Title: What is the IMF
1What 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!
2Why was the IMF created?
3Why 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
4Conclusion
- Cannot maintain (global) fixed exchange rates in
the presence of high capital mobility?
5A 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
6Why?
7Answer 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
8Growth of democracy (minimalist definition)
9http//freedom.indiemaps.com/
10Why?
- So, why do fixed exchange rates pose a problem
for democracies in the face of highly mobile
capital?
11Pure 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
12With paper money
- Central Banks intervene by adjusting interest
rates - So gold doesnt actually flow
- Gold Standard ? strict discipline!
13What is discipline?
- What do lower prices in Country A mean?
- Supply of money down
- More expensive to borrow
- Jobs cut!
- People dont eat!
14People dont eat
- Under authoritarianism
- Let them eat cake
- Under democracy
- Incumbents lose elections
15Hazard Rate over Time for Democracies (Solid
Line) Dictatorships (Dotted Line) Time in
years
16Stylized 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
17What was the IMF supposed to do?
- Soften the blow
- Lend to Country A deficit-countries so that
adjustment can be gradual
18Problem
- 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
19IMF Arrangementshttp//www.imf.org/external/np/ex
r/map/lending/index.htm
- Iceland
- Turkey
- Seychelles
- Pakistan
- Georgia
- Mongolia
20What is theInternational Monetary Fund?
- Based on
- Vreeland, James Raymond, The International
Monetary Fund Politics of Conditional Lending
(Routledge, January 2007).
21- 1944 44 countries signed the Bretton Woods
agreement - International Monetary Fund (stability)
- World Bank (development)
- The Bretton Woods Institutions.
22The IMF was given 2 tasks
The IMF has mainly focused on the latter function
so we will too But Ill touch on surveillance
at the end.
23Why 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!
24IMF lending as insurance
- A loan from the IMF enables a country to survive
a temporary balance of payments deficit.
25The 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.
26Was there really a shift?
27Stepping back a moment
- Who is the IMF?
- Where do the resources for loans come from?
28Who 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
29Where 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).
30Quotas
- Determine voting power at the IMF.
- US 17
- G5 38
- These guys call the shots! An issue well get
back to
31Soas 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.
32Solution?
- 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.
33Policy 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.
34La 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.
35Recidivism 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.
36Review 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.
37- 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
38Our 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
39What are the effects?HERE COMES THE BAD NEWS
- Lower economic growth.
- Growing consensus across the political spectrum.
40The 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
41How 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)
42- 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.
43Compliance
- 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
44International 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.
45Putting the domestic and international stories
together
46Entering into IMF Programs The effect of
domestic politics depends on international
politics
Effect of domestic institutions
Favorable US interest in the country
47Bureaucratic 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.
48So, 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
49The debate
50The left
51The 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
52Moderate 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.
53Why is there a debate?
- The compliance question has not been answered!
- Why not?
- The IMF (still) lacks transparency!
54Thank youWE ARE GLOBAL GEORGETOWN!