Lecture Notes, 12-16/11/02: Sheetal K

Lecture notes, 12-16/11/02: Sheetal K. Chand.

Globalisation and the Changing Roles of the IMF and the World Bank

A. The BW set-up

Post World –War 11 vision: open integrated world based on free and fair trade in goods and services between sovereign states as an antidote to the experience of the 1930s.
Bretton –Woods arrangements, 1948-73

-international monetary system – $-gold exchange standard

-IMF set up as custodian of the system:

-Central Goals: systemic stability and individual country balance of payments assistance so as to promote general and individual prosperity

- supervised fixed-par value system and provided temporary financing to countries in balance of payments need so as to pre-empt recourse to injurious beggar-thy- neighbour policies

-Problem of limited capital mobility – World Bank set up to provide financing for reconstruction and development especially for countries with limited or no access to international capital markets

-World Bank’s motto: “Our dream is a world without poverty”

Assessment: Golden years of the post-war monetary system. On average highest rates of growth, stable exchange rates, progressive dismantling of restrictions on trade and exchange. Globalisation took the form of integrated markets for goods and increasingly for services. Developing countries terms of trade volatile but no trends. Pronounced increase in prosperity. Relatively few adjustment programs and both industrial and developing countries borrowed from the IMF.

World bank performed role of major provider of capital and invested heavily in infrastructure projects. Official aid flows dominant. Noticeable decline in incidence of poverty.

Collapse of BW: Most important cause – excessive dollar creation and conversion into gold especially by France. Elimination by US of the gold conversion clause.

B. The Post-BW set-up, 1973-

Move to a de facto dollar standard
Multiplicity of exchange rate arrangements, countries free to choose exchange rate arrangements, whether fixed, floating or something in between
Progressive liberalization of financial markets and integration of capital markets
Collapse of central planning and triumph of liberal market economy approach
Decoupling of industrial countries from BW institutions as borrowers, because of alternative arrangements
BW institutions focus on developing and transition countries
Emergence of Washington consensus
BW institutions in search of new roles

Stresses, strains and criticisms

IMF

Failure to maintain stability of the international monetary system? Major swings in exchange rates between leading industrial countries and the excessive rise in financial hedging and speculative activities
Is the IMF needed? Inventing new roles e.g. lending to countries in financial crises
Vulnerability of developing and transition countries to industrial country exchange rate swings
Progressive deterioration in terms-of-trade of developing countries
Growing impoverishment of many countries
Vulnerability of developing countries to financial shocks accompanied by rapid swings in capital and exchange rate overshooting
Growing impoverishment of many developing and transition countries
Unprecedented large number of developing and transition countries with IMF programs, some more or less on a permanent basis

IMF responses:

Pre-2001

More lending facilities and with broader scope, e.g. structural adjustment, poverty, governance
Press for even more liberalization including capital accounts

longer duration of loans and some more subsidised
progressive expansion in conditionality from traditional macroeconomic criteria to detailed items such as fiscal, regulatory, and commercial transactions (see tables + Indonesia)
expansion in technical assistance and training of country officials
more transparency and data acquisition
more resident representatives and more country missions
major expansion in size of bureaucracy

Post-2001 and post criticisms egg G-24, Meltzer report, Stigliz’s globalization book

Restructuring and rationalization initiated of facilities
Narrower scope, and move in the direction of more traditional balance of payments lending
Significant reduction in extent of conditionality
Acceptance of temporary capital account controls
Better coordination with world bank and regionals
Establishment of independent evaluation office

World Bank

Failure of loans (73 percent of loans made to Africa)
Lending mainly to middle income countries with access to capital markets
Mixture of project and program loans and their lack of focus
Frequent reinvention of self
Excessive expansion
Overlap with IMF

Conclusions

Some observed interactions

Greater financial market openness advocated by US, IMF, OECD to promote more efficient global allocation of capital. The potential for financial crises aggravates traditional macroeconomic crises, and can prove highly destabilizing, as in many emerging economies, Mexico (1995), Russia (1998), Asian countries (1997/8).
If unable to maintain a hard peg (e.g. currency board), recommendation is to deal with potential exchange rate instability through floating systems. This should obviate the need for high reserve holdings, especially if combined with access to greater IMF standby funding (However, there is a fear of pure floating and many engage in “dirty” floating, e.g. Korea floats and now holds even more reserves than before - some $ 100 billion in international reserves). Hence, reserve holdings are likely to be even greater, and since these are invariably in US dollars, an issue of siegniorage is raised. Why should the US get it all? What sort of sharing mechanisms would be desirable?
The US treasury and the IMF heavily criticised Malaysia's recourse to capital controls during the Asian crisis and its refusal to have an IMF program. But Malaysia, which refused to lift capital controls until the international monetary system is properly reformed, appears to have done best in protecting its poor and avoiding the extreme disruptions of the other countries experiencing crises.
Temporary capital controls are now tolerated. This is a pragmatic acceptance of the fact that more countries are expressing interest in the Malaysian option, and in reserve pooling and conservation arrangements e.g. the swap agreements between ASEAN, China and Korea, parallel to ECB
There is a limit to how much individual countries can protect themselves and new (old) global solutions may be needed for the international monetary system.

Some systemic alternatives

A current proposal (IMF, US treasury, and others) –reform financial architecture; however, others advocate reform as well of foundations e.g.

-Gold standard (Mundell) -- stable exchange rates and free capital but gold adequacy problem. Also criticism that gold producers gain, but counter criticism is that in the alternative of a

- Dollar standard -- US gains. Cost for others?

-Dollar-Euro standard. Fairer to Europeans but also source of potential major instabilities, not least for outside countries who would be whipsawed between the dollar and the euro.

-Ideal solution is to have One-World- One-fiat currency managed by a board with representation from all members. Everybody gains. What shall we call it?

Table 1. Multilateral Development Banks ($ amounts in billions)

Asian
Dev. Bank / Inter-American
Dev. Bank / African
Dev. Bank / World
Bank / Total
Year of Formation / 1966 / 1959 / 1964 / 1945 / -
Regional Members / 41 / 28 / 53 / 181 / -
Non-Regional Members / 16 / 18 / 24 / -
--Borrowing Members / 38 / 26 / 53 / 156 / -
Total Loans & Investments Outstanding / $39.3 / $39.5 / $17.1 / $210.4 / $306.3
of which:
government loans / $24.4 / $32.3 / $9.5 / $117.2 / $183.4
zero interest credits / $14.3 / $6.9 / $7.6 / $83.2 / $112.0
private sector / $0.6 / $0.3 / $0.0 / $10.0 / $10.9
Market Investments / $9.5 / $12.7 / $2.6 / $50.9 / $75.7
1998 Lending & Investments / $6.1 / $10.1 / $1.7 / $32.5 / $50.4
of which:
government loans / $4.9 / $8.8 / $0 .8 / $22.2 / $36.7
zero interest credits / $1.0
• / $0.7 / $0.7 / $6.8 / $9.2
private sector / $0.2 / $0.6 / $0.2 / $3.5 / $4.5
Total Offices / 15 / 29 / 1* / 127 / 172
Total Employees** / 2,300 / 2,200 / 1,100 / 11,500e / 17,100
Administrative Expenses / $0.2 / $0.3 / $0.1 / $1.6 / $2.2
Debt Outstanding / $24.1 / $32.9 / $7.6 / $131.4 / $196.0
Paid-In Capital / $3.4 / $4.2 / $2.8 / $14.0 / $24.4
Concessional Capital Contributions / $20.6 / $9.5 / $13.1 / $96.3 / $139.5
Callable Capital / $45.0 / $90.0 / $19.6 / $177.7 / $332.3
Total Capital / $69.0 / $103.7 / $35.5 / $288.0 / $496.2
Retained Earnings / $8.6 / $7.2 / $2.0 / $30.0 / $47.8
Non-Borrower Member Callable Capital / $27.0 / $44.6 / $6.5 / $103.4 / $181.5
G-5 Share of Voting Rights / 35°1a / 40°10 / 18°10 / 38°10 / 33°10
G-5 Share of Concessional
Capital Contributions / 79% / 63°10 / 49% / 72°10 / 70%
G-5 Share of Non-Borrower
Member Callable Capital / 68°10 / 80°10 / 55°10 / 66°10 / 70%

Data for most recently available fiscal year.

* 25 offices are scheduled to open over the next 5 years.

** Including long-term consultants, World Bank employees: 10,000.

Source: Meltzer report (2000)

Table 2

Overlap of Regional Development Bank and World Bank Lending: 1996-9$ ($ amounts in billions)

Asia
ADB / IBRD
Amount / Share / Amount / Share
Korea / $4,015 / 24.6% / $7,048 / 27.7%
Indonesia / 3,767 / 23.1% / 4,223 / 16.6%
China / 2,920 / 17.9% / 6,487 / 25.5%
India / 1,576 / 9.6% / 2,095 / 8.2%
Thailand / 1,510 / 9.2% / 2,068 / 8.1%
Philippines / 1,419 / 8.7% / 1,141 / 4.5%
Total / $15,207 / 93.1% / $23,062 / 90.7%
Latin America
IADB / IBRD
Amount / Share / Amount / Share
Argentina / $5,785 / 28.9% / $6,038 / 35.0%
Brazil / 4,642 / 23.2% / 4,296 / 24.9%
Mexico / 1,829 / 9.1% / 3,677 / 21.3%
Peru / 1,493 / 7.4% / 1,080 / 6.3%
Venezuela / 1,030 / 5.1% / 122 / 0.7%
Uruguay / 882 / 4.4% / 269 / 1.6%
Colombia / 768 / 3.8% / 302 / 1.8%
Total / $16,429 / 81.0% / $15,784 / 91.5%

Source: Meltzer report (2000)
Table 3Multilateral Development Bank Activities (amounts in billions)

1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998
World Bank Group:*
IBRD Lending / $16.9 / $14.2 / $16.9 / $14.5 / $14.5 / $21.1 / $22.2
IDA Credits / 6.8 / 6.6 / 5.7 / 6.9 / 4.6 / 7.5 / 6.8
IFC Investments / 2.1 / 2.5 / 2.9 / 3.2 / 3.3 / 3.4 / 3.5
Iv1IGA Guarantees / 0.4 / 0.4 / 0.7 / 0.9 / 0.6 / 0.8 / 1.3
Asian Development Bank
ADB Government Lending / 3.8 / 3.7 / 2.5 / 4.0 / 3.5 / 7.7 / 4.9
ADF Credits / 1.2 / 1.3 / 1.2 / 1.5 / 1.7 / 1.6 / 1.0
ADB Private Sector
Investments / 0.1 / 0.2 / 0.1 / 0.2 / 0.2 / 0.1 / 0.2
Inter-American Development
Bank
L4DB Government Lending / 5.5 / 5.5 / .4.7 / 6.3 / 6.2 / 5.3 / 8.8
FSO Credits / 0.5 / 0.4 / 0.5 / 0.8 / 0.4 / 0.3 / 0.7
LADB Private Sector
Investments / --- / --- / --- / 0.1 / 0.2 / 0.3 / 0.6
African Development Bank
AfrDB Government Lending / 1.9 / 1.6 / 1.4 / 0.7 / 0.5 / 0.8 / 0.8
AfrDF Credits / 1.1 / 0.8 / --- / --- / 0.3 / 1.0 / 0.7
AfrDB Private Sector
Investments / --- / --- / --- / --- / --- / --- / 0.2
Total / $40.2 / $37.2 / $36.5 / $39.0 / $36.2 / $50.1 / $51.6

*World Bank figures are for fiscal year ending June 30 of following calendar year.

Sources:World Bank; Asian DevelopmenBank Inter-American Development Bank African Development Bank;Meltzer report (2000)

Table 4 Performance of World Bank Projects :

Failure Rate of Projects to Achieve Satisfactory Sustained Results

1990-93 / 1994-97 / 1998-99 / 1990-99
Adjustment Lending / 55% / 45% / 37% / 47%
Investment Lending / 60% / 59% / 56% / 59%
Africa / 75% / 74% / 68% / 73%
South Asia / 66% / 56% / 60% / 61%
Latin America / 51% / 50% / 37% / 48%
East Asia / 38% / 36% / 48% / 39%
Low Income / 73% / 69% / 66% / 70%
Lower Middle Income / 48% / 50% / 46% / 49%
Upper Middle Income / 45% / 36% / 31% / 39%
H Income / 27% / 30% / 28% / 28%
Total / 59% / 56% / 53% / 57%

Source: World Bank, Meltzer report (2000)
Table 5. Summary of Empirical Evaluations of the Effect of Fund Programs

Study / Time period / Number of
programs / Number of
countries / Balance of
payments / Growth
Before-after
Reichman, Stillson (1978) / 1963-72 / 79 / 0 / +
Connors (1979) / 1973-77 / 31 / 23 / 0 / 0
Killick (1984) / 1974-79 / 38 / 24 / 0 / 0
Zulu and Nsouli (1985) / 1980-81 / 35 / 22 / .. / 0
Pastor (1987) / 1965-81 / ... / 18 / +* / 0
Killick et al. (1995) / 1979-85 / ... / 16
Schadler, et al. (1993) / 1983-93 / 55 / 19
With-withoutWith /

With-without

Donovan (1981) / 1970-76 / 12 / 12 / ..
Donovan (1982) / 1971-80 / 78 / 44 / +
LoAey (1984) / 1971-82 / 38 / 38 / 0 / 0
Gylfason (1987) / 1977-79 / 32 / 14 / +* / 0
Generalized Evaluation
Goldstein, Montiel (1986) / 1974-81 / 68 / 58 / - / -
Khan (1990) / 1973-88 / 259 / 69 / +* / -*
Conway (1994) / 1976-86 / 217 / 73 / .. / -,+*
Bagci, Perraudin (1997) / 1973-92 / ... / 68 / +* / +*
Dicks-Mireaux, et al. (1997) / 1986-91 / 88 / 74 / .. / +*
Simulation
Khan and Knight (1981) / 1968-75 / ... / 29 / +
Khan and Knight (1985) / 196E-75 / , ... / 29 / +

.a/ Direction of change: (+) indicates positive effect, (-) indicates negative effects, (0) indicates no effect. An asterisk (*) indicates statistically significant at the 5 percent level.

Source: IMF WP

Table 6. Five Crisis-Affected Asian Countries*: Net Private Capital Inflows, 1992-1999

(in billions of U.S. dollars)

1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999
Total net / 29.0 / 31.8 / 36.1 / 74.2 / 65.8 / -20.4 / -25.6 / -24.6
Private
inflows
Net / 7.3 / 7.6 / 8.8 / 7.5 / 8.4 / 10.3 / 8.6 / 10.2
foreign
direct
investment
Net / 6.4 / 17.2 / 9.9 / 17.4 / 20.3 / 12.9 / -6.0 / 6.3
Portfolio
Invest*
Bank / 15.3 / 7.0 / 17.4 / 49.2 / 37.1 / -43.6 / -28.2 / -41.1
loans
Current / 16.1 / -13.5 / -23.2 / -40.4 / -53.0 / -25.0 / 69.7 / 61.7
Account

Sources: IMF

* Indonesia, Korea, Malaysia, Philippines, and Thailand. (-) is deficit.

Table 7 Indonesia (1997-8): Excerpts from Structural Policy Conditions

Policy Action
Fiscal Issues
Remove VAT exemption arrangements.
Increase proportion of market value of land and buildings assessable for tax to
40 percent for plantation and forestry.
Introduce single tax payer registration number.
Increase non-oil tax revenue by raising annual audit coverage, developing
improved
VAT audit programs, and increasing recover of tax arrears.
Increase in two stages excise taxes on alcohol and tobacco to reflect exchange
rate and price developments.
Raise profit transfers to the budget from state enterprises, including Pertamina.
Raise prices on rice, sugar, wheat flour, corn, soybeanmeal and fishmeal.
Eliminate subsidies on sugar, wheat flour, corn, soybeanmeal and fishmeal.
Accelerate provisions under the Nontax Revenue Law of May 1997, to require
all off-budget funds to be incorporated in budget within three years (instead of
five ears).
Incorporate accounts of Investment Fund and Reforestation Fund within
budget.
Ensure reforestation funds used exclusively for financing reforestation
programs.
Central Government to bear cost of subsidizing credit to small-scale enterprises
through State banks.
Cancel 12 infrastructure projects.
Discontinue special tax, customs, or credit privileges granted to the National
Car.
Phase out local content program for motor vehicles.
Abolish compulsory 2 percent after-tax contribution to charity foundations. 1
Discontinue budgetary and extrabudgetary support and privileges to IPTN
(Nusantma Aircraft Industry) projects.
Conduct revenue review with Fund assistance.
Monetary and banking issues
Provide autonomy to BI in formulation of monetary and interest rate policy.
Publish key monetary data on a weekly basis.
Submit to Parliament a drat law to institutionalize Bank Indonesia's autonomy.
Submit draft amendment to banking law to Parliament.
Provide autonomy to state banks to adjust interest rates on credit and deposit
liabilities, within guidelinesto all banks.
Impose limits on and phase out BI credits to public agencies and public sector
enterprises.
Strengthen HI's bank supervision department and strengthen enforcement of
re dons.
Upgrade the reporting and monitoring procedures for foreign exchange exposures
of banks
Appoint high level foreign advisors to BI to assist in the conduct of monetary
policy.
Set minimum capital requirements for banks of Rp 250 billion by end-1998, after
loan loss provisions.
Reduce the minimum capital requirements for existing banks.
Make loan loss provisions full tax deductible, after tax verification.
Table 7 cont.
Establish program for divestiture of BI's interests in private banks.
Require all banks to prepare audited financial statements.
Require banks to publish regularly more data on their operations.
Lift restrictions on branching of foreign banks.
Submit to Parliament a draft law to eliminate restrictions on foreign
investments in listed banks and amend bank secrecy with regard to
non performing loans.
Eliminate all restrictions on bank lending except for prudential reasons or to
support cooperatives or small scale enterprises.
Bank restructuring
Close 16 nonviable banks.
Replace the closed banks' management with liquidation teams.
Compensate small depositors in the 16 banks.
Place weak regional development banks under intensive supervision by Bl.
Provide liquidity support to banks, subject to increasingly restrictive
conditions.
Provide external guarantee to all depositors and creditors of all locally
inc o rated banks.
Establish Indonesia Bank Restructuring Agency (IBRA).
Determine uniform and transparent criteria for transferring weak banks to
]BRA.
Transfer 54 weak banks to IBRA.
Transfer claims resulting from past liquidity support from BI to IBRA.
Transfer to IBRA control of seven banks accounting for over 75 percent of past
BI liquidity support and seven banks that have borrowed more than 500
percent of their capital.
IBRA will continue to take control of or freeze additional banks that fail to
meet liquidity or solvency criteria. Where necessary, any such action will be
accompanied by measures to protect depositors or creditors in line with the
Government guarantee.
Issue presidential decree to provide appropriate legal powers to ]BRA,
including its asset management unit.
Take action to freeze, merge, recapitalize, or liquidate the six banks for which
audits have already been completed.
Establish independent review committee to enhance transparency and
credibility of
IBRA operations.
Conduct portfolio, systems and financial reviews of all IBRA banks as well as
major non-IBRA banks b international! recognized audit firms.
Conduct portfolio, systems, and financial reviews of all other banks by
international! recognized audit firms.
Announce plan for restructuring state banks through mergers, transfers of assets
and liabilities or recapitalization prior to privatization.
Ensure that state banks sign performance contracts, prepared by the Mini stFy of
Finance with World Bank assistance.
Mere two state-owned banks and conduct portfolio reviews of the two banks.
Draft legislation enabling state bank privatization.
Introduce private sector ownership of at least 20 percent in at least one state bank.
Prepare state state-owned banks for privatization.
Develop rules for the Jakarta Clearing House that will transfer settlement risk
from BI to participants.
Introduce legislation to amend the banking law in order to remove the limit on
private ownership of banks.
Table 7 cont.
Introduce deposit insurance scheme.
Establish Financial Sector Advisory Committee to advise on bank restructuring.
Declare insolvency of six private banks intervened in April and write down
shareholder equity,
Issue government bonds to Bank Negara Indonesia at market-related to r
finance transfer o deposits o banks frozen in Aril.
Initiate first case of an IBRA bank under the new bankruptcy law.
Foreign trade
Reduce by 5 percentage points tariffs on items currently subject to tariffs
25 percent.
Cut tariffs on all food items to a maximum of 5 percent.
Abolish local content regulations on dairy products.
Reduce tariffs on nonfood agricultural products by 5 percentage points
Graduals reduce tariffs on non-food agricultural products to a maximum of
10 percentage inks.
Reduce b 5 percentage rots tariffs on chemical
Reduce tariffs on steel/metal products by S percentage points.
Reduce tariffs on chemical, steel/metal and fisher products to 5-10 percent.
Abolish import restrictions on all new and used ships.
Phase out remaining quantitative import restrictions and other nontariff
barriers.
Abolish export taxes on leather, cork, ores and waste aluminum products.
Reduce export taxes on logs, sawn timber, rattan and minerals to a maximum
of
30 percent by April 15, 1998; 20 percent by end-December 1998, and 15
percent b end-December 1999 and 10 percent by end-December 2000.
Phase in resource rent taxes on logs, sawn timber, and minerals.
Replace remaining export taxes and levies by resource rent taxes
Eliminate all other export restrictions.
Remove ban on palm oil exports and replace by export tax of 40 percent. The
level of the export tax will be reviewed regularly for possible reduction,
on market prices and the exchange rate and reduced to 10 percent by end
December 1999.
Investment and deregulation
Remove !he 49 cent limit on foreign investment in listed companies.
Issue a revised and shortened negative list of activities closed to foreign investors.
Remove restrictions on foreign investment in palm oil plantations.
Lift restrictions on foreign investment in retail trade.
Lift restrictions on foreign investment in wholesale trade.
Dissolve restrictive marketing arrangements for cement, paper and wood.
Eliminate price controls on cement.
Allow cement producers to e with only a general exporters license.
Free traders to buy sell and transfer all commodities across district and provincial
boundaries, including cloves, cashew nuts and vanilla.
Eliminate BPPC (Clove Marketing Board).
Abolish quotas limiting the sale of livestock.
Prohibit provincial governments from restricting trade within and between
provinces.

Source: IMF

Table 8. Eastern Europe: IMF Programs and Outcomes

Program/actual / GDP
(% change) / Consumer prices
(year-end % change) / National wage (year-end % change) / Convertible Current account (U.S.dollars)
Hungary
1991 Program
1991 Actual
Poland
1990 Program
1990 Actual
1991 Program
1991 Actual
Czechoslovakia
1991 Program
1991 Actual
Bulgaria
1991 Program
1991 Actual
Romania
1991 Program
1991 Estimate / -3
-8
-5
-12
3
-8
-5
-16
-11
-23
0
-12 / 31
32
94
249
36
60
30
54
234
339
104
223 / 0
20
0
160
0
54
17
14
146
142
0
124 / -1.2
0.3
-3.0
0.7
-2.7
-2.2
-2.5
0.2
-2.0
-0.9
-1.7
-1.3

Source: extracted from Bruno (1993)