Meltzer Commission Report
By Anna Moyers
(1) Creation of the Commission
In November of 1998, the U.S. Congress established the International Financial Institution Advisory Commission (or the Meltzer Commission, named for its chair, Professor Allan Meltzer). The Commission was part of legislation authorizing $18 billion of U.S. funding for the International Monetary Fund (IMF). The members of the Commission then met to consider the future and efficacy of certain international financial institutions.
Questions concerning these institutions arose following a number of regional financial crises. First to occur were the debt problems suffered by Latin America in the 1980s, then Mexico in 1994-95. Finally, with the Asian financial crisis in 1997-98, the need for an evaluation of the international financial institutions (IFIs) became apparent. The effects of these economic disasters were felt in both developing and developed countries alike, financial markets having become more interconnected than imagined by the creators of the earliest of these institutions. While the Commission admits that financial crises may not be avoided entirely, tailoring the current institutions could help to reduce the frequency and effects of these crises, both locally and worldwide.
(2) The Commission’s Mandate
In response to these financial troubles throughout the globe, the Commission looked at seven international financial institutions: the IMF, the World Bank Group (Bank), the Inter-American Development Bank (IDB), the Asian Development Bank (ADB), the African Development Bank (AfDB), the World Trade Organization (WTO), and the Bank for International Settlements (BIS). The primary objectives for the Commission were to consider the roles of each of these institutions, how they could be improved, and what duties they should assume in the future. The Report lists the scope of examination as the following:
· “the effects of globalization, increased trade, capital flows, and other relevant factors on these institutions;
· the adequacy, efficacy, and desirability of current policies and programs at such institutions as well as their suitability for the beneficiaries of such institutions;
· cooperation or duplication of functions and responsibilities of such institutions;”
as well as any other areas that the Commission deems important. (Report at p. 24).
Over six months, the Commission held meetings on twelve days and public hearings on three. They relied on the works and recommendations of other experts, and focused primarily on the IMF and the multilateral banks. The recommendations of the Commission come from this charge from Congress, and with the goal to promote a more stable global economy and better financial markets at the regional and national level.
(3) The Recommendations in the Meltzer Commission Report
The Report identifies a mismatch between the economic situation that gave rise to the IFIs considered in the Report and the current realities of the global economy. This discrepancy has lead to many of the overarching problems pointed out in the Report. A majority of the members of the Commission concurred about the primary problems facing the IFIs. The majority pointed out an overlap of duties and tasks, otherwise known as “mission creep,” which cuts down on the efficiency of each institution. Noting a lack of accountability for the institutions, members encouraged that the institutions’ workings become more “transparent.” The problems that prompted the creating of the Commission, the IFIs failure to prevent or decrease the severity of the previous financial crises, became a goal in reforming each body. The Report also criticized the use of international resources for U.S. objectives. Finally, the members disapproved of frequent conditional lending, and the failure of the institutions to enforce commitments by borrowers, and then continuing to lend to countries that do not honor their commitments. (Report at p.23).
Although these are the criticisms of the situations of the IFIs taken as a whole, the Commission addresses each of the institutions individually, proposing recommendations for the future of each. For the IMF, the Commission takes a fairly firm approach. The Commission recommends that the IMF be a “quasi lender of last resort,” meaning that the IMF would provide short-term funds for countries in economic crises that have met certain pre-conditions. Furthermore, loans from the IMF would carry a penalty rate, the idea being that potential borrowers would look to other financial markets before resorting to the IMF. The Commission also suggests that the IMF discontinue long-term lending, and that it should “write-off in entirety its claims against all” heavily indebted poor countries (HIPCs) that begin to employ a workable financial plan. (Report at p.10). Overall, this is a scaling back of the role of the IMF, or as the Commission suggests, “that the IMF be restructured as a smaller institution.” (Report at p.42). With this more focused role, the Commission expects that the IMF will not only help financial stability worldwide, but also promote beneficial fiscal policies at the domestic level.
The Commission’s recommendations for the regional development banks and the World Bank focus on their role as aiding countries’ development; the World Bank’s name should be changed to the “World Development Agency,” and similar titles should be adopted by the regional banks. The division of labor among the agencies should be split by region, with the World Development Agency paying particular attention to African countries and the few developing countries in the Middle East. The Commission also advocates for the Bank the same stance toward HIPCs as proposed for the IMF: writing off debt for those countries “that implement an effective economic development strategy under the Banks’ combined supervision.” (Report at p. 15). Finally, the members suggest that the U.S. be prepared to increase its support for poor countries.
As for the BIS, the Commission recommends that it continue to set standards for international finances. With some streamlining of the organization, the Commission believes that the BIS can continue to provide information and assistance to the institutions, and particularly to the central banks.
One of the WTO’s roles is as a quasi-judicial body whose determinations affect international markets. The Commission proposes that these decisions by the WTO, or another multilateral body, must be endorsed by the U.S. Congress or other national legislature.
(4) Reactions to the Report
The reactions to the Meltzer Commission Report were varied, often split by political ideology. The conservative majority of the Commission, led by Meltzer, won the day over the more liberal minority, as pointed out in the dissenting statement by Jerome Levinson. Proponents of the Commission’s recommendations support the reduced roles advocated for the IFIs, largely noting that countries may only use the IMF, for example, to bail them out of economic crises, thereby helping them to continue ineffective, or even corrupt, financial practices. Or put another way, these IFIs create a “moral hazard.” Others took a more pessimistic view of the Report, finding the recommendations rather extreme and the light cast on the history of the IFIs prejudicial. This, the more liberal side, thought that the IFIs still have a place in the world’s economy, and that the approach taken by the Report, effectively “gutting” the institutions, could lead to greater problems than the current ones each country faces.
· See the E-book for background information on these international financial institutions:
http://www.uiowa.edu/ifdebook/ebook/ebook2/ebook.shtml