The Meltzer Commission Report

In appropriating funding in the fall of 1998 to increase the U.S. quota in the IMF, Congress required that anindependentcommission be created to evaluate the international financial institutions, giving particular attention to the IMF. First, the Commission proposed that the IMF restrict its lending to only short-term liquidity needs of membercountries and eliminate its role as a long-term lender, particularly for purposes of reducing poverty or promotingdevelopment. (7)

		Meltzer Commission Recommendations

The Meltzer Commission makes the case for restructuring the IMF to as part of a more targeted and much reduced mission,with redefined obligations for members of the Fund, as well. At the heart of the proposal is a strong conviction thatdeepstructural reforms, particularly of developing country financial systems, would go a long way toward reducing thepotentialfor currency crises and the related need for large, costly IMF bailouts. Participation in IMF Programs. Rules (preconditions) for Lending. Debt Issues. Meltzer Commission Dissenting Opinions

Four members of the Meltzer Commission dissented from the report and three formally voted against it,although they wereagreed on the need for IMF reform. They supported the report's call to differentiate clearly the responsibilities ofthe IMFand development banks and its conclusions that stronger banking systems in developing countries are imperative,thatgreater transparency mitigates abuse by all parties, and that the poorest countries need debt forgiveness and grantsfromindustrial countries to help cover basic public goods. The dissenting commissioners argue that the Commissionrecommendations,if implemented, might actually worsen rather than improve the prospect for global financial stability and therebypotentiallyundermine the fight against poverty and underdevelopment. (10)
The Treasury finds fault with this approach suggesting that: 1) it would potentially restrict the IMF from responding tofinancial emergencies in many large countries that did not prequalify, including the weaker countries that needassistancemost, perhaps aggravating broader systemic problems; 2) prequalification criteria are too narrow, focusing onfinancialsector issues, which alone are not sufficient to "significantly reduce" risk of crisis; 3) prequalified lending couldincreaserather than decrease moral hazard if countries targeted policy reform for the express purpose of meeting only IMFguidelines; 4) eliminating conditions for lending would reduce leverage for policy change, as well as increase thepossibility of financial assistance being misused; 5) very short loan maturities and excessive interest penalties wouldforcerepayment prematurely at excessive cost, worsening borrowing countries already tenuous financial position; and6)eliminating poverty assistance lending would remove IMF and its macroeconomic expertise from the developmentadjustment process involving the international financial institutions. There is also broad agreement that the IMF should operate as a monetary institution focusing on fiscal, exchange rate, andmonetary policies and leave long-term structural reform to the development banks. These reservations have been reiterated by both the U.S. Treasury and the Council on Foreign Relations. The U.S. Treasury argues that changes are needed in the IMF to meet new challenges of the global economy, but that theIMF is in the process of addressing many of the concerns that have been raised by the Meltzer Commission. Continued oversight surely will be necessary to keep the reform process moving, but more time may be needed tosort outprecisely which policy options will suit the collective, but competing needs of the IMF member countries and otherconstituents of the global economy.
In the fall of 1998, financial crises in Asia, Russia, and Brazil were unfolding, though in different stages, as the 105thCongress was in the process of passing the Omnibus Consolidated and Emergency Supplemental AppropriationsAct forFY1999 ( H.R. 4328 , P.L. 105-277 ). This legislation increased the U.S. quota of the International MonetaryFund (IMF), but attached a number of conditions to dispersal of the funds. Among them was creation of theInternationalFinancial Institutions Advisory Commission (the Meltzer Commission), which Congress chartered to evaluate andrecommend future U.S. policy toward the global financial institutions, particularly the IMF.
The Commission released its report on March 8, 2000, calling for changes in the mission and operations of the IMF and thedevelopment banks. The 11 commissioners were unanimous only in generally recommending that: 1)the IMF restrict itslending to short-term liquidity needs, and 2) that it forgive debt to the poorest developing countries. The reportmakes thecase for restructuring the IMF to reduce and define clearly its mission, and clarify obligations for members of theFund, aswell. At the heart of the proposal is a strong conviction that deep structural reforms, particularly of developingcountryfinancial systems, would go a long way toward reducing the potential for currency crises and the related need forlarge,costly IMF bailouts. It also focuses heavily on the role of moral hazard. These concerns led to specific policyprescriptions, not unanimously embraced, including requiring financial sector reforms as a precondition for IMFassistance,lending for no longer than 120 days (with one rollover period) and at "penalty" rates, and eliminating any long-termlendingfor structural adjustment or poverty reduction.
Four members of the Meltzer Commission dissented from the report. They supported the call to differentiate clearly theresponsibilities of the IMF and development banks, the need for stricter banking systems in developing countries,greatertransparency to mitigate abuse by all parties, and debt forgiveness for the poorest countries. They disagreed withthe detailslisted above, arguing that they would conceivably worsen rather than improve the prospect for global financialstability andthereby undermine the fight against poverty and slow development.
A number of respondents to the Commission report also disagreed with what some consider its "narrow" prescriptions,including the U.S. Treasury and the Council on Foreign Relations, which offer alternative reform programs. Inaddition,financial crises have been a part of the international economic landscape long before the IMF was established,suggestingthat too much emphasis on this one institution may not bring the desired stability to the international financialsystem. Still, the IMF is responsible for addressing the concerns raised by Congress and other government institutionsaround theworld, which have served as a critical impetus for change. Continued oversight will be necessary to keep the reformprocess moving and more time may be needed to sort out precisely which policy options will suit the collective, butcompeting, needs of IMF member countries and the broader participants of the global economy.