Tensions in the Role Tensions in the Role of the International of the International Monetary FundMonetary Fund

Presentation by Timothy Lane (IMF)Presentation by Timothy Lane (IMF)Oliver Smithies LectureOliver Smithies LectureBalliol College in association with Balliol College in association with Oxonia Oxonia 9 November, 20049 November, 2004

Main themes Main themes

Changes in the world economy have Changes in the world economy have brought major changes in the role of brought major changes in the role of the IMF the IMF

These changes have led to some These changes have led to some strainsstrains

Efforts have been made to reform the Efforts have been made to reform the IMF in light of this experience IMF in light of this experience

But some underlying tensions remain But some underlying tensions remain unresolved unresolved

Purposes of the IMFPurposes of the IMF

Policy spillovers Policy spillovers Benefits of pooling liquidity Benefits of pooling liquidity Financing to give members Financing to give members

confidence to make adjustments confidence to make adjustments without damaging national or without damaging national or international prosperityinternational prosperity

Some trends in recent Some trends in recent decadesdecades Fall of Bretton Woods systemFall of Bretton Woods system Capital mobilityCapital mobility Growth disappointments Growth disappointments Low-income countries debt crisesLow-income countries debt crises Fall of CommunismFall of Communism Emerging market crises of 1990sEmerging market crises of 1990s

Some broad areas Some broad areas where problems have where problems have emerged emerged ConditionalityConditionality Emerging market crisesEmerging market crises Prolonged useProlonged use Low-income countriesLow-income countries

ConditionalityConditionality

Classic purpose: safeguards and assurancesClassic purpose: safeguards and assurances Reasons for expansion of conditionalityReasons for expansion of conditionality ““Grandmotherliness”Grandmotherliness” Example of tension: Indonesian clove Example of tension: Indonesian clove

monopolymonopoly Concern over proliferation of conditionalityConcern over proliferation of conditionality

—and doubts about its effectiveness—and doubts about its effectiveness Conclusion: 2002 Conditionality GuidelinesConclusion: 2002 Conditionality Guidelines

—streamlining and focusing conditionality —streamlining and focusing conditionality

Remaining tensions in Remaining tensions in conditionalityconditionality Tailoring versus uniformity—both Tailoring versus uniformity—both

in establishing conditions and in establishing conditions and monitoring resultsmonitoring results

Streamlining as counterpart of Streamlining as counterpart of selectivity selectivity

““Ownership” and its limitsOwnership” and its limits

Emerging Market Emerging Market CrisesCrises Examples: Mexico 1994-95, East Asia 1997-Examples: Mexico 1994-95, East Asia 1997-

98, Russia 1998, Brazil 1999, 2002; 98, Russia 1998, Brazil 1999, 2002; Argentina 2001Argentina 2001

Key features:Key features:– Massive withdrawal of external financing Massive withdrawal of external financing – Massive current account adjustmentMassive current account adjustment– Deep economic slumps—in some cases short-Deep economic slumps—in some cases short-

lived, in others persistentlived, in others persistent

Problems with IMF Problems with IMF crisis response crisis response Surveillance: failure to anticipate outbreak of Surveillance: failure to anticipate outbreak of

crises (in some, but not all, cases); lack of crises (in some, but not all, cases); lack of candid criticism of vulnerabilities (including candid criticism of vulnerabilities (including exchange rate regime)exchange rate regime)

Despite large financing packages, massive Despite large financing packages, massive (and largely unforeseen) over-adjustment in (and largely unforeseen) over-adjustment in current accountscurrent accounts

Difficulties in handling financial sector falloutDifficulties in handling financial sector fallout Moral hazard concernsMoral hazard concerns Difficulties in saying no (e.g. in Argentina); Difficulties in saying no (e.g. in Argentina);

lack of mechanisms for orderly sovereign lack of mechanisms for orderly sovereign debt restructuringdebt restructuring

Debates over specific policy adviceDebates over specific policy advice

Response to crisis Response to crisis experience—experience—surveillance surveillance Vulnerability assessments Vulnerability assessments Financial sector work (FSAPs), etc. Financial sector work (FSAPs), etc. Data disseminationData dissemination Standards and codesStandards and codes ““Fresh look” surveillance Fresh look” surveillance Debt sustainability analysisDebt sustainability analysis More caution on capital mobility More caution on capital mobility

Crisis financingCrisis financing

Catalytic approach and its limitsCatalytic approach and its limits AlternativesAlternatives

– Bigger official packages? Bigger official packages? SRF, CCL, SRF, CCL, But moral hazard, resource constraints But moral hazard, resource constraints

limit overall packagelimit overall package– Bailins? (standstills, default, capital controls)Bailins? (standstills, default, capital controls)

—could be counterproductive—could be counterproductive– Sovereign debt restructuringSovereign debt restructuring

Elusive quest for rules-based approachElusive quest for rules-based approach—but concerns that discretion could be —but concerns that discretion could be misusedmisused

Information flowsInformation flows

Data disseminationData dissemination Increases in transparencyIncreases in transparency Learning: IEO; ex post Learning: IEO; ex post

assessments; INS courses, etc.assessments; INS courses, etc. Interaction with market Interaction with market

participants (ICMG and more participants (ICMG and more informal contacts)informal contacts)

Prolonged use—why is Prolonged use—why is it a problem?it a problem? Defeats idea of revolving pool of financingDefeats idea of revolving pool of financing May be symptomatic of flaws in program May be symptomatic of flaws in program

design, conditionality, implementation, design, conditionality, implementation, and/or projectionsand/or projections

May indicate that IMF support is the wrong May indicate that IMF support is the wrong instrument—i.e. because a country’s instrument—i.e. because a country’s problems are longer-term in natureproblems are longer-term in nature

May stunt domestic policy formulation May stunt domestic policy formulation processesprocesses

Reasons for prolonged Reasons for prolonged useuse Failure to achieve objectivesFailure to achieve objectives Lack of realism on time requiredLack of realism on time required Signaling—pressures from donorsSignaling—pressures from donors Facilities adapted to permit Facilities adapted to permit

prolonged use, especially for low-prolonged use, especially for low-income countriesincome countries

IMF’s response to IMF’s response to prolonged useprolonged use Ex post assessmentsEx post assessments Monitoring of incidenceMonitoring of incidence More general efforts to focus More general efforts to focus

conditionality, improve program designconditionality, improve program design Work on IMF’s role in low-income Work on IMF’s role in low-income

countriescountries Signaling—attempts to create Signaling—attempts to create

signaling mechanism separate from signaling mechanism separate from financing financing

Remaining issues with Remaining issues with prolonged useprolonged use Difficulty of saying “no”Difficulty of saying “no” Continuing lack of an alternative Continuing lack of an alternative

signaling mechanismsignaling mechanism

Low-income countriesLow-income countries

Disappointing growth performance, failure of Disappointing growth performance, failure of successive development modelssuccessive development models

Pervasive problems led to comprehensive programs—Pervasive problems led to comprehensive programs—but likely to be ineffective and illegitimate in absence but likely to be ineffective and illegitimate in absence of sufficient ownership in countryof sufficient ownership in country

Coordination with World Bank and donors Coordination with World Bank and donors Institutional capacityInstitutional capacity Debt crisis and HIPC Initiative Debt crisis and HIPC Initiative In 1990s, increasing macroeconomic stability (and, in In 1990s, increasing macroeconomic stability (and, in

later 1990s, somewhat better growth)later 1990s, somewhat better growth)– Key problems are not primarily macroeconomic—but debt Key problems are not primarily macroeconomic—but debt

sustainability is still a major issuesustainability is still a major issue– Ongoing financing needs are longer-termOngoing financing needs are longer-term– Continuing need for Fund to help countries hit by shocks Continuing need for Fund to help countries hit by shocks

Response to problemsResponse to problems

Debt reduction (HIPC Initiative) and Debt reduction (HIPC Initiative) and new debt sustainability new debt sustainability

PRSP approach—a step in the right PRSP approach—a step in the right direction, but doesn’t yet work as direction, but doesn’t yet work as intendedintended

Signaling—lower-access Signaling—lower-access arrangements arrangements

Response to shocks—work under way Response to shocks—work under way

Some key remaining Some key remaining issues for LICsissues for LICs How can countries graduate from How can countries graduate from

IMF financing (while continuing to IMF financing (while continuing to receive aid from other sources)? receive aid from other sources)? – How long is signaling needed?How long is signaling needed?– Will PRSP approach help build Will PRSP approach help build

ownership and capacity?ownership and capacity? How can we avoid an endless How can we avoid an endless

cycle of lending and debt relief?cycle of lending and debt relief?

Summary—some key Summary—some key remaining tensionsremaining tensions Bailins and bailouts—need for clear Bailins and bailouts—need for clear

principles versus perils of principles versus perils of predictability predictability

Selectivity versus pressures to lendSelectivity versus pressures to lend IMF financing as a signal IMF financing as a signal Parsimony versus Parsimony versus

comprehensiveness comprehensiveness ““Ownership”Ownership”

Preview of next lecturePreview of next lecture

Reform proposals include two Reform proposals include two strands which are intertwined:strands which are intertwined:– What should the IMF do?What should the IMF do?– How should the IMF be governed?How should the IMF be governed?

The next lecture will discuss The next lecture will discuss possible directions for reform, possible directions for reform, considering both of these strands considering both of these strands