alternative views of the imf thorvaldur gylfason stellenbosch, south africa 2-13 november 2009
TRANSCRIPT
Alternative Alternative Views Views
of the IMFof the IMF
Thorvaldur GylfasonThorvaldur GylfasonStellenbosch, South AfricaStellenbosch, South Africa
2-13 November 20092-13 November 2009
Background: Political Background: Political economy is inherently economy is inherently
controversialcontroversial Positive vs. normative Positive vs. normative
economicseconomics Milton Friedman (1957)Milton Friedman (1957)
Economic policy is intertwined Economic policy is intertwined with politics and political with politics and political debatedebate
Dividing lines in politicsDividing lines in politics Right vs. left – not always helpfulRight vs. left – not always helpful Efficiency vs. equalityEfficiency vs. equality Free trade vs. protectionismFree trade vs. protectionism Public interest vs. special Public interest vs. special
interestsinterests
Economists can disagree on Economists can disagree on politicspolitics But they can still be objectiveBut they can still be objective
Old controversies about plan vs. Old controversies about plan vs. market are now deadmarket are now dead New controversies about New controversies about
globalization have replaced them, globalization have replaced them, including …including …
Renewed controversies about the Renewed controversies about the IMF and the World Bank and their IMF and the World Bank and their programs, projects, and policy programs, projects, and policy recommendationsrecommendations
Background: Political Background: Political economy is inherently economy is inherently
controversialcontroversial
Two waves of Two waves of controversycontroversy
First wave: 1970s and 1980sFirst wave: 1970s and 1980s Main criticism: Fund programs Main criticism: Fund programs
may help strengthen the balance may help strengthen the balance of payments, but they are of payments, but they are sometimes inimical to output in sometimes inimical to output in the short runthe short run
Second wave: 1990s and 2000sSecond wave: 1990s and 2000s Several aspects, including Russia, Several aspects, including Russia,
Asia, capital flows, globalizationAsia, capital flows, globalization Ongoing, unsettledOngoing, unsettled Serious issues involvedSerious issues involved
Not just a Not just a
convenieconvenie
nt nt scapegoascapegoa
tt
Outline of controversiesOutline of controversies
1.1. Is the Fund subservient to its Is the Fund subservient to its main shareholders?main shareholders?
2.2. Fund programs: Is one size Fund programs: Is one size meant to fit all countries?meant to fit all countries?
3.3. Do Fund programs strengthen Do Fund programs strengthen the balance of payments as the balance of payments as intended?intended?
4.4. Do Fund programs hurt output Do Fund programs hurt output and growth?and growth?
II 1970s and 1980s
Outline of controversiesOutline of controversies
5.5. Did the Fund respond too Did the Fund respond too slowly in Russia?slowly in Russia?
6.6. Did the Fund advocate Did the Fund advocate premature financial premature financial liberalization in Asia?liberalization in Asia?
7.7. Did the Fund advocate Did the Fund advocate excessive increases in interest excessive increases in interest rates in Asia?rates in Asia?
8.8. Is the Fund on the wrong side Is the Fund on the wrong side of the debate of globalization?of the debate of globalization?
IIII
Discuss these briefly, one by one, from general to specific
1990s and 2000s
Outline of controversiesOutline of controversies
5.5. Did the Fund respond too Did the Fund respond too slowly in Russia?slowly in Russia?
6.6. Did the Fund advocate Did the Fund advocate premature financial premature financial liberalization in Asia?liberalization in Asia?
7.7. Did the Fund advocate Did the Fund advocate excessive increases in interest excessive increases in interest rates in Asia?rates in Asia?
8.8. Is the Fund on the wrong side Is the Fund on the wrong side of the debate of globalization?of the debate of globalization?
IIII
Non-quantitative approach
1990s and 2000s
Subservience to owners?Subservience to owners?11 Fund is occasionally accused of Fund is occasionally accused of
partiality in favor of its main partiality in favor of its main shareholders. Is this a fair shareholders. Is this a fair charge?charge? Collection agency for big banks?Collection agency for big banks? Some think so, others do notSome think so, others do not
Analogy: Owners of newspapers Analogy: Owners of newspapers typically limit their interference typically limit their interference to their selection of editorsto their selection of editors Few editors admit to being under Few editors admit to being under
pressure from owners, but there pressure from owners, but there are exceptions, also in the IMF’s are exceptions, also in the IMF’s historyhistory
One size for all?One size for all?22 Background: Resistance to Background: Resistance to
reforms based on argument reforms based on argument that “general principles do not that “general principles do not apply here”apply here” Exemptions from economic lawsExemptions from economic laws But rivers always flow But rivers always flow
downstreamdownstream A basic principle of IMF A basic principle of IMF
operations has always been to operations has always been to treat countries uniformly and treat countries uniformly and yet acknowledge their different yet acknowledge their different circumstancescircumstances So, tailor programs to specific So, tailor programs to specific
needsneeds
Not really controversial; they doNot really controversial; they doEmpirical evidence shows that Empirical evidence shows that
Fund programs work chiefly as Fund programs work chiefly as intendedintendedReduce current account deficitsReduce current account deficitsBolster foreign exchange reservesBolster foreign exchange reservesReduce inflation, but not always, Reduce inflation, but not always,
partly because of currency partly because of currency depreciationdepreciation
To see how, and prepare for #4, To see how, and prepare for #4, consider a small modelconsider a small model
Do Fund programs Do Fund programs strengthen the balance of strengthen the balance of
payments?payments?33
Reserves and output in Reserves and output in the short run: A simple the short run: A simple
modelmodelExpress key accounting Express key accounting
linkages in terms of simple linkages in terms of simple algebraalgebra
Use model to describe how Use model to describe how nominal income and foreign nominal income and foreign exchange reserves depend on exchange reserves depend on domestic creditdomestic creditDemonstrate how BOP target Demonstrate how BOP target
translates into prescriptions for translates into prescriptions for fiscal and monetary policies fiscal and monetary policies
Financial programming in actionFinancial programming in action
List of variablesList of variables
M = moneyM = money
D = domestic creditD = domestic credit
R = foreign reservesR = foreign reserves
R = R-RR = R-R-1-1 = balance = balance of paymentsof payments
P = price levelP = price level
Y = real incomeY = real income
v = velocityv = velocity
X = real exportsX = real exports
PPxx = price of exports = price of exports
Z = real importsZ = real imports
PPzz = price of imports = price of imports
F = capital inflowF = capital inflow
m = propensity to m = propensity to importimport
Two behavioral
parameters: m
and v
List of relationshipsList of relationships
M = D + R M = D + R (monetary (monetary survey)survey)
M = (1/v)PYM = (1/v)PY (money demand)(money demand)
R = (1/v)PY – DR = (1/v)PY – D (M schedule)(M schedule)
R = PR = PxxX – PX – PzzZ + FZ + F (balance of (balance of
payments)payments)
PPzzZ = mPYZ = mPY (import demand)(import demand)
R = PR = PxxX – mPY + F + RX – mPY + F + R-1-1 (B schedule)(B schedule)Estimate m and v
by regression
analysis
The M scheduleThe M schedule
Reserves (R)
M schedule
1
v
R = (1/v)PY – D
D up
An increase in reserves increases quantity of money, and hence also income
PY = v(R + D)
PY is nominal income GNP (PY)
The B scheduleThe B schedule
B schedule
1
m
R = PxX – mPY + F + R-1
F up, e down
An increase in income spurs imports, so reserves decline
Reserves (R)
GNP (PY)
Domestic credit contractionDomestic credit contraction
M
B
D down
M’
A
When D falls, M also falls, so that PY goes down and PzZ also decreases. Therefore, R increases. Here, an improvement in the reserve position is accompanied by a decrease in income.
R*C
Too low reserves
Reserves (R)
GNP (PY)
Domestic credit contractionDomestic credit contraction
M
B
D down
M’
A
So, credit restraint per se strengthens the BOP: R increases. But, and this was the charge against the IMF, income goes down, and this means that real real income goes down because prices are sticky. But …
R*C
Too low reserves
Reserves (R)
GNP (PY)
Not in theory because Fund Not in theory because Fund programs contain at least two programs contain at least two main elementsmain elements
Fundamental rule of the theory Fundamental rule of the theory of economic policy: It takes two of economic policy: It takes two stones to hit two birdsstones to hit two birdsSo, use credit policy to adjust BOP So, use credit policy to adjust BOP
……… … and, use some other instrument and, use some other instrument
to address the implications for to address the implications for outputoutput
E.g., exchange rate policy or E.g., exchange rate policy or structural measures that impact structural measures that impact supply sidesupply side
Do Fund programs hurt Do Fund programs hurt output in the short run?output in the short run?4a4a
Domestic credit contraction Domestic credit contraction accompanied by devaluation*accompanied by devaluation*
GNP (PY)
M
BD down
B’
M’
A
C
When D falls, M also falls, so that PY goes down and PzZ also decreases. Therefore, R increases. Further, devaluation* strengthens the reserve position and helps reverse the decline in income.
R*
Reserves (R)
*Or, e.g., capital account liberalization
F up, e down
Domestic credit contraction Domestic credit contraction accompanied by devaluation*accompanied by devaluation*
GNP (PY)
M
BD down
B’
M’
A
C
So, BOP improves through both channels: credit restraint and devaluation.*Meanwhile, income can go either up or down, or stay the same.
R*
Reserves (R)
*Or, e.g., capital account liberalization
F up, e down
Domestic credit contraction Domestic credit contraction accompanied by devaluation*accompanied by devaluation*
GNP (PY)
M
BD down
B’
M’
A
C
So, not surprising that a number of empirical studies found no evidence of negative effects of Fund-supported programs on output.
R*
Reserves (R)
*Or, e.g., capital account liberalization
F up, e down
The importance of The importance of appropriate side measuresappropriate side measures
Real exchange rate:Real exchange rate:
Devaluation* must be Devaluation* must be accompanied by fiscal and accompanied by fiscal and monetary restraint to prevent monetary restraint to prevent prices from rising and thus prices from rising and thus eating up the benefits of eating up the benefits of devaluationdevaluation
To work, nominal devaluation To work, nominal devaluation must result in must result in realreal devaluation devaluation
*P
ePQ
*Or, e.g., capital account liberalization
First-wave studiesFirst-wave studies
Four kinds of studies in Four kinds of studies in ascending order of complexity*ascending order of complexity*Before and afterBefore and afterWith and withoutWith and withoutGeneralized evaluationsGeneralized evaluationsComparisons of simulationsComparisons of simulations
All concluded that, in most Fund All concluded that, in most Fund programs, output did not go programs, output did not go downdown
*Haque and Khan, “Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence,” IMF WP
1998.
The distinction between short The distinction between short run and long run was not so run and long run was not so clear in the first waveclear in the first waveThis was before the endogenous This was before the endogenous
growth revolution that we growth revolution that we discussed beforediscussed before
In the second wave, the In the second wave, the distinction was clear, and the old distinction was clear, and the old criticism – that Fund programs criticism – that Fund programs restrained economic activity in restrained economic activity in the long run – resurfacedthe long run – resurfacedTrue or false?True or false?
Do Fund programs hurt Do Fund programs hurt output growth in the long output growth in the long
run?run?4b4b
Technically, this is difficult to Technically, this is difficult to ascertain because the long run ascertain because the long run spans several decadesspans several decadesDo not want to wait that long for Do not want to wait that long for
evidence of growth effects of Fund evidence of growth effects of Fund programsprograms
So, approach the question from So, approach the question from a different directiona different directionConsider, as a benchmark, a small Consider, as a benchmark, a small
model of growth and inflationmodel of growth and inflation
Do Fund programs hurt Do Fund programs hurt output growth in the long output growth in the long
run?run?
Inflation and growth in Inflation and growth in the long run: A simple the long run: A simple
modelmodelExpress key linkages between Express key linkages between
inflation and growth in simple inflation and growth in simple algebraalgebra
Use model to describe how Use model to describe how growth and inflation depend on growth and inflation depend on monetary and fiscal policymonetary and fiscal policyDemonstrate how the need for Demonstrate how the need for
low inflation and rapid growth low inflation and rapid growth translates into prescriptions for translates into prescriptions for fiscal and monetary policies, and fiscal and monetary policies, and moremore
List of variablesList of variables
= inflation (% per year)= inflation (% per year)
m = monetary expansion (% per year)m = monetary expansion (% per year)
g = growth rate of output (% per year)g = growth rate of output (% per year)
s = saving rate (% of GDP)s = saving rate (% of GDP)
E = efficiency (from Y = EK, so E = E = efficiency (from Y = EK, so E = Y/K)Y/K)
= depreciation rate (% per year)= depreciation rate (% per year)
Two relationshipsTwo relationships
= m – g= m – g (Q schedule)(Q schedule)
g = sE(g = sE() - ) - (G schedule)(G schedule)
Q schedule is derived from Mv = PY by Q schedule is derived from Mv = PY by assuming v is constant and converting the assuming v is constant and converting the equation to 1+equation to 1+ = (1+m)/(1+g) ≈ 1 + m – g = (1+m)/(1+g) ≈ 1 + m – g
G schedule comes from growth lectureG schedule comes from growth lecture Two negatively sloped relationships Two negatively sloped relationships
between inflation and growth: let’s draw between inflation and growth: let’s draw them!them!
Assume -1 < E’() < 0, so G is steeper
than Q.
Inflation and growthInflation and growth
Economic growth
Infl
ati
on
G
A
45°
Q
= m – g= m – g
g = sE(g = sE() - ) - m
m
G schedule slopes down G schedule slopes down
because inflation because inflation
reduces efficiency: E’(reduces efficiency: E’() )
< 0 < 0
Slope = -Slope = -
11
Economic growth
Infl
ati
on
Q’
G
A
B
Q
Increased monetary expansion Increased monetary expansion increases inflation and reduces increases inflation and reduces
growthgrowth
As m goes up, Q shifts right, so also goes up and g goes down because the rise in reduces E.
m1 m2
45° 45°
Economic growth
Infl
ati
on
QG
A
G’
B
Increased saving* increases Increased saving* increases growth and reduces inflationgrowth and reduces inflation
*Including public saving
As s goes up, G shifts right (and tilts), so g also goes up and goes down because m does not move.
m45°
How would we expect long-run How would we expect long-run growth to respond to Fund growth to respond to Fund programs in this model?programs in this model?
The model implies that fiscal The model implies that fiscal and monetary restraint reduces and monetary restraint reduces inflation and stimulates long-inflation and stimulates long-run growthrun growthBut output may or may not fall in But output may or may not fall in
the short run, a different questionthe short run, a different questionAlso, recall adverse effect of high Also, recall adverse effect of high
inflation and overvaluation on inflation and overvaluation on long-run growthlong-run growth
Do Fund programs hurt Do Fund programs hurt output growth in the long output growth in the long
run?run?
Back to base
Jeffrey Sachs* says soJeffrey Sachs* says soHe claims that the US wanted He claims that the US wanted
Russia to remain weakRussia to remain weakHe urged a Marshall plan for He urged a Marshall plan for
RussiaRussiaEven so, the IMF put strong Even so, the IMF put strong
emphasis on Russia and other emphasis on Russia and other transition countries in early transition countries in early 1990s and onwards1990s and onwardsEstablished European Established European
Department II Department II
Did the Fund respond too Did the Fund respond too slowly in Russia?slowly in Russia?55
*Jeffrey Sachs, The End of Poverty, Penguin Press, 2005.
Joseph Stiglitz* says soJoseph Stiglitz* says soHow would we describe a How would we describe a
collapse of confidence as collapse of confidence as occurred in Thailand in 1997 in occurred in Thailand in 1997 in our models?our models?By a plunge in F in the short-run By a plunge in F in the short-run
model, so both R and Y go downmodel, so both R and Y go downBy an outward shift of the Q By an outward shift of the Q
schedule in the long-run model, schedule in the long-run model, so so goes up and g goes down goes up and g goes down
Did the Fund call for Did the Fund call for premature financial premature financial
liberalization in Asia?liberalization in Asia?66
*Joseph Stiglitz, Globalization and its Discontents, W. W. Norton, 2002, and Making Globalization Work , W. W.
Norton, 2006.
Collapse of confidence: Collapse of confidence: The short runThe short run
GNP (PY)
M
B
F down
B’
A
C
When F falls, B shifts left, so that both R and PY go down from A to C. (The resulting fall in e may help reverse the leftward shift of B.) Dilemma: How should monetary policy react? Should D expand or contract?
Reserves (R)
?
?
Collapse of confidence: Collapse of confidence: The short runThe short run
GNP (PY)
M
B
F down
B’
A
C
If D expands, interest rates fallfall, so F falls further and B shifts farther to the left. If D contracts, interest rates riserise, so the fall in F is reversed and B shifts back to the right.Malaysia restricted movements of F.
Reserves (R)The M and B schedules are interdependentThe M and B schedules are interdependent
Stiglitz* says so, as does SachsStiglitz* says so, as does SachsThey have a point, as IMF They have a point, as IMF
concedesconcedesWithout knowing well how to Without knowing well how to
sequence policy reactions, an sequence policy reactions, an attempt was made to do as much attempt was made to do as much as possible at onceas possible at once
In retrospect, Malaysia was In retrospect, Malaysia was probably right to restrict capital probably right to restrict capital movementsmovements
Liberalization of trade should Liberalization of trade should precede liberalization of capital precede liberalization of capital movements to reduce volatilitymovements to reduce volatility
Did the Fund advocate too Did the Fund advocate too much monetary restraint in much monetary restraint in
Asia?Asia?77
*Joseph Stiglitz, Globalization and its Discontents, W. W. Norton, 2002, and Making Globalization Work , W. W.
Norton, 2006.
Collapse of confidence: Collapse of confidence: The long runThe long run
Economic growth
Q’
G
A
B
Q
When confidence collapses, money demand goes down (v goes up), so Q shifts right, inflation goes up and growth slows down.
m1 m2
Infl
ati
on
Collapse of confidence: Collapse of confidence: The long runThe long run
Economic growth
Q’
G
A
B
Q
Need to increase s through fiscal measures to shift G shift G rightwardrightward and reduce m through monetary policy to shift Q leftwardshift Q leftward to move back southeast from B.
m1 m2
Infl
ati
on
No! – not in my viewNo! – not in my viewBut Stiglitz and others raise good But Stiglitz and others raise good
points about, inter alia, points about, inter alia, increased inequality, pointing increased inequality, pointing out that …out that …Asia grew rapidly with reasonable Asia grew rapidly with reasonable
equality in the distribution of equality in the distribution of incomeincome
Inequality has increased recently Inequality has increased recently due, in part, to globalization and to due, in part, to globalization and to rapid technological progressrapid technological progress
Increased inequality precedes Increased inequality precedes crisescrises
Recall: Equality may be good for Recall: Equality may be good for growthgrowth
Is the Fund on the wrong Is the Fund on the wrong side of the debate of side of the debate of
globalization?globalization?88
William Easterly* says soWilliam Easterly* says soUnconditional foreign aid as Unconditional foreign aid as
manna from heavenmanna from heavenAid, like natural resources, needs Aid, like natural resources, needs
good management as well as good good management as well as good institutionsinstitutions
Aid accompanied by good policies is Aid accompanied by good policies is more effective than aid with bad more effective than aid with bad policiespolicies
Rationale for conditionalityRationale for conditionality
Development Development assistance: assistance:
A mixed blessing?A mixed blessing?
Before concluding
*William Easterly, The Elusive Quest for Growth, MIT Press, 2001, and The White Man’s Burden, Penguin
Press, 2006.
Increased transparencyIncreased transparencyPublication of policy Publication of policy
recommendations and recommendations and discussions on the webdiscussions on the web
Transparency helps local Transparency helps local reformers as they are able to reformers as they are able to point to Fund advicepoint to Fund advice
Increased opennessIncreased opennessFund no longer circumnavigates Fund no longer circumnavigates
sensitive matters like corruption sensitive matters like corruption if it is a matter of macroeconomic if it is a matter of macroeconomic concern concern
Examples: Kenya, RussiaExamples: Kenya, RussiaFlexibility, as now in IcelandFlexibility, as now in Iceland
In fairness to the FundIn fairness to the FundOne more thing
Entire banking system collapsed Entire banking system collapsed 20082008 Inflicting financial losses of ca. seven Inflicting financial losses of ca. seven
times GDP on foreign and domestic times GDP on foreign and domestic clientsclients
IMF was asked for helpIMF was asked for helpStand-by arrangement: $5 billion, of Stand-by arrangement: $5 billion, of
which $2 billion from IMF and rest which $2 billion from IMF and rest from Nordic countries and othersfrom Nordic countries and others
Shared conditionalityShared conditionalityNovel program featuresNovel program features
Temporary capital controlsTemporary capital controlsFiscal space for one yearFiscal space for one year
Iceland storyIceland story
Conclusion: Conclusion: Changing role of the FundChanging role of the Fund
The EndThe End
World has changed, IMF adjustedWorld has changed, IMF adjustedThe long run matters, tooThe long run matters, tooSo, Fund and Bank overlap more than beforeSo, Fund and Bank overlap more than before
Fund programs now are more varied than beforeFund programs now are more varied than before Public health issues are now a macroeconomic concernPublic health issues are now a macroeconomic concern
Institutional issues now receive more attentionInstitutional issues now receive more attention Financial markets; same is true of national central banksFinancial markets; same is true of national central banks
Personally, I think Fund has done goodPersonally, I think Fund has done goodPolicy advice, technical assistance, trainingPolicy advice, technical assistance, training
Example: Emphasis on inflation control has helped Example: Emphasis on inflation control has helped bring inflation down around the world, and – bring inflation down around the world, and – remember! – that’s good for growthremember! – that’s good for growth
Fund offers expertise in handling financial Fund offers expertise in handling financial crisescrises