critics, notably the US Treasury Secretary, say that the world cannot afford to risk the collapse into chaos of some big countries that might not have pre-qualified for aid.

And Mr Summers worries that, without conditionality, countries will not have much incentive to reform.

Many observers note that, although the IMF already operates a pre-qualifying system, the "contingent credit line," no countries have voluntarily stepped up to join up to it.

Europeans split with Americans

Mr Meltzer says he wants to take the politics out of the IMF and World Bank, who chose to bail out countries are important to US foreign policy, like Mexico, whether they deserve aid or not.

But his report itself is likely to prove highly contentious. The Europeans, who already resent the veto power of the United States on IMF actions, are unlikely to take kindly to yet another US suggestion for reform.

And although some Republicans in Congress may genuinely want reform, there is a growing popular resentment at the international economic institutions in the United States, as shown in the mass demonstrations that disrupted the Seattle trade talks in December.

Mr Meltzer is likely to find his report a pawn in a much bigger battle between protectionists and internationalists in the United States.

And the Europeans, who feel bruised by the battle over the IMF leadership, may well feel they want to assert themselves even more.


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