Economic Governance
and Crisis Management
Je a n - Fr é d é r i c M o r i n
Université libre de Bruxelles
The Twin Financial Crises
Currency crises
Banking crises
Deficit in the balance
of payments
Massive deposits
withdraw
Run of official foreign
exchange reserves
Bank runs
Downward pressure
on exchange rate
Credit crunch
How to Strike Back?
Goals
Risks
1. Use exchange
reserves
Stabilizing
the currency
Increased
exposure
2. Raising interest
rates
Attracting
foreign capital
Choking off
economic growth
Favoring
exports
Higher
inflation
3. Allowing the
currency to
depreciate
Frequent Assumptions
1) Wise decision-makers could avoid crisis;
2) The IMF coerces developing countries;
3) The US controls IMF decision making;
4) IMF policies weaken borrowing States;
5) Crises strengthen multilateral economic governance.
1. Can States
avoid crises?
2. Does the IMF
coerce borrowers?
3. Does the US
control the IMF?
4. What impact IMF
has on borrowers?
5. Do crises
strengthen IMF?
.
1. Can States avoid crises?
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The First Generation
“Sudden crises in the balance of payments may
not be so hard to model after all [..] [A
speculative attack] is justified by a change in
relative yields, for when the government is no
longer able to defend the exchange rate the
currency begins depreciating”
-Paul Krugman
“A Model of Balance-of-Payments Crises”,
Journal of Money, Credit, and Banking, vol. 11(3), 1979, p. 312
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The Unholy Trinity
Free capital flow
Canada
France
Fixed
exchange rate
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
China
3. Does the US
control the IMF ?
Sovereign
monetary policy
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Public Debt
Source: UNCTAD, Responding to the Challenges Posed by the Global Economic
Crisis to Debt and Development Finance, New York, United Nations, 2010, p. 36
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The Second Generation
“Speculative attacks appear to be self-fulfilling,
since they may occur even when the level of
reserves seems sufficient to handle normal
balance-of-payments deficits […] Such crises are
apparently unnecessary and collapse an
exchange rate that would otherwise have been
viable”
- Maurice Obstfeld,
“Rational and Self-Fulfilling Balance-of-Payments Crises”, The
American Economic Review, vol. 76(1), 1986, p. 72
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The 1997 Asian Crisis
King, Michael R. “Who Triggered the Asian Financial Crisis?”,
Review of International Political Economy, vol. 8(3), 2001, p. 450
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The State or the Market?
“Recent events highlight the importance of sustainable public
finances and the need for our countries to put in place credible,
properly phased and growth-friendly plans to deliver fiscal
sustainability […]. Those countries with serious fiscal challenges
need to accelerate the pace of consolidation. […]
We agreed the financial sector should make a fair and
substantial contribution towards paying for any burdens
associated with government interventions, where they occur, to
repair the financial system or fund resolution, and reduce risks
from the financial system. We recognized that there are a range
of policy approaches to this end. Some countries are pursuing a
financial levy.”
- The G20 Toronto Declaration, June 2010
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Trust: An Intervening Variable
State actor
Market actor
Affective trust
No intervention in the market is
necessary
Consider currencies as
interchangeable and risk-free
Reputational trust
Periodic market intervention
(such as change in interest rates)
Distinguish strong and weak
currencies
Momentary trust
Engage in ongoing market
intervention to support rates
Adjust currency exposure
immediately based on new
information
Impose exchange controls
Refuse to hold weak currencies
Distrust
Aykens, Peter, “(Mis)trusting Authorities: A Social Theory of Currency Crises”,
Review of International Political Economy, vol. 12(2), 2005, p. 321.
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Political Regime and Trust
• Probability of currency crisis increases with new
democracies, unanticipated cabinet dissolutions,
government turnovers, and divided governments
• Probability of currency crisis is higher in autocracies
than democracies.
Leblang, David & William Bernhard “The Politics of Speculative Attacks in Industrial Democracies”,
International Organization, vol. 54(2), 2000, p. 291-324.
Leblang, David & Shanker Satyanath, “Institutions, Expectations, and Currency Crises”,
International Organization, vol. (60), 2006, p. 245-262.
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Trust-Building Institutions
Central bank
independence
Pegged
exchange rates
Can’t lower
interest rates
to favor investment
Can’t devaluate the
currency
to favor exports
Must accept decisions
of a bank too liberal or
too conservative
Must defend the peg
against speculative
attacks
Insulate monetary
policy from shortterm politics
Loss of flexibility
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Central Bank Independence
Bernhard, William, Lawrence Broz and William Roberts Clark,
“The Political Economy of Monetary Institutions”, International Organization, 56(4), 2002, p. 698
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Fixed Exchange Rates
Bernhard, William, Lawrence Broz and William Roberts Clark,
“The Political Economy of Monetary Institutions”, International Organization, 56(4), 2002, p. 701
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Trust and Transparency
Central bank independence and fixed exchange rates are
not policy substitute
Central banks are opaque and difficult to monitor
Exchange rate pegs are easily observed
The selected institution’s transparency is inversely related
to the political system’s transparency
 Autocracies are more likely to have fixed exchange rates
 Democracies are more likely to have independent central banks
Broz, J. Lawrence, “Political System Transparency and Monetary Commitment Regimes”,
International Organization, vol. 56(4), 2002, p. 861-886
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
.
2. Does the IMF coerce
developing countries
with conditionality?
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Does the IMF coerce?
Yes!
No!
• Asymmetry of power
• No significant correlation
• Increasing use of conditionality • Some borrowers have
• Capacity to monitor and to
alternatives
sanction
• IMF is flexible
• Post Washington consensus
• Borrowers have interests in
conditionality
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Does the IMF bargain?
Yes!
No!
• Conditions vary greatly
• Domestic politics can increase
bargaining power
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
 Not time for bargaining
 False alternatives
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Does the IMF socialize?
Yes!
No!
 Several socialization
opportunities
 The “ownership” paradigm
 Developing countries are
receptive to IMF arguments
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
 Surveillance and peerreview are not designed
for socialization
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
3. Does the US control the
IMF decision making?
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
An Autonomous Bureaucracy?
A homogeneous bureaucracy of liberal
economists...
…relatively independent from the
executive Board…
…With their own preferences
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
A K-Group Hegemony ?
 We should not forget the Europeans
 A G5 coalition can have major impact
 But a split in the G7 favors IMF autonomy
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The “G1” as the Principal
Anecdotal evidences
• Turkey 1998 (Önis, 2006)
• Egypt 1987 and 1991 (Momami 2004)
Statistical evidences
(Stone 2008; Thacker 1999; Dreher & Jensen
2007; Oatley & Yackee 2004; Broz & Hawes 2006; Barro & Lee 2002)
•
•
•
•
US allies more likely to have loans
US allies receive fewer conditions
US allies are punished less severely for non compliance
Strategic countries receive larger loans
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Congress is key
• Congress has constitutional power and
uses it
• Constituencies and interest groups
influence Congress votes
Broz, Lawrence and Michael Brewster Hawes, “Congressional Politics of Financing the
International Monetary Fund”, International Organization, vol. 60 (2006), p. 367-399
Broz, Lawrence “Congressional Politics of International Financial Rescues”,
American Journal of Political Science, vol. 49(3), 2005, p. 479-496
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
4. Does conditionality
politically weaken
developing countries ?
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
According to the IMF…
“The results show that the presence of an IMF-supported
program does not reduce public spending on either health
or education—measured as a share of total public
spending, GDP, or in per capita real terms. In fact, we
estimate that during program periods, and with all other
factors being the same, public spending in each of the
health and education sectors increased by about 0.3 to 0.4
percentage points of GDP compared to a situation without
a program”
- IMF Independent Evaluation Office, 2003, p. 8
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
The cost of Crises
Country
Crisis year
Fiscal cost of
crisis (% GDP)
Argentina
1980
55
Argentina
1995
Australia
Country
Crisis year
Fiscal cost of
crisis (% GDP)
Malaysia
1997
16
1
Mexico
1995
20
1989
2
New Zealand
1987
1
Brazil
1994
13
Norway
1987
8
Chile
1981
41
Philippines
1983
13
Cote d’Ivoire
1988
25
Poland
1992
4
Czechoslovakia
1989
12
Senegal
1988
10
Egypt
1991
0,5
Spain
1977
6
France
1994
1
Sweden
1991
4
Hungary
1991
10
Thailand
1983
2
Indonesia
1992
4
Thailand
1997
33
Indonesia
1997
50
Turkey
1982
3
Japan
1991
12
Turkey
1994
1
Korea
1997
27
United States
1988
3
Keefer, P. “Elections, Special Interests, and Financial Crisis”, International Organization, vol. 61, 2007
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Regime Type Matters
• The effect on social spending is particularly
pronounced in democracies (Nooruddin & Simmons 2006)
• Autocracies react to crisis with higher decisiveness
(Haggard and MacIntyre 1998)
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
So Autocracies Are Better Off ?
• Credibility is as important as decisiveness (Keefer, 2007)
• A wide dispersal of veto authority increases rigidity
but a centralization of veto authority increases
volatility.
• A balanced distribution of authority is optimal
(MacIntyre 2001)
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Philippines: A Balanced System
Source: MacInyre, Andrew, “Institutions and Investors: The Politics of Economic Crisis in Southeast Asia”
International Organization vol. 55(1), 2001, p. 83
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
5. Do Crises Strengthen
multilateral economic
organizations?
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Crises and Multilateralism
• IMF faces harsh criticisms during crises
• The lack of crises is even more challenging
• Some multilateral institutions benefit
more from crises than others
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Crises and Regionalism
• The European model
 The Asian model
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Crises and Unilateralism
1. Can States
avoid crises?
2. Does the IMF
coerce LDC?
3. Does the US
control the IMF ?
4. What impact IMF
has on borrowers ?
5. Do crises
strengthen IMF?
Frequent Assumptions
1) Wise decision-makers could avoid crisis;
2) The IMF coerces developing countries;
3) The US controls IMF decision making;
4) IMF policies weaken borrowing States;
5) Crises strengthen multilateral economic governance.
Conclusion
• Regime type has a strong influence on the
conditions, the management, and the impact of
financial crises.
• Institutions that increase transparency and
clarify expectations benefit both to the state
and the market.
• Loans negotiation is a two-level game, both for
the borrower and the lender
Economic Governance
and Crisis Management
Je a n - Fr é d é r i c M o r i n
Université libre de Bruxelles