Kevin Gallagher

Conveniently scheduled at the end of the World Cup, leaders of the BRICS countries travel to Brazil in mid-July for a meeting that presents them with a truly historic opportunity. While in Brazil, the BRICS hope to establish a new development bank and reserve currency pool arrangement.

This action could strike a true trifecta — recharge global economic governance and the prospects for development as well as pressure the World Bank and the International Monetary Fund (IMF) — to get back on the right track.

The two Bretton Woods institutions, both headquartered in Washington, with good reason originally put financial stability, employment and development as their core missions.

That focus, however, became derailed in the last quarter of the 20th century. During the 1980s and 1990s, the World Bank and the IMF pushed the “Washington Consensus,” which offered countries financing but conditioned it on a doctrine of deregulation.
Read the rest of this entry »

Kevin P. Gallagher and Yuan Tian

Regular Triple Crisis contributor Kevin P. Gallagher is an associate professor of international relations at Boston University and co-director of the Global Economic Governance Initiative (GEGI) and Global Development Policy Program. Yuan Tian is the CFLP Pre-Doctoral Fellow for GEGI’s Task Force on Regulating Global Capital Flows. She is currently a third-year PhD student in economics at Boston University.

In the wake of the 2008 financial crisis, the International Monetary Fund (IMF) began to publicly express support for ‘capital controls’ in emerging markets.  In addition to public statements, and the endorsement of controls in Iceland, Ukraine, and beyond, the IMF underwent a systematic re-evaluation of Fund policy on the matter, and published an official view on the economics of capital flows in 2012.  To the surprise of many who witnessed the IMF’s scorn for regulating capital flows in the 1990s, in this new ‘view’ the IMF concludes that capital account liberalization is not always the optimal policy and that there are situations where capital controls—rebranded as ‘capital flow management measures (CFMs)’—are appropriate.

It is well known that the IMF claims that it has changed its tune, but has it really changed its ways?

Read the rest of this entry »

Matias Vernengo

Argentina has finalized a deal with the Paris Club two weeks ago. And tomorrow, if I’m not wrong, the case against the Vulture Funds will be finally decided by the Supreme Court. On the first one, Argentina signed an agreement with the Paris Club that implies the country will pay around US$9.7 billions in the next 5 years.

There is an interesting twist in the agreement with the Paris Club. The agreement was reached without accepting an IMF program, which have traditionally been part of all such negotiations. The Club and the IMF used to be joined at the hip. Two Paris Club chairmen, Jacques de Larosière and Michel Camdessus, became later managing directors of the IMF. So in a sense, the idea was that austerity at home was essential for repayment abroad. Here it is important to note a traditional confusion in the conventional view about the role of austerity.

Read the rest of this entry »

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad). The Eurodad report “Conditionally Yours: An Analysis of the Policy Conditions on IMF Loans,” co-authored by Griffiths and Konstantinos Todoulos, was released today.

Ukraine is the latest country faced by a debt crisis to be forced into the arms of the International Monetary Fund (IMF). The reality of the situation was pithily expressed by the Ukrainian Prime Minister, Arseniy Yatseniuk, who recently said he “will meet all IMF conditions… for a simple reason… we don’t have any other options.”

The European Network on Debt and Development (Eurodad) has, over the past decade, produced several reports criticising the excessive and often harmful conditions that the IMF attaches to its loans. The IMF claims to have seen the light and limited its conditions to critical reforms agreed by recipient governments. We decided to put that claim to the test in our latest report, published on Wednesday (April 2), and examined all the policy conditions attached to 23 of the IMF’s most recent loans. What we found was truly shocking. The IMF is going backwards—increasing the number of policy conditions per loan, and remaining heavily engaged in highly sensitive and political policy areas.

Here’s what we found:

  • The number of policy conditions per loan has risen in recent years, despite IMF efforts to ‘streamline’ their conditionality. Eurodad counted an average of 19.5 conditions per programme: a sharp increase compared to the average of 13.7 structural conditions per programme we found in 2005-07.
  • Almost all the countries were repeat borrowers from the IMF, suggesting that the IMF is propping up governments with unsustainable debt levels, not lending for temporary balance of payments problems—its true mandate.
  • Widespread and increasing use of controversial conditions in politically sensitive economic policy areas, particularly tax and spending, including increases in value added tax (VAT) and other taxes, freezes or reductions in public sector wages, and cutbacks in welfare programmes including pensions. Other sensitive topics include requirements to reduce trade union rights, restructure and privatise public enterprises, and reduce minimum wage levels.

Recent studies on related topics by the Center for Economic Policy Research (CEPR) and Development Finance International (DFI) have found similar findings.

What is to be done? Trying to cajole the IMF to improve itself is not what’s needed. Instead, we advocate for the IMF to go back to basics and fulfill the role that’s really required. It should focus on its true mandate as a lender of last resort to countries that are facing temporary balance of payments crises. Such countries need rapid support to shore up their public finances, not lengthy programmes that require major policy changes. Why not extend the example of the IMF’s new but little used Flexible Credit Line to all IMF facilities—requiring no conditionality other than the repayment of the loans on the terms agreed?

If countries are genuinely facing protracted and serious debt problems, then IMF lending only makes the situation worse. Instead, let’s prioritise developing fair and transparent debt work-out procedures to assess and cancel unpayable and illegitimate debt. However, the IMF should not be the venue for such debt work-out mechanisms: as a major creditor, they would face an impossible conflict of interest. Of course, this revamped role for the IMF is only possible if it addresses its crisis of legitimacy, and radically overhauls its governance structure to give developing countries a fair voice and vote, and to improve transparency and accountability.

Partners we work with who live under the grim cloud of an IMF programme learn to hate the institution. A conditionality-free IMF with a democractic makeover could be an institution the world could learn to love.

Triple Crisis welcomes your comments. Please share your thoughts below.

Timothy A. Wise

Cross-posted from Global Post.

LILONGWE, Malawi — Visit this small, landlocked country in late January and you will have a hard time believing its people often go hungry.

It is mid-rainy season, and in and around the capital city the landscape is lush and green.

Look more closely and you’ll notice that nearly every inch of unpaved space seems planted with maize (corn); the green stalks rise up to five feet above moist, rich soil. Outside of the city, along the road leading south toward the former colonial capital of Zomba, the hills roll with maize, not in vast tracts reminiscent of Iowa but in small, neatly bordered plots.

It certainly doesn’t seem like a land that cannot feed itself. But until recently, that is what Malawi has been.

Droughts often threaten the country’s one rainy season, and with per capita incomes at around $900 per year, hunger, and even starvation, stalk the countryside. The World Food Program has permanent offices here, and for good reason.

Even this season, when the rains have come strong but late, more than 10 percent of the country’s 16 million people face severe food insecurity. According to news reports, some have starved.

It is paradoxical only to outsiders that this greenest of seasons is also the hungriest. By planting time late in the year, many peasant farmers have consumed the last of their saved grain, even following a decent harvest like they had last year. Until the new crop comes in late March or April they have to rely on meager cash income to feed themselves and their families.

Read the rest of this entry »

Jakob Vestergaard and Robert H. Wade, Guest Bloggers

Part 2 of a two-part series.

The IMF’s existing quota formula allocates shares to member countries on the basis of four variables (with their weights in the formula given in parentheses):

  • Size of a member’s economy, as measured by GDP (50%);
  • Member’s integration into the world economy, or “openness” (30 %);
  • Member’s potential need for Fund resources, measured in terms of “variability” of current receipts and net capital flows (15%); and
  • Member’s financial strength and ability to contribute to the Fund’s finances, as measured by its foreign exchange reserves (5%).

Instead of announcing a new formula in January 2013, as planned, the Executive Board of Directors (EBD) reported to the Board of Governors on the outcome of the Quota Formula Review (IMF 2013). The main conclusions were:

(a) “it was agreed that GDP should remain the most important variable, with the largest weight in the formula and scope to further increase its weight”;  and

(b) there was “considerable support for dropping variability from the formula” (IMF 2013: 2-3).

Beyond these, the Executive Directors could agree on little. Read the rest of this entry »

Jakob Vestergaard and Robert H. Wade, Guest Bloggers

More than three years after the International Monetary Fund (IMF)’s governing body agreed to reform the organization’s governance so as to better reflect the increasing economic weight of dynamic emerging market economies in the world economy, only microscopic changes have been made. Emerging market and developing countries (EMDCs) have become increasingly frustrated with Western states as the latter have clinged to their inherited power in the IMF and other important international economic governance organizations. The emerging cooperation among the BRICS (Brazil, Russia, India, China, South Africa)—as seen in the advanced-stage negotiations to establish a Development Bank and a Contingent Reserve Arrangement—sends a “wakeup and smell the coffee” message. The West will carry a heavy responsibility for eroding global multilateral governance if it continues to drag its heels on the needed adjustments.

Part 1 of a two-part series.

Overview of the Current Stalemate

Everyone agrees, in principle, that the global governance organizations established after the Second World War—notably the IMF and the World Bank—must adapt their governance to the fact of a now more multipolar world. Everyone agrees, in principle, that member countries’ share of votes in the governing boards should reflect their present-day relative economic weight.

At first glance the IMF has already taken a big step towards raising the voting power of “emerging market and developing countries” (EMDCs). In 2010, its member countries agreed both to boost the lending power of the IMFand to shift 6.2% of quota shares, and hence voting power, in favour of “dynamic” EMDCs. In March 2010, then-Managing Director Dominique Strauss-Kahn hailed this agreement as “the most fundamental governance overhaul in the IMF’s 65-year history and the biggest-ever shift of influence in favor of emerging market and developing countries.”

However, more than three years later the shift has yet to be implemented, largely because the U.S. Congress has still not approved what the country’s executive branch agreed to (it remains an open question, though, whether the executive branch is using the Congress as an excuse for its own unwillingness to act). Read the rest of this entry »

Philip Arestis and Malcolm Sawyer

Whether a euro area banking union would have saved Cyprus from its recent TROIKA (of European Commission, European Central Bank and IMF) tragic treatment is a very interesting question. If it would, then clearly a move towards a banking union, as part of the construction of a political union should be a major component of the reconstruction of the euro area. As we argued in our March 2013 blog, the European Union (EU) summit meeting, 28th/29th June 2012, took a number of decisions in terms of a possible euro area banking union. The most relevant decision was the creation of banking supervision by the European Central Bank (ECB), banking licence for the European Stability Mechanism (ESM), and financial assistance by the ESM to governments, members of the euro area, when in financial difficulty. The banking supervision, however, will not come into full operation before 2014. ESM member states would then be able to apply for an ESM bailout when they are in financial difficulty or their financial sector is a threat to stability and in need of recapitalization. This is exactly the problem with the recent Cyprus problem, as we now elaborate.

Essentially the major problem in Cyprus has been the size and insolvency of its banking sector. It is far too big in relation to the total economy (ten times its annual GDP is often quoted by the TROIKA; being big relative to economy means its assets and liabilities relative to GDP are large); it is also the case that as an off-shore financial and business centre, the Cypriot banking attracted a significant amount of foreign deposits. The first feature poses the danger of a ‘systemic risk’ for the entire economy when one or more banks fail. The second feature exposes Cyprus to accusations, such as those from politicians in Germany and elsewhere that Cyprus has become a ‘money-laundering’ centre within the European Union. By the summer of 2012 it became clear that the two biggest domestic banks in Cyprus were in trouble because of huge losses from the exposure of their branches in Greece, in view of the depressed macroeconomic conditions there, promoted by TROIKA; also in view of the ‘haircut’ of the Greek sovereign debt, of which Cypriot banks had acquired a great deal by 2010. This mixture of wrong decision-making by Cypriot bankers and bad luck created the need for bank re-capitalisations. As a result, Cyprus applied for financial help from its partners in the euro area in the summer of 2012.

The request by Cyprus for a bail-out has certain unique features. The tiny economy of Cyprus requested 17.5 billion euros which, by contrast to the previous Southern European bail-outs, was a comparatively trivial sum in absolute terms. It was, nonetheless, quite large, nearly 100%, when expressed as a percentage of Cyprus GDP. The initial negotiations between the TROIKA and the outgoing government of Cyprus were accompanied by political noises from Germany implying that the German electorate was fed up with having to hand over money to the Southern European periphery yet again. The reason as to why the heavily indebted southern periphery of Europe was morally ‘undeserving’ of financial help was simply undesirable money-laundering. The argument produced is that hard working and prudent German tax payers should not be expected to rescue an overblown banking sector in Cyprus, which became a ‘tax haven’ for wealthy non-Europeans. These are especially Russians, whose deposits in Cyprus are thought to be of the order of 25bn euros, an amount that is almost one-third of the total deposits in the Cyprus banks. The depositors in the Cyprus banking system should be partly expected to rescue their economy, a proposal that was apparently initiated and promoted by the IMF part of TROIKA. The European Commission was reluctant on this score, fearing a bank run in Cyprus and potentially elsewhere in the euro area. Such a plan, it is argued by TROIKA, helps to reduce the unsustainable large banking and financial sectors of Cyprus. It is also the case that to the extent the ‘bail-in’ of the banks in Cyprus is successful it will introduce some market discipline in banking. By sending the message to all depositors in all banks that if a bank needs re-capitalisation they may be asked to bear some of the cost, the depositors will be forced to take more care where they ‘park’ their savings. Unfortunately the world is a much more complicated place to rely for such arguments to be uncontroversial. This is particularly so in the world of money and finance. In any case, and as the editorial of the Financial Times (18 March 2013) rightly commented “instead of throwing Cyprus a life-buoy, leaders put a millstone around its neck”.

Read the rest of this entry »

Erinc Yeldan, Guest Blogger

The IMF released the April edition of its World Economic Outlook (WEO).  One of the key analytical chapters (Chapter 3) of the Report is titled The Dog that Didn’t Bark: Has Inflation Been Muzzled, or Was It Just Sleeping?”  Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous fall in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere; —hence the metaphor: inflation (the dog…) does not respond (bark).  And the alleged mystery is but why?

The WEO suggests two candidates for explaining the mystery: the first one is based on the “structural unemployment has shifted” hypothesis, arguing that “the failure of inflation to fall is evidence that output gaps are small and that the large increases in unemployment are mostly structural.”  The logical policy implication of this argument is that “… the monetary stimulus already in the pipeline may reduce unemployment, but only at the cost of overheating and a strong increase in inflation—just as during the 1970s”. Yet, by itself this argument does not provide much of an explanation, as the underlying causes of this structural shift still remains unanswered.

Read the rest of this entry »

Cornel Ban

The most recent high profile form of target practice for the expansionary austerity thesis uses a great deal of IMF research as ammunition. A senior IMF level official who managed the Fund’s involvement during the Irish crisis blasted Europe’s policy of austerity and issued dire warnings about a gloomy future if the current course of action is maintained.Has the crisis really changed the International Monetary Fund’s policy advice? The main finding of an international workshop that took place recently at Boston University was that while some remarkable changes did in fact occur in IMF policy advice, they were too modest to suggest that an economic paradigm change is imminent.

The contributors noted that this international organization took a half-step on capital account regulation, became more open to the preferences of developing countries, relaxed its erstwhile strict commitment to austerity and has become a lot more reserved towards cross-border banking and the involvement of private sector consultants in its financial surveillance teams. At the same time, they found that the Fund has narrowed the scope of its programs to a predominantly orthodox economic policy agenda, continued to make counter-cyclical policies conditional on bond market sentiment and contributed to the weakening of recovery via its continued discrimination in favor of foreign creditors.

Read the rest of this entry »