Tensions in the Role of the International Monetary Fund Presentation by Timothy Lane (IMF) Oliver Smithies Lecture Balliol College in association with Oxonia 9 November, 2004

Main themes Changes in the world economy have brought major changes in the role of the IMF Changes in the world economy have brought major changes in the role of the IMF These changes have led to some strains These changes have led to some strains Efforts have been made to reform the IMF in light of this experience Efforts have been made to reform the IMF in light of this experience But some underlying tensions remain unresolved But some underlying tensions remain unresolved

Purposes of the IMF Policy spillovers Policy spillovers Benefits of pooling liquidity Benefits of pooling liquidity Financing to give members confidence to make adjustments without damaging national or international prosperity Financing to give members confidence to make adjustments without damaging national or international prosperity

Some trends in recent decades Fall of Bretton Woods system Fall of Bretton Woods system Capital mobility Capital mobility Growth disappointments Growth disappointments Low-income countries debt crises Low-income countries debt crises Fall of Communism Fall of Communism Emerging market crises of 1990s Emerging market crises of 1990s

Some broad areas where problems have emerged Conditionality Conditionality Emerging market crises Emerging market crises Prolonged use Prolonged use Low-income countries Low-income countries

Conditionality Classic purpose: safeguards and assurances Classic purpose: safeguards and assurances Reasons for expansion of conditionality Reasons for expansion of conditionality “Grandmotherliness” “Grandmotherliness” Example of tension: Indonesian clove monopoly Example of tension: Indonesian clove monopoly Concern over proliferation of conditionality— and doubts about its effectiveness Concern over proliferation of conditionality— and doubts about its effectiveness Conclusion: 2002 Conditionality Guidelines— streamlining and focusing conditionality Conclusion: 2002 Conditionality Guidelines— streamlining and focusing conditionality

Remaining tensions in conditionality Tailoring versus uniformity—both in establishing conditions and monitoring results Tailoring versus uniformity—both in establishing conditions and monitoring results Streamlining as counterpart of selectivity Streamlining as counterpart of selectivity “Ownership” and its limits “Ownership” and its limits

Emerging Market Crises Examples: Mexico , East Asia , Russia 1998, Brazil 1999, 2002; Argentina 2001 Examples: Mexico , East Asia , Russia 1998, Brazil 1999, 2002; Argentina 2001 Key features: Key features: –Massive withdrawal of external financing –Massive current account adjustment –Deep economic slumps—in some cases short-lived, in others persistent

Problems with IMF crisis response Surveillance: failure to anticipate outbreak of crises (in some, but not all, cases); lack of candid criticism of vulnerabilities (including exchange rate regime) Surveillance: failure to anticipate outbreak of crises (in some, but not all, cases); lack of candid criticism of vulnerabilities (including exchange rate regime) Despite large financing packages, massive (and largely unforeseen) over-adjustment in current accounts Despite large financing packages, massive (and largely unforeseen) over-adjustment in current accounts Difficulties in handling financial sector fallout Difficulties in handling financial sector fallout Moral hazard concerns Moral hazard concerns Difficulties in saying no (e.g. in Argentina); lack of mechanisms for orderly sovereign debt restructuring Difficulties in saying no (e.g. in Argentina); lack of mechanisms for orderly sovereign debt restructuring Debates over specific policy advice Debates over specific policy advice

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

Crisis financing Catalytic approach and its limits Catalytic approach and its limits Alternatives Alternatives –Bigger official packages? SRF, CCL, SRF, CCL, But moral hazard, resource constraints limit overall package But moral hazard, resource constraints limit overall package –Bailins? (standstills, default, capital controls)— could be counterproductive –Sovereign debt restructuring Elusive quest for rules-based approach—but concerns that discretion could be misused Elusive quest for rules-based approach—but concerns that discretion could be misused

Information flows Data dissemination Data dissemination Increases in transparency Increases in transparency Learning: IEO; ex post assessments; INS courses, etc. Learning: IEO; ex post assessments; INS courses, etc. Interaction with market participants (ICMG and more informal contacts) Interaction with market participants (ICMG and more informal contacts)

Prolonged use—why is it a problem? Defeats idea of revolving pool of financing Defeats idea of revolving pool of financing May be symptomatic of flaws in program design, conditionality, implementation, and/or projections May be symptomatic of flaws in program design, conditionality, implementation, and/or projections May indicate that IMF support is the wrong instrument—i.e. because a country’s problems are longer-term in nature May indicate that IMF support is the wrong instrument—i.e. because a country’s problems are longer-term in nature May stunt domestic policy formulation processes May stunt domestic policy formulation processes

Reasons for prolonged use Failure to achieve objectives Failure to achieve objectives Lack of realism on time required Lack of realism on time required Signaling—pressures from donors Signaling—pressures from donors Facilities adapted to permit prolonged use, especially for low-income countries Facilities adapted to permit prolonged use, especially for low-income countries

IMF’s response to prolonged use Ex post assessments Ex post assessments Monitoring of incidence Monitoring of incidence More general efforts to focus conditionality, improve program design More general efforts to focus conditionality, improve program design Work on IMF’s role in low-income countries Work on IMF’s role in low-income countries Signaling—attempts to create signaling mechanism separate from financing Signaling—attempts to create signaling mechanism separate from financing

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

Low-income countries Disappointing growth performance, failure of successive development models Disappointing growth performance, failure of successive development models Pervasive problems led to comprehensive programs—but likely to be ineffective and illegitimate in absence of sufficient ownership in country Pervasive problems led to comprehensive programs—but likely to be ineffective and illegitimate in absence of sufficient ownership in country Coordination with World Bank and donors Coordination with World Bank and donors Institutional capacity Institutional capacity Debt crisis and HIPC Initiative Debt crisis and HIPC Initiative In 1990s, increasing macroeconomic stability (and, in later 1990s, somewhat better growth) In 1990s, increasing macroeconomic stability (and, in later 1990s, somewhat better growth) –Key problems are not primarily macroeconomic—but debt sustainability is still a major issue –Ongoing financing needs are longer-term –Continuing need for Fund to help countries hit by shocks

Response to problems Debt reduction (HIPC Initiative) and new debt sustainability Debt reduction (HIPC Initiative) and new debt sustainability PRSP approach—a step in the right direction, but doesn’t yet work as intended PRSP approach—a step in the right direction, but doesn’t yet work as intended Signaling—lower-access arrangements Signaling—lower-access arrangements Response to shocks—work under way Response to shocks—work under way

Some key remaining issues for LICs How can countries graduate from IMF financing (while continuing to receive aid from other sources)? How can countries graduate from IMF financing (while continuing to receive aid from other sources)? –How long is signaling needed? –Will PRSP approach help build ownership and capacity? How can we avoid an endless cycle of lending and debt relief? How can we avoid an endless cycle of lending and debt relief?

Summary—some key remaining tensions Bailins and bailouts—need for clear principles versus perils of predictability Bailins and bailouts—need for clear principles versus perils of predictability Selectivity versus pressures to lend Selectivity versus pressures to lend IMF financing as a signal IMF financing as a signal Parsimony versus comprehensiveness Parsimony versus comprehensiveness “Ownership” “Ownership”

Preview of next lecture Reform proposals include two strands which are intertwined: Reform proposals include two strands which are intertwined: –What should the IMF do? –How should the IMF be governed? The next lecture will discuss possible directions for reform, considering both of these strands The next lecture will discuss possible directions for reform, considering both of these strands