The International Monetary Fund

1. The International Monetary Fund • Meghan Herbert - Background • Julia Ostrom – Current Situation • Tyler Smith – International Aspects • Derek Terry – Special Problems • Russell Wulfenstein – Future of the IMF

2. Background

3. International Monetary Fund (IMF) • Global organization with 184 members • Oversees global financial system by: • Observing exchange rates and balance of payment • Offering financial and technical assistance when requested • Headquarters in Washington, D.C.

4. Formation of IMF • Conceived July 1944 at a United Nations conference in Bretton Woods, New Hampshire • Representatives of 45 governments agreed on a framework for international economic cooperation • Necessary to avoid repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.

5. History Leading up to IMF • 1930’s • Economic activity in the major industrial countries diminished • Countries adopted mercantilist practices to defend their economies and conserve diminishing reserves of gold and foreign currency through: • Increased restrictions on imports • Devaluation of currencies to compete against each other for export markets • Policies of complicated restrictions on foreign exchange accounts held by citizens

6. History Continued • World trade declined sharply, as did employment and living standards in many countries • After World War II, leading allied countries considered various plans to restore order to international monetary relations • Bretton Woods conference: charter drafted for international institution to oversee the international monetary system • Ensure exchange rate stability • Promote elimination of exchange restrictions hindering trade

7. History Continued • December 1945- first 29 countries signed IMF’s Articles of Agreement • Article I sets out the IMF's main responsibilities: • promoting international monetary cooperation; • facilitating the expansion and balanced growth of international trade; • promoting exchange stability; • assisting in the establishment of a multilateral system of payments; and • making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties.

8. IMF Membership • IMF's influence in the global economy steadily increased as it accumulated more members • 1960’s: Jumped sharply when large number of former colonial territories joined after gaining independence • 1990’s: Increased again when the countries of the former Soviet bloc were added as members • June 2006: 184 members (more than 4X original membership) Growth in IMF Membership, 1945 - 2005(number of countries)

9. Challenges to IMF • Needs of the new developing and transition country members were different from those of the IMF's founding members • Other major challenges included: • End of the par value system & emergence of generalized floating exchange rates among the major currencies following the US abandonment of the convertibility of U.S. dollars to gold in 1971 • The oil price shocks of the 1970s • The Latin American debt crisis of the 1980s • The crises in emerging financial markets in Mexico and Asia in the 1990s • The Argentine debt default of 2001 • Recently, rapid advances in technology and communications have also changed international business • The expansion of the IMF's membership, together with these changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively

10. The Current Situation

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

12. Con’t . . . • To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments. It provides advice to its 184 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional, and global consequences of their policies.

13. Operations • Surveillance • Monitoring national, global, and regional economic and financial developments and advising member countries on their economic policies . • Financial Assistance • Provide loans to countries to help with balance of payment problems • Technical Assistance • Provide training to help countries build the expertise and institutions they need for economic stability and growth.

14. IMF Leadership • Board of Governors. • International Monetary and Financial Committee (IMFC). • Executive Board • Managing Director

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

16. Weighted Voting System • # of votes is tied to economic size of the country • Most commonly use a consensus system

17. International Aspects

18. The Washington Consensus • Fiscal Policy discipline; • Redirection of public spending toward education, health and infrastructure investment; • Tax reform – Flattening the tax curve: Lowering the income tax rates on proportionally high tax brackets (typically above median income), and raising the tax rates on the proportionally low tax brackets (typically below median income); lowering the marginal tax rate; • Interest rates that are market determined and positive (but moderate) in real terms; • Competitive exchange rates; • Trade liberalization – replacement of quantitative restrictions with low and uniform tariffs; • Openness to foreign direct investment; • Privatization of state enterprises; • Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and, • Legal security for property rights.

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

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

21. HIPC and PRGF (in billions SDRs) Total IMF financing requirements for HIPC = 3.6 Total Assets of the IMF = 221.7 Total Loans Outstanding PRGF = 19.2 (Last year it was 49.8)

22. Overdue Loans

23. How well has the IMF performed? • The IMF is believed to have prolonged financial problems. (e.g. Argentina) • The IMF is believed to have created some moral hazard problems. (e.g. Asian Financial Crisis) • " The evidence is the IMF messed up time after time after time " Joseph Stiglitz, former chief economist of the World Bank.

24. How has the IMF performed?

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

26. Special Problems

27. Problems with the IMF • IMF is heavily influenced by investors • Critics say the International Monetary Fund shifted into overdrive in their effort to save the economies of Indonesia, the Philippines, South Korea, and Thailand, to save the pocketbooks of international investors who could face a tide of defaults if these markets were not shored up. • IMF distorts the international investment market. • Every investment has an associated risk, and investors seeking higher returns must accept higher risks. The IMF interferes with this fundamental market mechanism by encouraging investors to seek out risky markets on the assumption that if their investments turn sour, they still stand a good chance of getting their money back through IMF bailouts. This kind of interference will only encourage more crises.

28. Problems with the IMF • IMF gives countries an easy way out • The promise of an IMF bailout insulates financiers and politicians from the consequences of bad economic and financial practices and encourages 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 growth, moderate price inflation, fiscal discipline, and high rates of saving. But these countries encountered a currency crisis because their governments attempted to maintain an exchange rate pegged to the U.S. dollar, while conducting monetary policies that diverged from that of the 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 currency markets quickly swept aside increasingly unrealistic currency values. • IMF is looked at as a lender of last resort • 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 market economy has a very efficient way of dealing with misjudgment, excess, and failure. It's called bankruptcy.

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

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

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

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

33. IMF Brazil Bailout • In 1998, Brazil’s inability to pay inordinate accumulated interest on loans caused a currency crisis. • The loans were extended by banks like Citigroup, J.P. Morgan Chase and FleetBoston, which stood to lose huge amounts of money. • The IMF, along with the World Bank and the U.S., bailed out Brazil with a $41.5 billion package that saved Brazil, its currency and, not incidentally, certain private banks.

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

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

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

37. The Future of the IMF

38. Net Benefit in Question • “What public goods can the IMF and the World Bank provide at a social benefit greater than the social cost? After two decades of intermittent crises, questions arise about the net benefit that these institutions provide.” http://www.house.gov/jec/imf/07-18-03.pdf Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

39. What is Success for the IMF? • “Increasingly success or failure must be judged by the ability of international institutions to encourage client countries to create the proper incentives for sustained growth and economic and social progress.” http://www.house.gov/jec/imf/07-18-03.pdf Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

40. Will the IMF Survive Another Decade or Two in its Current Form? • With international confidence on the decline, future success will require policy changes • Policy changes are constantly underway • International desire for a successful IMF ensures its survival http://ksghome.harvard.edu/~drodrik/G24-Mohammed.pdf

41. Required Changes for Success • The future of the IMF will depend on their ability to achieve three goals: • develop or enhance incentives within client countries for growth, • providing incentives for attainable public goods, and • improvements in quality of life and reduction in poverty. http://www.house.gov/jec/imf/07-18-03.pdf Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

42. Required Changes for Success • Focus on poverty alleviation is costly, unsustainable, and is not an official purpose of the IMF • The World Bank is recognized as “the central institution for poverty reduction” http://ksghome.harvard.edu/~drodrik/G24-Mohammed.pdf

43. Required Changes for Success • Response to new information. • The IMF has an advantage in obtaining information because of its working relationship with many developing countries and its mandatory Article 4 reports on country developments. The IMF was slow to develop standards to improve the quality of information and slower still 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

44. New Strategy • The IMF should restate its principal mission • Instead of lending to all, it should limit its role to preventing the spread of crises from troubled economies to their neighbors, trading partners, and others. • Instead of lengthy negotiations to extract promises of reform, it should not lend to countries that have not adopted and maintained some specified reforms. http://www.house.gov/jec/imf/07-18-03.pdf Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003

45. New Strategy • The IMF in principle could provide two benefits. • First, it can reduce risk of international or global financial crises by serving as a quasi-lender-of-last-resort. • Second, it can provide information, accounting, and financial standards that reduce costs of acquiring information. Better information improves market allocation by permitting market participants to make more informed choices. • One possible benefit would be less herd-like behavior by lenders. If lenders know only that a major lender is not renewing its loans, the probability that a troubled country may be forced to devalue and default rises. Reducing exposure to the country becomes a more prudent strategy than before. http://www.house.gov/jec/imf/07-18-03.pdf Carnegie Mellon Quarterly International Economics Report Gailliot Center for Public Policy July 2003