| Should Reform be a Requirement for Increasing the IMF's Resources? |
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In past financial crises, the International Monetary Fund has failed as an effective lender of last resort. This time, governments should insist that the practice of the IMF is reformed before allocating it further resources, says a report by CEPR. New Paper Finds IMF Lending Still Requires Harmful and Inappropriate Economic Conditions IMF Reforms at Risk, warns Boutros-Ghali 23rd April 09 ~ STWR IMF Reforms at Risk, warns Boutros-Ghali 21st April 09 - Edward Luce and Alan Beattie, Financial Times (UK) The agenda to reform the International Monetary Fund and restructure its shareholding to give emerging markets a bigger voice is in danger of being sidelined, says Youssef Boutros-Ghali, who chairs the fund’s policy steering committee. Mr Boutros-Ghali, who is the first developing country chairman of the influential 24-member committee, said governments were already showing “reluctance” to pursue a goal they endorsed at the G20 summit in London this month. He said the “urgent” task of reviving growth was driving out the “merely important” one of building institutions to reflect changing global realities. “Reform needs to be done in a time of crisis,” Mr Boutros-Ghali, Egypt’s finance minister, told the Financial Times. “But in a crisis, you want to put out the fire and not bother with plans to redecorate the living room.” Speaking in the run-up to the IMF and World Bank spring meetings, he predicted that the reweighting of government quotas – or IMF shareholdings – would prove “extremely painful” since beneficiaries were unlikely to give up their advantages lightly. Europe has eight seats on the IMF board and 30 per cent of the voting, compared with only 17 per cent and one seat for the United States. China and India both have quotas lower than some smaller European countries. Mr Boutros-Ghali said the same difficulties applied to governance reforms, such as whether the US would give up its veto, or whether board decisions would require a double majority of countries as well as shareholders. Currently some decisions require a “super-majority” of 85 per cent of shareholders. “It is going to open all sorts of Pandora’s boxes,” said Mr Boutros-Ghali. “I get the sense there’s a reluctance by governments: ‘Let’s not get into this reform/governance agenda now. There is plenty of time between now and 2011 [the G20 deadline].’ ” Mr Boutros-Ghali, who narrowly pipped Palaniappan Chidambaram, India’s finance minister, to the post last October, said that shareholders should also be pushing harder to create an IMF that was less “prescriptive”. A former IMF economist and nephew of the former United Nations secretary-general, Mr Boutros-Ghali said he had seen from both sides how the fund does business and said he had “felt what the IMF can do at the pointy end”. In future, it should vary its policy recipes, he said. “I want an institution that is more involved not only as a global policeman but as a global witchdoctor.” His comments were backed up yesterday by a Washington think-tank, which said recent IMF programmes in Ukraine, El Salvador and Pakistan had resulted in contractionary policies – “repeating the serious errors they [the fund] made in the last major crises of the 1990s”. The report, brought out by the liberal Centre for Economic and Policy Research, added: “The fund right now is supposed to help low and middle-income countries do what the high-income countries are doing – stimulate their economies. It defeats the purpose to require them to do the opposite.” However, Mr Boutros-Ghali said the IMF was a “much more legitimate” body than the G20 to address the global crisis, and he declined an invitation to pronounce the “Washington consensus” dead – a phrase used by Gordon Brown, a predecessor as chairman of the steering committee. He also praised the Obama administration’s approach to the crisis: “This administration believes… in a multilateral system that actually functions,” he said. He also dismissed recent talk – from China, in particular – of replacing the dollar as the main reserve currency with Special Drawing Rights, the basket of currencies that serves as the IMF’s principal unit. New Paper Finds IMF Lending Still Requires Harmful and Inappropriate Economic Conditions 21st April 09 - Center for Economic and Policy Research The Center for Economic and Policy Research (CEPR) released a new paper today that finds that the International Monetary Fund (IMF) is still prescribing inappropriate policies that could unnecessarily worsen economic downturns in a number of countries. The paper, "Empowering the IMF: Should Reform be a Requirement for Increasing the Fund's Resources?" examines conditions tied to the IMF's new lending to El Salvador, Pakistan, Ukraine and other countries and finds the IMF is requiring macroeconomic conditions that can unnecessarily exacerbate the effects of the global economic recession on these countries. "New funding should not be provided to the IMF unless the institution is subject to important reforms that will prevent the Fund from continuing and repeating the serious errors that they made in the last major crises of the 1990s," said Mark Weisbrot, co-Director of CEPR and lead author of the paper. Among the harmful conditions cited in the paper are agreements that unnecessarily tighten fiscal and monetary policy in countries facing declining output and negative external economic shocks. The IMF has at the same time advocated the passage of economic stimulus packages and expansionary monetary policy in developed economies such as the U.S., Europe, and Japan. "The main purpose of the IMF's lending and the increased resources for the Fund right now is supposed to be to help low-and middle-income countries do what the high-income countries are doing - stimulate their economies," said Weisbrot. "It defeats the purpose to require them to do the opposite." The authors also find that Fund-supported policies may have contributed to the vulnerability of countries in the current crisis, as it did in the run-up to the Asian crisis a decade ago. The paper concludes that governments allocating new resources to the IMF should first ensure that there is sufficient reform of IMF governance and past IMF practices, and that accountability mechanisms are put in place at the Fund. 21st April - CEPR This paper briefly reviews the IMF’s current practices and policy-making in the context of a proposed quadrupling of IMF resources to $1 trillion dollars, and a consequent increase in the Fund’s influence over economic policy-making in developing countries. In the last major set of economic crises of the 1990s, the Fund made serious mistakes that adversely affected the economies of Argentina, Indonesia, South Korea, Thailand, Russia, Brazil, and other countries. At the time, these mistakes drew widespread criticism, including from prominent economists such as Nobel Laureate Joseph Stiglitz and Columbia University’s Jeffrey Sachs. In those crises the Fund failed to act as a lender of last resort, when it was most urgently needed in Asia, as countries such as South Korea, Indonesia, Thailand, the Philippines, and Malaysia fell victim to a severe shortage of foreign exchange. It then imposed procyclical policies and in some cases, such as South Korea, set unrealistic inflation targets that would be impossible to achieve, given the currency depreciation, without a severe economic contraction. The IMF’s own Independent Evaluation Office later conceded that “[I]n Indonesia… the depth of the collapse makes it difficult to argue that things would have been worse without the IMF…” In Argentina, the Fund lent tens of billions of dollars to support an overvalued exchange rate that inevitably collapsed, while attempting to adjust the economy to this unsustainable exchange rate through contractionary macroeconomic policies. When the inevitable sovereign debt default and exchange rate collapse occurred at the end of 2001, the Fund again failed to act as a lender of last resort. Instead, it (together with the World Bank) drained a net 4 percent of GDP out of the country in 2002, while pressuring Argentina to pay more to its foreign creditors, and opposing some of the most important economic policies that facilitated Argentina’s recovery and ensuing six-years of rapid economic growth. This paper finds that the IMF is still prescribing inappropriate policies that could unnecessarily exacerbate economic downturns in a number of countries. In El Salvador, for example, the country has signed an agreement that precludes the use of expansionary fiscal policy. This is especially problematic because the country cannot use exchange rate policy and is very limited in monetary policy since it has adopted the dollar as its currency. The IMF agreement thus cuts off practically the only policy tool for a country that is heavily dependent on a contracting U.S. economy – El Salvador gets remittances amounting to 18 percent of GDP from the United States and exports about 9.6 percent of GDP there. In Pakistan, the IMF agreement signed last December provides for tightening both fiscal and monetary policy, including a sharp reduction in the fiscal deficit from 7.4 percent of GDP last year to 4.2 percent of GDP for the current fiscal year. It is questionable whether such policies are necessary, especially given that the country’s current account deficit has largely disappeared, and inflation has fallen considerably since last October. Furthermore, the country is facing a number of external shocks, including declining exports and capital inflows. The Fund has also prescribed fiscal tightening for Ukraine, where GDP is now projected to decline by 9 percent in 2009. The IMF Standby Arrangement approved in October 2008 provided for a zero fiscal balance. At the time, the country was undergoing a number of severe negative external shocks: the price of Ukraine’s steel exports, which amount to 15 percent of GDP, had fallen by 65 percent; Russia had decided to phase out natural gas subsidies, implying a price increase of up to 80 percent in gas imports, which amounts to 6 percent of GDP; and a slowdown in capital inflows due to the international financial crisis. It was also suffering from liquidity strains and falling confidence in the banking system. Given these conditions, and the fact that Ukraine’s gross public debt is a very low 10.6 percent of GDP, the agreed upon fiscal tightening would appear to be inappropriate. Hungary, Georgia, Latvia, Serbia, and Belarus all have signed IMF agreements that provide for fiscal tightening that could unnecessarily exacerbate these countries’ economic downturns. The Fund may also have contributed to the vulnerability of countries in the current crisis, as it did in the run-up to the Asian crisis a decade ago. For example, the Fund has supported the liberalization of capital flows, as well as inflation targeting. Central banks that have targeted a specific inflation rate tend to let the currency appreciate, which encourages the private sector to borrow in foreign currency. This foreign borrowing has made many countries more vulnerable to the current crisis, because households and firms are hit especially hard when the currency depreciates. This also limits the ability of countries to ameliorate the crisis by allowing the currency to depreciate. The IMF has also generally opposed capital controls, which can help governments stem the loss of reserves, currency crashes, and other problems associated with large capital outflows. This cuts off an important policy tool and makes governments more dependent on tightening fiscal and monetary policy to resolve balance of payments difficulties. The main purpose of having international institutions to provide hard currency lending, especially in a time of world recession, is to allow countries that would otherwise be prevented by balance of payments problems from pursuing expansionary (counter-cyclical) policies to do so. China, for example, is able to implement one of the largest stimulus packages in the world because it has $1.95 trillion in reserves. The resources of the IMF should be used to allow and encourage counter-cyclical policies wherever possible, not procyclical policies. The IMF’s current lending practices have implications for the immediate future of the affected countries, because procyclical policies can exacerbate the world economic downturn. But more importantly, the proposed quadrupling of IMF resources will have implications for many years to come, even after the world economy recovers. Although the new resources are unlikely to reverse the trend of governments avoiding, whenever possible, the Fund’s lending and influence, they will help to re-establish an unreformed IMF as a major power in economic and decision-making in low-and-middle income countries, with little or no voice for these countries in the IMF’s decision-making. This could have long-term implications for growth, development, and social indicators in many countries. Governments that are contributing to this increase in funding should think carefully about these implications and the possibilities of making such increases contingent on serious reforms of the IMF – especially in the areas of governance and accountability. Link to STWR's key facts page on the IMF, World Bank and Trade Decommissioning the IMF, World Bank and WTO - STWR
IMF Conditionality High, Effectiveness Low - Bretton Woods Project |
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