The International Monetary Fund Meghan Herbert - Background Meghan Herbert - Background Julia Ostrom – Current Situation Julia Ostrom – Current Situation

The International Monetary The International Monetary FundFund

Meghan Herbert - BackgroundMeghan Herbert - Background Julia Ostrom – Current SituationJulia Ostrom – Current Situation Tyler Smith – International AspectsTyler Smith – International Aspects Derek Terry – Special ProblemsDerek Terry – Special Problems Russell Wulfenstein – Future of the Russell Wulfenstein – Future of the

IMFIMF

BackgroundBackground

International Monetary Fund International Monetary Fund (IMF)(IMF)

Global organization with 184 Global organization with 184 membersmembers

Oversees global financial system by:Oversees global financial system by: Observing exchange rates and balance Observing exchange rates and balance

of paymentof payment Offering financial and technical Offering financial and technical

assistance when requestedassistance when requested Headquarters in Washington, D.C.Headquarters in Washington, D.C.

Formation of IMFFormation of IMF

Conceived July 1944 at a United Nations Conceived July 1944 at a United Nations conference in Bretton Woods, New Hampshire conference in Bretton Woods, New Hampshire

Representatives of 45 governments agreed on Representatives of 45 governments agreed on a framework for international economic a framework for international economic cooperationcooperation

Necessary to avoid repetition of the disastrous Necessary to avoid repetition of the disastrous economic policies that had contributed to the economic policies that had contributed to the Great Depression of the 1930s.Great Depression of the 1930s.

History Leading up to IMFHistory Leading up to IMF 1930’s1930’s

Economic activity in the major industrial Economic activity in the major industrial countries diminished countries diminished

Countries adopted mercantilist practices Countries adopted mercantilist practices to defend their economies and conserve to defend their economies and conserve diminishing reserves of gold and foreign diminishing reserves of gold and foreign currency through:currency through:

Increased restrictions on importsIncreased restrictions on imports Devaluation of currencies to compete Devaluation of currencies to compete

against each other for export marketsagainst each other for export markets Policies of complicated restrictions on Policies of complicated restrictions on

foreign exchange accounts held by citizensforeign exchange accounts held by citizens

History ContinuedHistory Continued

World trade declined sharply, as did employment World trade declined sharply, as did employment and living standards in many countriesand living standards in many countries

After World War II, leading allied countries After World War II, leading allied countries considered various plans to restore order to considered various plans to restore order to international monetary relationsinternational monetary relations

Bretton Woods conference: charter drafted for Bretton Woods conference: charter drafted for international institution to oversee the international institution to oversee the international monetary system international monetary system

Ensure exchange rate stability Ensure exchange rate stability Promote elimination of exchange restrictions hindering Promote elimination of exchange restrictions hindering

tradetrade

History ContinuedHistory Continued

December 1945- first 29 countries signed December 1945- first 29 countries signed IMF’s Articles of AgreementIMF’s Articles of Agreement

Article I sets out the IMF's main Article I sets out the IMF's main responsibilities:responsibilities: promoting international monetary cooperation;promoting international monetary cooperation; facilitating the expansion and balanced growth of facilitating the expansion and balanced growth of

international trade;international trade; promoting exchange stability;promoting exchange stability; assisting in the establishment of a multilateral assisting in the establishment of a multilateral

system of payments; andsystem of payments; and making its resources available (under adequate making its resources available (under adequate

safeguards) to members experiencing balance of safeguards) to members experiencing balance of payments difficulties.payments difficulties.

IMF MembershipIMF Membership IMF's influence in the global IMF's influence in the global

economy steadily increased as economy steadily increased as it accumulated more membersit accumulated more members

1960’s: Jumped sharply when 1960’s: Jumped sharply when large number of former colonial large number of former colonial territories joined after gaining territories joined after gaining independenceindependence

1990’s: Increased again when 1990’s: Increased again when the countries of the former the countries of the former Soviet bloc were added as Soviet bloc were added as membersmembers

June 2006: 184 members (more June 2006: 184 members (more than 4X original membership)than 4X original membership)

Growth in IMF Membership, 1945 - 2005

(number of countries)

Challenges to IMFChallenges to IMF

Needs of the new developing and transition country members Needs of the new developing and transition country members were different from those of the IMF's founding memberswere different from those of the IMF's founding members

Other major challenges included:Other major challenges included: End of the par value system & emergence of generalized floating End of the par value system & emergence of generalized floating

exchange rates among the major currencies following the US exchange rates among the major currencies following the US abandonment of the convertibility of U.S. dollars to gold in 1971 abandonment of the convertibility of U.S. dollars to gold in 1971

The oil price shocks of the 1970sThe oil price shocks of the 1970s The Latin American debt crisis of the 1980sThe Latin American debt crisis of the 1980s The crises in emerging financial markets in Mexico and Asia in the The crises in emerging financial markets in Mexico and Asia in the

1990s1990s The Argentine debt default of 2001The Argentine debt default of 2001

Recently, rapid advances in technology and communications Recently, rapid advances in technology and communications have also changed international businesshave also changed international business

The expansion of the IMF's membership, together with these The expansion of the IMF's membership, together with these changes in the world economy, have required the IMF to adapt changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectivelyin a variety of ways to continue serving its purposes effectively

The The CurrentCurrent Situation Situation

Purpose and StrategyPurpose and Strategy

The IMF's primary purpose is to ensure the The IMF's primary purpose is to ensure the stability of the international monetary stability of the international monetary system—the system of exchange rates system—the system of exchange rates and international payments that enables and international payments that enables countries (and their citizens) to buy goods countries (and their citizens) to buy goods and services from each other. This is and services from each other. This is essential for sustainable economic growth essential for sustainable economic growth and rising living standards.and rising living standards.

Con’t . . .Con’t . . .

To maintain stability and prevent crises in the To maintain stability and prevent crises in the international monetary system, the IMF reviews international monetary system, the IMF reviews national, regional, and global economic and national, regional, and global economic and financial developments. It provides advice to its financial developments. It provides advice to its 184 member countries, encouraging them to 184 member countries, encouraging them to adopt policies that foster economic stability, adopt policies that foster economic stability, reduce their vulnerability to economic and reduce their vulnerability to economic and financial crises, and raise living standards, and financial crises, and raise living standards, and serves as a forum where they can discuss the serves as a forum where they can discuss the national, regional, and global consequences of national, regional, and global consequences of

their policies.their policies.

OperationsOperations

SurveillanceSurveillance Monitoring national, global, and regional economic Monitoring national, global, and regional economic

and financial developments and advising member and financial developments and advising member countries on their economic policies . countries on their economic policies .

Financial AssistanceFinancial Assistance Provide loans to countries to help with balance of Provide loans to countries to help with balance of

payment problemspayment problems Technical AssistanceTechnical Assistance Provide training to help countries build the expertise Provide training to help countries build the expertise

and institutions they need for economic stability and and institutions they need for economic stability and growthgrowth..

IMF LeadershipIMF Leadership

Board of Governors.Board of Governors. International Monetary and Financial International Monetary and Financial

Committee (IMFC). Committee (IMFC). Executive Board Executive Board Managing Director Managing Director

IMF Managing DirectorIMF Managing Director

On June 7, 2004, Rodrigo de On June 7, 2004, Rodrigo de Rato, previously Spain’s Rato, previously Spain’s Minister ofMinister of Finance, begins his Finance, begins his five-year term as the IMF five-year term as the IMF Managing Director. Managing Director.

Weighted Voting SystemWeighted Voting System

# of votes is tied to economic size of # of votes is tied to economic size of the countrythe country

Most commonly use a consensus Most commonly use a consensus systemsystem

International AspectsInternational Aspects

The Washington ConsensusThe Washington Consensus

Fiscal Policy discipline; Fiscal Policy discipline; Redirection of public spending toward education, health and infrastructure Redirection of public spending toward education, health and infrastructure

investment; investment; Tax reform – Flattening the tax curve: Lowering the income tax rates on Tax reform – Flattening the tax curve: Lowering the income tax rates on

proportionally high tax brackets (typically above median income), and proportionally high tax brackets (typically above median income), and raising the tax rates on the proportionally low tax brackets (typically below raising the tax rates on the proportionally low tax brackets (typically below median income); lowering the marginal tax rate; median income); lowering the marginal tax rate;

Interest rates that are market determined and positive (but moderate) in Interest rates that are market determined and positive (but moderate) in real terms; real terms;

Competitive exchange rates; Competitive exchange rates; Trade liberalization – replacement of quantitative restrictions with low and Trade liberalization – replacement of quantitative restrictions with low and

uniform tariffs; uniform tariffs; Openness to foreign direct investment; Openness to foreign direct investment; Privatization of state enterprises; Privatization of state enterprises; Deregulation – abolition of regulations that impede market entry or restrict Deregulation – abolition of regulations that impede market entry or restrict

competition, except for those justified on safety, environmental and competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial consumer protection grounds, and prudent oversight of financial institutions; and, institutions; and,

Legal security for property rights. Legal security for property rights.

From the Financial From the Financial StatementsStatements

77 members are currently eligible for 77 members are currently eligible for the the Poverty Reduction Growth Poverty Reduction Growth FundFund (PRGF). Since July 1988, 54 of (PRGF). Since July 1988, 54 of the 77 PRGF-eligible members have the 77 PRGF-eligible members have made use of PRGF loans.made use of PRGF loans.

From the Financial From the Financial StatementsStatements

In 1996, the IMF and World Bank In 1996, the IMF and World Bank jointly launched the jointly launched the Heavily Heavily Indebted Poor CountriesIndebted Poor Countries (HIPC) (HIPC) Initiative to reduce the external debt Initiative to reduce the external debt burden of eligible poor and heavily burden of eligible poor and heavily indebted countries to a sustainable indebted countries to a sustainable level.level.

HIPC and PRGF (in billions HIPC and PRGF (in billions SDRs)SDRs)

Total IMF financing requirements for Total IMF financing requirements for HIPC = 3.6HIPC = 3.6

Total Assets of the IMF = 221.7Total Assets of the IMF = 221.7

Total Loans Outstanding PRGF = Total Loans Outstanding PRGF = 19.219.2

(Last year it was 49.8)(Last year it was 49.8)

Overdue LoansOverdue Loans

How well has the IMF How well has the IMF performed?performed?

The IMF is believed to have prolonged The IMF is believed to have prolonged financial problems. (e.g. Argentina)financial problems. (e.g. Argentina)

The IMF is believed to have created some The IMF is believed to have created some moral hazard problems. (e.g. Asian moral hazard problems. (e.g. Asian Financial Crisis)Financial Crisis)

"" The evidence is the IMF messed up time The evidence is the IMF messed up time after time after time after time after time " Joseph Stiglitz, " Joseph Stiglitz, former chief economist of the World former chief economist of the World Bank.Bank.

How has the IMF How has the IMF performed?performed?

How has the IMF done?How has the IMF done?

In regard to the IMF, In regard to the IMF, the Africans are also the most the Africans are also the most enthusiasticenthusiastic —especially Kenya (73%), Nigeria (67%) —especially Kenya (73%), Nigeria (67%) and Senegal (67%). Asians are fairly positive, but the and Senegal (67%). Asians are fairly positive, but the developed countries are quite muted in their developed countries are quite muted in their support.support. The largest donor—the US—has just 37 The largest donor—the US—has just 37 percent expressing positive views, with 26 percent percent expressing positive views, with 26 percent expressing negative views. expressing negative views. The only two countries The only two countries in which a majority views it negatively are in which a majority views it negatively are Argentina (60%) and Brazil (57%),Argentina (60%) and Brazil (57%), which have which have recently paid off their loans from the IMF so as to free recently paid off their loans from the IMF so as to free themselves from its influence. A plurality of 49 percent themselves from its influence. A plurality of 49 percent is negative in Turkey as well. Positive views rise a bit is negative in Turkey as well. Positive views rise a bit with education (but not income) and decline with age. with education (but not income) and decline with age. (World Public Opinion.org)(World Public Opinion.org)

Special ProblemsSpecial Problems

Problems with the IMFProblems with the IMF

IMF is heavily influenced by investorsIMF is heavily influenced by investors

Critics say the International Monetary Fund shifted into overdrive in Critics say the International Monetary Fund shifted into overdrive in their effort to save the economies of Indonesia, the Philippines, South their effort to save the economies of Indonesia, the Philippines, South Korea, and Thailand, to save the pocketbooks of international investors Korea, and Thailand, to save the pocketbooks of international investors who could face a tide of defaults if these markets were not shored up. who could face a tide of defaults if these markets were not shored up.

IMF distorts the international investment market.IMF distorts the international investment market. Every investment has an associated risk, and investors seeking higher Every investment has an associated risk, and investors seeking higher

returns must accept higher risks. The IMF interferes with this returns must accept higher risks. The IMF interferes with this fundamental market mechanism by encouraging investors to seek out fundamental market mechanism by encouraging investors to seek out risky markets on the assumption that if their investments turn sour, risky markets on the assumption that if their investments turn sour, they still stand a good chance of getting their money back through IMF they still stand a good chance of getting their money back through IMF

bailouts. This kind of interference will only encourage more crises.bailouts. This kind of interference will only encourage more crises.


IMF gives countries an easy way outIMF gives countries an easy way out The promise of an IMF bailout insulates financiers and politicians from the The promise of an IMF bailout insulates financiers and politicians from the

consequences of bad economic and financial practices and encourages consequences of bad economic and financial practices and encourages investments that would not otherwise have been made. An example of this is investments that would not otherwise have been made. An example of this is the Asian crisis. Asia's "tiger" economies were performing well, with strong the Asian crisis. Asia's "tiger" economies were performing well, with strong growth, moderate price inflation, fiscal discipline, and high rates of saving. growth, moderate price inflation, fiscal discipline, and high rates of saving. But these countries encountered a currency crisis because their But these countries encountered a currency crisis because their governments attempted to maintain an exchange rate pegged to the U.S. governments attempted to maintain an exchange rate pegged to the U.S. dollar, while conducting monetary policies that diverged from that of the dollar, while conducting monetary policies that diverged from that of the United States. Capital inflows covered up this disparity for a time. But when United States. Capital inflows covered up this disparity for a time. But when the Thai currency wobbled on rumors of exchange controls and devaluation, the Thai currency wobbled on rumors of exchange controls and devaluation, the currency markets quickly swept aside increasingly unrealistic currency the currency markets quickly swept aside increasingly unrealistic currency values.values.

IMF is looked at as a lender of last resortIMF is looked at as a lender of last resort The IMF is looked at as a lender of last resort when countries get into The IMF is looked at as a lender of last resort when countries get into

financial trouble. In that role, it's doing far more harm than good. A free financial trouble. In that role, it's doing far more harm than good. A free market economy has a very efficient way of dealing with misjudgment, market economy has a very efficient way of dealing with misjudgment, excess, and failure. It's called bankruptcy.excess, and failure. It's called bankruptcy.


ESAFESAF Vice Chairman Jim Saxton, Joint Economic Committee “It was Vice Chairman Jim Saxton, Joint Economic Committee “It was

a fundamental policy mistake for the IMF to have a fundamental policy mistake for the IMF to have established ESAF and embarked on the course of established ESAF and embarked on the course of development lending that has led to so many serious development lending that has led to so many serious problems around the world. This legislation seeks to correct problems around the world. This legislation seeks to correct this mistake by closing ESAF (Enhanced Structural this mistake by closing ESAF (Enhanced Structural Adjustment Facility ) and using its reserves for debt relief. Adjustment Facility ) and using its reserves for debt relief. The legislation is based on the view that the policy The legislation is based on the view that the policy underlying the establishment of ESAF is bankrupt, and underlying the establishment of ESAF is bankrupt, and therefore ESAF should be ended, and its legacy of heavy therefore ESAF should be ended, and its legacy of heavy debt burdens on the poorest nations should be written-off. debt burdens on the poorest nations should be written-off. As I have said many times, my own view is that this type of As I have said many times, my own view is that this type of lending through the IMF's general resources should also be lending through the IMF's general resources should also be ended, and the IMF refocused on its original function.”ended, and the IMF refocused on its original function.”

Problems with the IMF in Problems with the IMF in ArgentinaArgentina

IMF did not see the warning signsIMF did not see the warning signs IMF admits to are not having supervised Argentina IMF admits to are not having supervised Argentina

closely enough and not having paid enough attention to closely enough and not having paid enough attention to warnings sounded prior to 2001 that the fixed-exchange warnings sounded prior to 2001 that the fixed-exchange rate regime was in trouble. Indeed, not only did the IMF rate regime was in trouble. Indeed, not only did the IMF ignore clear warnings, but they tripled their loans to ignore clear warnings, but they tripled their loans to Argentina in the months preceding the December 2001 Argentina in the months preceding the December 2001 crisis, taking total loans from $5 billion to $15 billion. In crisis, taking total loans from $5 billion to $15 billion. In sum, the IMF was unprepared for the crisis, prescribed sum, the IMF was unprepared for the crisis, prescribed mistaken economic policies and poured money into mistaken economic policies and poured money into Argentina to prop up an unviable system. Argentina to prop up an unviable system.


IMF misdiagnosed the crisisIMF misdiagnosed the crisis The IMF’s management of the Argentine crisis (since The IMF’s management of the Argentine crisis (since

December 2001) has been plagued with errors in December 2001) has been plagued with errors in diagnosis, macroeconomic projections, and policy diagnosis, macroeconomic projections, and policy prescriptions. In an unprecedented document published prescriptions. In an unprecedented document published in early July, the Argentine government described in in early July, the Argentine government described in detail IMF mistakes. The government’s paper highlights detail IMF mistakes. The government’s paper highlights the extent of IMF clueless ness and inability to deal with the extent of IMF clueless ness and inability to deal with the crisis. The document also details IMF meddling in the crisis. The document also details IMF meddling in national affairs far outside its official mandate, such as national affairs far outside its official mandate, such as demanding modifications to the bankruptcy code and demanding modifications to the bankruptcy code and the repeal of a law that allowed for the prosecution of the repeal of a law that allowed for the prosecution of white-collar crime. white-collar crime.


IMF is contradictoryIMF is contradictory On the one hand, it acts as a lobbyist for defaulted On the one hand, it acts as a lobbyist for defaulted

private creditors, demanding that Argentina raise its private creditors, demanding that Argentina raise its debt-restructuring offer and insisting that the debt-restructuring offer and insisting that the government pay off its debt to the IFIs. On the other government pay off its debt to the IFIs. On the other hand, the IMF has also insisted that Argentina eliminate hand, the IMF has also insisted that Argentina eliminate export and financial transaction taxes, which together export and financial transaction taxes, which together account for one third of the government’s revenue, account for one third of the government’s revenue, because it claims these taxes “distort” the price because it claims these taxes “distort” the price structure. So as the IMF pressures for significantly higher structure. So as the IMF pressures for significantly higher payments to creditors, it also demands measures that payments to creditors, it also demands measures that would deeply cut government revenue. Meanwhile, would deeply cut government revenue. Meanwhile, Argentina’s millions of poor and unemployed don’t even Argentina’s millions of poor and unemployed don’t even enter into the IMF’s equation.enter into the IMF’s equation.

IMF Brazil BailoutIMF Brazil Bailout

In 1998, Brazil’s inability to pay inordinate In 1998, Brazil’s inability to pay inordinate accumulated interest on loans caused a accumulated interest on loans caused a currency crisis.currency crisis.

The loans were extended by banks like The loans were extended by banks like Citigroup, J.P. Morgan Chase and FleetBoston, Citigroup, J.P. Morgan Chase and FleetBoston, which stood to lose huge amounts of money.which stood to lose huge amounts of money.

The IMF, along with the World Bank and the The IMF, along with the World Bank and the U.S., bailed out Brazil with a $41.5 billion U.S., bailed out Brazil with a $41.5 billion package that saved Brazil, its currency and, package that saved Brazil, its currency and, not incidentally, certain private banks.not incidentally, certain private banks.

IMF Corporate WelfareIMF Corporate WelfareCongressman Bernard Sanders (I-VT), the Congressman Bernard Sanders (I-VT), the

Ranking Member of the International Ranking Member of the International Monetary Policy and Trade Subcommittee, Monetary Policy and Trade Subcommittee, said, "At a time when we have a $6 trillion said, "At a time when we have a $6 trillion national debt, a growing federal deficit, national debt, a growing federal deficit, and an increasing number of unmet social and an increasing number of unmet social needs for our veterans, seniors, and needs for our veterans, seniors, and children, it is unacceptable that billions of children, it is unacceptable that billions of U.S. taxpayer dollars are being sent to the U.S. taxpayer dollars are being sent to the IMF to bailout Brazil." IMF to bailout Brazil."

"This money is not going to significantly help "This money is not going to significantly help the poor people of that country. The real the poor people of that country. The real winners in this situation are the large, winners in this situation are the large, profitable U.S. banks such as Citigroup profitable U.S. banks such as Citigroup that have made billions of dollars in risky that have made billions of dollars in risky investments in Brazil and now want to investments in Brazil and now want to make sure their investments are repaid. make sure their investments are repaid. This bailout represents an egregious form This bailout represents an egregious form of corporate welfare that must be put to of corporate welfare that must be put to an end. Interestingly, these banks have an end. Interestingly, these banks have made substantial campaign contributions made substantial campaign contributions to both political parties”to both political parties”

IMF Corporate WelfareIMF Corporate Welfare

Sanders continued, "The policies of the IMF over Sanders continued, "The policies of the IMF over the past 20 years advocating unfettered free the past 20 years advocating unfettered free trade, privatizing industry, deregulation and trade, privatizing industry, deregulation and slashing government investments in health, slashing government investments in health, education, and pensions has been a complete education, and pensions has been a complete failure for low income and middle class families failure for low income and middle class families in the developing world and in the United States. in the developing world and in the United States. Clearly, these policies have only helped Clearly, these policies have only helped corporations in their constant search for the corporations in their constant search for the cheapest labor and weakest environmental cheapest labor and weakest environmental regulations. Congress must work on a new regulations. Congress must work on a new global policy that protects workers, increases global policy that protects workers, increases living standards and improves the environment."living standards and improves the environment."

IMF Corporate WelfareIMF Corporate Welfare

The Future of the IMFThe Future of the IMF

Net Benefit in QuestionNet Benefit in Question

““What public goods can the IMF and What public goods can the IMF and the World Bank provide at a social the World Bank provide at a social benefit greater than the social cost? benefit greater than the social cost? After two decades of intermittent After two decades of intermittent crises, questions arise about the net crises, questions arise about the net benefit that these institutions benefit that these institutions provide.”provide.”

http://www.house.gov/jec/imf/07-18-03.pdfCarnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

What is Success for the IMF?What is Success for the IMF?

““Increasingly success or failure must Increasingly success or failure must be judged by the ability of be judged by the ability of international institutions to international institutions to encourage client countries to create encourage client countries to create the proper incentives for sustained the proper incentives for sustained growth and economic and social growth and economic and social progress.”progress.”


Will the IMF Survive Another Will the IMF Survive Another Decade or Two in its Current Decade or Two in its Current

Form? Form? With international confidence on the With international confidence on the

decline, future success will require decline, future success will require policy changespolicy changes

Policy changes are constantly Policy changes are constantly underwayunderway

International desire for a successful International desire for a successful IMF ensures its survivalIMF ensures its survival

http://ksghome.harvard.edu/~drodrik/G24-Mohammed.pdf

The future of the IMF will depend on The future of the IMF will depend on their ability to achieve three goals: their ability to achieve three goals: develop or enhance incentives within develop or enhance incentives within

client countries for growth, client countries for growth, providing incentives for attainable public providing incentives for attainable public

goods, and goods, and improvements in quality of life and improvements in quality of life and

reduction in poverty.reduction in poverty.

http://www.house.gov/jec/imf/07-18-03.pdf

Required Changes for Required Changes for Success Success

Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

Focus on poverty alleviation is costly, Focus on poverty alleviation is costly, unsustainable, and is not an official unsustainable, and is not an official purpose of the IMFpurpose of the IMF The The World BankWorld Bank is recognized as “the is recognized as “the

central institution for poverty reduction” central institution for poverty reduction”

http://ksghome.harvard.edu/~drodrik/G24-Mohammed.pdf


Response to new information. Response to new information. The IMF has an advantage in obtaining The IMF has an advantage in obtaining

information because of its working information because of its working relationship with many developing relationship with many developing countries and its mandatory Article 4 countries and its mandatory Article 4 reports on country developments. The IMF reports on country developments. The IMF was slow to develop standards to improve was slow to develop standards to improve the quality of information and slower still the quality of information and slower still to make the information public. to make the information public.

http://www.house.gov/jec/imf/07-18-03.pdf


Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

The IMF should restate its principal The IMF should restate its principal mission mission

Instead of lending to all, it should limit its Instead of lending to all, it should limit its role to preventing the spread of crises from role to preventing the spread of crises from troubled economies to their neighbors, troubled economies to their neighbors, trading partners, and others. trading partners, and others.

Instead of lengthy negotiations to extract Instead of lengthy negotiations to extract promises of reform, it should not lend to promises of reform, it should not lend to countries that have not adopted and countries that have not adopted and maintained some specified reforms. maintained some specified reforms.


New Strategy New Strategy

The IMF in principle could provide two benefits. The IMF in principle could provide two benefits. First, it can reduce risk of international or global First, it can reduce risk of international or global

financial crises by serving as a quasi-lender-of-last-financial crises by serving as a quasi-lender-of-last-resort. resort.

Second, it can provide information, accounting, and Second, it can provide information, accounting, and financial standards that reduce costs of acquiring financial standards that reduce costs of acquiring information. Better information improves market information. Better information improves market allocation by permitting market participants to make allocation by permitting market participants to make more informed choices. more informed choices.

One possible benefit would be less herd-like behavior One possible benefit would be less herd-like behavior by lenders. If lenders know only that a major lender by lenders. If lenders know only that a major lender is not renewing its loans, the probability that a is not renewing its loans, the probability that a troubled country may be forced to devalue and troubled country may be forced to devalue and default rises. Reducing exposure to the country default rises. Reducing exposure to the country becomes a more prudent strategy than before. becomes a more prudent strategy than before.


New Strategy New Strategy

Documents

The International Monetary Fund Meghan Herbert - Background Meghan Herbert - Background Julia Ostrom – Current Situation Julia Ostrom – Current Situation