Transcript Tensions in the Role of the IMF

Tensions in the Role of
the International
Monetary Fund
Presentation by Timothy Lane (IMF)
Oliver Smithies Lecture
Balliol College in association with Oxonia
9 November, 2004
Main themes
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Changes in the world economy have
brought major changes in the role of the
IMF
These changes have led to some strains
Efforts have been made to reform the IMF
in light of this experience
But some underlying tensions remain
unresolved
Purposes of the IMF
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Policy spillovers
Benefits of pooling liquidity
Financing to give members confidence
to make adjustments without
damaging national or international
prosperity
Some trends in recent
decades
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Fall of Bretton Woods system
Capital mobility
Growth disappointments
Low-income countries debt crises
Fall of Communism
Emerging market crises of 1990s
Some broad areas where
problems have emerged
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Conditionality
Emerging market crises
Prolonged use
Low-income countries
Conditionality
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Classic purpose: safeguards and assurances
Reasons for expansion of conditionality
“Grandmotherliness”
Example of tension: Indonesian clove
monopoly
Concern over proliferation of conditionality—
and doubts about its effectiveness
Conclusion: 2002 Conditionality Guidelines—
streamlining and focusing conditionality
Remaining tensions in
conditionality
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Tailoring versus uniformity—both in
establishing conditions and monitoring
results
Streamlining as counterpart of
selectivity
“Ownership” and its limits
Emerging Market Crises
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Examples: Mexico 1994-95, East Asia 1997-98,
Russia 1998, Brazil 1999, 2002; Argentina 2001
Key features:
– Massive withdrawal of external financing
– Massive current account adjustment
– Deep economic slumps—in some cases short-lived, in
others persistent
Problems with IMF crisis
response
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Surveillance: failure to anticipate outbreak of crises
(in some, but not all, cases); lack of candid criticism
of vulnerabilities (including exchange rate regime)
Despite large financing packages, massive (and
largely unforeseen) over-adjustment in current
accounts
Difficulties in handling financial sector fallout
Moral hazard concerns
Difficulties in saying no (e.g. in Argentina); lack of
mechanisms for orderly sovereign debt
restructuring
Debates over specific policy advice
Response to crisis
experience—surveillance
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Vulnerability assessments
Financial sector work (FSAPs), etc.
Data dissemination
Standards and codes
“Fresh look” surveillance
Debt sustainability analysis
More caution on capital mobility
Crisis financing
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Catalytic approach and its limits
Alternatives
– Bigger official packages?
 SRF, CCL,
 But moral hazard, resource constraints limit
overall package
– Bailins? (standstills, default, capital controls)—
could be counterproductive
– Sovereign debt restructuring
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Elusive quest for rules-based approach—but
concerns that discretion could be misused
Information flows
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Data dissemination
Increases in transparency
Learning: IEO; ex post assessments;
INS courses, etc.
Interaction with market participants
(ICMG and more informal contacts)
Prolonged use—why is it
a problem?
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Defeats idea of revolving pool of financing
May be symptomatic of flaws in program
design, conditionality, implementation,
and/or projections
May indicate that IMF support is the wrong
instrument—i.e. because a country’s
problems are longer-term in nature
May stunt domestic policy formulation
processes
Reasons for prolonged
use
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Failure to achieve objectives
Lack of realism on time required
Signaling—pressures from donors
Facilities adapted to permit prolonged
use, especially for low-income
countries
IMF’s response to
prolonged use
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Ex post assessments
Monitoring of incidence
More general efforts to focus
conditionality, improve program design
Work on IMF’s role in low-income
countries
Signaling—attempts to create signaling
mechanism separate from financing
Remaining issues with
prolonged use
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Difficulty of saying “no”
Continuing lack of an alternative
signaling mechanism
Low-income countries
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Disappointing growth performance, failure of successive
development models
Pervasive problems led to comprehensive programs—but likely
to be ineffective and illegitimate in absence of sufficient
ownership in country
Coordination with World Bank and donors
Institutional capacity
Debt crisis and HIPC Initiative
In 1990s, increasing macroeconomic stability (and, in later
1990s, somewhat better growth)
– Key problems are not primarily macroeconomic—but debt sustainability is
still a major issue
– Ongoing financing needs are longer-term
– Continuing need for Fund to help countries hit by shocks
Response to problems
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Debt reduction (HIPC Initiative) and
new debt sustainability
PRSP approach—a step in the right
direction, but doesn’t yet work as
intended
Signaling—lower-access arrangements
Response to shocks—work under way
Some key remaining
issues for LICs
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How can countries graduate from IMF
financing (while continuing to receive
aid from other sources)?
– How long is signaling needed?
– Will PRSP approach help build ownership
and capacity?
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How can we avoid an endless cycle of
lending and debt relief?
Summary—some key
remaining tensions
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Bailins and bailouts—need for clear
principles versus perils of predictability
Selectivity versus pressures to lend
IMF financing as a signal
Parsimony versus comprehensiveness
“Ownership”
Preview of next lecture
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Reform proposals include two strands
which are intertwined:
– What should the IMF do?
– How should the IMF be governed?
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The next lecture will discuss possible
directions for reform, considering both
of these strands