Grabel, I, United Nations Conference on Trade and Development, Group of Twenty-four, and Intergovernmental Group of Twenty-four on International Monetary Affairs. 2004. Trip wires and speed bumps: managing financial risks and reducing the potential for financial crises in developing economies. United Nations.
There are four things outlined in the abstract that are accomplished by this paper: "First, it demonstrates that efforts to develop EWS [early warning systems] for banking, currency and generalized financial crises in developing countries have largely failed...Second, the paper advances an approach to managing financial risk through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed...Third...the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries...Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach" (abstract).
It is assumed that there is a link between financial liberalization and financial crises. It is also assumed that developing countries are keen to avoid financial crises, as recoveries can be quite difficult.
"Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies" (2).
EWS models have an incredibly poor track record. When a model is calibrated to be able to identify a crisis, it is thus tuned to a certain set of circumstances and is unable to predict subsequent crises.
"I argue that the failings of existing predictive models stem from the fact that they are based on six misguided initial assumptions" (6).
The assumptions about informational accuracy are too rigid, the people analyzing the data do not take into consideration that the analysis and the economy are overdetermined, crises do not have the same set of causal drivers, crises will not be averted with EWS systems, it has never been possible to predict economic tipping events, and investors do not necessarily have to respond to increased information with stabilizing actions.
The trip wire solution proposed by the author is distinct from the EWS method. Trip wires are diagnostic tools. They are designed to potentially stop market transactions when a certain point has been reached. They can be designed to solve a variety of problems associated with financial crises.
Speed bumps work in conjunction with trip wires: "Speed bgumps are narrowly targeted, gradual changes in policies and regulations that are activated whenever trip wires reveal particular vulnerabilities" (11).
Friday, January 30, 2009
Babb and Buria: Mission Creep, Mission Push and Discretion in Sociological Perspective: The Case of IMF Conditionality
Babb, S, and A Buira. 2004. Mission Creep, Mission Push and Discretion in Sociological Perspective: The Case of IMF Conditionality. In , 24:8-9.
"A term that has gained popularity among World Bank and IMF critics is 'mission creep,' or the systematic shifting of organizational activities away from original mandates" (2).
"The IMF's original purpose as it was conceived in 1944 was to establish a code of conduct that would enhance economic cooperation, and avoid the 'beggar-the-neighbor' policies that led to the economic turbulence of the thirties. This code of conduct required members to establish par values...and to work toward lifting restrictions on past payments...Over time, however, the functions and activities of the Fund changed along with the introduction and expansion of 'conditionality'--the policy measures member countries must adopt in order to have access to the IMF's resources" (2).
Critics of the IMF point to this mission creep as being fundamentally problematic. However, these authors argue that it is not unique to the IMF. In fact, institutional sociologists have experienced the creeping kind of nature within institutions for some time. While institutions are created for a certain purpose, they certainly morph into their own entities that pursue their own ends irrespective of the reasons for their initial creation. In fact, these institutions become much more keenly interested in their own survival than anything that may tie them to their original mandate.
"This paper examines historical evidence of mission creep at the IMF, and explores the organizational dynamics that may have contributed to this process...Synthesizing this evidence, we describe and account for three separate phases in the expansion of conditionality: the establishment of fiscal and monetary conditions in the 1950s; the introduction o debt-related conditions in the 1970s; and the introduction of liberalizing, governance, and a host of other reforms since the 1980s.
"In contrast to these two first phases, we argue that the most recent phase has marked a significant break with the past. Whereas the first period in the Fund's evolution was associated with the development of standardized rules, this latest stage is linked to the rise of 'discretional conditionality:' the increased dependence of disbursements and lending arrangements on the judgments of Management and Staff, rather than on clear rules determined at the outset. We conclude that this reversal cannot be attributed primarily to internal bureaucratic factors, but rather responded to the demands of the Fund's most powerful organizational constituent: the US Treasury. Thus, 'mission push' seems to be the most accurate way of describing recent developments in IMF conditionality" (4).
The evidence for this is presented systematically. I will not document it here.
"A term that has gained popularity among World Bank and IMF critics is 'mission creep,' or the systematic shifting of organizational activities away from original mandates" (2).
"The IMF's original purpose as it was conceived in 1944 was to establish a code of conduct that would enhance economic cooperation, and avoid the 'beggar-the-neighbor' policies that led to the economic turbulence of the thirties. This code of conduct required members to establish par values...and to work toward lifting restrictions on past payments...Over time, however, the functions and activities of the Fund changed along with the introduction and expansion of 'conditionality'--the policy measures member countries must adopt in order to have access to the IMF's resources" (2).
Critics of the IMF point to this mission creep as being fundamentally problematic. However, these authors argue that it is not unique to the IMF. In fact, institutional sociologists have experienced the creeping kind of nature within institutions for some time. While institutions are created for a certain purpose, they certainly morph into their own entities that pursue their own ends irrespective of the reasons for their initial creation. In fact, these institutions become much more keenly interested in their own survival than anything that may tie them to their original mandate.
"This paper examines historical evidence of mission creep at the IMF, and explores the organizational dynamics that may have contributed to this process...Synthesizing this evidence, we describe and account for three separate phases in the expansion of conditionality: the establishment of fiscal and monetary conditions in the 1950s; the introduction o debt-related conditions in the 1970s; and the introduction of liberalizing, governance, and a host of other reforms since the 1980s.
"In contrast to these two first phases, we argue that the most recent phase has marked a significant break with the past. Whereas the first period in the Fund's evolution was associated with the development of standardized rules, this latest stage is linked to the rise of 'discretional conditionality:' the increased dependence of disbursements and lending arrangements on the judgments of Management and Staff, rather than on clear rules determined at the outset. We conclude that this reversal cannot be attributed primarily to internal bureaucratic factors, but rather responded to the demands of the Fund's most powerful organizational constituent: the US Treasury. Thus, 'mission push' seems to be the most accurate way of describing recent developments in IMF conditionality" (4).
The evidence for this is presented systematically. I will not document it here.
Boughton: From Suez to Tequila
Boughton, JM. 2000. From Suez to Tequila: IMF as Crisis Manager. The Economic Journal 110: 273-291.
This paper explores the changing role of the IMF. It was initially created, in 1944, to provide resources in a short-term fashion to shore up economies.
"What brought Mexico to seek the assistance of the Fund was a formerly latent balance of payments problem that swiftly became manifest in response to a financial crisis, which shall be defined here as a sudden and catastrophic loss of net international assets that makes continuation of the existing policy regime impossible" (275).
The Fund was originally created in a world of limited capital mobility. That world clearly no longer exists in the same way, as capital movement is much less restricted.
"During the first decade of the IMF's life as a financial institution, what little lending the Fund did was aimed at helping countries establish currency convertibility for current account transactions at fixed exchange rate parities" (279).
In 1956, Egypt required the Fund's first major allotment of capital. This occurred because the Egyptian government nationalized the Suez canal, and French, British and Israeli governments attacked. Each of these four countries approached the Fund.
"The capital accounts as an independent force became a more general issue in the early 1960s, after most industrial countries had reestablished convertibility for current account transactions. When countries with the most advanced financial systems began dismantling capital controls, the Fund treated it as a welcome development and thus began to distance the institution further from the view that had prevailed at Bretton Woods" (281). This loosening of capital controls caused tension, eventually leading to the collapse of the Gold Pool, the institution of developed countries that attempted to keep the price of gold at 35$ an ounce.
After the collapse of the Gold Standard, in 1971 with Nixon separating the dollar from gold and in 1973 with the exchange market crisis, the world of international finance changed drastically.
"The major turning point both for the international financial system and for the crisis-management role of the IMF came in 1982" (284). Banks stopped lending.
The IMF response was large, and paved the way for IMF responses throughout the 1990s.
This paper explores the changing role of the IMF. It was initially created, in 1944, to provide resources in a short-term fashion to shore up economies.
"What brought Mexico to seek the assistance of the Fund was a formerly latent balance of payments problem that swiftly became manifest in response to a financial crisis, which shall be defined here as a sudden and catastrophic loss of net international assets that makes continuation of the existing policy regime impossible" (275).
The Fund was originally created in a world of limited capital mobility. That world clearly no longer exists in the same way, as capital movement is much less restricted.
"During the first decade of the IMF's life as a financial institution, what little lending the Fund did was aimed at helping countries establish currency convertibility for current account transactions at fixed exchange rate parities" (279).
In 1956, Egypt required the Fund's first major allotment of capital. This occurred because the Egyptian government nationalized the Suez canal, and French, British and Israeli governments attacked. Each of these four countries approached the Fund.
"The capital accounts as an independent force became a more general issue in the early 1960s, after most industrial countries had reestablished convertibility for current account transactions. When countries with the most advanced financial systems began dismantling capital controls, the Fund treated it as a welcome development and thus began to distance the institution further from the view that had prevailed at Bretton Woods" (281). This loosening of capital controls caused tension, eventually leading to the collapse of the Gold Pool, the institution of developed countries that attempted to keep the price of gold at 35$ an ounce.
After the collapse of the Gold Standard, in 1971 with Nixon separating the dollar from gold and in 1973 with the exchange market crisis, the world of international finance changed drastically.
"The major turning point both for the international financial system and for the crisis-management role of the IMF came in 1982" (284). Banks stopped lending.
The IMF response was large, and paved the way for IMF responses throughout the 1990s.
Thursday, January 29, 2009
Evans and Finnemore: Organizational Reform and the Expansion of the South's Voice at the Fund
Evans, P, M Finnemore, Harvard University. Center for International Development, UNCTAD. Project of Technical Support to the Intergovernmental Group of Twenty-four on International Monetary Affairs and Development, and UNCTAD. 2001. Organizational Reform and the Expansion of the South's Voice at the Fund. United Nations.
"In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths and deployment of the Fund's staff. Our recommendations address two general issues. First, we explore ways to diversity the 'intellectual portfolio' of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South....Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow Executive Directors from developing countries to play a larger role in shaping the Fund's policies" (from abstract).
The first suggestion requires a substantive restructuring of the Fund's organization. The second is perhaps a simpler fix. Both of these fixes requires political capital to be spent.
The authors argue that The Fund should represent a unique source of global human capital, as it is comprised of hundreds of the best economists in the world. However, this is not how The Fund is seen by policy makers who are compelled to work within its constraints. This can be reconciled with a more granular approach to assessing different fund prescriptions that relies on local knowledge and resources.
The Fund is also not governed according to the principle of one state, one vote. Instead, voting takes place based on the amount of money that countries have given to Fund reserves. This is then exacerbated by the amount of consensus needed to reach agreements: a full 85%. With a voting bloc that is larger than 15%, the US effectively wields a veto hammer for all Fund decisions.
The degree of professional homogeneity at the Fund is also remarkable: almost all of its staff are Western trained macro-economists.
"In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths and deployment of the Fund's staff. Our recommendations address two general issues. First, we explore ways to diversity the 'intellectual portfolio' of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South....Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow Executive Directors from developing countries to play a larger role in shaping the Fund's policies" (from abstract).
The first suggestion requires a substantive restructuring of the Fund's organization. The second is perhaps a simpler fix. Both of these fixes requires political capital to be spent.
The authors argue that The Fund should represent a unique source of global human capital, as it is comprised of hundreds of the best economists in the world. However, this is not how The Fund is seen by policy makers who are compelled to work within its constraints. This can be reconciled with a more granular approach to assessing different fund prescriptions that relies on local knowledge and resources.
The Fund is also not governed according to the principle of one state, one vote. Instead, voting takes place based on the amount of money that countries have given to Fund reserves. This is then exacerbated by the amount of consensus needed to reach agreements: a full 85%. With a voting bloc that is larger than 15%, the US effectively wields a veto hammer for all Fund decisions.
The degree of professional homogeneity at the Fund is also remarkable: almost all of its staff are Western trained macro-economists.
Cooper: Chapter 11 for Countries
Cooper, RN. 2002. Chapter 11 for Countries. Foreign Affairs 81: 90.
This article explores the possibility of a changing IMF policy towards debtor nations: let them temporarily suspend payments to the creditor in order to get things in order and resume payments. In essence, it is, as the title of the article indicates, the ability for countries to file for bankruptcy.
This would allow countries who fall on hard times to avoid the rush of creditors attempting to get their assets as quickly as possible. Also, if this type of provision follows US bankruptcy law, it would allow a majority of creditors to determine the repayment structure. Currently, countries must pay back and renegotiate with all of the different creditors separately.
The remainder of the article discussed two things: the exact mechanics of how a Chapter 11 type of provision within the IMF would take form and the nature of financial crises.
This article explores the possibility of a changing IMF policy towards debtor nations: let them temporarily suspend payments to the creditor in order to get things in order and resume payments. In essence, it is, as the title of the article indicates, the ability for countries to file for bankruptcy.
This would allow countries who fall on hard times to avoid the rush of creditors attempting to get their assets as quickly as possible. Also, if this type of provision follows US bankruptcy law, it would allow a majority of creditors to determine the repayment structure. Currently, countries must pay back and renegotiate with all of the different creditors separately.
The remainder of the article discussed two things: the exact mechanics of how a Chapter 11 type of provision within the IMF would take form and the nature of financial crises.
Pauly: Opening Financial Markets
Pauly, LW. Opening financial markets. Cornell University Press.
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
Wednesday, January 28, 2009
Fischer: In Defense of the IMF
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).
"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).
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