Fischer, S. 1998. In Defense of the IMF-Specialized Tools for a Specialized Task. Foreign Affairs 77, no. 4: 103-6.
"Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis...First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries su8ffering from a different malady. Second--and the main theme--he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard--the bailout issue" (103).
Fischer argues that the first two considerations are linked: the structural elements make IMF policies towards SE Asia very different from previous IMF SAP applications, and that the structural elements must be addressed in order for crises like this to not happen in the future. As to the issue of moral hazard, it is, according to this author, overstated.
This crisis stemmed from the following: "First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply" (104).
Fischer argues that, though Feldstein proposed three questions that the IMF should consider before prescribing structural adjustment, each of these miss the most important question: "Does the program address the underlying causes of the crisis?" (105). "Financial sector and other structural reforms are vital to the reform programs of Thailand, Indonesia, and South Korea because the problems of weak financial institutions, inadequate bank regulation and supervision, and the complicated and non-transparent relations among governments banks, and corporations were central to the economic crisis. IMF lending to these countries would serve no purpose if these problems were not addressed. Nor would it be in the countries' interest to leave the structural and governance issues aside: markets are skeptical of halfhearted reform efforts" (105).
Showing posts with label Structural Adjustment Programs. Show all posts
Showing posts with label Structural Adjustment Programs. Show all posts
Wednesday, January 28, 2009
Feldstein: Refocusing the IMF
Feldstein, M. 1998. Refocusing the IMF. Foreign Affairs 77, no. 2: 20-33.
"The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits" (20).
"Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed system collapsed completely in 1971, the IMF was forced to find a new raison d'être" (20).
Their new motivation can be seen as building from the Mexico financial crisis. Mexico indicated that it would be unable to satisfy its international commitments. If they were to default on this loan, that had the potential to push many US banks into insolvency, as it would have wiped out a substantial chunk of credit. The US provided a bridge loan to Mexico so that they would be able to pay back these loans eventually. Many of the loans that were about to be defaulted upon were restructured. This was not only accomplished in Mexico, but in Central and South America more generally.
In order to meet these restructured loans, countries embarked on a process of increasing exports and decreasing imports in order to earn foreign exchange. The IMF was a part of overseeing that restructuring of these economies towards a goal of accruing more international capital was proceeding smoothly.
The next step in IMF development involved country restructuring after the fall of the Soviet Union. The IMF brought much experience to countries that had little experience with market based economic decisions. It also did not hurt that their advice came with substantial financial incentives to adopt these market orientated policies.
"The IMF is now acting in Southeast Asia and Korea in much the same way that it did in Eastern Europe and the former Soviet Union: insisting on fundamental changes in economic and institutional structures as a condition for receiving IMF funds. It is doing so even though the situations of the Asian countries are very different from that of the former Soviet Union and Eastern Europe. In addition, the IMF is applying its traditional mix of fiscal policies...and credit tightening...that were successful in Latin America" (22).
There is then an exploration of the SE Asian currency crisis:
"The Southeast Asian currency collapse that began in Thailand was an inevitable consequence of persistent large current account deficits and of the misguided attempt of Thailand, Indonesia, Malaysia, and the Philippines to maintain fixed exchange rates relative to the dollar" (22).
Thailand had a current account deficit that was quite large, and a currency pegged to the dollar. This meant that Thailand had to attract much foreign capital to service its debt. However, there were also pressures that kept investors coming back: the government ran a budget surplus, the population saved heavily. This was an untenable situation, especially with the baht tied to the dollar: when the yen fell relative to the dollar, Japanese investments in Thailand were discounted substantively. This caused a massive selling off of the baht. "At that point the IMF stepped in with a multibillion dollar rescue plan" (23).
This spread to the Philippines, Malaysia and Indonesia, as all had fixed currencies and current account deficits.
The author believes that a similar role to the one played by the IMF in Latin America would have been appropriate, but that the Fund went well beyond that measure. The structural adjustment programs were extensive and excessively detailed.
"In deciding whether to insist on any particular reform, the IMF should ask three questions: Is this reform really needed to restore the country's access to international capital markets? Is this a technical matter that does not interfere unnecessarily with the proper jurisdiction of a sovereign government? If the policies to be changed are also practiced in the major industrial economies of Europe, would the IMF think it appropriate to force similar changes in those countries if they were subject to a fund program? (27).
"The IMF's recent emphasis on imposing major structural and institutional reforms as opposed to focusing on balance-of-payments adjustments will have adverse consequences in both the short term and the more distant future. The IMF should stick to its traditional task of helping countries cope with temporary shortages of foreign exchange and with more sustained trade deficits" (20).
"Today's emphasis on structural and institutional reforms has not always been part of IMF programs. The IMF was founded in 1945 to help operate a system of fixed exchange rates, in which all currencies were pegged to the dollar, in turn fixed with respect to gold, that experts then considered necessary to encourage international trade. Although that system succeeded temporarily, differences in inflation between countries forced many to alter their currency values. When the fixed system collapsed completely in 1971, the IMF was forced to find a new raison d'être" (20).
Their new motivation can be seen as building from the Mexico financial crisis. Mexico indicated that it would be unable to satisfy its international commitments. If they were to default on this loan, that had the potential to push many US banks into insolvency, as it would have wiped out a substantial chunk of credit. The US provided a bridge loan to Mexico so that they would be able to pay back these loans eventually. Many of the loans that were about to be defaulted upon were restructured. This was not only accomplished in Mexico, but in Central and South America more generally.
In order to meet these restructured loans, countries embarked on a process of increasing exports and decreasing imports in order to earn foreign exchange. The IMF was a part of overseeing that restructuring of these economies towards a goal of accruing more international capital was proceeding smoothly.
The next step in IMF development involved country restructuring after the fall of the Soviet Union. The IMF brought much experience to countries that had little experience with market based economic decisions. It also did not hurt that their advice came with substantial financial incentives to adopt these market orientated policies.
"The IMF is now acting in Southeast Asia and Korea in much the same way that it did in Eastern Europe and the former Soviet Union: insisting on fundamental changes in economic and institutional structures as a condition for receiving IMF funds. It is doing so even though the situations of the Asian countries are very different from that of the former Soviet Union and Eastern Europe. In addition, the IMF is applying its traditional mix of fiscal policies...and credit tightening...that were successful in Latin America" (22).
There is then an exploration of the SE Asian currency crisis:
"The Southeast Asian currency collapse that began in Thailand was an inevitable consequence of persistent large current account deficits and of the misguided attempt of Thailand, Indonesia, Malaysia, and the Philippines to maintain fixed exchange rates relative to the dollar" (22).
Thailand had a current account deficit that was quite large, and a currency pegged to the dollar. This meant that Thailand had to attract much foreign capital to service its debt. However, there were also pressures that kept investors coming back: the government ran a budget surplus, the population saved heavily. This was an untenable situation, especially with the baht tied to the dollar: when the yen fell relative to the dollar, Japanese investments in Thailand were discounted substantively. This caused a massive selling off of the baht. "At that point the IMF stepped in with a multibillion dollar rescue plan" (23).
This spread to the Philippines, Malaysia and Indonesia, as all had fixed currencies and current account deficits.
The author believes that a similar role to the one played by the IMF in Latin America would have been appropriate, but that the Fund went well beyond that measure. The structural adjustment programs were extensive and excessively detailed.
"In deciding whether to insist on any particular reform, the IMF should ask three questions: Is this reform really needed to restore the country's access to international capital markets? Is this a technical matter that does not interfere unnecessarily with the proper jurisdiction of a sovereign government? If the policies to be changed are also practiced in the major industrial economies of Europe, would the IMF think it appropriate to force similar changes in those countries if they were subject to a fund program? (27).
Wednesday, January 21, 2009
Wade: Capital and Revenge: The IMF and Ethiopia
RH Wade, “Capital and Revenge: The IMF and Ethiopia,” Challenge 44, no. 5 (2001): 67-75.
“Ever since the financial crisis of 1997, the International Monetary Fund and the US Treasury have been less insistent on opening capital markets around the world. But the author has little doubt that when the dust settles, the push for unrestricted capital flows will strengthen again. Ethiopia provides a case study of the interest involved” (67). “Once memories of the Asian crisis fade, the Fund and the Treasury are likely to move again to secure the lifting of restrictions on capital movements worldwide” (68).
The story of Ethiopia is told in relation to IMF lending in the late 1990s. Ethiopia was elegiable for a loan from the IMF at very favorable conditions because their level of economic development was relatively quite low. They took the loan, though it came with a certain set of conditions that were tied to tranche payments. The first payments went according to plan and the government adjusted according to the agreement. The author then highlights an unfortunate situation involving a US banks, Ethiopian Airlines and the Ethiopian government. The airlines bought four planes from Boeing, and entirely financed by the US bank. The conditions of that loan were not entirely favorable. The airlines Wanted to renegotiate the conditions of that loan, but the US bank refused. The Ethiopian government then loaned the airlines the money to pay off the bad loan. This angered the US bank, and the IMF became more picky when it followed up with an assessment of Ethiopia’s progress according to the structural adjustment policies that were agreed upon. Ethiopia called in Stiglitz to help them understand what they could do with the IMF. Stiglitz went, thus angering the fund further.
Ethiopia eventually got its way and the Fund renegotiated the conditions of its loan. However, the following year, both the Fund and Ethiopia found themselves in another bind. This caused delay in Ethiopia’s ability to receive debt relief, for one.
“The other striking point about the story is the invisible power of the Fund officials as the gatekeepers to not only concessional finance but also country reputation. When they began to call Ethiopia a ‘reluctant reformer’ and to talk about the ‘break-down of the program,’ virtually no one who heard them was in a position to know that these comments were largely untrue—for example, that the apparent failure to meet the foreign exchange reserve requirement was a technical failure, not a real one” (74-5).
“Ever since the financial crisis of 1997, the International Monetary Fund and the US Treasury have been less insistent on opening capital markets around the world. But the author has little doubt that when the dust settles, the push for unrestricted capital flows will strengthen again. Ethiopia provides a case study of the interest involved” (67). “Once memories of the Asian crisis fade, the Fund and the Treasury are likely to move again to secure the lifting of restrictions on capital movements worldwide” (68).
The story of Ethiopia is told in relation to IMF lending in the late 1990s. Ethiopia was elegiable for a loan from the IMF at very favorable conditions because their level of economic development was relatively quite low. They took the loan, though it came with a certain set of conditions that were tied to tranche payments. The first payments went according to plan and the government adjusted according to the agreement. The author then highlights an unfortunate situation involving a US banks, Ethiopian Airlines and the Ethiopian government. The airlines bought four planes from Boeing, and entirely financed by the US bank. The conditions of that loan were not entirely favorable. The airlines Wanted to renegotiate the conditions of that loan, but the US bank refused. The Ethiopian government then loaned the airlines the money to pay off the bad loan. This angered the US bank, and the IMF became more picky when it followed up with an assessment of Ethiopia’s progress according to the structural adjustment policies that were agreed upon. Ethiopia called in Stiglitz to help them understand what they could do with the IMF. Stiglitz went, thus angering the fund further.
Ethiopia eventually got its way and the Fund renegotiated the conditions of its loan. However, the following year, both the Fund and Ethiopia found themselves in another bind. This caused delay in Ethiopia’s ability to receive debt relief, for one.
“The other striking point about the story is the invisible power of the Fund officials as the gatekeepers to not only concessional finance but also country reputation. When they began to call Ethiopia a ‘reluctant reformer’ and to talk about the ‘break-down of the program,’ virtually no one who heard them was in a position to know that these comments were largely untrue—for example, that the apparent failure to meet the foreign exchange reserve requirement was a technical failure, not a real one” (74-5).
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