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/.