Transcript Security Scenarios And The Global Economy

NS3040
Winter Term 2015
International Monetary Fund
IMF I
• IMF founded in 1944 at the Bretton Woods Conference
• Officially charged with managing the global regime of exchange
rates and international payments
• A watchdog of the international of the monetary and exchange
rate policies vital to the prosperity of the global economy
• No independent source of financing – dependent on member
contributions (based on relative country size)
• Similar to a credit union that permits membership to access a
common pool of resources
• In theory members with balance-of-payments trouble
seek recourse with the IMF to buy time to rectify their
economic policies and restore economic growth.
• Fund recast itself in a broader, more active role
following the 1973 collapse of fixed exchange rates
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IMF II
• Since then has received both criticism and credit for its
efforts to:
• promote financial stability,
• prevent crisis,
• facilitate trade and
• reduce poverty.
• The Fund pursues its missions in three fundamental ways:
• 1. Surveillance
• Formal system of review that monitors financial and
economic policies of member countries to ensure they
are living within their means
• Tracking developments on a national, regional and
global level
• Consultations with member countries over macro-ecomic
and financial issues
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IMF III
• 2. Technical Assistance
• Practical support and training directed mainly toward low- and
middle income countries to help manage their economies
• Includes tax policy, expenditure management, monetary and
exchange rate policy, financial system regulatlion, privatization,
trade liberalization -- etc.
• 3. Lending
• Giving short- to mid-term loans to member nations that are
struggling to meet their international obligations
• Loans (or bailouts) are provided in return for implementing
specific IMF conditions designed to help restore macroeconomic
dynamics conducive to sustainable growth
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IMF IV
• Crisis Management Role
• Historically much of the Fund’s work has been in developing countries
• In recent global crisis has been involved in European economies such as
Iceland, Ireland, Greece and Portugal
• IMF cannot force will on member countries; countries accept Fund’s
conditioned financial assistance on a voluntary basis
• Critics of the Fund
• General Criticisms: Joe Stiglitz and William Easterly most vocal
• Contend that Fund’s loan conditions – overly harsh: fiscal austerity, high
interest rates, trade liberalization, privatization and open capital
markets – Rigid adherence to the Washington Consensus
• The Fund’s programs thus have been counterproductive and have often
devastated local populations
• Jeffrey Sachs contends the Fund responsible for the Asia Crisis of 1997
• Specific difficulties in Russia and Argentina in the late 1990s – extensive
lending to prop up unsustainable currencies
• Currently – Fund slow to anticipate and respond to current global crisis
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Rogoff: Defense of the Fund I
• Ken Rogoff has replied to the four most common
criticisms of the Fund:
• 1. IMF loan programs impose harsh fiscal austerity on
cash-strapped countries
• 2. IMF loans encourage financiers to invest recklessly,
confident the fund will bail them out (the moral
hazard problem)
• 3. IMF advice to countries suffering debt or currency
crisis only aggravates economic conditions
• 4. The Fund has irresponsibly pushed countries to
open themselves up to volatile and destabilizing flows
of foreign capital
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Rogoff: Defense of the Fund II
• 1. The Austerity Myth
• Countries do not go to the Fund unless they have hit lending limits
from other sources and or can not raise capital independently
• Actually by lending the Fund helps countries avoid severe austerity
that would be imposed by markets
• The Fund does insist on being repaid, but most of these payments
usually come well after the crisis and the country is on road to
recovery
• The Fund can not give grants because its resources are limited and
that would deny support to other needy countries.
• 2. The Hazardous Critique
• Private investors have lost considerable amounts -- $225 billion in
Asian financial crisis, $100 billion in 1998 Russian debt default etc
• Most countries generally do repay the IMF, if not on time, then late
but with full interest
• If the IMF is consistently paid then private lenders receive no
subsidy, so there is no bailout.
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Rogoff: Defense of the Fund III
• 3. Fiscal Follies
• Argument that Fund’s policies and conditions more than cancel out
any good additional resources provide.
• Fund pushes countries to increase domestic interest rates when
cuts would better serve to stimulate the economy
• Fund causes countries to tighten their budgets in midst of
recessions
• Rogoff argues fund is more flexible than this.
• Fact is countries have a hard time borrowing during downturn and
must tighten their belts precisely when a looser fiscal policy might
be desirable
• Often have falling currencies and simply must raise interest rates to
stabilize the exchange rate to stop inflation and further
devaluations.
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Rogoff: Defense of the Fund IV
• 4. Capital Control Freaks
• Argued that IMF’s zeal in promoting free capital flows around world
planted seeds of the Asian Financial crisis
• Closer look suggests that banks should have had better regulations
on loans to make sure money did not go into speculative activities.
• In recent years, especially after the start of the 2008 global crisis
the Fund has become more flexible on this issue – especially with
regard to short-term capital inflows that can destabilize exchange
rates.
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Future of the Fund I
• Several issues are facing the Fund that will affect its
future:
• Funding – how best to increase Fund resources?
• Governance – how should the Director be selected? So far has
always been a European
• Governance - voting shares – supposed to be allocated based on
economic size, but emerging economies have proportionately less
• Regional IMF’s – after Asia Crisis a number of proposals for regional
IMFs focused on regional needs
• Flexibility – can the Fund continue their traditional Washington
Consensus style programs?
• Organization – to avoid conflicting advice, should the Fund be
merged with the World Bank?
• Changing global environment – greater need for public institutions
to deal with externalities – market failures with increased
interdependency and financial complexity?
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Future of the Fund II
• Summers Trilemma
• Proper public management – creation of institutions and the
implementation of regulations that aim at reducing or eliminating
market failure and market imperfections
• Depending on the importance give this goal, the IMF takes on more
or less importance
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Future of the Fund III
• Policy Solutions – reflecting the three competing goals.
• Traditional Conservatives – importance of free markets and
sovereign governments – IMF used only in major emergencies
• Modern Protectionists – see need for protection against
international financial integration due to perceived inefficiencies of
financial markets – Expanded role for IMF
• International Utopians see need for global institutions increased
interdependence and greater externalities – Major role for IMF
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