A Clear Shot at Darth Vader Jude Wanniski July 10, 1998

Conservatives and supply-siders have been trying to reform the International Monetary Fund for more than 20 years, on the grounds that it does far more harm than good. This year, for the first time, they can almost taste a small victory over this Evil Empire, as it is begging the Republican Congress for an $18 billion replenishment of its capital pool, and Congress has been resisting. Admittedly, the first round of resistance can be chalked up to Rep. Chris Smith [R-NJ], who threatened to add a rider to the funding that would add restrictions on use of funds of any international organization for family planning. That issue is still lurking elsewhere, but no longer involves the IMF funding, which spends no money on family planning anyway. Its money goes to cover bad loans of the big banks that control the IMF. But when the IMF vote was put off in the House last spring because of it, other opposition forces had time to gather. Former Treasury Secretaries George Shultz and William Simon, and former Citicorp president Walter Wriston, joined in a statement that endorsed the actual elimination of the IMF. This show of force was enough to propel House Majority Leader Dick Armey into action with vocal opposition. Armey has enough clout, as Speaker Newt Gingrich’s chief lieutenant, plus a Ph.D. in economics, to bring the IMF to its knees. Majority Whip Tom DeLay this week said he will back Armey even if Newt caves in.

It was Jack Kemp who actually got the ball in play last fall, when he issued an Empower America statement calling for the resignation of IMF Director Michel Camdessus before another dollar is given to the institution. Senate Majority Leader Trent Lott, who has been hearing Kemp’s complaints about the IMF for decades, picked up on the theme. He actually told Treasury Secretary Bob Rubin some weeks ago that he personally wouldn’t lift a finger to assist in the replenishment until Camdessus is replaced. But the Senate had already approved the $18 billion. Lott goofed in making Sen. Chuck Hagel of Nebraska the point man on the IMF issue, and Hagel became an IMF champion instead of a negotiator for reform when the farm lobby turned him around. (The NYTimes then rewarded Hagel with a puff piece on what a wonderful Republican Senator he is turning out to be, especially for helping the IMF.)

All the action is now in the House, where the Foreign Operations subcommittee will take up the legislation next week. As it is now written, Armey seems prepared to back a small replenishment of $3.5 billion in exchange for IMF reforms that nobody believes would be followed even if the White House agreed to them. There is always the dodge that the IMF does not take its orders from the administration, although that is laughable. Former Fed Chairman Paul Volcker recently wrote an op-ed for the WSJournal asserting as a matter of fact that the Treasury dominates the IMF. Kemp’s position is that even $3.5 billion is too much if the IMF can be counted upon to destroy more emerging market economies with it. If Camdessus were replaced by someone like Pedro Aspe, Mexico’s finance minister during their growth years, or Domingo Cavallo, Argentina’s finance minister during its successful fight against inflation, Kemp says the IMF would deserve $18 billion, as we could be sure it would produce growth instead of decline.

Gingrich had been behind Armey’s effort, but in the last week, he has shifted gears, under pressure from the agriculture lobby and the small banks of the Independent Bankers Association of America (IBAA). These influential grass-roots lobbies are acting out of fear that unless the IMF can halt the economic decline in southeast Asia with the $18 billion it is asking, they will continue to suffer from collapsing farm prices. Instead of seeing that the plunge in prices for our agricultural products has been caused by the Fed’s starving of the world economy for dollar liquidity, the small farmers and their bankers have swallowed the story that the deflation began in Thailand, Malaysia and Indonesia because of errors made by their governments. This is what our Treasury and Fed policymakers want them to believe; and our news media trumpets that argument. The small farm and bank lobbies not only should be directing their fire at the Fed, to end the dollar deflation, but also supporting Kemp’s position that only a change in personnel at the IMF will restore the ability of foreign markets to buy U.S. farm goods.  Two weeks ago, Kemp issued a blast at the IMF for urging Mexico to raise taxes to offset declining oil revenues -- a policy which if followed will result in a further decline of Mexico’s buying in the U.S. farm market.

Why does any of this matter on Wall Street? If Armey can at least beat back attempts in the House to give the IMF what it wants, Gingrich and Lott could get control of the issue sufficiently to use this resistance as a bargaining chip with Treasury to ensure the departure of Camdessus and his co-director, MIT Professor Stanley Fischer, who oversees austerity policies. Unless and until this is done, all U.S. investment in the emerging markets will have enormous risks attached. As soon as this victory is won, with the IMF becoming a positive force instead of a negative one, the equity markets throughout the developing world will be able to discount sustained double-digit growth rates. At this juncture, there is now no place in Latin America or Asia where we could justify serious investment commitments. The light would go from red or yellow to green in much of the developing world if we had confidence in the man at the top of the IMF.

What discourages conservatives on Capitol Hill is that even with control of Congress, they appear to be losing again to the power of the Treasury/IMF combine, which is really the power of the big banks. To lose because the small banks and farmers think they will benefit from IMF funding is especially discouraging to the folks at the conservative think tanks -- CATO, Heritage, Empower America -- who hoped this year would produce some progress. The first signal will be the voting next week on the Foreign Operations subcommittee, where an attempt will be made to override Armey’s $3.5 billion with the full amount of $17.9 billion.

If any kind of victory can be had on the House floor, there would be an opportunity for a conference committee to make its demands on Treasury for a personnel change. Trent Lott now is persuaded that nothing else will have any effect on the IMF, and that Camdessus should be replaced by someone from the developing world who can relate to its needs. Armey worries that a personnel change will do little to change policy, but that would not be true if an Aspe or Cavallo were in charge. The IMF rank-and-file will follow orders from the top. When Treasury advised Lott that Camdessus’s term would be up in two years, he told it to come back then if it wanted his support. Although the press corps does not seem to think so, this is a big deal, folks: the first chance in 25 years to get a clear shot at Darth Vader.