4. IMF Flashcards
How did the IMF respond to the crisis in Greece?
Greece could not repay loans
- 2010, European Commission, ECB and IMF provided £88bn of bailout loans. Later after a second bailout of £98bn - 87% of Greek GDP in 2010
IMF:
- Provided loans to countries hit badly by GFC - Greece, Ireland, Portugal and Spain. In summer 2015, Greece close to bankruptcy - additional bailout of £61bn over 3 years against economic reforms
Troika (IMF) suggested Greece should follow austerity measures - spending cut, higher taxes, labour market/pension reofmrs
Austerity -> falling GDP, high unemplyoment, lower taxess -> rising debt per GDP
Austerity stabilises exchange rate - investor confiednce rises, FDI rises, employment rises, taxes rise means lower debts per GDP
Why have the IMF been criticised in the past?
1997 Asian fiancial crisis - IMF forced fiscal austerity and financial sector liberalisation
1998 Argentina - contractionary fiscal policy on country in recession
IMF called a market fundamentalist by Joseph Stiglitz
What is the IMF?
Created in 1944 by Keynes and Harry Dexter White
Roles:
1. Monitor Breton Woods pegged exchange system
- Value of currencies in term of gold/dollar
- Keep exchange rates within 1% par value
- Stabilising system in international finance
- Avoid competitive exchange depreciation
- Members borrow from IMF if short term deficit in the current account
What is the system of pegged exchange rate £ to $
Suppose there is a deficit in the current account
- Must buy dollars and sell pounds to increase the supply of pounds in forex market
- Decreases the value of pounds (note this isn’t possible if fixed)
- IMF gave money to buy pounds and increase the demand of pounds, meaning exchange rates return back to original level
(Demonstrated by simple s/d curve with quantity of pounds against price of pounds against dollars)
What is the impact of quotas for the IMF?
All members pay quotas depending on GDP of the country
- Main source of funding for the IMF - like putting money in a bank
- Countries in need can have temporary loans, later return the loan
What are the new roles of the IMF?
Globalisation expanded trade and financial flows - high interdependence, national actiona affect other countries - coordinate and collaborate on policy
ROles:
Surveillance:
- National reviews on policy
- Financial sector assessment programs
- Multilateral reveiws - behaviour of global economic/financial systems
- Early warning systems - conducted with financial stability board
Financial assistance: conditional loans, low interest to c ountries in crisis
- Typically countries in crisis have falling exchange rates
- Creates high interest borrowing due to possible default, unable to finance
How is the IMF governed?
184 member states assigned quotas - drawing rights - and paid subscription to IMF
Quotas based on wealth and detemines voting power within IMF
UK - 4.5%
Germany - 6%
France - 4.5%
Italy - 3.3%
Decisions done through weighted voting
- Most important decisions require majority of 85% of votes
- US have 17% effective veto
- Quotas do not reflect currency GDP growth: loss representations.
What was the impact of the IMF in the 80s and 90s?
IMF gave conditional loans to assist poor countries - logic of condition is that governments with bad macro figures can’t manage the foreign aid - sometimes this was too intrusive, inappropriate and ineffective
What was the washington consensus?
One size fits all issue, pushes for:
- Fiscal policy austerity
- Privatisation of public companies
- Market liberalisation
Before the WC< development economics was led by export pessimism and development planning
- Countries that based growth on neoclassical comparative advantage did better
-By end of cold war emphasis on the market economy approahc
1989 - Washington Consensus, 10 policies needed in Latin America:
- Conservative macro policies
- Liberal micro eceonomic measures
Policies:
1.Fiscal discipline
2. Order public spending away from non merit subsidies, towards health/education/infrastructure
3. Tax reforms - broader base/lower marginal rates: distort less
4. Financial liberalisation -> liberalise interest rates
5. Competitive exchange rate
6. Trade liberalisation
7. Liberalise inward FDI
8. Privatisation
9. Deregulation
10. Property rights for informal sector (more confidence to invest)
Explain in detail some of the policies?
Fiscal policy austerity:
- Reduce deficit, cut tax and spending
Positive: revenues close to expenditure can help pay debt
Negative: slow growth, increased unemployment
Privatisation:
Positives: competing firms more efficient than public monopolies
Negatives: unemployment rises (without insurance), corruption if companies sold at too low a price, private monopolies created increasing prices
Liberalisation:
Reducing barriers to trade - moves towards comparative advantage
Negatives: possible job destruction
Capital market liberalisation: increased efficiency, attracts FDI
Negatives: speculative investors, high volatility
What is some criticism to the washington consensus?
- too US centric - supporting US hegemony and business interest
- Too focused on neo classical approach - markets self regulating, government intervention should be minimal
- Missing key elements e.g. financial liberalisation needs regulatory framework
- Neglects quality of institutions
- Too universal - no single blueprint, depends on circumstance; work from ground up, not top down
- No mention of foreign aid
- Too short term
- Purpose of development should be to reduce poverty: also importance of safety nets for the most vulnerable
What did the IMF do in Ethiopia?
90s:
Austerity:
- Expenditure limited to tax
- International donor could not give money to construct schools or hospitals
Financial market liberalisation:
- Competition among bakns reduce interest rates
-Not enough banking supervision - growth of commercial banks and increase inteerest rates
What was the Asian Financial Crisis - what did the IMF do?
1997:
Speculators believed baht was overvalued - borrowed from local banks, immediately sold them in forex market for dollars
- Baht weakened, bought the baht back, paid the loan and profited
In Thailand, the government bought baht to avoid declining exchnage rate by increasing demand:
-Lack of foreign currency to support fixed exchange rate due to speculative attacks
- Banks unable to pay debts
- Crisis spread to Indonesia, South Korea, Hong Kong, Malaysia, Russia, Latin America
- IMF provided conditional bailouts of $95bn
IMF reforms:
- Bank closures
- Tight domestic credit
- High interest rates
- Fiscal contraction
Incited further panic, bank lending stopped altogether and the stock market collapsed
WHat was macroeconomic populism?
Latin American policies - government spending and real wages increase in non sustainable way, lead to inflation, then stagnation and ultimately economic collapse - drops real wages lower than they were before populist period began
Examples:
- Salvador Allende Chile 1970
- Mexico 1970-82
- Venezuela and Argentina more recent
The start generally after stabilisation programmes - economy has idle capacity and the budget and external balanace have room left for expansionary policy:
- High public spending, real wages and employment. GDP increases, low impact on inflation. Shortages alleviated by imports. Reduction in reserves or debt default
- Increased inflation, although wages keep up. Bottlenecks (setbacks) lead to price and exchange controls. Budget deficit hen greatly increases due to subsidies, and the economy runs into stagflation
- Shortages, accelerated inflation and capital flight occurs - declining tax revenues combined with inflation, high budget deficit. Stabilisation attempted by reducing subsidies and devaluation leads to further drop in real wages
- New government implements orthodox policies to stabilise the economy. Once the economy is stabilised, real wages will have fallen lower than before phase 1 began
What was the IMF’s role in the 2007 crisis?
Did they anticipate it?
- No doubt of credit and housing booms
- Didnt analyse US subprime market until 6 months after problem emerged
- OVerall message reassuring - banking system strong and well regulated
- Complacent about e.g. Ireland and Iceland, two countries where banking system was greatly over leveraged
The predominant pattern was that market knows best
October 2008 - emergency funding scheme - $200bn to Hungary, Romania and Ukraine
Eurozone crisis 2010: bailouts to Greece, Portugal, Spain, Cyprus and Ireland.
