The paper reviews aspects of the financial governance of the IMF, focusing on the equity implications of the manner of distributing the cost of running the Fund’s regular (nonconcessionary) lending operations as well as the modalities of funding its concessionary lending and debt relief operations. It is concluded that while the Fund charges borrowers roughly what it pays its creditor members for the resources used in its regular lending operations, its overhead costs (administrative budget plus addition to Reserves) are shared between the two groups of members in a less equitable manner. With the overhead costs rising inexorably to meet an increasing number and variety of responsibilities being placed upon the institution, largely at the instance of the Fund’s principal creditors, by virtue of their dominant majority of voting power, the under-representation of the Fund’s debtors undermines the legitimacy of its decision-making. In regard to the concessionary lending and debt relief operations, some of the funding modalities have involved a substantial contribution by Fund debtors, sometimes under pressure. While this outcome has been accepted as part of an intra-developing country burden-sharing exercise, it has also meant a significant burden-shifting away from the developed countries in the cost of meeting their responsibilities to the poorest members of the international community.
In the context of the financial governance of the IMF, what are the equity implications of the manner in which the IMF distributes the cost of running its regular (non-concessionary) lending operations as well as the modalities of funding its concessionary lending and debt relief operations? While the IMF charges borrowers roughly what it pays its creditor members for the resources used in its regular lending operations, its overhead costs (administrative budget plus addition to Reserves) are shared between the two groups of members in a less equitable manner. With the overhead costs inexorably rising to meet an increasing number and range of responsibilities being placed upon the institution ñ largely at the instance of the IMFís principal creditors by virtue of their dominant majority of voting power ñ the under-representation of the IMFís debtors undermines the legitimacy of its decision-making. With regard to the concessionary lending and debt relief operations, some of the IMFís funding modalities have involved a substantial contribution by IMF debtors, sometimes under pressure. While this has been accepted as part of an intra-developing country burden-sharing exercise, it has also meant a significant burden shifting away from the developed countries in the cost of meeting their responsibilities to the poorest members of the international community.
Drawing on the Indonesian experience in 1997, this paper demonstrates the complexity of managing banking crises deals. It aims at deriving conclusions from this experience for other developing countries facing similar problems. The paper also refers to comparative experiences of other countries, in particular Malaysia and Thailand, examines the IMF programme and reveals its shortcomings.
The key question is to what extent the ineffectiveness and slow progress of bank restructuring, corporate restructuring and continued dilemmas in macroeconomic management in Indonesia were due to shortcomings of the economic programme, its sequencing or emphasis, and to what extent it has to be attributed other factors, including corruption and lack of policy-making capacity.
This study challenges the conventional story of an U.S. economy experiencing the longest expansion and shortest recession in the post-war period, now advancing through a slow, sturdy recovery. It characterizes the present state of the world economy as a growthrecession and draws plausible scenarios for the U.S. economy and their implications for the rest of the world.
The thread of the argument emerges from an appraisal of the unique configuration of demand and accumulation of debt by the main sectors of the U.S. economy. This analysis stresses that rather than a virtuous expansion during the 1990s, the entire model was based on unsustainable driving forces. After 2000Q2 economic growth fell progressively below potential, failing to generate sufficient employment. Prospects of a US-led worldwide recovery are inconsistent with the unprecedented and unsustainable debt exposure of main sectors of the US economy.
Should this appraisal prove prescient, a further pursuit of free market globalization would be deemed counter-productive. The central case we put forward as antidote to the risk of such a global impasse would be the reinstatement of the appropriateness of fiscal policy in tandem with properly regulated credit and external sectors, co-ordinated worldwide.
IMF conditionality was introduced in the 1950s as a means to restore membersí balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centred on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditionality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member countryís compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable.
This paper uses the term, capital management techniques, to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows and those that enforce prudential management of domestic financial institutions. The paper shows that regimes of capital management take diverse forms and are multi-faceted. The paper also shows that capital management techniques can be static or dynamic. Static management techniques are those that authorities do not modify in response to changes in circumstances. Capital management techniques can also be dynamic, meaning that they can be activated or adjusted as circumstances warrant. Three types of circumstances trigger implementation of management techniques or lead authorities to strengthen or adjust existing regulations--changes in the economic environment, the identification of vulnerabilities, and the attempt to close loopholes in existing measures.
The paper presents seven case studies of the diverse capital management techniques employed in Chile, Colombia, Taiwan Province of China, India, China, Singapore and Malaysia during the 1990s. The cases reveal that policymakers were able to use capital management techniques to achieve critical macroeconomic objectives. These included the prevention of maturity and locational mismatch; attraction of favored forms of foreign investment; reduction in overall financial fragility, currency risk, and speculative pressures in the economy; insulation from the contagion effects of financial crises; and enhancement of the autonomy of economic and social policy. The paper examines the structural factors that contributed to these achievements, and also weighs the costs associated with these measures against their macroeconomic benefits.
The paper concludes by considering the general policy lessons of these seven experiences. The most important of these lessons are as follows. 1.) Capital management techniques can enhance overall financial and currency stability, buttress the autonomy of macro and micro-economic policy, and bias investment toward the long-term. 2.) The efficacy of capital management techniques is highest in the presence of strong macroeconomic fundamentals, though management techniques can also improve fundamentals. 3.) The nimble, dynamic application of capital management techniques is an important component of policy success. 4.) Controls over international capital flows and prudential domestic financial regulation often function as complementary policy tools, and these tools can be useful to policymakers over the long run. 5.) State and administrative capacity play important roles in the success of capital management techniques. 6.) Evidence suggests that the macroeconomic benefits of capital management techniques probably outweigh their microeconomic costs. 7.) Capital management techniques work best when they are coherent and consistent with a national development vision. 8.) There is no single type of capital management technique that works best for all developing countries. Indeed our cases, demonstrate a rather large array of effective techniques.
There are sound reasons for cautious optimism regarding the ability of policymakers in the developing world to build upon these lessons. In particular, we are heartened by the growing understanding of the problems with capital account convertibility in developing countries; by the increasing recognition of the achievements of capital management techniques by important figures in academia, the IMF and the business community; and by the potential for some developing countries (such as China, India, Malaysia, Chile, Singapore) to play a lead role in discussions of the feasibility and efficacy of various capital management techniques.
In 1999, the World Bank and the International Monetary Fund adopted a new set of processes to guide lending to some of the world’s poorest countries. This set of processes is known as the Poverty Reduction Strategy Paper (PRSP) approach.
This study reviews the PRSP approach. The study begins with a primer of just what the PRSP approach is. In what ways does it represent a change in practices and in what ways is it a codification of business-as-usual? The paper then reviews the recent “mid-term” evaluations of the PRSP approach conducted both internally by the Bank and Fund as well as by external organizations. It is argued that neither the internal nor external reviews are asking the really hard questions. To really evaluate the PRSP approach, it is necessary to compare outcomes to what would have happened but for the PRSP’s implementation. That means evaluating the marginal impact of the approach. Knowing whether the PRSP process is really addressing the concerns of the poor means being able to identify the poor, measure changes in their well-being, and then analyse whether these changes are in fact due to changes in policy resulting from the PRSP approach
This paper builds on the emerging consensus in the development literature that the enhanced HIPC initiative does not fully remove the debt overhang in many poor and highly indebted countries. It examines the six most crucial problems of the enhanced HIPC Initiative and presents specific suggestions on how the framework of the HIPC Initiative would need to be changed in order to provide a better basis for long-term debt sustainability. However, even after the adoption of such changes, the long-term debt sustainability of HIPCs would remain fragile. The paper thus addresses some of the key issues related to a new aid architecture and the structural transformation HIPCs must undergo to achieve long-term debt sustainability.
The paper addresses three key issues raised by the G-7 in its proposals in 2001 to reform the multilateral development banks: (i) the restructuring of the International Development Association (IDA), with a part of its lending in the form of grants rather than loans; (ii) the harmonization of procedures, policies and overlapping mandates among multilateral development banks (MDBs;) and (iii) the volume of support by MDBs for global public goods (GPGs) and the rankings and priorities among them.
The paper argues that while in principle shifting a fraction of IDA’s resources to grants can address some of the problems associated with loans, these gains are limited. At the same time it poses long-term political risks for the World Bank. Moreover, the paper cautions that the more fundamental problem with IDA is the manner in which the IDA Deputies – the representatives of the donor countries – have been making policy decisions relating not just to IDA but also to the institution as a whole. The result has been a creeping constitutional coup that has fundamentally subverted the role of the Executive Board in the institution’s governance. The paper also questions whether developing countries in their quest for a larger IDA may not be sacrificing their larger interests in the global system.
A positive future for foreign private lending to developing countries requires reducing perceived risk through mechanisms for more permanent debtor-creditor “conversation” and an accepted and effective “bankruptcy” approach to orderly workouts from unavoidable sovereign defaults. Developing countries fear that current reform proposals, particularly the Sovereign Debt Restructuring Mechanism of the International Monetary Fund, would increase uncertainty and borrowing costs, and certain revisions are suggested here. Most importantly, however, premature closure around any controversial proposal could rob the international system of measures for increasing investor and citizen confidence. Further consideration of the matter in all relevant forums is an urgent priority.
The global International Financial Institutions (IFIs) increasingly justify their operations in terms of the provision of International Public Goods (IPGs). This is partly because there appears to be support among the rich countries of the North for expenditures on these IPGs, in contrast to the “aid fatigue” that afflicts the channelling of country specific assistance. But do the IFIs necessarily have to be involved in the provision of IPGs? If they do, what are the terms and conditions of that engagement? How does current practice compare to the ideal? And what reforms are needed to move us closer to the ideal? These are the questions that this paper attempts to ask, in the framework of the theory of International Public Goods, and in light of the practice of International Financial Institutions, the World Bank in particular. For the World Bank, a series of specific operational and resource reallocation implications are drawn from the reasoning.
The new Basel Accord framework relies on markets and supervisors to discipline banks. Yet both markets and supervisors fail, and more so in developing countries than in highincome countries. Therefore, the new Accord is not, as its designers claim, suitable for wide application. Nevertheless, developing country policymakers have little choice but to implement it in part or in whole. Hence there are problems of governance in international regulation. I offer seven general principles for the design of a prudential regime more robust to government and market failure. Four alternative capital regimes are evaluated in the light of these principles. Simpler and harsher regimes are likely to achieve greater safety with a given level of resources.
This paper examines the role of competition policy in emerging markets from a developmental and international perspective. The main issues addressed include the following:
Developing countries face serious obstacles to economic growth and experience high volatility in their foreign exchange earnings, closely linked to the variability of exports and capital. They have little ability to carry out the type of counter-cyclical policies that developed countries use to counter shocks. The IMF and other IFIs have been in charge of providing financing at times of cyclical Balance of payments crises, but their role has been constrained by limited availability of resources. This paper proposes a Counter-cyclical Financing Mechanism (CCFM), managed by the IMF. Emerging and developing countries would qualify for the facility, intended to offset the effect of cyclical declines in GDP, exports and private capital flows. With adequate cooperation and macro-policies, access would be automatic and based on shortfalls calculated for one year and up to two years. Charges would be the same as at present, with lower interest charges applied to low-income countries. Excluding China, a total amount of some US$120-140 billion would cover significant deviations on an annual basis (about one third of total loans by the IMF and World Bank/IDA, and only 1 percent of total international debt securities outstanding). The financing would be raised through an extraordinary increase in IMF quotas and special bond issues by the IFIs.
As a result of the emerging market crises of the last decade and a large body of academic research on the influence of investor protection in the development of capital markets and economic growth, there is a growing consensus that reforming the legal infrastructure supporting business should be an important component of reforms in many developing countries. But the consensus is unwieldy, as there are still many forces against reform and little agreement about what constitutes feasible legal reforms. This paper has two parts. In the first, we identify the forces for and against legal reform and review the role these forces play in episodes of reform. In the second, we seek to further our understanding of what constitutes good laws and regulatory mechanisms, and more importantly how to make them enforceable in different countries. If legal reform is to succeed, the commonly advocated principles of corporate governance in the international community must be brought down to the local political and judicial realities. Translating international corporate governance initiatives into clear and enforceable rights for creditors and shareholders that incorporate these constraints will be difficult but necessary. Bankruptcy law and corporate law reform need to be politically feasible and enforceable. Legal reforms should be complemented with carefully drafted judicial reforms, as well as market-based mechanisms that foster a culture of corporate governance.
The paper examines the case of cocoa as an illustration of the problems faced by primary commodity producers. The impact of market liberalisation within cocoa producing countries and industrial countries, the main consumers, on the cocoa price and cocoa farmers is examined. The paper shows that the market liberalisation cannot be held responsible for such improvements in productive efficiency as occurred over time, which was one of the two stated goals of these measure. Nor is there convincing evidence that the producer’s share in the export price increased, which was the other goal. A serious consequence of the preoccupation with market liberalisation, however, was that it diverted attention from the problems that are of main concern to cocoa producers, viz., the market volatility, low prices, and the producers’ share in the value chain. The paper then goes on to explore the kinds of action that might be considered to address these issues. It makes a case for filling the institutional vacuum that has been created as a result of the abolition of state marketing authorities in several cocoa producing countries. The paper attempts to show that the conditions are favourable for a cocoa producers’ alliance to emerge, which is desirable from the viewpoint of regulating cocoa supplies to prevent further price declines.
This paper describes G-3 exchange rate volatility and evaluates its impact on developing countries. The paper presents empirical evidence showing that G-3 exchange rate volatility has a robust and significantly negative impact on developing countries’ exports. A one percentage point increase in G-3 exchange rate volatility decreases real exports of developing countries by about 2 per cent, on average. G-3 exchange rate volatility also appears to have a negative influence on foreign direct investment to certain regions, and increases the probability of occurrence of exchange rate crises in developing countries. These results imply that greater stability in the international exchange rate system would help improve trade and foreign direct investment prospects for developing countries – and would help prevent currency crises.
What organizational reforms might increase the influence of developing member countries within the International Monetary Fund? In this paper we argue that a variety of organizational changes are both feasible and could substantially increase the ability of developing countries to articulate policy alternatives and advance change. We focus particularly on changes in the recruitment, training, career paths and deployment of the Fund’s staff. Our recommendations address two general issues. First, we explore ways to diversify the “intellectual portfolio” of the staff by drawing more effectively on hands-on knowledge of the concrete circumstances that shape policy outcomes in the South. More mid-career hiring of staff with practical experience inside developing country institutions could increase the degree to which the distinctive institutional circumstances of developing members are taken into account in formulating Fund policies and implementing them. Allocating a larger share of the Fund’s resources to research consulting contracts for researchers and institutions based in developing countries could also expand input of ideas that reflect the experience of member countries from the South. Second, large asymmetries in workload currently make it difficult for those working on the needs of developing members to formulate and advocate alternative policies. We suggest a number of ways in which even modest reallocation and addition of staff resources might create breathing space that would allow Executive Directors from developing countries to play a larger role in shaping the Fund’s policies.
Financial crises now seem circumscribed to developing countries. While contagion used to spread crises among the large financial centres, it now affects developing countries on a regional basis, sometimes even mysteriously on a worldwide basis. While crises could unmistakably be linked to serious macroeconomic policy mismanagement, now they hit countries with no serious imbalances. This paper looks at the effect of domestic and external financial liberalization. Using a sample of 27 developing and developed countries, it studies the exchange market pressure and output gap effects of liberalization. The results may be summarized as follows.
This paper argues that the agenda for international financial reform must be broadened in at least two senses. First of all, it should go beyond the issues of financial prevention and resolution to those associated with development finance for poor and small countries, and to the “ownership” of economic and development policies by countries. Secondly, it should consider, in a systematic fashion, not only the role of world institutions but also of regional arrangements and the explicit definition of areas where national autonomy should be maintained. These issues should be tabled in a representative, balanced negotiation process.
When East Asian countries came under speculative attacks in 1997, some of them were not able to defend themselves, and subsequently had to seek the financial assistance of IMF and accept its stabilization programmes. These crisis-hit countries were criticized for not having restructured their financial, corporate, and public sectors along the lines suggested by the Washington consensus. This failure was singled out as the main cause of the crisis and, understandably, these crisis-hit countries were subject to heavy doses of structural reforms. The East Asian crisis became contagious, even threatening the stability of major international financial centres. The severity and contagiousness of the East Asian crisis underscored the importance of, and renewed interest in, reforming the international financial system. Numerous proposals have been put forward. The G-7-led reform, however, has concentrated its efforts on reforming the financial and corporate sectors of developing economies, while by and large ignoring the problems of the supply side of international finance.
This paper looks at the role of the International Monetary Fund (IMF) in the evolving global financial system from the perspective of developing country interests. It finds that on certain issues, such as the scope and purposes of its lending operations, a consensus has been reached that IMF should continue to serve all its members, including the poorest, and that its resources should be available for supporting macro-relevant structural reforms as well as for dealing with financial crises.
On a number of other issues, there remain differences between industrial and developing country views, including on the extension of IMF surveillance to cover the observance of international standards and codes. Largely unsettled are the modalities of the involvement of the private sector in crisis resolution, with special reference to the development of arrangements in the international sphere that would be analogous to domestic bankruptcy procedures, including the declaration of standstills and principles for orderly and equitable debt workouts. The liberalization of the capital account and the choice of exchange regimes are two interconnected areas in which international prescriptions conflict with developing country insistence on the preservation of national autonomy and in favour of intermediate regimes, as opposed to corner solutions. The scope and content of IMF conditionality raises the issue of how to reconcile it with the importance of assuring country ownership.
This paper focuses on the prospects for sustained development in the four East Asian economies most adversely affected by the crises of 1997/98. These include all three second-tier South-East Asian newly industrializing countries (NICs) – Indonesia, Malaysia and Thailand – as well as the Republic of Korea, the most adversely affected of the first-generation newly industrialized economies (NIEs). The first section critically examines the East Asian model presented by the World Bank’s “East Asian Miracle” (1993). The study emphasizes the variety of East Asian experiences. The three second-tier South-East Asian experiences are shown to be quite distinct from, and inferior to, those of the first-generation NIEs, especially the Republic of Korea and Taiwan Province of China.
For small open economies, efficient taxation of foreign and domestic capital depends on
their relative mobility. If foreign and domestic capital are equally mobile internationally, it will
be optimal for countries to subject both types of capital to equal tax treatment. If foreign capital
is more mobile internationally, it will be optimal to have lower taxes on capital owned by foreign
residents than on capital owned by domestic residents. Absent market failure, there is no
justification for favouring FDI over foreign portfolio investment. In practice, countries appear
to tax income from foreign capital at rates lower than those for domestic capital and to subject
different forms of foreign investment to very different tax treatment. FDI appears to be sensitive
to host-country characteristics. Higher taxes deter foreign investment, while a more educated
work force and larger goods markets attract FDI. There is also some evidence that multinationals
tend to agglomerate in a manner consistent with location-specific externalities.
Recent studies have shown that exchange rates in developing countries have limited flexibility. In this paper we review the existing explanations for this stylized fact, using a simple framework of monetary policy in a world where firms face balance sheet effects and the economy has a high pass-through from depreciation to inflation. We estimate a panel regression using quarterly data in the period 1990–1999 for a sample of 46 countries (19 industrial and 27 developing), and find that the use of the exchange rate to buffer external shocks depends crucially on (i) on the degree of integration with capital markets, and (ii) the quality of external financing. We conclude that flexible regimes are viable in financially open economies, provided external financing is not based on very volatile capital. This, of course, is dependent on the establishment of credible macroeconomic policies.
This Report consists principally of recommendations and guidelines. It acknowledges the threat to the benefits of a liberal global regime for international capital flows posed by their instability. Concern is expressed as to risks to stability linked to reliance on short-term borrowing from banks, the interaction between different financial risks, and faultlines in global financial markets resulting from firms’ own hedging and risk management that may be difficult to identify in advance. But, in general, the Report’s recommendations focus mainly on changes in recipient countries in practices with regard to the monitoring and management of financial risks, rather than on changes in the main sources of international lending and investment. Those directed at the latter would require no major deviations from the thrust of existing policies in the countries concerned. In particular, the Report does not discuss proposals put forward in some quarters for substantial improvements in transparency regarding operations in currency markets widely considered to have contributed to recent episodes of instability. On the subject of controls over capital movements, the Report limits itself to cautious endorsement of those over inflows