16th March 2006
Over its existence the IMF has been an instrument with multiple objectives. The main objectives have been (a) surveillance over countries’ economic policies; (b) occasional provision of financial resources for countries undergoing adjustment under a Fund-supported program; (c) technical assistance for structural reforms and for institution building; and (d) “certification” over some desirable actions by counties. Over the years, some of these activities became more important than others. In the 1980s and 1990s for example assistance for structural changes and for institution building became important. After the 1997-98 financial crisis, certification for desirable standard and codes and for provision of particular data became important. To remain “universal” and useful to all its members the Fund must continue to promote multiple objectives. It cannot become a one purpose institution.
The Fund is now criticized for its limited role with respect to global imbalances which have become very large in connection with a few major countries such as the United States, China, and Japan. Fund surveillance is still bilateral, i.e. directed at single countries. Thus critics are demanding a larger role in multinational surveillance. However, multilateral surveillance is not likely to be very successful because of technical, organizational, and political obstacles. Some changes would, however, make the Fund more effective: the quotas assigned to the countries could better reflect their current economic power; some expansion in multilateral surveillance work should be planned, possibly by bringing fresh blood into this activity from outside the Fund; the Management and the staff should be instructed to be much more focused or even blunt in their views on countries’ policies; the resources available to the Fund should be increased and the executive directors should be more independent from the countries that nominate them. It would however be a mistake to redirect on a large scale the resources of the institution toward an activity with a very slim chance of success.
16th March 2006
After having briefly reviewed the recent experiences with trade liberalization the paper argues that the effects of financial liberalization on employment and incomes often carry great disturbances for economic and social development. Therefore, financial liberalization warrants at least as much attention as trade liberalization. The paper weights the potential benefits in terms of growth against the adverse effects of volatility and crises that are frequently associated with financial liberalization, and in particular with debt and portfolio flows. It is motivated by the concern expressed by the World Commission on the Social Dimension of Globalization that “[g]ains in the spheres of trade and FDI run the risk of being set back by financial instability and crisis” and draws the conclusion that volatility in international financial markets is currently perhaps one of the most harmful factors for enterprises and labour in developing countries. Hence, the paper suggests how greater policy coherency between international and national financial, economic and employment policies can give greater attention to employment and incomes.
13th March 2006
The impacts of all merchandise trade distortions (including agricultural subsidies) globally are estimated using the latest versions of the GTAP database and the LINKAGE model of the global economy (projected to 2015). Results suggest that developing countries’ economies bear a disproportionate burden of current distortions, reducing their average income by 0.8 percent (and Sub-Saharan Africa’s by 1.1 percent) compared with 0.6 percent for high-income countries.
A huge 63 percent of those costs are due to agricultural market distortions, even though agriculture accounts for just 4 percent of global GDP. As much as 93 percent of the cost of those agricultural distortions is due to import barriers and only 2 percent to agricultural export subsidies and 5 percent to direct domestic subsidies to farmers – although within that, the cost of cotton policies is mostly due to domestic support programs. Half of the overall cost to developing countries is due to the region’s own policies, partly because they trade with each other fairly intensively and partly because their own trade barriers are higher than those of highincome countries. If all those trade-distorting measures were to be removed, the developing countries’ shares of global output as of 2015 would rise from 70 to 75 percent for primary agricultural goods, and of textiles and clothing from 62 to 65 percent. Developing countries’ shares of global exports would rise even more dramatically, especially in agriculture: from 47 to 62 percent in primary farm products and from 34 to 40 percent in processed farm products. That represents a rise in developing country exports of around $200 billion per year (in 2001 US dollars) – an increase of two-thirds compared with the baseline scenario for 2015 – and in exports of nonagricultural goods of $400 billion per year. This amounts to more than six times what was needed to service the foreign debt of all developing countries in 2003. Cotton exports alone would rise by more than $4 billion for developing countries as a whole, almost half of which would be enjoyed by Sub-Saharan Africa. Self-sufficiency in that year would be 102 instead of 100 percent for agricultural products, 121 instead of 118 percent for textiles and clothing, and for other manufactures it would be 100 instead of 101 percent.
10th February 2006
This paper analyses the macroeconomic impact of East Asia’s growing demand for primary and industrial commodities in four Latin American countries – Brazil, Chile, Peru and Venezuela. The paper shows that whilst the export boom has contributed to improved external accounts in these countries, it has posed the challenge of how to manage the surpluses. Policy makers in the region have responded by pursuing prudent macroeconomic management policies. Venezuela is the only country that has increased public expenditure significantly, mainly in the social sectors. A striking finding is that in Peru, government revenues from the mining sectors are very small. A further finding is that public investment in the four countries has not increased in line with the increase in surpluses. However, foreign investors have demonstrated interest in investing in the extractive sectors in these countries. This paper concludes that Latin American countries benefiting from the ongoing upward trend in commodity prices should do more to increase investment, especially in the infrastructure sectors. They should also avoid excessive currency appreciation, which undermines the competitiveness of their manufactured exports, which are the ones that really create jobs and value added, and through export diversification contribute to reduced variability in the terms of trade.
6th February 2006
A number of high-debt emerging-market economies face structural, long-term debt problems that tend to keep their growth rates low, that impart an unequalizing bias to the growth process, that severely constrain social spending and human development, and that make them vulnerable to capital flow reversals. Unless the nature and pace of growth can be improved in these lower-middle income countries, the Millennium Development Goals (MDGs) are unlikely to be met either in many of these countries, or globally. These high-debt emerging-market economies face an impossible choice between draconian and never-ending fiscal austerity, or crisis and a “debt event.” Both “bitter pills" impose high social and economic costs.
This paper proposes the creation of a “Stability and Social Investment Facility” (SSF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SSF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, we estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SSF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending.
The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SSF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.
10th November 2005
A genuine reform of the IMF would require as much a redirection of its activities as improvements in its policies and operational modalities. There is no sound rationale for the Fund to be involved in development and trade policy, or in bailout operations in emerging market crises. It should focus on short-term counter-cyclical current account financing and policy surveillance. To be effective in crisis prevention it should help emerging markets to manage unsustainable capital inflows by promoting appropriate measures, including direct and indirect controls. It should also pay greater attention to destabilizing impulses originating from macroeconomic and financial policies in major industrial countries. Any reform designed to bring greater legitimacy would need to address shortcomings in its governance structure, but the Fund is unlikely to become a genuinely multilateral institution with equal rights and obligations for all its members, de facto as well as de jure, unless it ceases to depend on a few countries for resources and there is a clear separation between multilateral and bilateral arrangements in debt and finance.