Tensions%20in%20the%20Role%20of%20the%20International%20Monetary%20Fund

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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

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Main themes

• 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
  

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Purposes of the IMF

• Policy spillovers
• Benefits of pooling liquidity
• Financing to give members confidence to make
  adjustments without damaging national or
  international prosperity

4
Some trends in recent decades

• Fall of Bretton Woods system
• Capital mobility
• Growth disappointments
• Low-income countries debt crises
• Fall of Communism
• Emerging market crises of 1990s

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Some broad areas where problems have emerged

• Conditionality
• Emerging market crises
• Prolonged use
• Low-income countries

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Conditionality

• Classic purpose safeguards and assurances
• Reasons for expansion of conditionality
• Grandmotherliness
• Example of tension Indonesian clove monopoly
• Concern over proliferation of conditionalityand
  doubts about its effectiveness
• Conclusion 2002 Conditionality
  Guidelinesstreamlining and focusing
  conditionality

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Remaining tensions in conditionality

• Tailoring versus uniformityboth in establishing
  conditions and monitoring results
• Streamlining as counterpart of selectivity
• Ownership and its limits

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Emerging Market Crises

• 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 slumpsin some cases short-lived,
  in others persistent

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Problems with IMF crisis response

• 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

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Response to crisis experiencesurveillance

• Vulnerability assessments
• Financial sector work (FSAPs), etc.
• Data dissemination
• Standards and codes
• Fresh look surveillance
• Debt sustainability analysis
• More caution on capital mobility

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Crisis financing

• 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
• Elusive quest for rules-based approachbut
  concerns that discretion could be misused

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Information flows

• Data dissemination
• Increases in transparency
• Learning IEO ex post assessments INS courses,
  etc.
• Interaction with market participants (ICMG and
  more informal contacts)

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Prolonged usewhy is it a problem?

• 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
  instrumenti.e. because a countrys problems are
  longer-term in nature
• May stunt domestic policy formulation processes

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Reasons for prolonged use

• Failure to achieve objectives
• Lack of realism on time required
• Signalingpressures from donors
• Facilities adapted to permit prolonged use,
  especially for low-income countries

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IMFs response to prolonged use

• Ex post assessments
• Monitoring of incidence
• More general efforts to focus conditionality,
  improve program design
• Work on IMFs role in low-income countries
• Signalingattempts to create signaling mechanism
  separate from financing

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Remaining issues with prolonged use

• Difficulty of saying no
• Continuing lack of an alternative signaling
  mechanism

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Low-income countries

• Disappointing growth performance, failure of
  successive development models
• Pervasive problems led to comprehensive
  programsbut 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 macroeconomicbut
  debt sustainability is still a major issue
• Ongoing financing needs are longer-term
• Continuing need for Fund to help countries hit by
  shocks

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Response to problems

• Debt reduction (HIPC Initiative) and new debt
  sustainability
• PRSP approacha step in the right direction, but
  doesnt yet work as intended
• Signalinglower-access arrangements
• Response to shockswork under way

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Some key remaining issues for LICs

• 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?
• How can we avoid an endless cycle of lending and
  debt relief?

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Summarysome key remaining tensions

• Bailins and bailoutsneed for clear principles
  versus perils of predictability
• Selectivity versus pressures to lend
• IMF financing as a signal
• Parsimony versus comprehensiveness
• Ownership

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Preview of next lecture

• Reform proposals include two strands which are
  intertwined
• What should the IMF do?
• How should the IMF be governed?
• The next lecture will discuss possible directions
  for reform, considering both of these strands