US signals hands off world economy ahead of G7 meet on IFIs reform

World Bank, Development News, 15 February 2001

US Treasury Secretary Paul O'Neill yesterday indicated the new US administration would take a strongly skeptical view of official intervention in global markets to help stabilize the world economy, reports the Financial Times (p.1). In an interview on the eve of his departure for Palermo for his first meeting with G7 finance ministers and central bank heads, O'Neill rejected the notion that crises were an inevitable feature of capitalism requiring an official backstop to help resolve them.

He said the failure to stop crises from developing was a failure to let markets operate freely. It doesn't have anything to with the failure of capitalism. It's to do with an absence of capitalism, O'Neill is quoted as saying.

Though O'Neill was careful not to rule out US involvement either in coordinated currency market intervention, or leadership in IMF operations to help countries in financial difficulties, he suggested more attention should be given to using free markets to prevent crises from developing. Why do we have to intervene? Especially, why do we have to intervene on a crisis basis? [Crises] are great media fodder, but they're not real hot for anybody else, he said.

O'Neill strongly indicated he shared concerns about what economists dub moral hazard, the process by which the certainty of a bailout in the event of a crisis leads investors to behave recklessly. When you don't have risk associated with investment you don't really have capitalism. You have a kind of socialized lottery system,

Expressing confidence that free markets should be able to forestall crises before they happen, O'Neill likened the IMF and the World Bank to a fire company that should never have to respond to emergencies. In an ideal world, the fire company never leaves the firehouse ... hopefully they learn how to play chess really well, he added.

The remarks come as Reuters reports that a source said the finance ministers meeting in Palermo this weekend would prepare the way for the G7 summit in Genoa in July, which would include discussions on reforming the international financial system, among other issues. In particular, the G8 will look at ways of reforming the World Bank and the development banks connected to it, in order to make the system more efficient.

Also on the agenda is debt relief for poor countries, new development initiatives for poor areas, and measures to fight money laundering.

The source said a document to be prepared in Palermo will talk about reform of the World Bank and development banks with a view to increase their efficiency and make the development banks more specialized in their geographic areas. To boost development in poorer countries, the meeting will discuss measures to liberalize trade and eliminate tariff barriers, in agriculture and textiles for example, the source said, adding that the US was in favor of these measures.

There's talk of offering poorer countries grants to finance the school and health systems, he said.

However, notes the Globe and Mail (Canada), the Canadian government will likely oppose the Italian initiative for a major reform of the World Bank and other international financial institutions (IFIs). That's partly because the Canadian government thinks that any reform of the financial institutions should be decided upon by the global community and not just the G7.