What is the IMF

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What is the IMF?

• ECONOMIC DEVELOPMENT INTERNATIONAL
  POLITICS(Course number INAF 100-14)
• Classroom location Intercultural Center (ICC)
  209aClass day time Tuesday, 1015am-1205pm
• Instructor James Raymond Vreeland, Professor 2.0
  
• WE ARE GLOBAL GEORGETOWN!

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Why was the IMF created?
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Why did we ever need the IMF?A puzzle
Degree of global capital mobility
Fixed exchange rates Capital controls
Floating exchange rates Open capital flows
1971-3
1944
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Conclusion

• Cannot maintain (global) fixed exchange rates in
  the presence of high capital mobility?

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A puzzleWhy were countries able to maintain
fixed exchange rates with high capital mobility
in the late 19th century?
Fixed exchange rates Open capital flows
Degree of global capital mobility
Fixed exchange rates Capital controls
Floating exchange rates Open capital flows
1971-3
1870
Interwar period
1944
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Why?
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Answer Democracy
Growing s of democracies
Few democracies
Fixed exchange rates Open capital flows
Degree of global capital mobility
Fixed exchange rates Capital controls
Floating exchange rates Open capital flows
1971-3
1870
Interwar period
1944
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Growth of democracy (minimalist definition)
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http//freedom.indiemaps.com/
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Why?

• So, why do fixed exchange rates pose a problem
  for democracies in the face of highly mobile
  capital?

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Pure gold standard

• Country A imports from Country B
• Gold moves from A to B (re-coined/minted)
• Less money in A ? lower prices
• More money in B ? higher prices
• ? Country B imports from Country A
• Balance is restored

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With paper money

• Central Banks intervene by adjusting interest
  rates
• So gold doesnt actually flow
• Gold Standard ? strict discipline!

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What is discipline?

• What do lower prices in Country A mean?
• Supply of money down
• More expensive to borrow
• Jobs cut!
• People dont eat!

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People dont eat

• Under authoritarianism
• Let them eat cake

• Under democracy
• Incumbents lose elections

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Hazard Rate over Time for Democracies (Solid
Line) Dictatorships (Dotted Line) Time in
years
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Stylized history

• Late 19th century
• Mobile capital, authoritarian governments
• Interwar years
• Mobile capital democracy ? beggar-thy-neighbor
• Bretton Woods (1944-1971/3)
• Capital controls democracy
• Post Bretton Woods
• Floating exchange rates

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What was the IMF supposed to do?

• Soften the blow
• Lend to Country A deficit-countries so that
  adjustment can be gradual

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Problem

• Keynes Plan called for contributions totaling 26
  billion (with 23 billion from the US)
• The White Plan called for only 5 billion (with
  2 billion from the US)
• Compromise
• 8.8 billion, with just 2.75 billion from the US
• The US would only provide Marshall Plan
  assistance to countries that did not seek
  additional assistance from the IMF
• On the eve of the current crisis
• instead of having reserves approximating half of
  the value of global imports, the IMF holds on
  reserve a total of less than 2 percent of global
  imports

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IMF Arrangementshttp//www.imf.org/external/np/ex
r/map/lending/index.htm

• Iceland
• Turkey
• Seychelles
• Pakistan
• Georgia
• Mongolia

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What is theInternational Monetary Fund?

• Based on
• Vreeland, James Raymond, The International
  Monetary Fund Politics of Conditional Lending
  (Routledge, January 2007).

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• 1944 44 countries signed the Bretton Woods
  agreement
• International Monetary Fund (stability)
• World Bank (development)
• The Bretton Woods Institutions.

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The IMF was given 2 tasks

• Surveillance.
• Lending.

The IMF has mainly focused on the latter function
so we will too But Ill touch on surveillance
at the end.
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Why lending?

• Gold standard each currencys value was
  ultimately backed up by gold.
• A balance of payments deficit could lead to a
  depletion of gold reserves ?
• Lowered confidence that the government can really
  back up the value of the currency ?
• Run on the currency hyperinflation, breakdown of
  economic order!
• Governments close up trading!

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IMF lending as insurance

• A loan from the IMF enables a country to survive
  a temporary balance of payments deficit.

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The shift?

• The world shifted away from the Bretton
  Woods-gold standard in the 1970s
• The old exchange system collapsed.
• The IMF faced a crisis of purpose.
• But the IMF was already involved in the
  developing world.
• Expanded this role not just lending for
  stability, but also to promote development.

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Was there really a shift?
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Stepping back a moment

• Who is the IMF?
• Where do the resources for loans come from?

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Who is the IMF?

• Currently 185 members.
• (Non-member independent countries Andorra,
  Liechtenstein, Nauru, Taiwan, Cuba, and North
  Korea)
• Members have votes according to the size of
  their subscription to the IMF

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Where do the resources for loans come from?

• Members provide a contribution called the
  members quota (held on reserve).
• The size of the quota is a function of the
  countrys economy
• GDP
• current account transactions
• official reserves
• Largest USA (SDR 37,149.3 million). Smallest
  Palau (SDR 3.1 million).

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Quotas

• Determine voting power at the IMF.
• US 17
• G5 38
• These guys call the shots! An issue well get
  back to

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Soas an international lender,

• If a country gets into a balance of payments
  crisis, or for whatever reason, has a shortfall
  in its foreign reserves,
• The IMF can provide a loan (lest this country
  enter into destructive policies).
• Problem This bailing out option lowers the
  incentive to pursue sound policy.
• ? Moral Hazard.

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Solution?

• If the IMF determines that the need for an IMF
  loan is due to bad policy,
• The Fund imposes policy conditions in return for
  the loan.
• This arrangement of conditions for loans is known
  as Conditionality.
• Note that the loan is not provided upfront, but
  disbursed in tranches, subject to reviews of
  compliance with conditions.

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Policy conditions usually entail

• Fiscal austerity
• cutting government services and increasing taxes
• Tight monetary policy
• raising interest rates and reducing credit
  creation
• Currency devaluation.
• What are the goals of IMF programs?
• Economic stability.
• Economic growth.

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La loi

• LETTER OF INTENT
• Drafted (by whom?) signed by finance minister,
  central bank president, and/or chief executive.
• Sent to the Executive Board for approval
• 1st tranche of loan released.

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Recidivism is the norm Extreme examples from
around the world

• South Korea spent 13 years under consecutive
  agreements from 1965 to 1977.
• Zaire 14 years straight (1976-1989).
• Liberia 15 years (1963-1977).
• Peru participated in consecutive agreements from
  1954 to 1971 (18 years).
• Panama from 1968 to 1987 (20 years of consecutive
  agreements)
• After a stint of seven years (1961 to 1967),
  Haiti entered into agreements again from 1970 to
  1989, for a total of 27 out of 29 years.

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Review of background on the IMF

• Similar to a credit union (access to pool of
  resources).
• Can lend from this pool to countries in crisis.
• Moral hazard lowers the incentive to avoid bad
  policies.
• Thus, Conditionality force the country to
  follow good policies in return for a loan.
• So, you can think of an IMF program as having 2
  components loan conditions.

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• What are the goals of IMF programs?
• Economic stability?
• Economic growth?
• Note that while originally intended to promote
  international economic stability, the IMF has
  become increasingly concerned with promoting
  growth and addressing poverty

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Our primary objective is growth It is toward
growth that our programs and their conditionality
are aimed. It is with a view toward growth that
we carry out our special responsibility of
helping to correct balance of payments
disequilibria and, more generally, to eliminate
obstructive macroeconomic imbalances. When I
refer to growth, I mean high-quality growth, not
growth for the privileged few, leaving the poor
with nothing but empty promises. Michel
Camdessus, former IMF Managing Director
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What are the effects?HERE COMES THE BAD NEWS

• Lower economic growth.
• Growing consensus across the political spectrum.

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The problem may be one of POLITICAL ECONOMY

• What role do politics play in international
  organizations?
• International politics
• Friends of the United States get loans with weak
  conditionality.
• (E.g., UN Security Council members bribed???)
• Domestic politics
• Governments use the IMF as a scapegoat to push
  through policies that protect elites at the
  expense of labor and the poor

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How does bringing in the IMF help push through
economic reform?
Figure 1 The logic of bringing in the IMF
Payoff to veto player
-1 (change policy)
Accept
Veto player
Without the IMF
Reject
0 (maintain the status quo)
Executive
With the IMF
-1 (change policy) loan
Accept
Veto player
Reject
-r (reject the IMF)
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• Note the story requires a veto player opposed to
  the deficit reduction.
• What is a veto player? (Discuss.)
• The probability of such a veto player existing
  increases with the number of veto players.
• Hypothesis As the of veto players increases,
  the probability that the government wants an
  arrangement increases.

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Compliance

• Note that the IMF can be used as leverage only if
  conditionality is enforced.
• Sometimes countries are given a free-ride.
  Conditionality is window dressing.
• Why?
• International politics
• Bureaucratic politics

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International Politics

• Is the IMF a tool of foreign policy for the US
  (as well as Japan, Germany, France and UK)?
• Hundreds of anecdotes Systematic evidence?
• Countries that vote with the G7 at the UN are
  more likely to receive an IMF program.
• Countries receiving US foreign aid receive
  lighter punishments for non-compliance.
• More US bank exposure, more IMF loans.

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Putting the domestic and international stories
together
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Entering into IMF Programs The effect of
domestic politics depends on international
politics
Effect of domestic institutions
Favorable US interest in the country
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Bureaucratic politics

• The principal-agent problem A long chain of
  command with little accountability.
• Perhaps the IMF is a power unto itself, seeking
  to maximize its budget.
• Seeks to loan as much as possible.
• Seeks to expand the contributions of member
  countries.
• The main condition it enforces on loan
  recipients repayment.

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So, the effects of the IMF

• May be due to loans propping up bad
  governments/policies
• International politics
• Bureaucratic story
• May be due to wrong policies
• Bad IMF advice
• And/Or partial reform
• Consensus that IMF programs historically did not
  help economic development

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The debate
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The left

• Bad policy advice

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The right

• Policy advice is ignored
• IMF lending goes to strategically important
  countries
• Or just any countries and the IMF doesnt enforce
  bureaucratic story
• Loans subsidize bad policies and bad governments

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Moderate view

• Governments use the IMF to push through policies
  that protect elite constituencies.
• This partial reform is not good for economic
  growth and exacerbates income inequality.

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Why is there a debate?

• The compliance question has not been answered!
• Why not?
• The IMF (still) lacks transparency!

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Thank youWE ARE GLOBAL GEORGETOWN!