change of the IMF role

Question 1

Introduction

Answer 1

• The question:
o IMF was profoundly criticised by academia during the 2008-2009 financial crisis due to its inability to foresee, prevent or respond to the crisis
 Lead to great structural changes that lead to a change in the role it now has in economic governance
can be explained through neoliberal insitutionalism
• The answer:
o Its role as a whole has remained the same but it has become more efficient in carrying out thanks to new structures, more resources and new techniques
• The Plan:
o Will look at them in turn
 It has picked up the role of protecting economic stability
• Especially in developed countries through the Financial Stability Board
 Has become the first responder to economic crisis
• Can be seen in Europe
 It has become the major coordinator of macroeconomic policies

Question 2

point 1

Answer 2

one way it has changes is that it has strengthen its role in watch over economic stability
o Making its role more legitimate and more valuable
• The role was already in place before during the 1990s and 2000s financial crises, however it lacked resources, capacity and efficiency
o Used the conditionality principle and basically recycled debt for developing countries
 Lost legitimacy and found to be irrelevant
• Since the 2008 financial crisis this has greatly change
o Ban and ghallager: increasing its efficiency as watch over economic stability
o

Question 3

example economic stability

Answer 3

In a G20 meeting countries agreed that the IMF should oversee stability and economic surveillance
 Economic Stability Board
 Financial Sector Assessment Programs
• every five years of 29 countries whose financial sectors are deemed systemically important
 Financial Stability Board
• Created in 2009
• Evolved from the Financial Stability Forum
• Implemented new rules for greater financial regulation
• Back to question: its role has been accredited more legitimacy and more valuable

Question 4

point 2:

Answer 4

another way its role has changed is by becoming the first responder to economic crisis
o Before it did have the role of lender of last resort, however
 As mentioned by Momani before it would simply finance the balance of payments deficit with very out of touch conditional principles
o Was criticised of basically recycling debt in the poor countries rather than aiding in dept repayment
• Learning from the experience of the 2008 financial crisis it reformed it ways of facing a financial crisis

Question 5

example first responder of economic crisis

Answer 5

o Increased its resources to do so
• In 2008 it established the short-term Liquidity Facility to ensure its ability to provide financial assistance
• Moreover it created the Flexible Credit Line in order to provide pre-emptive financial assistance in order to prevent crisis
• Conditionality principle is still in place but with stricter and more efficient adjustments policies that not only look at economic growth but at maintaining stability
 Becoming more effective in responding to crisis
• trust worthy among countries
o allowed it to be the first responder to crisis rather htan the lender of last resort
• Example: during the Greece government-debt crisis the IMF intervened
o Three adjustment programs
 Originally IMF agreed to a three-year €110 billion loan, paying 5.5% interest, conditional on the implementation of austerity measures.
• Greece brought down its primary deficit from €25bn (11% of GDP) in 2009 to €5bn (2.4% of GDP) in 2011

Question 6

point 3

Answer 6

become the coordinator of economic policies
 Crisis was caused by a deregulated interconnectedness of financial markets and market more in general
• So to avoid future crisis the imf has picked up the role of coordinator of economic policies
• Before: the IMF was more a promoter of microprudential policies
o Traditional microprudential regulation seeks to enhance the safety and soundness of individual financial institutions
 This shifted greatly after the Financial crisis
• As the interconnectedness of financial crisis can overtake microprudential polices

Question 7

example of coordiantor of macroeconomic policies

Answer 7

o Focused in particular with the Macroprudential regulation (MPR)
 seeks to ‘curb the credit cycle’ through regulatory interventions that impose constraints on private institutions.
• Capital account liberalisation wasn’t promoted anymore but capital controls were requested
focuses on the procyclical behavior of the financial system in the effort to foster its stability.
o Dresses the interconnectedness of the financial markets
o Can be seen through the establishment of Basel III
 Basel III
• Bolster of bank capital adequacy and liquidity requirements
• Decrease bank leverage

Question 8

theoretical debate on stability

Answer 8

• Neoliberal institutionalism: institutions can be reshaped to make them more effective in achieve common goals
o Mitigate anarchy better
 What happened to the IMF: Created stronger regulations
• However, Momani: ‘it has effectively failed to predict and warn of looming crisis’
o This doesn’t change the new role it has picked up, rather confirms it (by confirming its failure in doing so it confirms the role it has)
 Role has changed by becoming more important in the economic stability surveillance

Question 9

theoretical debate on first response

Answer 9

• Neoliberal institutionalism:
o Institutions are built to aid states in achieving what they wouldn’t be able to do alone
 Enable states
• This is what it does by being the responder to financial crisis it enables states to achieve stability again
• Conditionality is highly criticised
o As mentioned by Khan conditionality is
 too strict
 undermines domestic political institutions
• doesn’t lead to stability
• However it doesn’t imply that the IMF is not the first responder to crisis
o Although its methods are still criticised it has still been successful in improving conditions of countries suffering financial crisis like Greece
 After the 2008 financial crisis it has reformed its ways showing how it strengthen its role as responder of economic crisis

Question 10

theoretical debate on coordinator

Answer 10

• Neo-insitutionalliberalism: insitutions can successfully protect states from the consequences of globalisation
o Haveem: the creation of institutions has been pushed by the efforts of states to cope with a pervasive globalisation
 Which can be seen with the financial crisis in which the globalisation fo financial markets have lead to the collapse of the world economy

• However, Horváth and Wagner (2015) argue that countercyclical policies have the potential to increase cross-sectional risk.
 insulate banks from economy-wide fluctuations
 but they do not insulate banks from fluctuations in bank-specific, idiosyncratic, conditions
• increase the incentives for banks to correlate with each other. Systemic risk may thus increase, rather than fall.
• However, this doesn’t mean that the IMF hs not change its role in economic coordinator after the fiancnial crisis

Question 11

neoliberal insitutional scholars

Answer 11

Schweller-Priess: enables state
Haveem: respond to globalisation
Sterling-Folker: can be reformed to better address common interest

Question 12

scholars economic stability

Answer 12

Ban and Ghallagher: increased it efficiency in watching econ stability
Momani: was unable to ensure econ stability although changes

Question 13

scholars response to econ crisis

Answer 13

Momani: before, it had balanced the payment depth but useless
Khan: conditionality too strict

Question 14

scholars macro econ policies

Answer 14

Rawling: credity sycle correlated to bank crisis

Horvath and Wagner: idyosincratic risk not isolated