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
2
•
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)
3
•
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
4
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?
5
Table 1.
Multilateral Development Banks
($ amounts in billions)
Asian
Dev. Bank
Inter-American African
Dev. Bank
Dev. Bank
World
Bank
Total
Year of Formation
1966
1959
1964
1945
-
Regional Members
Non-Regional Members
--Borrowing Members
Total Loans & Investments Outstanding
of which:
government loans
zero interest credits
private sector
Market Investments
1998 Lending & Investments
of which:
government loans
zero interest credits
private sector
Total Offices
Total Employees**
Administrative Expenses
Debt Outstanding
Paid-In Capital
Concessional Capital Contributions
Callable Capital
Total Capital
Retained Earnings
Non-Borrower Member Callable Capital
G-5 Share of Voting Rights
G-5 Share of Concessional
Capital Contributions
G-5 Share of Non-Borrower
41
16
38
$39.3
28
18
26
$39.5
53
24
53
$17.1
181
156
$210.4
$306.3
$24.4
$14.3
$0.6
$9.5
$6.1
$32.3
$6.9
$0.3
$12.7
$10.1
$9.5
$7.6
$0.0
$2.6
$1.7
$117.2
$83.2
$10.0
$50.9
$32.5
$183.4
$112.0
$10.9
$75.7
$50.4
$4.9
$1.0
$0.2
15
2,300
$0.2
$24.1
$3.4
$20.6
$45.0
$69.0
$8.6
$27.0
35°1a
$8.8
$0.7
$0.6
29
2,200
$0.3
$32.9
$4.2
$9.5
$90.0
$103.7
$7.2
$44.6
40°10
$0 .8
$0.7
$0.2
1*
1,100
$0.1
$7.6
$2.8
$13.1
$19.6
$35.5
$2.0
$6.5
18°10
$22.2
$6.8
$3.5
127
11,500e
$1.6
$131.4
$14.0
$96.3
$177.7
$288.0
$30.0
$103.4
38°10
$36.7
$9.2
$4.5
172
17,100
$2.2
$196.0
$24.4
$139.5
$332.3
$496.2
$47.8
$181.5
33°10
79%
63°10
49%
72°10
70%
68°10
80°10
55°10
66°10
70%
Member Callable Capital
Data for most recently available fiscal year.
* 25 offices are scheduled to open over the next 5 years.
** Including long-term consultants, World Bank employees: 10,000.
Source: Meltzer report (2000)
6
http://phantom-x.gsia.cmu.edu/IFIAC/Report.html
Table 2
Overlap of Regional Development Bank and World Bank Lending: 1996-9$ ($
amounts in billions)
Asia
Korea
Indonesia
China
India
Thailand
Philippines
ADB
Amount
$4,015
3,767
2,920
1,576
1,510
1,419
Share
24.6%
23.1%
17.9%
9.6%
9.2%
8.7%
IBRD
Amount
Share
$7,048
27.7%
4,223
16.6%
6,487
25.5%
2,095
8.2%
2,068
8.1%
1,141
4.5%
Total
$15,207
93.1%
$23,062
90.7%
IBRD
Amount
$6,038
4,296
3,677
1,080
122
269
302
$15,784
Share
35.0%
24.9%
21.3%
6.3%
0.7%
1.6%
1.8%
91.5%
Latin America
Argentina
Brazil
Mexico
Peru
Venezuela
Uruguay
Colombia
Total
IADB
Amount
$5,785
4,642
1,829
1,493
1,030
882
768
$16,429
Share
28.9%
23.2%
9.1%
7.4%
5.1%
4.4%
3.8%
81.0%
Source: Meltzer report (2000)
7
Table 3
Multilateral Development Bank Activities (amounts in billions)
J
1992
1993
1994
1995
1996
1997
1998
World Bank
Group:*
IBRD Lending
IDA Credits
IFC Investments
$16.9
6.8
2.1
$14.2
6.6
2.5
$16.9
5.7
2.9
$14.5
6.9
3.2
$14.5
4.6
3.3
$21.1
7.5
3.4
$22.2
6.8
3.5
Iv1IGA Guarantees
0.4
0.4
0.7
0.9
0.6
0.8
1.3
3.8
1.2
3.7
1.3
2.5
1.2
4.0
1.5
3.5
1.7
7.7
1.6
4.9
1.0
0.1
0.2
0.1
0.2
0.2
0.1
0.2
5.5
0.5
5.5
0.4
.4.7
0.5
6.3
0.8
6.2
0.4
5.3
0.3
8.8
0.7
---
---
---
0.1
0.2
0.3
0.6
1.9
1.1
1.6
0.8
1.4
---
0.7
---
0.5
0.3
0.8
1.0
0.8
0.7
---
---
---
---
---
---
0.2
$40.2
$37.2
$36.5
$39.0
$36.2
$50.1
$51.6
Asian Development Bank
ADB Government Lending
ADF Credits
ADB Private Sector
Investments
Inter-American Development
Bank
L4DB Government Lending
FSO Credits
LADB Private Sector
Investments
African Development Bank
AfrDB Government Lending
AfrDF Credits
AfrDB Private Sector
Investments
Total
*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)
8
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
Latin America
66%
51%
56%
50%
60%
37%
61%
48%
East Asia
38%
36%
48%
39%
Low Income
73%
69%
66%
70%
Lower Middle Income
Upper Middle Income
48%
45%
50%
36%
46%
31%
49%
39%
H Income
27%
30%
28%
28%
Total
59%
56%
53%
57%
Source: World Bank, Meltzer report (2000)
9
Table 5. Summary of Empirical Evaluations of the
Effect of Fund Programs
y
h
Time period
Number of
programs
Number of
countries
Balance of
payments
Growth
0
0
0
..
+*
+
0
0
0
0
0
0
Before-after
Reichman, Stillson (1978)
Connors (1979)
Killick (1984)
Zulu and Nsouli (1985)
Pastor (1987)
Killick et al. (1995)
Schadler, et al. (1993)
1963-72
1973-77
1974-79
1980-81
1965-81
1979-85
1983-93
79
31
38
35
...
55
23
24
22
18
16
19
12
78
38
32
12
44
38
14
..
+
0
+*
68
58
69
73
68
74
+*
..
+*
..
...
With-without
Donovan (1981)
Donovan (1982)
LoAey (1984)
Gylfason (1987)
Goldstein, Montiel (1986)
Khan (1990)
Conway (1994)
Bagci, Perraudin (1997)
Dicks-Mireaux, et al. (1997)
1970-76
1971-80
1971-82
1977-79
Generalized
Evaluation
1974-81
1973-88
1976-86
1973-92
1986-91
259
217
...
88
-*
-,+*
+*
+*
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
10
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
31.8
36.1
74.2
65.8
-20.4
-25.6
-24.6
Total net
29.0
Private
inflows
Net
7.3
foreign
direct
investment
Net
6.4
7.6
8.8
7.5
8.4
10.3
8.6
10.2
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
16.1
-13.5
-23.2
-40.4
-53.0
-25.0
69.7
61.7
loans
Current
Account
Sources: IMF
* Indonesia, Korea, Malaysia, Philippines, and Thailand. (-) is deficit.
11
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
Introduce single tax payer registration number.
Increase non-oil tax revenue by raising annual audit coverage,
developing
VAT audit programs, and increasing recover of tax arrears.
Increase in two stages excise taxes on alcohol and tobacco to reflect
exchange
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
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
Cancel 12 infrastructure projects.
Discontinue special tax, customs, or credit privileges granted to the
National
Phase out local content program for motor vehicles.
Abolish compulsory 2 percent after-tax contribution to charity
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
Publish key monetary data on a weekly basis.
Submit to Parliament a drat law to institutionalize Bank Indonesia's
Submit draft amendment to banking law to Parliament.
Provide autonomy to state banks to adjust interest rates on credit and
deposit
Impose limits on and phase out BI credits to public agencies and public
sector
Strengthen HI's bank supervision department and strengthen enforcement
of
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
Set minimum capital requirements for banks of Rp 250 billion by end1998, after
Reduce the minimum capital requirements for existing banks.
Make loan loss provisions full tax deductible, after tax verification.
12
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
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
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
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
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
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
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
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
Draft legislation enabling state bank privatization.
Introduce private sector ownership of at least 20 percent in at least one
Prepare state state-owned banks for privatization.
Develop rules for the Jakarta Clearing House that will transfer settlement
risk
Introduce legislation to amend the banking law in order to remove the
limit on
13
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
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
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
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
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
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
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
Eliminate BPPC (Clove Marketing Board).
Abolish quotas limiting the sale of livestock.
Prohibit provincial governments from restricting trade within and between
provinces.
Source: IMF
14
Table 8. Eastern Europe: IMF Programs and Outcomes
GDP
(%
change)
Consumer
prices
(year-end
% change)
National
wage
(year-end
% change)
Convertible
Current
account
(U.S.dollars)
-3
-8
31
32
0
20
-1.2
0.3
1990 Program
1990 Actual
-5
-12
94
249
0
160
-3.0
0.7
1991 Program
1991 Actual
3
-8
36
60
0
54
-2.7
-2.2
-5
-16
30
54
17
14
-2.5
0.2
-11
-23
234
339
146
142
-2.0
-0.9
0
-12
104
223
0
124
-1.7
-1.3
Program/actual
Hungary
1991 Program
1991 Actual
Poland
Czechoslovakia
1991 Program
1991 Actual
Bulgaria
1991 Program
1991 Actual
Romania
1991 Program
1991 Estimate
Source: extracted from Bruno (1993)
15