The Growth and Reducing Inequality Working Paper Series is a joint effort of the G-24 and Friedrich-Ebert-Stiftung New York to gather and disseminate a diverse range of perspectives and research on trends, drivers and policy responses relevant to developing country efforts to boost growth and reduce inequality. The series comprises selected policy-oriented research papers contributed by presenters at a Special Workshop the G-24 held in Geneva (September 2017) in collaboration with the International Labour Organization and the Friedrich-Ebert-Stiftung, as well as relevant sessions in G-24 Technical Group Meetings.
The Infrastructure Finance in the Developing World Working Paper Series is a joint research effort by the Global Green Growth Institute and the G-24 that explores the challenges and opportunities for scaling up infrastructure finance in emerging markets and developing countries. Each paper addresses a unique piece of the infrastructure finance puzzle and provides critical analysis that will give impetus to international discourse and play a catalytic role in the creation and success of new development finance institutions. The papers have been authored by top experts in their respective fields, and the process has been carefully guided by the leadership of both organizations. This work has important implications in the post-2015 environment, given the essential role infrastructure must play in achieving sustainable development. To this end, GGGI and the G-24 look forward to further development and operationalization of the contents of these papers.
In recent years the IMF has made efforts to build an improved “crisis prevention and resolution framework” that minimizes the size and frequency of bailouts, largely out of a concern with the possible moral hazard consequences of its interventions. This framework, however, which includes an emphasis on greater private sector involvement, the encouragement of the use of collective action clauses and a more effective enforcement of access limits to IMF lending has not generated an observable change in practice. The institution may be trying to achieve an almost impossible objective: imposing more stringent criteria to constrain its intervention capacity without recognizing that such an approach is ultimately inconsistent with the IMF’s intrinsically political nature. This is clearly evidenced in the cases of countries that have to restructure their debts. The failure of the SDRM project reflected, among other factors, the prevailing view in the US administration that market forces should be relied on to find an “solution” in these situations almost on their own. But this has in practice meant that the IMF relinquishes its potential contribution to improving the result of sovereign debt restructurings. In fact, the IMF has frequently exerted pressure on the debtor and its views have often been biased in favour of the creditors’ interests. In particular, its lending into arrears policy (LIA) has been used as a means to induce debtor governments to “accommodate” to these interests. But by providing financing to the debtor through its LIA policy the Fund could potentially play a positive role in reducing the gap between the creditors’ “reservation price” and the country’s repayment capacity while, at the same time, making sure that the debt burden becomes sustainable. In this way, both debtor countries and its creditors would be better off. However, the Fund should not support “market-friendly” sovereign debt restructurings that are incompatible with sustainable debt paths and may represent a greater risk for its resources than more “coercive” alternatives. Indeed, the paradox is that “investor friendly” debt restructurings represent quite the opposite of a market outcome: they require active and often massive IMF interventions and the level of the resulting haircut is suboptimally low.
In the past several years, much has been written about the need for major governance reform of the Bretton Woods institutions whose representation structures are outdated and no longer accurately reflect the distribution of power in the global economy. Discussions in advance of the autumn IMF/World Bank annual meeting to be held in Singapore have been strongly focused on the issue of quota reallocation, with a well articulated US preference for a reallocation of votes towards some large emerging market countries at the expense of European representation. European member states are currently represented in ten different constituencies at the board of directors and account for a large number of executive directors. Thus, authors and policy makers writing on this topic have previously focused on the ‘problem’ of European representation and see a combination of European seats a ‘natural’ way to change representation in favour of developing countries.
European countries do not share this view, both because individual countries fear losing power in a single seat system, and because there is relatively limited appetite in Europe at present for coordination of development and financial policy. Despite this negative outlook, there are some European countries which may be natural ‘champions’ of rationalisation of European voice. Thus, this paper will examine both the positions of individual member states on the topic of European coordination by analysing internal and external pressures for embracing governance change, as well as identifying windows of policy opportunity that exist in the coming period to achieve change. It will suggest that the sequencing of US pressure for quota reallocation is poorly aligned with European priorities, and that waiting even a relatively short period of time (e.g. less than one year) would make it easier for a more substantial realignment of European representation and therefore global governance reform.
The paper discusses the trends of recent global imbalances and the financial flows that sustain them, as well as the associated risks with regard to international financial stability and worldwide economic growth. It considers the responsibilities of the IMF surveillance in their correction under Article IV of the Articles of Agreement.
The paper analyzes the likely impact of a potential dollar crisis on developing countries through a reduction of capital flows, increased interest rates and higher spreads on debt service and on their access to and cost of borrowing. The impact of a crisis on their export revenues is also considered. In this connection, the paper assesses the Fund’s likely response to a dollar crisis, and considers the Fund’s most constructive possible response consistent with its purposes.
The paper discusses the Fund’s potential role in dealing with global imbalances in the light of the Articles and of the Fund’s own history, particularly the precedent set by the Oil Facility of the mid-1970s. The paper suggests the establishment of a counter cyclical facility to deal with exogenous shocks to assist developing and emerging countries.
In order to reduce the risks and the deflationary impact on the international economy of a reduction is US aggregate demand, the paper proposes a coordinated approach to the management of the global economy and the correction of global imbalances by the largest 20 economies with the Fund’s technical support.
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.
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.
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.
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.
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.
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.