Transcript IMF Structural Adjustment Programs: Concepts, Design, Critique

Macroeconomic Factors and
Growth: Theory and
Case Studies
Lecture 1: The „Washington
Consensus“
Ulrich Fritsche
DIW Berlin
Structure
– Lecture 1: The „Washington Consensus“ (Fritsche)
– Lecture 2: The Struggle for a “Post-Washington
Consensus” (Seidel)
– Lecture 3: Case studies
– Basic aim of this lecture: Background, theoretical
arguments, discussion
Lecture 1: The „Washington
Consensus“
• Background: IMF, World Bank and the invention of
“Development” after 1945
• Basic model of stabilization and structural
adjustment (Ref.: Fischer, 1997; Agénor/Montiel,
1996)
• The clash of the 1970s: “Old-fashioned”
(structuralist) macroeconomics vs. “Neo-liberal”
development economics (Ref.: Gore, 2000)
• Basic elements of the “Washington Consensus” of
the early 1990s (Ref.: Williamson 1990/2002)
The Background: The Inter-war Gold
Standard
In the beginning God created sterling and franc.
On the second day He created the currency board and (...) money
was well managed.
On the third day God decided that man should have free will and so
He created the budget deficit.
On the fourth day, however, God looked upon his work and was
dissatisfied. It was not enough.
So, on the fifth day God created the central bank to validate the sins
of man.
On the sixth day God completed His work by creating man and giving
him dominion over all of God's creatures.
Then, while God rested on the seventh day,
man created inflation and the balance-of-payments problem.
Peter B. Kenen
The Inter-war Period: Disturbances
and trouble
– Inflation periods in industrialized countries in the
early 1920s: Austria, Germany, France ....
– Return to the „old“ exchange rates of the Gold
standard: Overvaluation problem
– Keynes: Tract on Monetary Reform
• with externally fixed interest rate + wage stickiness internal
adjustment is costly, devalution preferable
– Great Depression: Behaviour of USA not
compatible with the stability conditions!
– Beggar-thy-neighbor problems!
– For a excellent survey: Nurkse (1944)!
Finance of Development: The idea of
development finance
If either an undeveloped or a war-ravaged country is unable
to meet its capital requirements by capital imports, then it
may be driven to use up whatever international cash
reserves it can command, so as to meet at least part of
those requirements. International liquidity, which should
merely serve as a short-term buffer in the balance of
payments, will be used in effect for long-term purposes. If
international currency reserves are distributed among
countries in accordance with needs arising from normal
short-term balance-of-payments fluctuations, and if these
reserves are in fact expended for capital purposes, then
capital capital will have been distributed according to an
inappropriate criterion; that is, not according to capital
requirements but according to international liquidity
requirements. (Nurkse 1949)
The IMF Articles of Agreement
• (ii) To facilitate the expansion and balanced growth of
international trade, and to contribute thereby to the promotion
and maintenance of high levels of employment and real
income and to the development of the productive
resources of all members as primary objectives of
economic policy.
• (iii) To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive
exchange depreciation.
• (iv) To assist in the establishment of a multilateral system of
payments in respect of current transactions between members
and in the elimination of foreign exchange restrictions which
hamper the growth of world trade.
The IMF Articles of Agreement
• (v) To give confidence to members by making the general
resources of the Fund temporarily available to them under
adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without
resorting to measures destructive of national or international
prosperity.
The Monetary Approach to the
Balance of Payments
– Elasticity approach: partial approach, no income
effects
– Absorption approach: no separation of price and
income effects
– Jacques J. Polak 1957: Monetary Analysis of
Income Formation and Payments Problems. (IMF
Staff Papers).
The Monetary Approach to the
Balance of Payments
P  EPa
PPP
y  y*
Full employment
MS  PLr ( i , y )
Money market equilibrium
m( R  H)  PLr ( i , y )
i  ia
Solution:
Interest rate parity
R

EP a Lr ( i a , y )  H
m
The Monetary Approach to the
Balance of Payments
– The reserves are determined by those forces who
determine supply and demand on the money
market (assumption: money market equilibrium!)
– The desired money holding determines the
balance of payment.
– „The balance of payments is a monetary
phenomenon.“ (Frenkel/Johnson 1976)
The Monetary Approach to the
Balance of Payments
i
LM
(1)
H, E, Pa
i = ia
IS
(2)
R
y*
y
(1) H or Eor Pausl
(2) Excess demand for
money
(3) leads to
disequilibrium on
money market (after
real devaluation)
 real balance effects,
money holding
adjustment
(2) increase of reserve
holding
The Monetary Approach to the
Balance of Payments
R
Money market equilibrium
Coincidence
of external and
internal equilibrium
(1)
External equilibrium
P
(1) monetary expansion
The Savings Gap
y*  1K
K  y * y t 1
Y S  f ( K )
Im  y *
CPr iv  (1  s )( y * T )
K  ( y * T  CPr iv )  ( T  CGov )  (Im  Ex )
K  s( y *  T )  ( T  CGov )  ( y * Ex )
 ( s   )y * (1  s )T  CGov  Ex
I  f ( YS )
The Savings Gap
Y S  f ( K )
gradient: 
K
T for instance
B
I  f ( YS )
gradient: (s+ )
A
y*
The availability of resources constrains growth!
The Merged Model (cf. Agénor/
Montiel 1996) in the P-y-space
P
World bank (growth part)
Money market equilibrium
y
Structuralist macroeconomics and
the IMF-World Bank paradigm
– IMF: Monetarist and strictly stability oriented
– Prebisch, Singer, CEPAL, structuralists
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•
Secular deterioration of terms of trade
Development as a political struggle
Dependencia theories
Importsubstitution as a tool for development
Development planning
Bottleneck theories
Inflation as a necessary by-product of development
IMF annual report 1948
– „Inflation is a serious handicap to recovery and to the
restoration of international economic equilibrium. Waste of
resources and misdirection of production have resulted from
rapidly rising prices. Much of the investment in some
countries has been directed toward escaping the
consequences of holding cash rather than toward expand-ing
output and increasing efficiency. The excessive domestic
demand that accompanies inflation adds to the difficulty of
maintaining an appropriate flow of exports, for output that
might have been available for export is otherwise absorbed
and prices are pushed to non-competitive levels. Inflationary
pressure also stimulates imports, in-cluding imports of goods
which may not be necessary for essential consumption and
investment.“
Neo-liberal supply-side economics of
the early 1980s
–
–
–
–
–
The struggle became more pronounced
Oil price shocks
Stagflation in the 1970s
„primitive Keynesianism“ was blamed for the fault
Reagonomics, Thatcherism => intellectual climate
changed
– This in turn bounced back to development
economics: Bhagwati, Krueger => Free trade
arguments, Political economy arguments for
privatization
Financial repression
r
I
Sg1
Sg2
Sg3
F'
F
I
Ig1
Ig2
Quelle: Fry (1988: S. 16).
Ig3
I,S
The „Washington Consensus“
according to Williamson (1990/2002)
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Avoidance of fiscal deficits
Public expenditure priorities
Tax reform (and Laffer curve)
Competitive interest rates and fight against financial
repression
Competitive exchange rates
Trade policy (and the gains from free trade)
FDI as a driving force of development
Privatization
The role of property rights
Deregulation
The „Washington Consensus“
according to Williamson
P
World bank (growth part)
Money market equilibrium
y
The Concordat: Responsibilities of
the IMF and the World Bank
IMF
-
-
-
Reform of Tax Policy and
Tax Administration;
Budget and Public Expenditures;
Financial Sector Reform;
Reform of the Exchange
Rate System
Source: IMF (1996).
World Bank
-
Foreign Trade Reform;
-
Aspects of Tax Reform;
-
-
-
Deepening of Financial
Intermediation;
Reform of the Public Enterprises;
Public Expenditures and
Investment;
-
Sectoral Price Policy
-
Social Security Reform
Specific Aspects
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Exchange Rate-based vs. Money-based programs
heterodox vs. orthodox
Financial Crisis and contagion
Moral Hazard and Fund Programs
Special features of programs in transition countries
• property rights
• deregulation of prices
• institution-building
Critique
– Neo-classical critique:
• Frank Hahn (1976): monetarist model does not discuss the
possibility of multiple equilibria and stability of the equilibrium.
• Implicit assumption of full employment (Walras Law!)
– Structuralist critique:
• monetarist approach is „wrong“, inflation is inertial, price-wage
spirals
• Two-gap approach (foreign exchange and savings gap)
becomes Three-gap approach (government investment is
complementary to private investment
– Discussion about „Post-Washington Consensus“
• Lecture 2