The World Bank’s narrow focus on value for money
may undermine the ability of governments to use
procurement as a tool for development; meanwhile,
US and European corporate lobbyists continue to
pressure the Bank to go slow on the use of country
procurement systems.

This policy brief argues that, all too often, the Fund’s use
of “conditionalities” for lending has stepped beyond its
core legal mandate, particularly causing harm to the least
developed countries’ economic development, for example
by dictating their trade policies.

Discussions on foreign direct investment (FDI) as a
means of financing development often suffer from
two different shortcomings. The first, a very basic
one, confuses real with financial resources. The second
does not distinguish between different forms of foreign
direct investment. The question of financing
development is concerned with finding the real
resources for increasing the level of investment, or
more generally capacity-enhancing expenditure in the
economy. This becomes an issue only when the
economy in question does not have any idle real
resources, in the form of unutilized industrial capacity,
or unusually large foreign exchange reserves, or
surplus stocks of foodgrains and other commodities.
If such idle resources are absent, then the real
resources of the economy have got to be diverted
from their current uses for increasing productive
investment, entailing some sacrifice on the part of
some members of society; or additional real resources
have to be obtained from outside, in the form, for
instance, of FDI.

It is often said that bankers have short memory; hence
they repeat their errors. We have witnessed a major
financial crisis every ten years over the last three decades.
In the 1980’s the savings and loans debacle cost US tax
payers US$200 billion. In the 1990’s the Asian financial
crisis bankrupted many Asian banks and corporations.
Today, problems emanating from strained US subprime
mortgages have led to a credit crisis.
The subprime mortgage blow-out surfaced in June 2007
with the collapse of two hedge funds managed by Bear
Stearns. It quickly affected financial markets worldwide
and reached crisis proportions in August-September when
money markets temporarily froze up, halting the lifeblood
of the banking industry. That immediately prompted the
European Central Bank and the Fed to pump in $100
billion of liquidity into the system, action they have
repeatedly undertaken since then.
Nervousness in money markets, as measured by spreads of
LIBOR above Treasury yields, subsided temporarily, but
has since come back with a vengeance. Interbank
borrowing is more expensive than borrowing from the
authorities because no private entity wants to part with its
cash, and the premium has been close to the all-time high
set during the 1987 stock market crash.

Monetary policy is commonly understood as the
operations of the Central Bank in bond and treasury bill
markets in order to set the interest rate and thereby
influence inflation and economic activity. Conventional
wisdom has it that the exchange rate of an economy open to
cross-border capital flows should be left to be determined
by market forces in a so-called free float. The notion has
some support in theory by the notion of a “trilemma,”
referring to the inability of monetary authorities to
influence exchange rate and interest rate, given an open
capital account, and in practice, by many developing
countries’ difficulties in maintaining over-valued exchange
rates for prolonged periods in the past.

At present, the negotiations for the Doha round are in
jeopardy to be put on hold until at least 2009. A twoyear
break in negotiations is not necessarily damaging to
the talks as long as nations use the time to rethink trade
liberalization. By reintroducing development to the
Doha round, the possible subsequent reforms could be
a way forward in making trade work for the poor.

Inflation targeting has become the dominant monetary
policy prescription for developing and industrialized
countries alike. Initially adopted by New Zealand in 1990,
the norms surrounding the inflation targeting regime have
been so powerful that virtually all Central Banks have
declared that maintaining price stability with inflation in
the “low single digits” is their only mandate. It is further
maintained that price stability will lead to sustained growth
and employment creation.

Turkey experienced a severe economic crisis in
November 2000 and again in February 2001. The
crisis erupted after Turkey adopted an exchange-rate
based disinflation program led and engineered by the
IMF.1
During the year 2001, GNP fell by 9.5% in
real terms, consumer price inflation soared to
54.4%, and the currency fell 51% against the major
foreign monies. The rate of unemployment rose by
2 percentage points in 2001 and then by another 3
percentage points in 2002. Real wages fell by 20%
in 2001 and have not recovered to this day.

It is fifty years since Jean-Jacques Polak published
his classic article “Monetary Analysis of Income
Formation and Payments Problems” in the IMF
Staff Papers. This paper provided the theoretical
basis for the IMF’s financial programming, and
continues to do so today. This is remarkable in and
of itself. The world economy has gone through
major changes over this period, as have
corresponding fashions within economic theory as
triumphant Keynesianism gave way to varieties of
monetarism in the wake of the collapse of the postwar
boom.

Of late, it has been increasingly recognized that space
for pursuing the kind of industrial policies
successfully used by the East Asian newly
industrialized economies has been restricted for
developing countries by trade rules enforced on
signatories by the World Trade Organization (WTO)
and by International Monetary Fund (IMF)
conditionalities.1
This note focuses on the impact of
these trends on low income countries (LICs).2