Woods, N. 2006. The Globalizers: The IMF, The World Bank, And Their Borrowers. Cornell University Press.
"The IMF and World Bank are targets of endless criticism. Left-wing groups denounce them as tools of US imperialism. Antiglobalization websites accuse them of enforcing global capitalism. Right0wing think tanks accuse the Fund and Bank of supporting corrupt elites and governments that cripple their economies, maul their environments, and oppress their people. In 20045 it was revealed that even the terrorist group Al Qaeda may have planned an attack on the institutions" (1).
There are three reasons that these IOs do not successfully carry out their ostensibly noble mandates: Firstly, they do not stand in isolation and are influenced by powerful governments; secondly, the technocrats who make up these institutions are shaped by a certain kind of institutional milieu which goes on to shape the ethos of the institution; finally, they have to contend with the governments that they work with on a level of equality, and they cannot impose their will. These all lead to obvious problems. The author refers to this with the chapter sub title "Riding Three Horses at Once".
"There is no incontrovertible evidence that the IMF and World Bank know what is good for their borrowing countries. More important, there is even less evidence that what they know translates into what they require of governments. Overall, powerful states set the boundaries within which the IMF and World Bank work. Within those parameters, professional economists and staff draw up the details. They work with an eye on the political masters of the institutions and equally with a view to promulgating their own and institutions interests. They express their solutions in the language of professional economists. Once solutions are defined, staff take their mission into the field. There they must coerce or persuade borrowing governments to undertake prescribed measures. Their influence in the short term depends on local conditions and whether politicians have an interest in using Fund or Bank resources or conditionality to bolster a particular position or policy" (6).
Showing posts with label IMF. Show all posts
Showing posts with label IMF. Show all posts
Wednesday, March 11, 2009
Tuesday, March 10, 2009
Stone: The Scope of IMF Conditionality
Stone, RW. 2008. The Scope of IMF Conditionality. International Organization 62, no. 04: 589-620.
Is the IMF autonomous, controlled by the hegemon, or something else?
Two models are tested regarding IMF conditionality: A public-choice model and an informal governance model. "Public-choice critics argue that the Fund is an out-of-control agency that seeks to maximize its importance by imposing the highest levels of conditionality the market will bear. To the contrary, we find that the Fund has refrained from exploiting the vulnerability of particular countries to maximize the scope of conditionality. Alternatively, critics of major-power influence in the IMF claim that conditionality reflects the interests of the major shareholders rather than the needs of borrowing countries. We find evidence of US influence, which operates to constrain conditionality, but only in vulnerable countries that are important recipients of US aid. In ordinary countries under ordinary circumstances, broad authority is delegated to the Fund, which adjusts conditionality to accommodate local circumstances and domestic political opposition" (from abstract).
Some of the standard critiques of the IMF is that it is either a rogue institution imposing its will on sovereign states, or it is a tool of the most powerful states. Which of these is true, as they are mutually exclusive?
They don't find evidence for the rogue IO explanation, which are, "...derived from a public choice perspective" (1). "The puzzle that the power politics school is unable to explain is why weaker states participate in international organizations, if their policies simply reflect the preferences of the powerful. In order for institutions to be useful to powerful states, they must elicit voluntary participation, which means that there must be sufficient agreement about common purposes that weaker states can expect to benefit from cooperation" (1-2).
"We develop an alternative view, which we call informal governance. International organizations operate according to two parallel sets of rules: formal rules, which embody consensual procedures, and informal rules, which allow exceptional access for powerful countries. In this view, the danger embodies in delegation is not that the agency will run out of control, but that it will be captured by the most powerful state in the system" (2).
A history of IMF autonomy is covered.
"Our conclusions support our model of informal governance and are inconsistent with the public-choice inspired model of bureaucratic rent seeking" (41). The US is a major impact on IMF policies, especially when correlated with US aid giving.
Is the IMF autonomous, controlled by the hegemon, or something else?
Two models are tested regarding IMF conditionality: A public-choice model and an informal governance model. "Public-choice critics argue that the Fund is an out-of-control agency that seeks to maximize its importance by imposing the highest levels of conditionality the market will bear. To the contrary, we find that the Fund has refrained from exploiting the vulnerability of particular countries to maximize the scope of conditionality. Alternatively, critics of major-power influence in the IMF claim that conditionality reflects the interests of the major shareholders rather than the needs of borrowing countries. We find evidence of US influence, which operates to constrain conditionality, but only in vulnerable countries that are important recipients of US aid. In ordinary countries under ordinary circumstances, broad authority is delegated to the Fund, which adjusts conditionality to accommodate local circumstances and domestic political opposition" (from abstract).
Some of the standard critiques of the IMF is that it is either a rogue institution imposing its will on sovereign states, or it is a tool of the most powerful states. Which of these is true, as they are mutually exclusive?
They don't find evidence for the rogue IO explanation, which are, "...derived from a public choice perspective" (1). "The puzzle that the power politics school is unable to explain is why weaker states participate in international organizations, if their policies simply reflect the preferences of the powerful. In order for institutions to be useful to powerful states, they must elicit voluntary participation, which means that there must be sufficient agreement about common purposes that weaker states can expect to benefit from cooperation" (1-2).
"We develop an alternative view, which we call informal governance. International organizations operate according to two parallel sets of rules: formal rules, which embody consensual procedures, and informal rules, which allow exceptional access for powerful countries. In this view, the danger embodies in delegation is not that the agency will run out of control, but that it will be captured by the most powerful state in the system" (2).
A history of IMF autonomy is covered.
"Our conclusions support our model of informal governance and are inconsistent with the public-choice inspired model of bureaucratic rent seeking" (41). The US is a major impact on IMF policies, especially when correlated with US aid giving.
Steinwand and Stone: The International Monetary Fund: A Review of the Recent Evidence
Steinwand, MC, and RW Stone. 2008. The International Monetary Fund: A review of the recent evidence. The Review of International Organizations 3, no. 2: 123-149.
"We review studies of participation in IMF programs, design of IMF conditionality, implementation and enforcement of IMF conditions, conventional program effects and catalytic effects. At every stage, we find substantial evidence of the influence of major IMF shareholders, of the Fund's own organizational imperatives, and of domestic politics within borrowing countries. We conclude that very little is known with certainty about the effects of IMF lending, but that a great deal has been learned about the mechanics of IMF programs that will have to be taken into account in order to obtain unbiased estimates of those effects" (from abstract).
There is an overview of critics of the IMF on page 124.
"The functionalist perspective, which is the one most widely adopted in the IMF literature, emphasizes the element of common interest in cooperation [Keohane]...Institutions, in this perspective, arise as solutions to collective action problems..." (126). "In contrast, the structural approach emphasizes differences in national interests and the distribution of power [Krasner}...Structural explanations treat the existence of conflicts of interest as fundamental, although the particular reasons for conflict vary with the international context" (126). "The public choice framework [Vaubel]...emphasizes the perverse incentives created by principal-agent relationships under incomplete information. The objectives of international bureaucrats are to increase their power, prerequisites and organizational slack, and elected officials delegate authority to them in order to escape their own accountability to voters. It is often argued that the IMF is able to provide political cover for governments that want reform but face opposition at home [Puntnam, Haggard, Kaufman, Vreeland] (127).
There is a review of the variables covered in IMF analysis by a variety of authors.
Conclusion: selection effects in methodology are quite important. Further research topics are then posited.
"We review studies of participation in IMF programs, design of IMF conditionality, implementation and enforcement of IMF conditions, conventional program effects and catalytic effects. At every stage, we find substantial evidence of the influence of major IMF shareholders, of the Fund's own organizational imperatives, and of domestic politics within borrowing countries. We conclude that very little is known with certainty about the effects of IMF lending, but that a great deal has been learned about the mechanics of IMF programs that will have to be taken into account in order to obtain unbiased estimates of those effects" (from abstract).
There is an overview of critics of the IMF on page 124.
"The functionalist perspective, which is the one most widely adopted in the IMF literature, emphasizes the element of common interest in cooperation [Keohane]...Institutions, in this perspective, arise as solutions to collective action problems..." (126). "In contrast, the structural approach emphasizes differences in national interests and the distribution of power [Krasner}...Structural explanations treat the existence of conflicts of interest as fundamental, although the particular reasons for conflict vary with the international context" (126). "The public choice framework [Vaubel]...emphasizes the perverse incentives created by principal-agent relationships under incomplete information. The objectives of international bureaucrats are to increase their power, prerequisites and organizational slack, and elected officials delegate authority to them in order to escape their own accountability to voters. It is often argued that the IMF is able to provide political cover for governments that want reform but face opposition at home [Puntnam, Haggard, Kaufman, Vreeland] (127).
There is a review of the variables covered in IMF analysis by a variety of authors.
Conclusion: selection effects in methodology are quite important. Further research topics are then posited.
Grabel: Policy Coherence or Conformance?
Grabel, I. 2007. Policy Coherence or Conformance? The New World Bank International Monetary Fund World Trade Organization Rhetoric on Trade and Investment in Developing Countries. Review of Radical Political Economics 39, no. 3: 335.
Policy coherence is explored in this article. It is argued that the term has been abused, and that much of what it is referred to would be better suited by the term "conformance".
"This article has three objectives: (a) to define the concept of coherence and trace its usage in policy debates historically and up to the present; (b) to explore how the concept is being institutionalized or codified through cooperation among the International Monetary Fund, World Bank, and World Trade organization...and through recent bi-and multilateral trade agreements; and (c) to offer the beginnings of a critique of what I see as the use and abuse of the concept. I will argue that the concept of coherence today is code for another and altogether different goal: policy conformance" (336).
These three institutions have worked together to promote trade liberalization in such a coherent way that they may end up working against their original mandates. This is completed partially through the at least tacit, if not explicit, approval of the US.
Coherence should be a concept with no explicit telos, but the policies implemented by these institutions have all ended up moving in a very explicitly direction. "Properly understood, policy coherence should entail an understanding of the uniqueness of diverse national contexts; of path dependence, institutional embeddedness, and stickiness; recognition that there exists multiple paths to development; and respect for national policy space" (340).
Policy coherence is explored in this article. It is argued that the term has been abused, and that much of what it is referred to would be better suited by the term "conformance".
"This article has three objectives: (a) to define the concept of coherence and trace its usage in policy debates historically and up to the present; (b) to explore how the concept is being institutionalized or codified through cooperation among the International Monetary Fund, World Bank, and World Trade organization...and through recent bi-and multilateral trade agreements; and (c) to offer the beginnings of a critique of what I see as the use and abuse of the concept. I will argue that the concept of coherence today is code for another and altogether different goal: policy conformance" (336).
These three institutions have worked together to promote trade liberalization in such a coherent way that they may end up working against their original mandates. This is completed partially through the at least tacit, if not explicit, approval of the US.
Coherence should be a concept with no explicit telos, but the policies implemented by these institutions have all ended up moving in a very explicitly direction. "Properly understood, policy coherence should entail an understanding of the uniqueness of diverse national contexts; of path dependence, institutional embeddedness, and stickiness; recognition that there exists multiple paths to development; and respect for national policy space" (340).
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.
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).
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
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-Ã -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-Ã -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).
Thursday, December 18, 2008
Knight: Developing Countries and the Globalization of Financial Markets
M Knight, “Developing countries and the globalization of financial markets,” World Development 26, no. 7 (1998): 1185-1200.
The author notes that, throughout the beginning of the 90s, there was a substantive move towards the globalization of financial markets. "These developments create the prospect of a more efficient worldwide allocation of savings and investment than was possible in the past4, when domestic investment in most countries was constrained by domestic caving" (1185). While there are upsides, the financial crisis of the late 90s demonstrated the risks.
"This paper analyzes the recent globalization of financial markets, considers some features that may raise concerns about financial stability in DTEs [developing and transition economies] and outlines recent initiatives to enhance the safety and stability of financial systems. In particular, it focuses on imperfect competition and gaps in the structure of financial markets as elements of financial instability in DTEs, and discusses the complementary roles of market discipline and official oversight as essential elements of a robust financial system" (1185).
"We consider an economy where domestic bank credit is the only source of financing for capital investment by productive enterprises, and examine the consequences of the structure of competition in the banking sector for the overall stability of the financial system. The key element of the analysis is that, in evaluating credit risks, banks assess the underlying profitability of the project they are considering financing using a different information set from that available to the prospective borrower. They therefore provide a valuable service to the productive firms: that of giving a 'second opinion' on the expected profitability of the project. The efficiency with which banks provide this financial service depends on a number of factors, including the structure of competition in the banking sector and the state of the macro economy" (1189).
"This analysis suggests that an imperfectly competitive banking system responds to bad loan problems by reducing lending and raising intermediation spreads" (1191).
"The discussion in the preceding sections shows that a number of factors--both microeconomic and macroeconomic--can cause financial problems in DTEs, and that regulatory oversight and market discipline are, in principle, complementary means for achieving a stable and robust financial system...The basic elements of a sound financial system are a supportive legal and regulatory environment, strong internal governance, external discipline provided by market forces, and external governance provided by regulation and supervision at both the domestic and international level" (1197).
The author notes that, throughout the beginning of the 90s, there was a substantive move towards the globalization of financial markets. "These developments create the prospect of a more efficient worldwide allocation of savings and investment than was possible in the past4, when domestic investment in most countries was constrained by domestic caving" (1185). While there are upsides, the financial crisis of the late 90s demonstrated the risks.
"This paper analyzes the recent globalization of financial markets, considers some features that may raise concerns about financial stability in DTEs [developing and transition economies] and outlines recent initiatives to enhance the safety and stability of financial systems. In particular, it focuses on imperfect competition and gaps in the structure of financial markets as elements of financial instability in DTEs, and discusses the complementary roles of market discipline and official oversight as essential elements of a robust financial system" (1185).
"We consider an economy where domestic bank credit is the only source of financing for capital investment by productive enterprises, and examine the consequences of the structure of competition in the banking sector for the overall stability of the financial system. The key element of the analysis is that, in evaluating credit risks, banks assess the underlying profitability of the project they are considering financing using a different information set from that available to the prospective borrower. They therefore provide a valuable service to the productive firms: that of giving a 'second opinion' on the expected profitability of the project. The efficiency with which banks provide this financial service depends on a number of factors, including the structure of competition in the banking sector and the state of the macro economy" (1189).
"This analysis suggests that an imperfectly competitive banking system responds to bad loan problems by reducing lending and raising intermediation spreads" (1191).
"The discussion in the preceding sections shows that a number of factors--both microeconomic and macroeconomic--can cause financial problems in DTEs, and that regulatory oversight and market discipline are, in principle, complementary means for achieving a stable and robust financial system...The basic elements of a sound financial system are a supportive legal and regulatory environment, strong internal governance, external discipline provided by market forces, and external governance provided by regulation and supervision at both the domestic and international level" (1197).
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