No. 1 — Jnauary 7, 2000


Weekly Review

--- by Marc Castellano

At the inaugural meeting of the so-called Group of 20 countries, held December 16 in Berlin, Secretary of the Treasury Lawrence Summers presented ideas for changing the global financial role of the International Monetary Fund. The G-20 includes the Group of Seven countries, plus Argentina, Australia, Brazil, the People's Republic of China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey and the country holding the European Union presidency — currently Finland. Not surprisingly, delegates to the new forum, which is designed to foster a dialogue between developing countries and industrialized nations, failed to agree on the outlines of an IMF reform plan. Canadian Finance Minister Paul Martin, who will chair the group for its first two years, said that the U.S. proposals met with "very strong encouragement," but Ministry of Finance officials, along with their counterparts from France and Germany, questioned key elements of Mr. Summers' blueprint for revamping the international lending body.

Resistance from Tokyo had been foreshadowed by the unofficial dialogue that began in response to a December 14 speech Mr. Summers made at the London School of Business. At the time, the Treasury secretary fleshed out the U.S. view of an IMF that would play a scaled-back role in providing funds to developing countries. Specifically, he said, the organization should not be "a source of low-cost financing for countries with ready access to private capital, or long-term welfare for countries that cannot break the habit of bad policies." Instead, in the White House's opinion, the IMF should focus on providing short-term assistance to combat financial crises, reinvent itself as an organization and promote the flow of information from governments to markets and investors.

Mr. Summer's remarks put Washington and Tokyo on an apparent collision course. Finance Minister Kiichi Miyazawa, for example, described as "unrealistic" the idea of limiting the IMF's lending activities to the provision of short-term emergency credits. Parliamentary Vice Finance Minister Yoshimasa Hayashi added that the IMF has been an important lender of last resort. He has suggested changes that would enable the IMF to act more effectively to prevent currency crises. Part of this scenario is continued long-term lending to assist balance-of-payments adjustment and structural reform in emerging economies. Vice Finance Minister for International Affairs Haruhiko Kuroda made similar comments. He indicated that Japan would not support any scheme that would clip the fund's wings.

Some observers saw Mr. Summer's statements as an attempt by the Clinton administration to placate the growing number of IMF critics in Congress who believe that the fund's operations must be reformed. Although many Japanese and European officials agree with this general thrust, a consensus on how to reshape the IMF remains elusive. At the G-20 talks, German Finance Minister Hans Eichel questioned the feasibility of the U.S. proposals, suggesting that they may not be practical in crisis situations. His French counterpart, Christian Sautter, expressed concern that the world's poorest nations, especially those in Africa, might lose a critical source of funding if the U.S.-suggested reforms were implemented. As expected, the Japanese participants were skeptical of recommendations to limit the role of the IMF. Ultimately, the G-20 communique endorsed several principles advocated by Washington but did not mention Mr. Summers' specific proposals.

The debate over the IMF's role has become intertwined with the upcoming change in its leadership. In November, Managing Director Michel Camdessus announced his resignation effective mid-February 2000. The search is now on for his successor. The top post at the IMF customarily has been reserved for a European, and for years, discussion of candidates from outside Europe was taboo. However, in a significant break from tradition, Tokyo has put forward a contender: former Vice Finance Minister for International Affairs Eisuke Sakakibara, also known as "Mr. Yen" for his reputed ability to influence currency markets.

Although few observers believe that Mr. Sakakibara has a prayer of being named as the new IMF head, his bid is important on a symbolic level. Politically, Japan remains relatively weak on the international stage despite being the world's second-largest economy. No Japanese has ever led a key international body like the IMF, the United Nations or the World Bank. Nor has Tokyo received much credit for its efforts to combat the 1997-99 East Asian financial and economic crisis.

Senior Japanese officials have suggested that the IMF position should be open to non-European candidates, and they have actively solicited support for Mr. Sakakibara's candidacy from developing countries. Demonstrating surprising initiative at the recent Association of Southeast Asian Nations summit (see JEI Report No. 45B, December 3, 1999), Prime Minister Keizo Obuchi successfully worked to secure the nominal backing of Asean members for the former Finance Ministry official.

Mr. Sakakibara has the appropriate credentials for the job. He served at the IMF in the 1970s, speaks English and is considered to be among the world's financial movers and shakers. Still, he is not European. More importantly, he does not command political clout in the necessary circles. In addition, as an outspoken skeptic of free-market capitalism, Mr. Sakakibara would have trouble courting the favor of key U.S. figures. The fact that his candidacy is a long shot is not unacknowledged in Japan.

What is significant is that Tokyo, in an uncharacteristically bold move, jumped at the chance to raise a subtle but meaningful challenge to the Western-dominated leadership that has become a tradition at the IMF. Perhaps Japan hopes to gain a more influential voice in the debate over the IMF's future role and the structure of the international monetary system.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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