This get-tough approach could well apply to you. Most readers of this magazine live in one of the more than 130 nations that have, once or more since World War II, needed the IMF for help just to keep its banks open and its economy from collapsing. When the IMF fails, the consequences can be catastrophic. The IMF has admitted, for instance, that its belt-tightening advice worsened the 1998 depression in Indonesia. The world’s fourth largest nation has since descended into near anarchy. And now O’Neill comes along, saying the IMF needs to get even tougher on basket cases. That idea is so radical it leaves many experts in international finance, including many staffers at the IMF, alternately snickering and groaning. “If we had half as much power as O’Neill seems to imagine,” says a senior IMF official, “we’d have cured cancer, abolished nuclear weapons and brought universal world peace.”
The problem is politics. To critics, the idea that an agency of accountants, economists and bankers can impose painful reform on wayward national leaders–in the absence of an economic crisis–sounds like a fantasy. And O’Neill, a former aluminum-company executive, appears to be ignoring the potential diplomatic backlash. Many in the international community already see the IMF as a harsh tool of U.S. domination. Only two weeks ago, Thailand, South Korea, Malaysia and Indonesia–the four Asian countries caught up in the crash of 1998–along with China completed a set of mutual-aid currency swaps with Japan in order to create an emergency cash fund that might let them escape IMF oversight in a new crisis.
Tough is not always practical. O’Neill’s “position isn’t lunatic, but is it realistic?” asks Robert Lawrence, a member of the Council of Economic Advisers under Bill Clinton. Consider Turkey, in trouble of late because economic reforms demanded by the European Union exposed massive bank corruption, which triggered a political crisis and capital flight. Now, as a condition of $8 billion in new IMF loans agreed to last week, Turkey promises to embark on an even more controversial round of reform. “I approve the decision O’Neill made on Turkey,” says Lawrence. “But what do you do when a rogue undertaking reform discloses his past crimes and everything crashes? Walk away? These things are not so simple.”
So far O’Neill is just thinking aloud. IMF insiders are watching to see whom he will appoint to replace the outgoing first deputy managing director, Stanley Fisher. This No. 2 post traditionally goes to the United States, while the No. 1 job goes to a European. The reality, however, has tended to be that the American decides, and the European announces the decision as his own. While there were some reports of tension between Fisher and incoming German managing director Horst Koehler, it appears to have been more a matter of personality than policy. Indeed, the IMF seems behind proposals to establish a public and private early-warning system for countries in trouble. Both Koehler and O’Neill speak of the need to eliminate the “moral hazard” in the IMF’s role as lender of last resort. Under present practice IMF bailouts encourage private lenders to lend more recklessly to developing nations because they wind up being bailed out along with the country.
O’Neill would push reform more aggressively on developing nations themselves, at least in theory. He has hesitated putting these ideas into practice. When O’Neill arrived in office, Argentina had just landed a big IMF bailout. It has since failed to deliver on promised reforms, yet O’Neill has continued to support Argentina as its IMF credits crept up to $13.7 billion. Turkey, too, had failed to implement reforms three times in six months before O’Neill backed the new IMF credit last week that brings the total committed to $19 billion. For Turkey, this is the 19th visit to the IMF credit window in the last half century. A Treasury official cautions that O’Neill’s decision on Turkey this week is only “a partial indicator” of how he will handle future crises because “this was a fire that was burning when we got here.” The next conflagration will tell us more about whether the fire marshal dares let these basket cases go up in flames.
