August 2005

Oscar Ugarteche

Dears Julie and Walden

Many thanks for the paper. I only read it last week and have the advantage of Kunni's and Helleiner's comments.

Having assisted the mutistakeholder of FFD at the UN in NY and Geneva from February to June, here goes this provocative comment. It took me longer to think out something that will complete your proposal which sounds very interesting indeed.

Many regards and thank you very much for a very good read.

Oscar

Comments : Can the IMF be reformed? By Walden Bello and Julie de los Reyes

Bello’s and de los Reyes’s paper is one of those texts that leave one wondering if there is anything else to add. After much thinking these are some observations. To the point:

This paper brings up different manifest problems in a proposal. One is the problem of the power held by the US within the IMF. The other is the impacts of the stabilization policies and the technical workings of the institutions. The proposal is to change it, regionalize it, and disempower the US. A third problem is the not so evident relationship between the two which is shown with the references made to the US and the IMF in the Asian and Argentina crises. Their proposal here becomes more complicated as well.

To have added some historical perspective to Bello and de los Reyes, the IMF was created when the US was at its peak of hegemony, at the end of WWII. The US Government set aside Keynes’s proposal for an international central bank and Roosevelt gave open support to White’s initiative of an international monetary fund so long as the US dollar was made as good as gold (at 35USD an ounce). This fixed parity regime ended in 1971 through the Smithsonian Agreement, while SDR’s were created and introduced in 1969 to generate international liquidity at 0.88 grams of gold which was 1USD= 1SDR at the fixed rate then.

“However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.”

Today it rests at 1.46590.

The US dollar has devalued vis a vis gold from 35 USD an ounce to 460 USD an ounce between 1971 and 2005, with the known effects on commodities prices, and 46% in terms of the other major currencies..

The SDR was recomposed from the gold base into a basket of currencies including the yen, mark, pound and US dollar itself in 1973 at 1SDR = 1USD. That was the end of the IMF as we new it, and of the SDR as an international liquidity supplement. The IMF has neither kept stable exchange rates nor major financed balance of payments deficits.

The IMF did some deep soul searching in the early 1970’s until it found its new role as economic policy and loan guarantor in 1977, when it was asked by the G7 ?Club of Paris? to oversee economic policies in Bolivia first and in Peru later, given private banks could not do so. From then on, the annual article IV visits turned into a permanent presence through an office at Central Banks, not only for coercing economic policies but for watching that these were followed carefully. Whether the economy grew or not was irrelevant as long as the debt was paid. This has been the evidence of the 1980’s in major debtor countries where a depression occurred while the debt was paid under the severe eyes of the Fund. As poverty grew resulting from these policies, and global protests were more strident, it was evident that they could not continue on such path, but then the Asian crisis burst. After their failure in Asia and the hammering they received even from Stiglitz and some Governments of Asia, they then switched to “poverty-orientated policies” in the late 1990’s with no success so far. After Stalingrad came the retreat. In the way Argentina exploded. The credibility of the IMF ended. Added to this comes the success of China, which has never followed the IMF prescriptions, as a contrast.

In that measure I disagree with Bello and de los Reyes in that it is not politically convenient nor feasible the seek the closing of the IMF. I fail to see who wants them, nor needs them. Bankers do not believe in them any longer and both the new Nigeria deal as well as the new Argentina deal were made without the IMF. The IMF is dead, with no credibility and not sufficient resources unless it sells its gold position. Multilateralism must be upheld, yes.

Is there a need for a global guarantor of economic policies? Is there a need for a lender of last resort to prevent crises? These questions are addressed by Bello and de los Reyes with a No, for the first one and a Yes for the second one. The reason there is no need for economic policies is because the “one size fits all” approach has not worked. And the evidence from the Centre for Economic Policy shows that 77% of the population is worse off now than in 1980 and that income disparities have increased. In Latin America only Costa Rica and Chile have grown between 1980 and 2003 in real terms per capita. The rest is either worse off or in the same place, poverty has grown in absolute numbers and exports, the base for the policy, have more than doubled on average. Migration, until 1990 was related to violence and war, but with the adjustment policies have increased. Latin American massive professional migration is a new feature.

If the IMF is not a guarantor of sound economic policies, that ensure payments, nor of creditors, what is its role? It should have been lender of last resort (LLR). Shame it was not and that it preferred minding every country’s business rather than its own, emergency lending for balance of payments shocks. Keeping the stability of the world economy is its main role.

The new century needs a LLR. Global or regional? How do deficit regions cover themselves when in need? Isn’t the G7 bailed out this way? I agree with the idea of regional institutions but something broader must be established to get funds form one region to the next. There is a need for a Lender of Last Resort. The question is whether the IMF is one such lender or not. In Argentina they were not. In Asia they were partially. Why not in Argentina? Because it had lent their quota to that country in order to ensure their policies were followed. When the balance of payments need arose, it was late. The IMF has turned into a fiscal fund to cover the lack of taxation income of the Government. Is this its objective? Clearly not. This is true for almost all of Latin America and the Philippines at least. There is a need for a LLR with no conditions. Lissakers in May 2005 at the multistakeholder’s meetings of FFD held at the UN in New York suggested that the IMF broaden its first tranche with no conditions, while trebling its resources from the sale of its gold. This would take away the US Government pressures and the conditions. Bello and de los Reyes go further and suggest that the tranches be given without conditions but add, “from a regional Fund”. This is the brand new element in the current debate.

What does the regionalization of the IMF imply? Is the G7 let off its responsibilities? These are issues that Bello and de los Reyes should complete given their certainty on the political difficulty of shutting it down. Frankly, why not propose shutting down a weak institution upheld only by a few countries in an apolar world. The new international LLR should be regional by definition. Latin America and Asia can more than keep themselves as long as reserves are maintained by Central banks. But how about Africa?

On the other hand, isn’t the G7 going to be made responsible for financing the problems they created in the international order ? Was the Asian crisis not the result in a way of previous loan pushing by Japanese banks at 0% in yen? The Japanese had a responsibility to help out with an Asian solution in 1997 indeed but they cried Chicken.

How regional are the crisis depends on many things. IN the middle of the first decade of the XXI st century it seems that the Asian crisis had an immediate effect on short term lending around the world. (see graph) and that net resource transfers became negative not only to Asia. In Latin America after the Asian crisis, there was a banking crisis in nearly every country due to the reduction of short term loans and the reversal of net resource transfers. The problem globally was the free movement of capital sponsored by the IMF and by every central bank in the region. The obvious result is that there is less growth in the 1990’s than in the three decades from 1940’s to 1970’s and more volatility. The export led model does not work in the way it is prescribed by the IMF.

A further question for Bello and de los Reyes is, the model set up at central banks by the IMF through its coercion is built by the World Bank at the national executive level when it switched from project lending to policy based lending in the mid 1980’s, having the professionals and resources to implement the policies it wants. The WB in that measure is a political party of sorts, consort of the IMF. This leads immediately to the issue of what to propose about the WB. Shutting it down and strengthening the existing regional banks might be a solution in keeping with the general idea of regionalization.

There already exists a Fondo latinoamericano de reservas (FLAR) based in Bogota and there already exist regional development banks which need strengthening in project financing and reforming from policy based lending that has done so much harm..