In an Uncertain World

by Robert Rubin

  The struggle over IMF funding was just one more example of how complicated the issues regarding our interdependence with the rest of the global economy are, how little they are understood by the American people, and how difficult dealing with international economic issues in our political system often is. I saw the IMF as a vital and necessary institution, in the front line of the fight to contain the spreading financial crisis. Although the international financial architecture needed to be modernized, I believed strongly that the IMF was critically important and should be strengthened through reform. Some of our critics thought we’d be better off having no IMF at all.

  Talking about the need for these funds put us in a delicate situation of a familiar sort. We didn’t want to say that the world would collapse if Congress didn’t act—which might have helped to secure congressional support—because doing so might increase the level of distress in the global financial markets. On the other hand, there was a pressing problem, because in our view the IMF was in danger of running out of ammunition. Even if it had enough money to deal with the immediate problems, the Fund needed to have—and to be seen as having—the power to deal with new problems that might arise. By calling this into question, Congress’s failure to act could itself contribute to the loss of confidence afflicting the markets. The IMF’s other major shareholders, who viewed the increase in funding as a routine manner, had all already acted. By holding up the new funding, Congress was diminishing our leverage within the IMF, diminishing confidence in American leadership in Asia and elsewhere, harming our ability to exercise leadership in the crisis, and, most important, risking extending or deepening that crisis.

  Some of the hostility we encountered in Congress recapitulated the opposition’s arguments at the time of the Mexican rescue. But once again, the underlying substantive issues didn’t quite explain the intensity of the opposition. This time it seemed to me that the reaction of many in Congress was exacerbated by irritation at their lack of input into our previous decisions about Thailand, South Korea, and Indonesia. With the IMF funding issue, members of Congress now had an outlet for doing something about their objections.

  Politically, we confronted objections from both sides of the aisle. Some Democrats took the position that IMF programs were too hard on people in developing countries, who were already suffering from collapsing economies. Others complained that IMF programs didn’t require nations to take steps to protect the environment, uphold labor standards, or respect human rights. A focal point for many of these issues was Indonesia. A number of liberal Democrats, such as Barney Frank of Massachusetts and David Bonior of Michigan, told us they wouldn’t support IMF funding unless Suharto released an Indonesian labor leader named Muchtar Pakpahan, who was being held in prison. Bonior, the tough-minded House Democratic whip, who represented a district outside Detroit that is heavy with unionized autoworkers, argued that respecting the right to organize unions should be a condition of any country receiving IMF money.

  My answer to Bonior—whose intellectual integrity and concern for the least well off was unquestionable—was that the test for getting IMF support should be doing what is needed to reestablish the fundamentals for economic growth and market confidence. Reestablishing stability was imperative for the very people Bonior was most concerned about, and trying to use the IMF to serve purposes other than effectively promoting economic recovery could impede those efforts. But for me personally, there was another point as well—one I didn’t make to Bonior. Civil and political rights are at the core of America’s identity and beliefs, and I think we should promote our values abroad through moral suasion, advocacy, and public exposure. But it seems to me there are complex conceptual and practical questions about imposing our values—however strongly we believe in them—on other people.

  But I seldom said anything to question whether human rights should play a central role in our foreign policy. Once or twice I tried to raise the philosophical issue. For example, why are freedom of speech and due process universal values, but not the right to food and health care? And why is the United States in a morally superior position because of our adherence to human rights when we use only around 0.1 percent of our enormous prosperity to aid desperately poor people around the world? But if you did that, people would categorize you as someone who just didn’t care about human rights. In fact, I care greatly about them and agreed with the administration’s view that human rights goals could be better accomplished through engagement than imposition. That was our position in moving to replace the annual process of renewing China’s trade status with what we called “permanent normal trade relations.” China, in our view, would be more likely to change as part of the global community than if it were isolated, and that seems to me clearly right.

  The practical complexity of the issue came out in my discussions with Bonior over Indonesia. David would say, “I don’t think we should support corrupt governments that jail labor leaders.”

  And I would respond, “David, I agree in principle. If you had no other considerations, that would be the right issue to focus on. But the principled position you’re taking is enormously detrimental to the interests of the Indonesian people.”

  Indonesian workers, I told him, would be far better off if their country got an IMF program, which would minimize the severity and duration of the financial crisis. If we took the position Bonior supported, by contrast, we’d be punishing the Indonesian people for the misdeeds of their leaders. What’s more, the return of financial stability and growth to Indonesia would be conducive to the progress of labor rights and other issues that we as a nation cared about. Certainly, there were places where the United States could never support an IMF program because the regime’s practices were so abhorrent to our values—Saddam Hussein’s Iraq, apartheid-era South Africa, or Afghanistan under the Taliban, for example. Even in those cases, I find troubling the idea of punishing people who are already in dire straits because of government actions over which they have no control. But Suharto’s Indonesia didn’t fall into this extreme category.

  There was another problem involved in making such stipulations. Once you tasked the IMF with worrying about issues that weren’t directly related to reestablishing confidence, where would you stop? Bonior was focused on labor rights. Phil Gramm, the Republican senator from Texas, insisted that recipients of IMF programs should have no trade restrictions against the United States. We didn’t disagree with Gramm’s substantive view any more than we did with Bonior’s. But putting conditions of this kind on the IMF would make working out programs with crisis countries more difficult and would make the IMF more intrusive. We also faced a political problem in having to deal with such issues simultaneously. Many measures proposed to satisfy Democrats would be opposed by Republicans—and vice versa. As one aide to House Majority Leader Dick Armey said at the time, Republicans weren’t “going to vote for a bill that turns the IMF into a union-organizing institution.” But Republicans wanted to attach conditions of their own. Some had to do with internal IMF reforms. Others, which had almost nothing to do with the IMF, drove Democrats crazy. Some conservatives wanted to use the legislation as a vehicle for what was known as the “Mexico City” language—a ban on funding for family-planning programs abroad that made mention of abortion.

  This issue had derailed IMF funding in 1997, and even after we’d resolved most of these other issues just before the 1998 midterm elections, Newt Gingrich threatened to hold up the IMF bill if the antiabortion language wasn’t included. Larry, Linda Robertson, our extraordinarily effective congressional liaison, and I all visited Gingrich in his office to argue that the two issues had nothing to do with one another. Newt responded that unconnected matters were often tied together in legislation. It was like the debt ceiling battle all over again; we argued that the IMF funding was too important to be drawn into a political battle over abortion. If IMF funding is so important, Newt said, you should give in on the Mexico City language. He was very friendly and completely unyielding.
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  In response to the opposition of the conservatives, many of whom saw the IMF as a kind of foreign aid, I made the same arguments over and over again. Our contribution to the IMF didn’t cost us anything. Since we received a liquid, interest-bearing claim in exchange for our contribution, it wasn’t a budgetary expense and didn’t increase the deficit or divert resources from other areas. And, most important, it was enormously in our self-interest as a country to support the IMF. Even if one had no concern about what happened to people in the rest of the world—which clearly was not our view—one should still be in favor of IMF funding for the protection and benefit of the American people, since what happened elsewhere could so strongly affect our economic and national security interests. Throughout the fifty-plus years that the IMF and World Bank have been in existence, successive administrations have concluded that the United States benefits from these institutions. Both Republican and Democratic Presidents have fought for additional funding. But it is always an uphill battle.

  In the end, we reached agreement on the multitrack negotiations with various members and constituencies. We asked all our G-7 partners to sign a letter that laid out their support for internal IMF reforms—including the greater transparency and openness that were being put in place—so that Congress could rightly say it was funding a new, improved IMF. We compromised on the Mexico City language, putting in a very limited provision. Through quiet diplomacy, the IMF managed to secure Muchtar Pakpahan’s release from prison, and we met some of the other Democrats’ concerns as well.

  But the larger factor that helped us was that, over time, the attitude of many legislators toward the crisis began to change. Some, such as Senators Chuck Hagel of Nebraska, Paul Sarbanes of Maryland, and Chris Dodd of Connecticut, all serious internationalists in a difficult environment, recognized early on that the United States had a powerful interest in combating the global crisis and that doing so would require a strong IMF. And as the financial turmoil continued, more and more members of Congress realized that the problem was serious and the danger to our own economy was real. No one wanted to be blamed for an economic derailment in the United States.

  Another useful development was that a number of legislators came to recognize that specific interests in their districts—manufacturing, agriculture, and other export-related industries—were suffering from the decline in Asia and might suffer a great deal more without the IMF. Most striking to me was the way the agricultural committees in the House and Senate turned into supporters, as the farm lobby drove home the effect of the crisis on farmers’ exports.

  An example of this phenomenon was what happened with Representative Sonny Callahan of Alabama, a likable and powerful Republican on the House Appropriations Committee who had been on the other side of the issue for many months. At some point, Sonny decided to support IMF funding. It turned out that his constituency in southern Alabama included a big pulp mill. All of a sudden, this company was laying people off because its exports were being affected by the Asian crisis; one of its primary customers was a paper manufacturer in Indonesia. That drove home to Sonny more clearly than anything we could say that we now lived in a global economy where what happened to an institution like the IMF could matter to businesses and workers in Monroe County, Alabama.

  CHAPTER TEN

  Hitting Bottom

  ON THE SAME DAY in August 1998 that Russia became the first of the crisis countries to default on its foreign debt, the President testified before a grand jury and made a televised speech apologizing to the nation about Monica Lewinsky. On September 10, he convened a meeting of the cabinet in the White House residence to apologize for misleading us. After Clinton apologized and explained himself, others got a chance to speak.

  I wasn’t planning to say anything. But I thought to myself: We’re all human, and we all make mistakes—sometimes very large ones. And Clinton’s mistakes should be seen in the context of his accomplishments. I also thought that the whole issue—though certainly serious—had been disproportionately covered by the news media, with the result that other issues of great significance, including the momentous events in Indonesia and Russia, hadn’t gotten enough attention.

  After a while I finally raised my hand. “You know, Mr. President, there’s no question you screwed up,” I said. “But we all make mistakes, even big ones. In my opinion, the bigger issue is the disproportion of the media coverage and the hypocrisy of some of your critics.”

  I truly admired the way Clinton had dealt with the crisis—even though the crisis was of his own making. He was remarkably focused and intent, doing his work while the storm raged around him. Talking to the President about Russia, you wouldn’t have known he had anything else to worry about. He came to work every day and did his job as President. I remember one afternoon when he invited about fifty members of Congress—split evenly between Republicans and Democrats—to discuss Social Security reform. This was at a moment when the Lewinsky problems were at their height and Republicans were aggressively calling for impeachment. We all sat around the table at Blair House, and he led the discussion as if nothing else were going on in the world. It was a remarkable seminar on the many aspects of this issue. Even Clinton’s demeanor was relaxed, engaged, and engaging—as much with Republicans trying to impeach him as with the Democrats who were supporting him.

  Like everyone else, I wondered how the President could do this. Sometime later, we had an interesting conversation. We’d been discussing the Vice President’s campaigning difficulties during the primaries, and Clinton told me that he had used “mental devices” to help him through the Lewinsky period. I didn’t ask him specifically what those were, but he thought Gore might use similar techniques to overcome his difficulties and campaign more effectively.

  Whether or not it might have helped Gore on the campaign trail, the notion of consciously adopting the right frame of mind did help my tennis game by reducing my tendency to hesitate and to be too tentative, something that impedes most amateur players. While playing, I kept in mind the thought that even a very good basketball player misses 55 percent of his shots. Even a fine tennis player makes a lot of errors; the object is to focus on hitting the shot as well as possible and not to worry about either the likelihood of messing up or the outcome of the point. When I told Steve Friedman that the Lewinsky matter had improved my tennis game, he waited with bated breath for what I had to say. He may have been somewhat disappointed by my explanation.

  Did the Lewinsky scandal harm Clinton’s second term on a substantive level? Some people argue that the administration missed opportunities as a result, particularly with regard to reform of the Social Security system. But my instinct is that Clinton could not have gotten more done, at least in this area, even if the scandal had never struck. We had begun to explore Social Security reform in 1997. When we floated one relatively modest change—revising the annual cost-of-living adjustment to better reflect inflation—we basically had our heads handed to us by Democrats in Congress and interest groups. Projections of a budget surplus had just materialized, and while they didn’t at all solve Social Security’s very serious long-term problems, they provided politicians with an easy way out. First, instead of reforms, they’d use the new surpluses to fund the Social Security deficits, and second, they’d put part of the Social Security trust fund into equities in the hope of earning greater returns.

  Some might argue that Clinton should have gone to war with his own supporters on this issue or that he could have done so if he hadn’t needed their support in the impeachment fight. But well before the scandal, we already felt stuck. If we put a proposal out that was dead on arrival, the reaction would not only require us to retreat but would also make ultimate progress on the issue more difficult. No one will ever know whether the politics might have worked out differently in a more normal environment, but my sense is that meaningful changes weren’t viable independent of the impeachment issue. What is certain, however, is that the hangover from the Lewinsky matter did make Gore’s
job as a presidential candidate more difficult.

  BY AUGUST 1998, we had been fighting to contain the Asian crisis for close to a year. But no sooner did one country’s problems seem to be under control than pressures would erupt somewhere else. The most dramatic and final stage began in August 1998, when the Russian government defaulted on its debt, triggering what we’d feared all along and had come close to in December 1997 in South Korea. Markets around the world, including in the United States, were severely disrupted, and the world felt the threat of a truly global financial crisis.

  Large IMF loans had been a key part of the crisis response. But those loans were provided only when matched by adequate policy reforms. The crisis countries had eventually put reforms in place, even though it took a while in Indonesia, enabling the IMF money to continue to flow. But in the case of Russia, the point came when the IMF had to say no.

  Our concerns about Russia had been intensifying during the spring of 1998. The growing turmoil there reflected elements of most of the previous crises. The ruble exchange rate was linked to the dollar’s. The government had a significant budget shortfall financed by issuing large amounts of short-term ruble-denominated bonds known as GKOs. Attracted by the promise of high yields and a boom mentality, foreign investors had bought these bonds aggressively. Though the post-Soviet economy clearly had enormous problems, investors had assumed that the IMF would step in to help during any emergency. Russia was, as the saying went in markets, “too nuclear to fail.”

  But as the psychology that had tripled the price level of the Russian stock market in a single year shifted, Russia found itself in terrible difficulty. Yields on Russia’s debt skyrocketed, hitting 60 percent in May 1998. It became doubtful whether Russia could continue to roll over the GKOs, which were coming due at the rate of $1 billion per week, or meet the payments on other Russian bonds. Yet the country’s political system seemed paralyzed, lacking the will or desire to take the kind of steps—such as collecting taxes, cutting government spending, and letting the ruble float—that would have helped to restore confidence. For us, Russia raised a new version of a by now familiar problem: What to do about a country that isn’t prepared to participate adequately in its own rescue? And what if that country happens to be an unstable former superpower with thousands of nuclear warheads still pointed at you?