BALDWIN, RE, and P MARTIN. 1999. Two Waves of Globalisation: Superficial Similarities, Fundamental Differences. NBER Working Paper.
There are differences and similarities between the two eras of globalization roughly summed up as the 19th century up to WWI and the 1960s to the present. The authors argue that trade and capital flow ratios and reductions to international transactions are among the similarities. The differences can be seen in initial conditions (the world now is substantively divided between rich and poor, previously it was mostly poor) and the ability of ideas to be traded in lieu of goods.
This article represents an incredibly thorough account of the similarities and differences between the two eras of globalization. I will not document all of this nuance here, as it would be cumbersome.
The main point of the article is that, as the title indicates, there are some similarities between the two eras, but these are mostly superficial; the differences between the eras represent fundamental differences. One reason that the eras are so different is that trade in ideas has become a cornerstone of the second wave of globalization. Another reason is that the initial conditions of the second wave of globalization are so distinct from the first wave. Thirdly, there are great constraints on policy makers with populations wanting both welfare and low taxes. Additionally, the presence of IFIs makes for a qualitatively different trajectory of the process of globalization.
Thursday, January 22, 2009
Reinhart and Rogoff: Is the 2007 US Sub-Prime Financial Crisis so Different?
REINHART, CM, and K ROGOFF. 2008. Is the 2007 US Sub-Prime Financial Crisis so Different? an International Historical Comparison. NBER Working Paper.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
Reinhart and Rogoff: The Aftermath of Financial Crises
Reinhart, Carmen, and Kenneth Rogoff. 2008. The Aftermath of Financial Crises. NBER Working Paper (December 19).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
Wednesday, January 21, 2009
Mody and Saravia: Catalyzing Capital Flows: Do IMF Programs Work as Commitment Devices?
A Mody and D Saravia, “Catalyzing Capital Flows: Do IMF Programs Work as Commitment Devices?,” in , 2003, 25-27.
“An objective of IMF programs is to help countries improve their access to international capital markets. In this paper, we examine if Fund programs influence the ability of developing country issuers to tap international bond markets and whether they improve spreads paid on the bonds issued. We find that the Fund programs do not provide a uniformly favorable signaling effect, i.e., the mere presence of the IMF does not act as a strong seal of good housekeeping. Instead, the evidence is most consistent with a positive effect of IMF programs when they are viewed as deteriorated significantly. The size of the Fund’s program matters, but the credibility of a joint commitment by the country and the IMF appears to be critical” (1).
“In this paper, we explore the possibility that successful catalysis depends on a credible joint commitment by the country and the Fund that leads to improved prospects for honoring debt contracts. In other words, the catalytic effect—or the Fund’s ‘seal of approval’—is not automatic and the mere presence of a Fund program does not lead to more capital flows. Rather, an IMF program is effective as a commitment device when other available information does not negate its credibility. As such, the value of the commitment implied by a Fund program and its ability to catalyze capital flows, is likely to depend on initial country conditions, program design, and the country-Fund relationship. Our contribution then is to move from a presumption of undifferentiated effects to identify country, program, and relationship characteristics that create the conditions for credible commitments and hence contribute to enhanced capital flows under IMF programs” (3).
They reach four conclusions:
1. Having a Fund program operative in a country decreased possible negative effects from a country’s volatility in exports
2. If reserves have not been reduced beyond recoverable levels, Fund programs are possibly helpful
3. Bigger Fund programs can be effective even when funds are not deployed
4. If a country and the Fund have an iterated interaction that is timely, success is also more likely.
They use a model of Eichengreen and Mody (2001) for their empirical analysis.
There is an excellent overview of the relationship between fund lending and improving access to international capital: while Fund lending may be quite small, it does provide the necessary sign to international capital that this country’s macroeconomic policies are on the right track.
There is a review of literature surrounding IMF lending policies. “Two early studies (Edwards 1989 and Khan 1990) reached three conclusions that have stood the test of time. First, Fund programs help improve the external payments position, this improvement takes effect relatively quickly, i.e., within a year, and is sustained beyond the program. Second, the impact on inflation is statistically insignificant. Third, growth actually suffers during the period of an IMF program but recovers once the program ends, though possibly not to the level prior to the initiation of the program” (8).
We adopt an estimation approach developed in earlier papers (see Eichengreen and Mody 2001). We estimate a two-equation model: the ‘spreads’ equation, which specifies the determinants of spreads charged, and the ‘selection’ equation, which is a probit for the decision to issue the bond” (11).
Skipped much here.
“…a Fund program is not an automatic or standardized ‘good housekeeping’ seal of approval. Investors appear to value the Fund’s participation in resolving the country’s external payment difficulties but only when they view it is as likely that the effort will be successful. Our further contribution, we believe, is to suggest the conditions under which programs are likely to succeed. Successful outcome, measured in this paper as improved access to international markets, depends on the market’s perception of credible reform measures” (22).
“An objective of IMF programs is to help countries improve their access to international capital markets. In this paper, we examine if Fund programs influence the ability of developing country issuers to tap international bond markets and whether they improve spreads paid on the bonds issued. We find that the Fund programs do not provide a uniformly favorable signaling effect, i.e., the mere presence of the IMF does not act as a strong seal of good housekeeping. Instead, the evidence is most consistent with a positive effect of IMF programs when they are viewed as deteriorated significantly. The size of the Fund’s program matters, but the credibility of a joint commitment by the country and the IMF appears to be critical” (1).
“In this paper, we explore the possibility that successful catalysis depends on a credible joint commitment by the country and the Fund that leads to improved prospects for honoring debt contracts. In other words, the catalytic effect—or the Fund’s ‘seal of approval’—is not automatic and the mere presence of a Fund program does not lead to more capital flows. Rather, an IMF program is effective as a commitment device when other available information does not negate its credibility. As such, the value of the commitment implied by a Fund program and its ability to catalyze capital flows, is likely to depend on initial country conditions, program design, and the country-Fund relationship. Our contribution then is to move from a presumption of undifferentiated effects to identify country, program, and relationship characteristics that create the conditions for credible commitments and hence contribute to enhanced capital flows under IMF programs” (3).
They reach four conclusions:
1. Having a Fund program operative in a country decreased possible negative effects from a country’s volatility in exports
2. If reserves have not been reduced beyond recoverable levels, Fund programs are possibly helpful
3. Bigger Fund programs can be effective even when funds are not deployed
4. If a country and the Fund have an iterated interaction that is timely, success is also more likely.
They use a model of Eichengreen and Mody (2001) for their empirical analysis.
There is an excellent overview of the relationship between fund lending and improving access to international capital: while Fund lending may be quite small, it does provide the necessary sign to international capital that this country’s macroeconomic policies are on the right track.
There is a review of literature surrounding IMF lending policies. “Two early studies (Edwards 1989 and Khan 1990) reached three conclusions that have stood the test of time. First, Fund programs help improve the external payments position, this improvement takes effect relatively quickly, i.e., within a year, and is sustained beyond the program. Second, the impact on inflation is statistically insignificant. Third, growth actually suffers during the period of an IMF program but recovers once the program ends, though possibly not to the level prior to the initiation of the program” (8).
We adopt an estimation approach developed in earlier papers (see Eichengreen and Mody 2001). We estimate a two-equation model: the ‘spreads’ equation, which specifies the determinants of spreads charged, and the ‘selection’ equation, which is a probit for the decision to issue the bond” (11).
Skipped much here.
“…a Fund program is not an automatic or standardized ‘good housekeeping’ seal of approval. Investors appear to value the Fund’s participation in resolving the country’s external payment difficulties but only when they view it is as likely that the effort will be successful. Our further contribution, we believe, is to suggest the conditions under which programs are likely to succeed. Successful outcome, measured in this paper as improved access to international markets, depends on the market’s perception of credible reform measures” (22).
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).
Saturday, January 17, 2009
Momani: American Politicization of the International Monetary Fund
B Momani, “American politicization of the International Monetary Fund,” Review of International Political Economy 11, no. 5 (2004): 880-904.
The IMF has been criticized as being a tool used by the US to influence the politics of other countries. The IMF denies this, and makes the claim that conditionality agreements are created through highly technocratic processes that are widely separated from the corruption of political interests. “This article argues that political intervention in the terms and conditions of IMF agreements occurs when IMF staff recommendations are repeatedly disregarded. This method traces politicization in the IMF decision-making process, by comparing and contrasting IMF staff’s Article IV Consultations for slippages in recommended conditions” (881).
IMF contributions are used to determine the relative voice of different member countries in establishing policy. These quotas are determined as a product of GDP production as well as current account factors. The US has the largest share of votes in the IMF with a total of 17% of the overall vote followed by Japan (~6%) and Germany (6%). The combination of 23 African countries represent a total of 1.16% of the total vote. Because many decisions require 85% consensus to be had, the US essentially wields a veto.
The literature is reviewed. It shows a mixture of results that all lean towards the US exerting a certain kind of power through determining lending conditionality. The author argues that this study will provide added-value because it will utilize IMF archives that were previously not available. The method will explore Article IV Consultations, which are produced by IMF staff and are expected to be mostly apolitical. If final conditionality differs greatly from the Article IV Consultations, then political motivations are assumed to be in play. If the final conditionality does not differ greatly, the opposite is concluded.
Figure 2 (888) outlines a causal flow-chart that can be used to determine whether or not political pressure was applied in IMF conditionality being imposed. The case study explored is Egypt.
“Based on numerous interviews with IMF staff, staff members expressed resentment towards the Executive Board for interfering in their negotiations with Egypt and other countries. The staff argued that many countries had important allies in the Executive Board which helped them receive favoritism” (895). Executive Board members who were keen on making sure that a certain policy towards a certain country went through stayed abreast of that country’s negotiation with the IMF for political reasons, it was argued by some.
“While there is no clear algorithm for IMF decision-making, based on IMF written statutes, the IMF argues that its decision-making is apolitical, and based on its staff’s recommendations. The IMF claims that external factors, such as the distribution of power inn the international system, is perhaps symbolically reflected in IMF quotas, but does not affect the final outcome of decisions. This is based on the belief that the IMF staff, who are technocratic and not politically motivated, determine the conditions attached to loan agreements” (898).
“In 1987 and 1991, Egypt demonstrated to the US government that tough IMF conditions would undermine Egypt’s political stability in an already volatile region and therefore the United States intervened to ensure two lenient agreements by usurping staff recommendations. Lenient agreements that did not reflect the Article IV Consultations prepared by the IMF staff prevailed because of US pressure on the Executive Board. So, it can be learned that the staff did not succumb to US pressure by changing the post-agreement Article IV consultations. On the contrary, the United States was able to push lenient agreements through without the implicit support of th EIMF staff. Decision-making in the Fund did not follow the principle of consensus building, but rather reaffirmed that US power in the Fund is enforced at all levels within the process of determining conditionality” (898-90).
The IMF has been criticized as being a tool used by the US to influence the politics of other countries. The IMF denies this, and makes the claim that conditionality agreements are created through highly technocratic processes that are widely separated from the corruption of political interests. “This article argues that political intervention in the terms and conditions of IMF agreements occurs when IMF staff recommendations are repeatedly disregarded. This method traces politicization in the IMF decision-making process, by comparing and contrasting IMF staff’s Article IV Consultations for slippages in recommended conditions” (881).
IMF contributions are used to determine the relative voice of different member countries in establishing policy. These quotas are determined as a product of GDP production as well as current account factors. The US has the largest share of votes in the IMF with a total of 17% of the overall vote followed by Japan (~6%) and Germany (6%). The combination of 23 African countries represent a total of 1.16% of the total vote. Because many decisions require 85% consensus to be had, the US essentially wields a veto.
The literature is reviewed. It shows a mixture of results that all lean towards the US exerting a certain kind of power through determining lending conditionality. The author argues that this study will provide added-value because it will utilize IMF archives that were previously not available. The method will explore Article IV Consultations, which are produced by IMF staff and are expected to be mostly apolitical. If final conditionality differs greatly from the Article IV Consultations, then political motivations are assumed to be in play. If the final conditionality does not differ greatly, the opposite is concluded.
Figure 2 (888) outlines a causal flow-chart that can be used to determine whether or not political pressure was applied in IMF conditionality being imposed. The case study explored is Egypt.
“Based on numerous interviews with IMF staff, staff members expressed resentment towards the Executive Board for interfering in their negotiations with Egypt and other countries. The staff argued that many countries had important allies in the Executive Board which helped them receive favoritism” (895). Executive Board members who were keen on making sure that a certain policy towards a certain country went through stayed abreast of that country’s negotiation with the IMF for political reasons, it was argued by some.
“While there is no clear algorithm for IMF decision-making, based on IMF written statutes, the IMF argues that its decision-making is apolitical, and based on its staff’s recommendations. The IMF claims that external factors, such as the distribution of power inn the international system, is perhaps symbolically reflected in IMF quotas, but does not affect the final outcome of decisions. This is based on the belief that the IMF staff, who are technocratic and not politically motivated, determine the conditions attached to loan agreements” (898).
“In 1987 and 1991, Egypt demonstrated to the US government that tough IMF conditions would undermine Egypt’s political stability in an already volatile region and therefore the United States intervened to ensure two lenient agreements by usurping staff recommendations. Lenient agreements that did not reflect the Article IV Consultations prepared by the IMF staff prevailed because of US pressure on the Executive Board. So, it can be learned that the staff did not succumb to US pressure by changing the post-agreement Article IV consultations. On the contrary, the United States was able to push lenient agreements through without the implicit support of th EIMF staff. Decision-making in the Fund did not follow the principle of consensus building, but rather reaffirmed that US power in the Fund is enforced at all levels within the process of determining conditionality” (898-90).
Buira: An Analysis of IMF Conditionality
A Buira et al., An Analysis of IMF Conditionality (United Nations, 2003).
“IMF conditionality was introduced in the 1950s as a means to restore members’ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centered on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditi8onality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country’s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable” (iii).
“Conditionality is perhaps the most controversial aspect of IMF policies. Among the traditional criticisms of Fund conditionality are that it is too short-run oriented, too focused on demand management and does not pay adequate attention to its impact on growth and the effects of programmes on social spending and on income distribution” (1).
The author explores some of the literature critical of IMF conditionality. This literature is specific in its criticism of the IMF’s overreaching through the imposition of structural modifying conditions that must be met in order to secure loans. Some have argued that the model of providing short-term stabilizing funding with conditions is fundamentally flawed, and that the IMF should approach countries with recommendations as to the changes that must be made structurally to their economy only when they are approached by said countries. The history of conditionality extends back to the US’ involvement in supplying much credit to The Fund after WWII. Initially, there was no conditionality. However, the Articles of the organization were amended.
“Conditionality may be defined as a means by which one offers support and attempts to influence the policies of another in order to secure compliance with a programme of measures. It is a tool by which a country is made to adopt specific policies or to undertake certain reforms that it would not otherwise have undertaken for support. Within the context of the IMF, conditionality refers to policies a member must adopt to secure access to Fund resources. These policies are intended to help the member country overcome its external payments problem and thus be in a position to repay the Fund in a timely manner, thereby ultimately assuring the ‘revolving character’ of Fund resources” (3).
What is the nature of conditionality? Is it possibly coercive? Probably. It depends mostly on the relationship between the Fund and the country that is seeking funding. For example, a country that has much access to global financial markets will be in a relatively stronger position vis-à-vis the fund than a country that has no ready access to global finance. Additionally, if a country is facing a balance of payments crisis, it may have to rely heavily on the Fund for liquidity, and that kind of a position would put countries in a compromising position, potentially. In another way, the Fund moves well beyond its mandate as a short-term financial stability institution and becomes an organization that imposes policies that directly affect development. That is clearly the mandate of The Bank. If Fund conditionality is not coercive, at its very least it has the potential of being overly paternalistic .
In another vein: is Fund resources assured through the practice of conditionality? Other institutions who are in the business of loaning sovereigns money do not provide conditions. In addition, the size of the Fund’s reserves has not grown apace with the economy at large. The “revolving character” of the resources is thus brought into question.
On September 20, 2002, The Fund agreed to four guidelines that were designed to overhaul the process of conditionality: “national ownership of programs…parsimony in the application of conditions…tailoring the programme to the member’s circumstances… clarity as to what essential aspect of the programme must be complied with, and what additional measures are contemplated whose non-observance will not constitute a breach of the agreement and impair the country’s ability to draw Fund resources” (10).
“IMF conditionality was introduced in the 1950s as a means to restore members’ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centered on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditi8onality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country’s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable” (iii).
“Conditionality is perhaps the most controversial aspect of IMF policies. Among the traditional criticisms of Fund conditionality are that it is too short-run oriented, too focused on demand management and does not pay adequate attention to its impact on growth and the effects of programmes on social spending and on income distribution” (1).
The author explores some of the literature critical of IMF conditionality. This literature is specific in its criticism of the IMF’s overreaching through the imposition of structural modifying conditions that must be met in order to secure loans. Some have argued that the model of providing short-term stabilizing funding with conditions is fundamentally flawed, and that the IMF should approach countries with recommendations as to the changes that must be made structurally to their economy only when they are approached by said countries. The history of conditionality extends back to the US’ involvement in supplying much credit to The Fund after WWII. Initially, there was no conditionality. However, the Articles of the organization were amended.
“Conditionality may be defined as a means by which one offers support and attempts to influence the policies of another in order to secure compliance with a programme of measures. It is a tool by which a country is made to adopt specific policies or to undertake certain reforms that it would not otherwise have undertaken for support. Within the context of the IMF, conditionality refers to policies a member must adopt to secure access to Fund resources. These policies are intended to help the member country overcome its external payments problem and thus be in a position to repay the Fund in a timely manner, thereby ultimately assuring the ‘revolving character’ of Fund resources” (3).
What is the nature of conditionality? Is it possibly coercive? Probably. It depends mostly on the relationship between the Fund and the country that is seeking funding. For example, a country that has much access to global financial markets will be in a relatively stronger position vis-à-vis the fund than a country that has no ready access to global finance. Additionally, if a country is facing a balance of payments crisis, it may have to rely heavily on the Fund for liquidity, and that kind of a position would put countries in a compromising position, potentially. In another way, the Fund moves well beyond its mandate as a short-term financial stability institution and becomes an organization that imposes policies that directly affect development. That is clearly the mandate of The Bank. If Fund conditionality is not coercive, at its very least it has the potential of being overly paternalistic .
In another vein: is Fund resources assured through the practice of conditionality? Other institutions who are in the business of loaning sovereigns money do not provide conditions. In addition, the size of the Fund’s reserves has not grown apace with the economy at large. The “revolving character” of the resources is thus brought into question.
On September 20, 2002, The Fund agreed to four guidelines that were designed to overhaul the process of conditionality: “national ownership of programs…parsimony in the application of conditions…tailoring the programme to the member’s circumstances… clarity as to what essential aspect of the programme must be complied with, and what additional measures are contemplated whose non-observance will not constitute a breach of the agreement and impair the country’s ability to draw Fund resources” (10).
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