Global Policy Forum

European governments yesterday moved to defend the role of international economic co-operation after US Treasury Secretary Paul O'Neill signalled that the new US administration plans to take a more hands-off approach to global problems, reports the Financial Times. Speaking ahead of the meeting of G7 finance ministers in Palermo this weekend, the governments of France, Britain and Belgium expressed an enthusiasm for co-operation which was at variance with recent comments made by O'Neill.

The European governments yesterday made clear their view that the current threat of further turbulence in the world's largest economy made cooperation between G7 governments all the more important. The French and British governments said they believed the US slowdown would only be temporary, but it is clear that since the previous G7 meeting in Prague last September, the global outlook has clouded over.

"This is quite an important meeting," a British official insisted, adding that it would be important to build relationships with O'Neill so it would be easier discuss problems as they emerged in the future. The story notes, however, that before leaving for Palermo, O'Neill sought to ease concerns that the Bush administration might play a much less active role in international economic cooperation than its predecessor. "I want to underscore that on economic and financial policy, as in other areas, the US will remain fully engaged internationally," he said in a prepared statement. He highlighted the role that the IMF and the World Bank play in achieving global economic stability.

Agence France-Presse notes O'Neill said he attached "particular priority to a transparent and accountable IMF" as a means of containing regional financial difficulties that could have global implications. He added that surveillance of member economies by the IMF was critical to crisis detection and called on the Fund to publicize "key indicators of potential trouble."

The news comes as the Economist reports that as the administration of US President George W. Bush settles in, and the administration's policy on international financial reform takes shape, IMF Managing Director Horst Kí¶hler and World Bank President James Wolfensohn know how much is at stake for the future of both organizations.

If the agony is in the waiting, it is likely to be prolonged. Although Bush has been president for nearly four weeks now, appointments below cabinet level have been slow to materialize, and nowhere more so than in the economic realm. Uncertainty is standard during presidential transitions, says the story, but for the Fund and the Bank, the doubts loom even larger this time. This is partly because of well-rehearsed Republican skepticism about the virtues of the two institutions, and partly because the transition comes in the middle of a halting process of reform that was set in train after the Asian and Russian financial crises of 1997-1998.

These recent efforts form part of an immodestly named discussion on "reform of the international financial architecture". By themselves, these reforms are relatively uncontroversial. What is causing concern at the IMF is whether the new US Treasury team will pursue a more radical course. A chief concern of those who want to rein in the IMF is the issue of moral hazard. Yet concerns about moral hazard can be taken too far, says the story. Once a crisis strikes, moral hazard seems rather theoretical. Suddenly, what matters are the international economic or political consequences of failing to respond.

The chances are that the Bush team will be very interested in the report of the Meltzer Commission, published last March, which recommended a dramatic scaling back of the activities of both the IMF and the Bank. There is much to commend in the report, says the story. Sharper focus is an aim that both institutions share.

In the end, though, the new US team may be more pragmatic than some fear, or others hope. Pragmatism goes with the territory. It is politically impossible to stand aloof and insist that national governments sort out their own troubles when the stability of the whole international financial system is at stake, or when America's vital interests are threatened. And by that stage it is no use saying-however true it may be-that the crisis should not have happened in the first place.

The main threat to the institutions probably comes not from the White House or the Treasury but from Capitol Hill. Congress has little regard for the Fund and the Bank. They overlook something, says the story. Often, those beleaguered institutions have enabled America to protect its interests while sharing the burden of cost with others. Adam Posen, at the Institute for International Economics, argues that the real moral hazard problem lies not with the Bank and the Fund but with US foreign policy itself.

Commenting in an editorial, the Economist says that especially in the case of the Fund, the problem of mission creep is at least as much the fault of successive US administrations as of the Fund's own managers. Often, notably in Russia, the Fund has stepped in to do America's foreign-policy bidding, even though by its own lights its actions were risky at best.

The quid pro quo for a properly focused Fund and Bank, says the editorial, is greater willingness on the part of Congress and the administration to give more aid of their own explicitly, either to serve national-security goals or to pursue development objectives which lie, for whatever reason, outside the scope of the institutions.

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