The IMF: Successes and Failures

The IMF: Successes and Failures

Presentation at

Warren Wilson College

11-18-2002

Robert F. Mulligan, Ph.D.

Department of Business Computer Information Systems and Economics

College of Business

Western Carolina University

Bretton Woods Conference

(United Nations Monetary and Finance Conference, July 1944)

44 allied nations represented

International Monetary Fund

§ provide short-term loans to cover temporary (i.e., non-recurring) balance-of-payments shortfalls, facilitating international trade and maintaining fixed exchange rates

§ participation in/contribution into IMF price of IBRD development/reconstruction assistance

International Bank for Reconstruction and Development (World Bank)

§ facilitate private lending (by minimizing, guaranteeing against, or pooling risk), first for the reconstruction of Europe, later for the developing world, including former colonies

§ longer-term lending than IMF (e.g., 30-years)

International Trade Organization

§ facilitate negotiation of tariff reduction/removal and arbitrate trade disputes

International Monetary Fund in practice

§ governed by 1944 Articles of Agreement

§ continues to lend for short term monetary stabilization but has become a development lender to rival the World Bank

§ LDC Trust Fund (1976)

§ Structural Adjustment Facility (1985) (0.5% for 10 years with 5.5 yr grace period)

§ Enhanced Structural Adjustment Facility (1987)

World Bank Group

§ International Bank for Reconstruction and Development (IBRD) (market interest, usually greater than 4%)

§ International Finance Corporation (IFC)

§ International Development Association (IDA) (interest free w/ 0.75% service fee over 40 years w/ 10 year grace period)

§ Multilateral Investment Guarantee Corporation (MIGA)

in practice

§ also governed by its own 1944 Articles of Agreement

§ never facilitated private lending

§ "expropriation is the right of any country"

§ lends exclusively to governments or SOEs

§ Marshall Plan (1948) coopted IBRD's reconstruction role

§ adopted redistribution mission under Robert McNamara (1968-1981)

kinds of lending

§ Program Loans

§ Sectoral Adjustment Loans (SECALs)

§ Structural Adjustment Loans (SALs) (limited to 10% of total lending)

International Trade Organization

§ lost public support in U.S. over special treatment of Commonwealth

§ President Truman declined to submit treaty to Senate for ratification

General Agreement on Tariffs and Trade

World Trade Organization

§ tariffs have long been negligible

Development Planning

§ borrowers assume e-rate risk

§ Bank and Fund often criticized for conditionality: conservative monetary policy needed to guarantee stable e-rate

§ lenders choose and design projects

§ underlying philosophy hostile to free markets: assumes the market order is amenable to planning and requires planning

§ lending exclusively to governments or SOEs

§ Asian Development Bank

§ African Development Bank

§ Inter-American Development Bank

§ European Bank for Reconstruction and Development

IMF pre-1973

§ supervised system of fixed exchange rates with dollar as reserve currency

§ necessary for dollar to be a low-inflation currency

§ system collapsed when U.S. increased social and defense spending in 1960s without increasing taxes

1971-1973 "Breakdown of Bretton Woods System"

IMF & World Bank post-1973

§ floating e-rates

§ IMF became a development lender

§ World Bank began providing short-term loans like IMF

IMF in Argentina

§ e-rate pegged too high (1 Argentine peso = 1 U.S. dollar) made Argentine exports too expensive

§ imposed a foreign trade deficit

§ no way to earn foreign currencies needed to service external debt

§ $40 b earned through privatization of SOEs

§ $155 b external debt by late 2001

§ external debt equaled 50 % of GDP by late 2001

§ peso devaluation caused massive bankruptcies because many Argentine firms borrowed in dollars

§ multinational corporations and the wealthy have been permitted to shelter their wealth abroad

§ all bank accounts frozen since January 2002

§ 20 % unemployment

§ two presidents have resigned - political instability drives away foreign investment

IMF in Brazil

§ 1998 $41 b loan program intended to be preventative rather than curative

§ immediately followed by $20 b capital flight

§ conditionality: cut government budget $28 b, including layoffs of government employees and privatization of SOEs

§ interest rates raised to 32.5 % (overnight benchmark rate), 48.7-84.3 % (commercial bank rates), 150-250 % (consumer lending)

§ massive loan defaults, bankruptcies, and bank failures

§ 17 % unemployment in industrial sector

§ "no restructuring, forgiveness, or renegotiation"

§ $30 b loan 2002-2003 conditional on large government budget surplus

IMF in Venezuela

§ recommended tax increases, devaluation of the Venezuelan Bolivar, modest privatization of SOEs, and increases in user fees for government-provided services

§ privatized SOEs were sold as monopolies

§ interest rates doubled between 1996-1998, to 68 %

§ because Venezuela is a major petroleum exporter, it has a current account surplus even with external debt service

Table 1 Outstanding Development Loans (Multilateral Claims) as Percentages of GDP and Government Revenue, 2000 (millions of current U.S. dollars)
	Argentina	Brazil	Venezuela
Gross Domestic Product	$80,741	$301,468	$60,497
Current Account	-$8,970	-$24,632	$13,350
Government Surplus (+) or Deficit (-)	-$2,302	-$17,613	-$1,065
Government Revenue	$11,654	$59,041	$6,659
Multilateral Claims	$31,263	$34,551	$2,909
Multilateral Claims as % of GDP	38.72%	11.46%	4.81%
Multilateral Claims as % of Gov Rev	268.25%	58.52%	43.69%
Sources: IMF International Financial Statistics Yearbook 2001, IMF Balance of Trade 2001, Joint BIS-IMF-OECD-World Bank Statistics on External Debt http://www1.oecd.org/dac/debt/htm/, Universal Currency Converter http://www.xe.net/ucc/.