August 2005

Kunibert Raffer

Dear Julia,
Dear Walden,

Late thanks for your paper on the IMF, which I have found on returning to Vienna recently, and which I have been able to read now.

I feel that you describe the history of the IMF very well in a nutshell, and that you discuss the topic of reforms in a stimulating way. Where I do have problems is in accepting your presentation of the SDRM. To me your choice of words seems to be very positive - unduly so, in fact - and to imply that you are in full support of it.

If so, I think I have to contrast this with my view on the SDRM. If I should have misread your phrasing, it seems nevertheless a good idea to me to add a clearly diverging view to your analysis.

As can be easily shown it was not only "powerful interest groups in the US" that opposed the SDRM. Some developing country governments voted against it as well. Quite a few colleagues from the NGO-sphere opposed it, even academics such as I. It is true that Krueger's first speech produced fairly positive reactions from many NGOs.
This changed, however, once she started to put more details on the table.
Highly critical assessments were written. Asked by the then G24 Liaison Office to write a paper on Krueger's proposal in order to have it distributed to the IMF's Executive Directors representing developing countries, I myself strongly advised against accepting the SDRM (cf. my paper in English, French, and Spanish on
http://homepage.univie.ac.at/Kunibert.Raffer/net). While I am sure that opposition by us and even by developing countries was not what stopped the SDRM - thank god for stopping it - I feel that your paper misrepresents the fact that not only Wall Street (important as they are) opposed it with perfect reason.

The concerns I see re. the SDRM that I miss in your paper are:

a) It would have been no real change in debt management. The IMF would continue to take the important decisions as it has done so far.
Krueger puts it into a nutshell: "The Fund would only influence the process as it does now, through its normal lending decisions". (for quotes, pl. see my paper written for DMFAS, a unit of UNCTAD, in 2003 available via my homepage as well).

b) The strong institutional self-interest behind the SDRM, which aims uniquely at strongly increasing the Fund's importance. The IMF's Board determines sustainability - and thus automatically the amount of necessary debt reductions - as well as the debtor's economic policies. One variant gives the IMF the right to endorse the standstill, even sanctions against developing countries. The whole SDRM procedure - down to absolutely minor details - is to become part of the Fund's Articles of Agreement. The "new judicial organ" (meanwhile called SDDRF), the selection criteria for its members, or even classification rules for the many creditor classes the IMF imagines would all become enshrined into the Fund's statute. The Fund proposed to "help" debtors to choose which debts to include into their SDRM-procedures. The SDDRF would be an IMF organ unable to challenge the Board's decisions. By any other logic than the IMF's very own, it would not really be "independent of the Fund". This "statutory approach" would firmly and officially install the IMF as the overlord of sovereign debt relief. Establishing the sole mandate for the Fund it would end the long turf war with the IBRD. Your wording "apply for IMF protection" could indeed not be better chosen.

c) The present de facto preferential creditor status of IFIs, which in the case of important multilateral development banks is secured in breach of their statutory obligations, would be legalised. The Fund and multitaleral institutions would remain exempt from financial accountability for their own decisions. Even if their staff causes damages because of grave negligence or disregarding minimum professional standards, IFIs insist on full repayment with interest, gaining financially from their own errors and negligence, or in my words of some 12 years ago, "IFI-flops securing IFI-jobs". Prolonged and aggravated crises increase their importance. An institutional self-interest in crises is built into the present system. While private creditors having to reduce claims feel the sting of the market mechanism, IFIs can increase their exposure, knowing that they will be protected. At present, new loans necessary to repair damages done by prior loans increase IFI-income. This perverted economic incentive system absolutely unreconcilable with the market mechanism would be perpetuated and reinforced by the SDRM. Recalling that the statutes of all multilateral development banks request them to reduce their claims if necessary - and the EBRD actually recognises losses - this would be a huge step backwards. It would also fall behind the standards of the HIPC-Initiatives that broke the taboo of debt reductions by IFIs. The SDRM is thus also IMF protection in the sense of protecting the IMF against reforms.

In this connection I should like to mention one reform that would be elegantly off the table by the SDRM. Assuming we all agree that the IMF - like other IFIs - has sometimes created substantial economic damages by not obeying best practice and by acting gravely negligently (as can be proved by quoting the IEO) - why not demand that people having suffered from such actions must get damage compensation? This is quite normal in all other cases. Developing countries and the poor are the exception. Tort law is a known and accepted field of law. As an economist I feel that - should one insist on different treatment, which I do not - there is even a much more urgent need to compensate the poor for economic damage suffered than the rich. At the moment victims of development finance get lots of sympathy. This is nice but not enough. Especially the poor in distress can use money very well. This proposal of mine of making
IFIs financially accountable does - I am aware of this - not gather much NGO-support. I wonder why.

d) The SDRM is unlikely to solve the problem of a debt overhang and to help debtors. But it would have provided new tasks, personnel, and resources for the Fund and increased the IMF's power and standing vis-・vis debtor countries. For nearly anyone but the Fund it would have been a simply disastrous rescheduling mechanism. In my view this also explains private sector resistance, as well as resistance by some developing countries. To ascribe their resistance solely to the fact that they would lose money seems wrong to me. The private sector has granted more debt reduction that far than IFIs. It has thus shouldered more risk. The private sector rightly opposed a self-help scheme of the IMF's.

With thanks for your stimulating paper and best regards

Kuni