dollars for dictators

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    Dollars for Dictators
    September 23, 2004

    When the International Monetary Fund meets next week in Washington, it is hoping to persuade the U.S. to approve its no-strings-attached, multi-billion-dollar foreign aid expansion. If that sounds odd at a time when U.S. resources are already stretched, wait until you see the list of beneficiaries.

    The new IMF financing would make Iran eligible for a total of $465 million, Syria would be entitled to $90 million, Robert Mugabe's Zimbabwe $115 million and Sudan $100 million. Oil-rich, authoritarian Venezuela would have $840 million and the gentle junta running Burma $80 million. As the creditor nation in the Fund, the U.S. would be asked to cough up the lion's share of the dough.

    The proposal, launched in 1997 by the Clinton Administration and Britain, is about increasing the "special drawing rights" pool at the Fund. SDRs, which are paper receipts that can be exchanged for real money, originated under the gold standard as a liquidity tool for balance of payments shortfalls. This meant that these "international reserves" would continually circulate from deficit to surplus countries.

    But the collapse of Bretton Woods in 1971 removed any such logic for printing "paper gold." That meant that the SDR department at the Fund had to find a new line of work and, as Carnegie Mellon economist Adam Lerrick notes in a paper for the Joint Economic Committee released today, it has "morphed into a foreign aid mechanism to transfer money from rich to poor countries." Since 1970, the Fund has allocated 21.4 billion SDRs ($31 billion at the current dollar rate). Now it wants to double that.

    Ostensibly, the new SDRs would restore equity in the Fund since some new members have never received any SDRs and others' share of the world economy has grown. But as Mr. Lerrick notes, these goals could have been met by a reallocation of existing SDRs. The rub is that those countries that had used up their allocations would have been required to pay back what they had borrowed. Mr. Lerrick points out that "63 governments or more than half of IMF developing country members with SDR allocations have consumed their existing shares." So the more politically acceptable path is to expand the SDR account.

    Which presents its own problems. First, despite the rhetoric, SDRs are not free money created out of thin air. They are receipts that borrowers bring to the window to be redeemed, usually for dollars, euros or yen. The Fund has to get that real money from its creditor members -- and that means you, dear taxpayer.

    According to Mr. Lerrick, "SDR Department charges add up to an annual cost to U.S. taxpayers of $330 million." That means, Mr. Lerrick says, if the SDR expansion is ratified by Congress, "U.S. exposure could easily surpass $12 billion in hidden foreign aid without control over where the funds go or the ends to which they are devoted. The cost to U.S. taxpayers would then reach $750 million per year." The IMF is hoping no one will notice, since the Fund's drain on American resources is "off-budget" under Congressional accounting, meaning that it doesn't show up as an annual expenditure but is an off-the-books future liability.

    Equally egregious is the lack of accountability in SDR accounting. SDRs are supposed to be "borrowed," but formal IMF policy states that they are distributed without condition and without any expectation of repayment. This is the antithesis of President Bush's foreign-aid policy, which pledges to screen candidates, monitor results and emphasize incentives. We have a hunch Iran, Syria and Venezuela wouldn't qualify under these Bush standards.

    Expansion of the SDR account requires three-fifths approval of Fund members and that hurdle has already been cleared. But it also needs 85% approval by voting power and only has 76% to date. The U.S., with its 17% vote, holds the blocking veto. Unless Washington wants to prop up Tehran's mullahs and other class acts, we would suggest using it.
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