International Financial institutions and third World Debt

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International Financial institutions and third
World Debt

• Vinod Vyasulu
• Mysore 17 October 2006

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International Financial institutions and third
World Debt

• What are the IFIs?
• The Bretton Woods Institutions
• International Bank for Reconstruction and
  Development
• International Monetary Fund
• Both based in Washington DC

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International Financial institutions and third
World Debt

• Both created after World War 2
• IBRD to help in the reconstruction of war
  devastated
• Europe
• IMF to prevent the kind of trade distortions that
  led to the Great Depression by giving timey
  loans to settle balance of payments crises

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International Financial institutions and third
World Debt

• IBRD is headed by an American nominated by the US
  president
• The IMF is headed by a European chosen from among
  themselves by the Europeans

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International Financial institutions and third
World Debt

• Each is run by a Board of Directors
• vote weight on the basis of contributions to the
  institution
• India, Bangladesh, Sri Lanka together have one
  Director

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International Financial institutions and third
World Debt

• After the rise of Europe and Japan the IBRD had
  completed its job
• Under Macnamara, it changed its focus to third
  world issues
• Finance large projects, encourage private sector
  investment
• promote transfer of technology

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International Financial institutions and third
World Debt

• In recent years,
• shifted focus to poverty alleviation and then
• improvements in governance

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International Financial institutions and third
World Debt

• With the collapse of the dollar-gold link in 1971
• the IMF began to take a more active part in
  international financial crises
• Each country is entitled to short term loans
  without any strings being attached
• many countries exhausted this, oil shocks etc.
• and asked for more
• This led to the introduction of 'conditionalities'

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International Financial institutions and third
World Debt

• These conditionalities are meant to deal with the
  underlying causes of the balance of payments
  problem
• The IMF believes in a simple macroeconomics
• In a free economy, the balance of payments will
  be in equilibrium if the 'prices are right'
• Imbalances occur because of price distortions
• Or because governments fail to observe budgetary
  discipline and create deficits

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International Financial institutions and third
World Debt

• The solution is simple
• Reduce budgetary deficits
• Get the prices right
• The price here is the exchange rate of the
  currency
• To get it right often means devaluation
• Expenditure compression is the conditionality

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International Financial institutions and third
World Debt

• This is a unique 'one-sizefits-all' solution
  from the IMF
• For country after country recommends
• expenditure cuts to reduce budget deficit
• Devaluation to restore balance of payments
  equilibrium
• has never recommended increase in taxes to raise
  revenue and protect expenditure

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International Financial institutions and third
World Debt

• The power of the IMF comes from the fact that
  private agencies treat its recommendations as a
  'good conduct certificate'
• Once the IMF gives a loan, all sorts of financing
  becomes available
• this led to several economy collapses in Latin
  America
• Mexico, Argentina, Brasil to name only a few

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International Financial institutions and third
World Debt

• In the 1980s, the IBRD and IMF began to work
  together
• First, the IMF would sort out the short term mess
  in a country
• Then the IBRD would come in with loans for big
  projects
• Countries accepted this as leaderships had a
  short term vision
• many were military dictatorshipsArgentina Brasil

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International Financial institutions and third
World Debt

• Keeping up with the IMF, the IBRD came up with
  the
• Washington Consensus
• Governments should stick to governing
• Private sector should be in business
• People should pay for what they use
• LPGLiberalisation,Privatisation,Globalisation

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International Financial institutions and third
World Debt

• In the 1997 financial crisis in East Asia, the
  IMF applied the same conditionalities
• But these countries had a budget surplus
• It made the problems worse and delayed recovery

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International Financial institutions and third
World Debt

• The IBRD has moved to budgetary support
• this enables it to make conditions for the entire
  economy, not just the project being financed
• Karnataka in 2000-2004 a case in point

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International Financial institutions and third
World Debt

• Why do countries accept such conditionalities?

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International Financial institutions and third
World Debt

• Thank You for your Attention