Summary of the recommendations of the Meltzer-Report
April 27, 2008 – 11:32 amTo assess the evolution of the Financial Architecture after the Asian Crisis, the Meltzer Report provides a good gauge for the critique of the USA and other G7 countries towards the International Financial Institution. The report is named after Allan H. Meltzer, an economist and prominent critic of the Bretton-Woods-Institutions.
In this post, the main recommendations are going to be listed and assesses whether they have been implemented.
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The IMF should serve as quasi lender of last resort (LOLR) to emerging economies.
The IMF is acting less and less as LOLR to emerging economies. Most loans to emerging economies hit by the Asian or the Russian crisis have been paid back (see paper by William Cline). To become LOLR, the IMF would need more funds and more access to supervision, as Olivier Jeanne and Charles Wyplosz argue in this IMF paper.
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Eligible member countries must permit freedom of entry and operation for foreign financial institutions.
Financial integration of emerging economies has increased to some extent – mostly in Europe, leastly in Latin-America and Asia in the middle (see BIS-Paper by Alicia García-Herrero and Philip Wooldridge. The main integration was regional rather than global.
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Every country that borrows from the IMF must publish, regularly and in a timely manner, the maturity structure of its outstanding sovereign and guaranteed debt and off-balance sheet liabilities.
Measuring public debt is not an easy taks because of the different types and issuers of public debt. The BIS, the World Bank, the IMF and the OECD maintain the Joint External Debt Hub which collects and publishes information about sovereign debt. A list of central government debt for 89 countries between 1991-2005 is available at the Inter-American Development Bank.
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Commercial banks must be adequately capitalized either by a significant equity position, in accord with international standards, or by subordinated debt held by non-governmental and unaffiliated entities.
Standards for minimum capital for banks and other financial institutions are given by Basel II, but the final decision on how to implement Basel II was not reached until July 2007.
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The IMF in cooperation with the BIS should promulgate new standards to ensure adequate management of liquidity by commercial banks and other financial institutions so as to reduce the frequency of crises due to the sudden withdrawal of short-term credit.
The adequate bodies would not be the IMF and the BIS, but the BCBS and other international bodies such as IOSCO or IAIS.
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The IMF should establish a proper fiscal requirement to assure that IMF resources would not be used to sustain irresponsible budget policies.
The IMF has introduced and updated several codes for fiscal transparency.
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The IMF should use its policy consultations to recommend either firmly fixed rates (currency board, dollarization) or fluctuating rates.
Just like in 2001, the world is still far away from completely floating exchange rates for all currencies (see IMF overview of Exchange Rate Arrangements in 2006).
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The IMF should cease lending to countries for long-term development assistance (as in sub-Saharan Africa) and for long-term structural transformation (as in the post-Communist transition economies). The Enhanced Structural Adjustment Facility and its successor, the Poverty Reduction and Growth Facility, should be eliminated.
The Poverty Reducation and Growth Facility is still active. Togo has been the most recent recipient in April 2008.
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The IMF should write-off in entirety its claims against all heavily indebted poor countries (HIPCs) that implement an effective economic development strategy in conjunction with the World Bank and the regional development institutions.
Through co-operation of creditors in the Paris Club and together with IMF and World Bank, several debt relief initiatives for heavily indebted poor countries have been implemented. The IMF estimates that about 40% of debt has been cancelled.
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Further quota increases for the IMF are not necessary.
Adjusting quota shares is necessary to reflect the economic development of various IMF Members. Often this was done by increasing quota for some countries. If the USA wants to keep its defacto veto of having more than 15% of votes, then it also needs to increase its quota.
The Development Banks
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The development banks must be transformed from capital-intensive lenders to sources of technical assistance, providers of regional and global public goods, and facilitators of an increased flow of private sector resources to the emerging countries.
The World Bank has programs for technical assistance and co-operation with the private sector through the International Finance Corporation.
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The focus of their individual financial efforts should be on the 80 to 90 poorest countries of the world that lack capital market access.
This would not only be counterproductive, because the World Bank provides technical assistance along with financial help, but it would also set the wrong incentives because countries with difficult capital market access would then stop their efforts to achieve that goal.
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All resource transfers to countries that enjoy capital market access (as denoted by an investment grade international bond rating) or with a per capita income in excess of $4000, would be phased out over the next 5 years.
Poverty and a good bond rating are not mutually exclusive. Often countries might still be in financial need even though their treasury bonds might have excellent ratings. This proposal contradicts with the previous one, because some countries have access to bond markets but their per capita income is well below US-$ 4000.
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In poor countries without capital market access, poverty alleviation grants to subsidize user fees should be paid directly to the supplier upon independently verified delivery of service. Costs would be divided between recipient countries and the development agency. The subsidy would vary between 10% and 90%, depending upon capital market access and per capita income.
The World Bank is more and more engaging with the private sector and funds directly the supplier. Often however governments supply certain goods and then financial support from the World Bank becomes an indirect transfer of funds to goverments.
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The government of each developing economy would present its own reform program for institutional change which would be supported by the World Bank and audited independently.
Institutional change needs to go along with changes in social and political norms. The problem is not drafting a reform agenda, but implementing them and creating the mechanisms for a continuous evolution.
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To underscore the shift in emphasis from lending to development, the name of the World Bank would be changed to World Development Agency. Similar changes should be made at the regional development banks.
A name change has not occured and would most likely be strongly contested by United Nations institutions reponsible for development.
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All country and regional programs in Latin America and Asia should be the primary responsibility of the area’s regional bank.The World Bank should become the principal source of aid for the African continent until the African Development Bank is ready to take full responsibility. The World Bank would also be the development agency responsible for the few remaining poor countries in Europe and the Middle East.
There is still considerable overlap between the various regional development banks.
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The World Bank and the regional development banks should write off in entirety their claims against all heavily indebted poor countries (HIPCs) that implement an effective economic development strategy under the Banks’ combined supervision.
See above to a comment on the similar IMF reform proposal.
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The United States should be prepared to increase significantly its budgetary support for the poorest countries if they pursue effective programs of economic development.
Even though the USA is the largest donor of development aid, compared to its economic power it only donates a marginal amount to development (about 0.17% of GNI)
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The Commission recommends that the BIS remain a financial standard setter.
The main standard-setting bodies are the BCBS, the IOSCO, the IASB, the IAIS and the FATF. All cooperate with the BIS, but are not the same.
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Implementation of standards, and decisions to adopt them, should be left to domestic regulators or legislatures.
Especially in Europe, the Commission was a driver of implementation of already negotiated standards, thus it is not always clear whether national discretion to implement at will is the best way to establish international standards.
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The Basel Committee on Bank Supervision should align its risk measures more closely with credit and market risk.
Basel II is the attempt to do exactly that.
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Rulings or decisions by the WTO, or any other multilateral entity, that extend the scope of explicit commitments under treaties or international agreements must remain subject to explicit legislative enactment by the U.S. Congress and, elsewhere, by the national legislative authority.
WTO Agreements have to be ratified and implemented in national legislation, but non-compliance can be countered by sanctions and other enforcement mechanism. Whether the Dispute Settlement Mechanisms at the WTO undermine national sovereignty or create a fair playing field for all countries under international trade law is a different matter.