The Institute for Domestic and International Affairs
International Monetary Fund Background Information Rutgers Model United Nations 16-19 November 2006
Director: Janelle Gendrano
Š 2006 Institute for Domestic & International Affairs, Inc. (IDIA) This document is solely for use in preparation for Rutgers Model United Nations 2006. Use for other purposes is not permitted without the express written consent of IDIA. For more information, please write us at idiainfo@idia.net
Introduction _________________________________________________________________ 1 Currencies and the International Economy ____________________________________________ 2 Bretton Woods Conference, July 1944 ________________________________________________ 3 The Masterminds of Bretton Woods__________________________________________________ 5 Bretton Woods Institutions _________________________________________________________ 6 The Gold Standard and the End to Bretton Woods System _______________________________ 7 The IMF’s Role at Present __________________________________________________________ 9 Goals __________________________________________________________________________ 10 Work of the IMF_________________________________________________________________ 12 Structure _______________________________________________________________________ 13 Funding, Financing, and Voting ____________________________________________________ 15 Criticisms_______________________________________________________________________ 17 Case Study One: The East Asian Financial Crisis______________________________________ 18 The Root of the Problem: Pegging the Thai Baht to the Dollar ___________________________ 19 IMF Response ___________________________________________________________________ 20 Results of IMF Actions____________________________________________________________ 21
Case Study Two: Argentina ____________________________________________________ 23 Import Substitution Industrialization________________________________________________ 24 The Convertibility Plan: Pegging the Peso to the Dollar ________________________________ 25 Impact of Currency Devaluation____________________________________________________ 27 Loss of Investor Confidence________________________________________________________ 27 Effects of Floating the Peso and IMF’s Response ______________________________________ 29
Current Status ______________________________________________________________ 30 Reasons for Criticism _____________________________________________________________ 32 IMF Successes ___________________________________________________________________ 33 Brazil __________________________________________________________________________ 33 Iraq____________________________________________________________________________ 35 Debt Cancellation for Developing Nations ____________________________________________ 36 HIPC and MDRI Initiatives________________________________________________________ 37 International Opinion_____________________________________________________________ 38
Summary___________________________________________________________________ 40 Discussion Questions _________________________________________________________ 41 Works Cited ________________________________________________________________ 47
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Introduction The International Monetary Fund (IMF) is an organization that offers fiscal and monetary advice, policy recommendations, and capital to national governments.1 The original goals of the IMF were to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.2 While the goals of the IMF have essentially remained the same over the years, their implementation has developed to accommodate its member nations and modernization. Surveillance, financial assistance, and technical assistance are some of the primary forms of support the IMF offers. From the IMF’s creation in 1944 until 1971, the IMF primarily served as an international regulating body aimed at currency exchange stability. The IMF was in charge of setting the value of United States Dollar relative to the price of gold; all other foreign currency was then based off of the value of the Dollar. In 1971, the system changed entirely by getting rid of the gold standard system, causing the IMF to revaluate its role and function in the 1970s through the 1990s. While many saw the end of the gold standard as synonymous with the end of the IMF, the change
Balance of Payments: a simple measure of the payments in financial capital that flow from one nation to another. If more money flows in than out, one has a positive balance of payments - if more flows out than in, one has then a negative balance. The money flowing over the border is like other money paying for goods, commodities, real estate, services, securities. It’s usually separated into: • Current Account. Goods and services. • Financial Account. Financial assets. (Stocks, Bonds, Foreign Direct Investments). • Capital Account. Non-financial assets. Source: http://www.investordictionary.com/ definition/balance+of+payments.aspx
actually enabled the IMF to be more powerful and influential than ever before. Today, The IMF is most notable for its role in the managing of global economy through financial aid. While The World Bank, the IMF’s sister organization, limits monetary loans to the poorest of nations, the IMF caters to all one hundred and eighty-four member nations from all areas of the economic spectrum. Nations in economic crises may turn to the 1
Linda Fasulo, An Insider’s Guide to the UN (New Haven: Yale University Press), 192 International Monetary Fund, “About the IMF,” International Monetary Fund, http://www.imf.org/external/about.htm (accessed February 02,2006) 2
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IMF for loans. The IMF’s loans often come with significant interest rates and stipulations. These stipulations, called conditionalities,3 direct how the money should be used, require specific changes in the nation’s economic policies, or force the implementation of IMF suggested Structural Adjustment Programs. Critics of the IMF see certain conditionalities as IMF heavy-handedness.4 Case studies of nations that sought debt relief from the IMF show that the conditionalities and Structural Adjustment Program the list of budgetary and policy changes required by the IMF and World Bank in order for a developing country to qualify for a loan. This “conditionality” typically includes reducing barriers to trade and capital flows, tax increases, and cuts in government spending. Source: http://www-personal.umich.edu/~alandear/glossary/s.html
Structural Adjustment Programs may be more detrimental than helpful in the long run.
Third
world debt has been a major issue for
the
IMF,
with
non-
governmental organizations (NGOs) such as Jubilee: Drop the Debt and Third World Watch relentlessly campaigning for the IMF to relieve third world nations struggling to pay off increasing debts to the Fund.
Despite criticisms, there is no doubt that the IMF has
influenced a great number of economic initiatives around the world. From eliminating certain nation’s third world debt to being a main catalyst for economic crises, the IMF has a tremendous impact on all people of the global community.
Currencies and the International Economy Currency stabilization is crucial to the success of the global economy. Because of the importance of currency stabilization, the after effects of World War II, and the growing worldwide depression of the 1920s, world powers came together at the Bretton Woods conference, an economic summit between the United States, the United Kingdom, and the other forty-two Allied nations from the first World War. The outcome of Bretton Woods defined economic policy until the 1970s, when President Richard Nixon abandoned the Gold Standard, which was a commonly used monetary system that based the value of currency off of the value of bullion. The Gold Standard was crucial to the original initiatives of the 3
Axel Dreher, “The Development and Implementation of IMF and World Bank Conditionality,” Hamburg Institute of International Economics, 2002, http://econwpa.wustl.edu/eps/if/papers/0207/0207003.pdf 4 Joseph Kahn, “I.M.F’s Hand Often Heavy, A Study Says,” New York Times, October 21, 2000, Proquest Historical Newspapers, http://proquest.umi.com
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Bretton Woods Conference. Once other nations followed suit and switched from the Gold Standard to fiat currency, new issues of currency stabilization arose.
Bretton Woods Conference, July 1944 The Bretton Woods Conference was aimed to ameliorate the economic consequences of the first and second World Wars. The results of Bretton Woods, including the creation of the International Bank on Reconstruction and Development (IBRD), the World Trade Organization (WTO), and the IMF, continue to shape economic policy today. The end of the First World War in 1918 led to a decade of reconstruction in all areas, especially focused on the economies of many states involved in the conflict. Formerly established trade patterns were disrupted or destroyed. Worldwide markets shrank, and international trade decreased due to a lack of a stable currency. The center of the global economy moved from newly-weakened Europe to the now economically strong United States. In addition to dealing with the consequences of war, European nations were also faced with the challenge of rebuilding their once strong economic infrastructure. The world experienced an economic depression of immeasurable magnitude in the 1920s
and
1930s.
The
Great
Depression of the United States caused shockwaves throughout the financial world, crippling industry in major cities that were already negatively affected by
Foreign Exchange Controls Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. See currency exchange. Source: en.wikipedia.org/wiki/Foreign exchange controls
the international recession caused by WWI. In addition to the failure of industry, the macroeconomic policies of individual nations that were intended to strengthen their own failing economies led to the downturn of the global economy.
Trade barriers, which
discouraged international trade in order to favor domestic businesses and industry, were a prevailing aspect of 1920s macroeconomic policy. The monetary policies of the 1930s were similar to those of the 1920s, with isolationist principles such as trade barriers defining global economics. Nations also used foreign exchange controls to regulate the value of other nations’ currency in order to discourage the purchase of other currencies. War debts burdening European nations and the
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United States led to a major effort of each indebted nation to conserve dwindling reserves of gold and foreign exchange. In order to do so, nations curtailed foreign imports, devalued their currencies, and implemented restrictions on foreign exchange accounts held by their citizens. The worldwide depression of the 1930s is largely attributed to the economic policies of this time.5 In July 1944, the forty-four Allied Nations from the Second World War came together in Bretton Woods, New Hampshire to discuss the formation of a new global economic policy.
The essential goal of the conference was initially to establish more liberal
international markets with less government restriction. This measure would foster a stronger and more profitable trade system. In order to accomplish this goal, delegates realized the need to stress the importance of policies geared toward currency exchange stability.6 The representatives at Bretton Woods also saw the formation of new economic policy designed to bolster trade and lower barriers as a form of both economic and diplomatic Why is Currency Exchange Stability Important? Businesses often invest into the economies of other nations, and when the exchange rate of a nation fluctuates frequently, financial risks increase for any international transaction. Currency exchange instability discourages international investments, and the lack of incoming capital is extremely detrimental for individual nation’s economies and in turn the global economy.
security.
The Bretton Woods
Conference stability
as
saw a
economic preventative
measure against future military conflict among nations.
The
connection between military conflict like that of the Second World War and economic wellbeing was not lost on the delegates of Bretton Woods.
Cordell Hull, a United States
Secretary of State from 1933 to 1944, described the value of economic security: If we could get a freer flow of trade … freer in the sense of fewer discriminations and obstructions … so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.7
Allied nations agreed that free markets were a crucial part of the success of the international economy. The delegates also recognized that each nation’s individual economic policies had 5
“A Fund by Design,” The Economist, Vol. 321, October 12, 1991, Vol. 321, accessed via Academic Search Premier, http://web32.epnet.com 6 B.H. Beckhart, “The Bretton Woods Proposal for an International Monetary Fund,” Political Science Quarterly, 1944, p 492 - 494 7 Cordell Hull, The Memoirs of Cordell Hull, vol. 1 (New York: Macmillan, 1948), p. 81.
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5 Although government
intervention increased in all nations during the depression period of the 1920s and early 1930s, some states exercised more federal influence over the economy than others. France, for example, generally believed in more government intervention in national economy than the United States. Bretton Woods concluded that individual economic policies would be left up to sovereign nations, but that the global community must work toward keeping the international economy as free as possible. This objective entailed the reduction of trade tariffs and other economic barriers hindering international commerce.
The Masterminds of Bretton Woods Coming into Bretton Woods were two already formed but distinct plans from the United States and the United Kingdom. Doctor Harry Dexter White, an American economist Keynesian Economics: Body of economic thought originated by the British economists and government adviser, John Maynard Keynes (18831946), that active government intervention is necessary to ensure economic growth and stability. Keynesian economics had a great influence on the public economic policies of industrial nations, including the United States. Source: www.equanto.com/glossary/k.html
and a senior official of the U.S. Department of the Treasury, was the chief architect of the American plan, and called for the establishment of the United and Associated Nations Stability Fund, aimed to prevent economic crises within struggling nations. White and his American colleagues reasoned that economic crises around the world ultimately have an
incredibly detrimental effect on all economies. Prior to the American plan there had never been an international organization aimed specifically with dealing with internal economic problems of nations.
White also favored an incentives system that would cause price
stability through the global economy. John Maynard Keynes, a prominent economist and creator of Keynesian economics, developed much of the United Kingdom’s plan, involving the establishment of an International Clearing Union, an institution dealing with bilateral loans. The plan was based on the British ideas to maintain national sovereignty but also to avoid deflationary policy and keep exchange rates relatively flexible.8
8
George N. Halm, “The International Monetary Fund,� The Review of Economic Statistics, 1994
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Bretton Woods Institutions After three weeks of discussion and policy-making, the delegates of the Bretton Woods Conference, with input from other nations, wound up revising and combining both the British and American plans to create the Bretton Woods Agreement.
This plan
announced the establishment of two organizations that came to be known as the Bretton Woods Institutions. The International Bank for Reconstruction and Development (IBRD), aimed at the economic and infrastructure development of the poorest nations in the world, and is now one of the five branches of the World Bank. The World Bank can be seen as the institution influenced most by the American plan crafted by White, and incidentally, only Americans have served as the president of the World Bank.9 The International Monetary Fund was the second Bretton Woods Institution outlined by the Bretton Woods Agreement, and serves to facilitate international economic consultation as well as collaboration on monetary and credit problems. Although the goals of the IMF were similar to already existing private international financial institutions, the IMF was distinct due to its purpose and international backing.
The Bretton Woods
Agreement had provisions allowing the IMF to become involved with credit operations, currency exchange stabilization and control, and scarce currencies. The IMF was heavily influenced by the British plan Keynes proposed, and in turn the policies of the IMF were a product of Keynesian economic theory.
Because of the Bretton Woods Institutions,
primarily the IMF, Keynesian economics still dominates global economics today.10 The IMF and the World Bank were intended to prevent another worldwide economic depression similar to the depression of the 1930s while also ensuring that capitalism remains the dominant form of economic system throughout the world. For the most part, both goals have been met. While no major economic crises have wreaked havoc in Europe and the United States since the 1930s, developing nations still suffer from constant economic despair. Arguably, the economic state of developing nations comes as a result of capitalism
9
Michael Gavin and Dani Rodrick, “The World Bank in Historical Perspective,� The American Economics Review, 1995, p.329 10 Beckhart, 495
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being the dominant system in the world.11 Capitalism works well for those states that can fully implement this economic theory, but can prove difficult for states that can only do so in a limited fashion.
The Gold Standard and the End to Bretton Woods System Prior to 1971, the gold standard was used to back most of the world’s currencies. The value of a nation’s currency depended on how much bullion a nation had in its’ reserves. Generally, the more bullion a nation had, the stronger and more stable its currency was. Nations that used the gold standard to value its currency had a fixed currency. The
Bretton
Woods
standard and the United States Dollar
Gold Standard: a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price.
simultaneously.
Source: http://www.econlib.org/library/Enc/GoldStandard.html
Agreement established a system of payments that was based on the gold The Dollar was
fixed at a rate of $35 USD per ounce of gold. Because the Dollar was the only currency fixed to gold by the IMF, all other currencies were to be valued in relation to the Dollar. The Dollar was literally as good as gold in any IMF transaction, and in turn, any international transaction after 1944. This system helped in cultivating the United States’ domination of international markets and the global economy, although the reason why the Dollar was chosen as the primary currency was because most European nations had war debt to the United States after the Second World War.
12
Theoretically, the gold standard is a stable and effective way to value currencies and is beneficial to economies. The value of gold remains relatively stable, making currencies based off of gold similarly dependable, preventing hyperinflation and economic recession and in turn increasing consumer confidence. However, the expanding global markets and higher volumes of international trade became unable to be backed by gold as there simply was not enough gold in reserves around the world to back the transactions. 11
“IMF Hails World Recovery,” http://news.bbc.co.uk/1/hi/business/710963.stm, BBC News, April 12 2000, (accessed February 6, 2006) 12 Ian M. Drummond, “The Gold Standard and International Monetary Systems, 1900-1939,” 1998 (accessed by www.jstor.org)
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The primary motives for the move away from the gold standard were growing global markets and rapidly draining gold reserves in the United States due to a trade deficit and the expense of the Vietnam War. A number of other international factors further contributed to Floating Currency: a currency that uses a floating exchange rate as its exchange rate regime. In the modern world, the majority of the world’s currencies are floating, including the most widely traded currencies: the United States Dollar, the Japanese yen, the euro, and the British pound sterling. A floating currency is contrasted with a fixed or pegged currency. Source: http://www.investordictionary.com/definition/floating+currency.aspx
U.S. President Richard Nixon’s decision to end the gold standard. On 15 August
1971,
Nixon
declared
the
United
States Dollar as a floating currency, or a currency that’s value is dependent on international markets. Like the gold standard, the values of floating currencies were based on the acquisition of another valuable commodity. However, instead of gold, the commodity was now foreign currency. Nations would in effect purchase the currency of other nations in order to increase the value of its own currency. After Nixon converted the United States Dollar into a floating currency, the rest of the world followed suit, as the Dollar was the most powerful currency of the time and necessary in international transactions. The conversion to floating currency led to the end of the Bretton Woods system, which comprised the rules initially established to manage commercial and financial relations among member nations of the Bretton Woods Institutions.13 Today, the IMF runs in accordance to the floating and pegged currencies around the world. Certain nations, like China for instance, manipulate the value of their currency and their money supply to keep a constant exchange rate to the Dollar. Similar to China, many nations are pegged to the Dollar, as the Dollar is a relatively stable currency not likely to fall victim to hyperinflation. Most industrialized nations have floating currencies; the United States Dollar, the British Pound, and the Euro are examples of floating currencies. Although the gold standard-based Bretton Woods system no longer exists, the global community still faces similar economic problems. These difficulties include massive United States account deficits, the ineptitude of other nations’ currencies, the dominance of domestic political 13
J. Gowa, “Closing the Gold Window: Domestic Politics and the End of Bretton Woods, “ Cornell University Press (accessed by www.jstor.org)
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factors in setting monetary policies, and most notably, the role of international financial markets in forcing the hands of policymakers.
The IMF’s Role at Present The IMF has historically functioned mostly as a regulatory body for international transactions by setting currency values and helping to facilitate trade through loans. With the end of the gold standard and the Bretton Woods system, the IMF had to redefine its purpose and goals. While the IMF continues to help maintain currency exchange security and bring stability to unstable currencies, the IMF accomplishes this goal helping nations improve their own economies rather than setting international regulations and currency values. Since the IMF’s inception, the organization has played a crucial role in the spread of Keynesian economics throughout global and national economic systems.
The IMF
maintained this role through its lending programs, using Keynesian approaches in order to help ameliorate economic difficulties in troubled nations. Even so, in the 1980s there was a slight shift in economic policy. Unlike the past, the IMF now determined that governments have indirect roles in, but not a direct responsibility for, ensuring national economic prosperity. With the collapse of Bretton Woods, fewer international regulations remained on international transactions. The lack of uniformity in international markets led the IMF to expand its role in financial surveillance in order to oversee the successful implementation of what little policies remained in tact. The IMF plays a key role in the monitoring of financial systems around the world. The detailed economic and financial data recorded by IMF specialists are a valuable resource to economists and governments, and the IMF uses this data to help establish specific lending programs tailored to each nation seeking assistance. During the Bretton Woods system, the IMF was not nearly the lending source it is today. In fact, only two years after its creation and the initial activity of the organization, the IMF lent very little over the following decade due to dwindling reserves. In present day, the IMF’s primary task is lending money to impoverished, economically unstable nations. Increased activity in lending led to a heightened influence in the creation of macroeconomic
Rutgers Model United Nations 2006 and national economic policy around the world.14
10 The structural adjustment programs
attached to the loans, explained in detail below, are instrumental in the expansion of IMF influence throughout the world.15
Overview of the IMF There are one hundred and eighty-four members of the IMF. The only countries in the United Nations that are not members of the IMF are North Korea, Cuba, Lichtenstein, Andorra,
Monaco,
Tuvalu,
and
Nauru.16 Unlike the United Nations General Assembly, where everyone is allotted one vote on matters presented to the body, the IMF has proportional votes. The number of votes allotted to a given state depends on how much money it contributes to the IMF’s treasury. The IMF, particularly the executive board, works on a daily basis to carry out the goals of the organization.
Goals The IMF’s primary goals are four-fold. The first goal of the IMF is to provide assistance to member nations in serious economic crisis.
An example of this aim is
illustrated in the Eastern European state of Georgia. Prior to the break-up of the Soviet Union, Georgia, a small satellite state, was a part of the USSR economy. As a result of the Soviet economy rapidly declining until the Soviet Union was dissolved in 1991, Georgia was left in economic turmoil, with hyperinflation, unemployment, and low personal income causing a downward financial spiral. The IMF came to Georgia’s aid in the early 1990s, and ever since, there has been remarkable improvement in the economy. In its IMF-supported programs, Georgia has gradually raised tax receipts from virtually zero in 1993 to more than
14
“IMF Lending, 1950-1989”, www.imf.org (accessed February 27 2006) James M. Boughton “Silent Revolution: International Monetary Fund 1979-1989” International Monetary Fund, 2001, pp. 1-5 16 “The IMF at A Glance,” International Monetary Fund, www.imf.org/external/np/exr/facts/glance.htm (accessed February 4, 2006) 15
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ten per cent of its gross domestic product at present. Increasing revenue was central to stabilization from hyperinflation in 1994 to less than ten per cent per annum inflation today. Other reforms, such as privatization, improvement of corporate governance, building a sound, independent, and well-functioning financial system, have created the basis for greater investment, sustainable growth, and a reduction in the size and dominance of the underground economy.17 The IMF’s second goal is to promote currency exchange stability. The IMF has been particularly helpful with the integration of the Euro, advising the European Economic Monetary Union (EMU) and holding regular consultations with IMF members in the EMU.18 Another example of the IMF’s success in currency exchange stability is the case of Bulgaria. In late 1996, Bulgaria was in the midst of a banking crisis that caused a period of Currency Board: A currency board combines three elements: a fixed exchange rate between a country’s currency and an “anchor currency,” automatic convertibility, and a long-term commitment to the system, often made explicit in the central bank law. The main reason for countries to consider a currency board is to demonstrate that they are pursuing an anti-inflationary policy. Source: http://www.imf.org
hyperinflation. The financial upheaval caused waning public support for the Bulgarian government, eventually leading to widespread protests and calls for new elections.
After
evaluating earlier stabilization programs that failed, the IMF concluded that a renewed stabilization effort in Bulgaria would require a
transparent, rules-based system. Utilizing recommendations and input from national political parties, journalists, trade unions, foreign donors, and academics, Bulgaria and the IMF worked to create a currency board to oversee the stabilization of the national currency. Another goal of the IMF is to facilitate the expansion and growth of international trade. Learning from the isolationist policies of the interwar period in the 1920s and 1930s, the IMF made sure that the integration of world markets was a central tenet of the organization.
At the same time, international trade bolsters the Keynesian economic
framework of the IMF and largely benefits the industrialized nations that dominate the fund. In countries enduring economic crises, conditionality and structural adjustment programs are 17
Business Week, “An IMF Success Story? Try Georgia,” August 31, 1998, http://www.businessweek.com/1998/35/b3593067.htm (accessed February 6, 2006) 18 “The IMF and the European Economic Monetary Union,” March 1999, http://www.imf.org/external/np/exr/facts/emu.htm (accessed February 6, 2006)
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designed to liberalize the economies of the afflicted nation in order to welcome foreign capital and investments.19 Often, countries in economic crisis are developing nations, providing an excellent foundation for the manufacturing sector of the global market. Manufacturing jobs brought incoming corporations should result in more capital for the nation.
Based on this economic assumption, the IMF supports corporations from
industrialized nations seeking a workforce in impoverished nations because the corporations can provide economic stability through labor, revenue, and taxes. Additionally, because the standard of living is typically much lower than in an industrialized nation, greater production of goods at a lower cost leads less cost. The means in which
Sweatshop: A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers.
the
Source: www-personal.umich.edu/~alandear/glossary/s.html
to more international trade at IMF
achieves
this
particular goal has garnered much criticism from non-governmental organizations concerned with human and labor rights, as manufacturing jobs in developing nations are often sweatshop labor. The fourth goal of the IMF is to give loans to countries that cannot meet their balance of payments. Lending money is by far the IMF’s most common function. IMF loans greatly influence the other three main goals of the organization, as most assistance provided to nations in crisis is in the form of loans. IMF loans usually come with conditions and other stipulations, such as structural adjustment programs, designed to develop the indebted nation’s economy. The restrictions and programs are tailored to the specific situation of the country seeking debt relief. In addition to the stipulations, the IMF charges interest on the loans it provides to nations, expecting full payment in return plus the added interest. The interest on IMF loans sometimes poses more of a problem in the long run than the original economic situation that caused the need for the economic assistance in the first place.
Work of the IMF The IMF implements its goals in three essential ways. Lending is the primary manner the IMF achieves its goals. As previously mentioned, the IMF lends money to nations with 19
Albino Barrera, “Fair Exchange”, Christian Century vol. 121, issue 19, p 22
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13
The IMF helps nations make external payments and
maintain an appropriate level of reserves.
This method prevents the impositions of
restrictions on trade and payments that would be detrimental to the domestic economy or domestic currency value.20 The IMF also provides temporary financing for economic initiatives within a nation. IMF lending and its associated restrictions are aimed to correct underlying economic policy problems.
For low-income developing nations, loans are
specifically aimed at poverty reduction. The IMF also operates through surveillance, which entails monitoring a nation’s economic and financial development as well as its economic policy.
Surveillance is
generally aimed at crisis prevention. When the IMF worked with the EMU to help integrate the Euro, surveillance was extensively used. Various practices such as monitoring each participating nation’s monetary policy and conducting regular consultations and updates with the nations were implemented to ensure a smooth transition and to avert potential problems. A third method of goal implementation is through providing nations with technical assistance. The IMF does extensive work in economic research and statistics. Most of the work done by the IMF is available to the public, although extensive evaluations of specific cases are often limited in accessibility. Member nations are encouraged to use IMF work and statistical findings in order to help formulate their own policy. In addition to doing its own research and policy work, the IMF trains people from nations whose own economic research is not well-developed.
Structure The IMF is comprised of many different offices, all of which are ultimately headed by the International Monetary and Financial Committee, the Board of Governors, and the Joint IMF-World Bank Development committee. Under those three entities are the Executive Board and the Independent Evaluation Office. The Executive Board is one of the most important parts of the IMF, as it is responsible for conducting the day-to-day business of the agency. The Board carries out its work with the aid of papers and studies prepared by IMF management and staff. Composed 20
“IMF: A Global Financial Institution,” http://www.unic.undp.org/imf.htm (accessed February 5, 2006)
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of twenty-four directors and the managing director, the Board usually meets several times each week. The directors are appointed or elected by member countries or by groups of countries. The managing director serves as the Board’s chairman.21 Under the Executive Board are the Area Departments, the Functional and Special Services Departments, Information and Liaison Department, and the Support Services Department. Within the Area Departments are regional branches that serve the interests of Africa, Asia and Pacific Island, Europe, Middle East and Central Asia, and the Western Hemisphere.
All of
these
offices,
especially
the
IMF Organizational Functions Chart
Area
Departments and the Functional and Special Services Department, provide the Executive Board with research and
information
necessary for it to Source: http://www.imf.org/external/np/obp/orgcht.htm carry out the IMF’s agenda. While the official structure is evident from the chart and description above, the distribution of power is not easily seen. Because of the proportional voting system, power in the IMF is gained largely through how much money a nation is willing to give the Fund. The more money a nation gives, the more say a nation has on IMF initiatives. Not surprisingly, the United States and Western European nations dominate the IMF. While the voting system is proportionally fair, the dominance of the United States and Western powers still draws criticism from many nations worldwide.
21
“IMF Executive Directors and Voting Power,”http://www.imf.org/external/np/sec/memdir/eds.htm (accessed February 4, 2006)
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Funding, Financing, and Voting The funding, financing, and voting aspects of the IMF are intertwined. The financing of IMF initiatives is reliant on funding contributed by member nations. The economic packages that need to be financed are voted upon by member nations, and the number of votes a member nation has is dependent on how much money it contributes to the IMF. The IMF receives its funding in a variety of ways. Most of the IMF’s funding comes from its member nations. Upon joining the IMF, every member nation is assigned a quota, or set amount of money it will contribute to the IMF on a yearly basis. Various economic factors are considered in determining quotas, such as gross domestic product, current account Sources of IMF Money Most resources for IMF loans are provided by member countries, primarily through their payment of quotas. Concessional lending and debt relief for low-income countries are financed through separate contributionbased trust funds. The IMF’s annual operating expenses are largely paid for by the difference between its interest receipts and its interest payments.
transactions, and official reserves. Each
Source: www.imf.org
accommodate the changing realities of
quota is different, but all are paid in Special Drawing Rights (SDRs), the IMF’s unit of account.
Quotas are
changed every five years in order to
global economics.22 At the end of August 2005, member quotas totaled SDR 312 billion. The highest contributor to the Fund is the United States with SDR 37 billion. The IMF also has gold holdings worth USD $45 billion, although there are strict regulations as to when the IMF is allowed to sell the gold holdings for currency, as putting that amount of gold on the open market would significantly affect the global price of gold, and could result in significant economic turmoil.23 The IMF finances programs and initiatives through the money contributed by member nations as well as interest made off of existing loans.
Certain initiatives, like the
Heavily Indebted Poor Countries 22
Highly Indebted Poor Countries Initiative: The Heavily Indebted Poor Country Initiative, the debt relief scheme created in 1996 by the World Bank and IMF to provided limited debt relief for the poorest countries with the goal of bringing countries to a sustainable level of debt. The program has since been revised and is now the Enhanced Heavily Indebted Poor Country Initiative (EHIPC). Source: www.jubileeaustralia.org/512_jubilee_debt_jargon.php
“IMF Quotas”, IMF, http://www.imf.org/external/np/exr/facts/quotas.htm (accessed April 2, 2005) “Where the IMF Gets Its Money,” IMF, http://www.imf.org/external/np/exr/facts/finfac.htm (accessed April 2, 2005) 23
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(HIPC) initiatives and the Multilateral Debt Relief Initiatives (MDRIs) are funded by trust funds established by the International Monetary Fund. The reasons for the trusts are simple: the International Monetary Fund, above all, is a banking and lending institution subject to global banking standards. Currently, the IMF’s credit rating is AAA, meaning that there is an exceptional low risk for the bank to default on the money that it has borrowed from its membership.24
HIPC initiatives and MDRIs involve the cancellation of loans to poor
nations. If the IMF voluntarily writes off billions of Dollars in loans, its credit ratings would plummet because the written off loans would be seen as unwise lending decisions by credit raters.
If the IMF’s
credit rating was lowered, it
AAA Credit Rating: the highest credit rating given by debt analysis agencies. A triple-A credit rating allows a corporation or government to borrow at a low interest rate because the market accepts a small risk premium. Source: http://www.investordictionary.com/definition/aaa+(credit+rating).aspx
would lose enormous political clout and would not be able to carry out many of its structural adjustment programs around the world, as the rate at which it could borrow money would increase substantially. In order to avoid a bad credit rating while simultaneously funding those initiatives, trusts set up by the IMF fund the program. In this way, the IMF indirectly funds the initiatives and is insulated from any credit danger because of them. The voting process of the IMF relies on a proportional system. The higher a member nation’s quota, the greater the amount of votes the member nation has. For the International Monetary Fund Simulation at Rutgers Model United Nations, delegates will be representing directors of the Executive Board of the IMF. With the exception of the directors from the United States, Japan, Germany, France, and the United Kingdom, each director represents a bloc of nations. Directors representing of blocs utilize the votes of all the nations within his or her respective bloc. Despite the immense amount of money contributed to the IMF, the United States has the largest amount of votes, representing 17.6 per cent of total votes in the
24
“Backgrounder: Debt Relief and the HIPC,” Initiative for Policy Dialogue, http://www2.gsb.columbia.edu/ipd/j_debtrelief.html (accessed April 2, 2005)
Rutgers Model United Nations 2006 Executive Board.25
17
For the exact breakdown of votes in the Executive board, see the
Appendix.
Criticisms While the IMF has had a number of successes, the organization has been subject to continual criticism from many sources, such as NGOs, government officials, and academia. Common criticism of the IMF include concern over heavy-handedness with conditions and structural adjustment programs, fundamental differences in economic beliefs, the domination of the western world within the IMF, and the overall success rate of IMF projects. Governments in need of financial aid frequently perceive the IMF to be heavy-handed in the way the organization lends money. The conditions “recommend” entire policy and infrastructure
transformations,
infringing
on
national
sovereignty.
A
typical
“recommendation” for a structural adjustment program is an austerity program, which is when a national government reduces its spending in order to pay back creditors. The conditionalities are seen as overbearing and even harmful, but are required in order to receive loans from the Fund.26 In the instance of austerity programs, a nation usually has to cut public spending, like developmental projects and welfare, in order to pay back the IMF, and standards of living usually decline as a result. In addition to the conditionalities are high interest rates that have the potential to leave an indebted nation even further in debt in the long run. However, because conditionalities and structural adjustment programs are not being forced on a nation but instead recommended, nations typically have no choice but to accept the IMF’s terms. Plus the IMF sees austerity programs as crucial because interest on loans is a primary way the Fund generates revenue. The success rate of the IMF-suggested programs has not been very high. In fact, there are many cases, such as Argentina, Kenya, and the nations involved in the Asian Financial Crisis, where the stipulations have actually caused disastrous results. The very economic crises that the IMF continually tries to prevent came as a result of the programs recommended by the IMF.
25
“IMF Executive Directors and Voting Power,” IMF, http://www.imf.org/external/np/sec/memdir/eds.htm (accessed April 2, 2005) 26 Joseph Kahn, “I.M.F’s Hand Often Heavy, A Study Says”
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Often, the criticism is at a fundamental level. Because the IMF is primarily based off of Keynesian economics and its initiatives reflect the IMF’s economic policy, critics who support supply-side economics or non-capitalist modes of production do not approve of the Supply-Side Economics: an economic theory maintaining that cutting taxes will give incentives to invest, work harder and save more, which thereby will stimulate the economy. Source: http://www.investordictionary.com/definition/supply-side+economics.aspx
IMF. The arguably detrimental nature of certain
IMF
initiatives is often
blamed on the basic economic principles that determine them. Not only does this economic philosophy govern the body, but at the same time, the nations that embody those values the most hold the most power within the Fund. Representatives of developing nations protest the fact that in the IMF, wealthy, industrialized nations like the United States, the United Kingdom, and Japan exercise more influence over the future of developing states than the governments of those states themselves. In this way, the IMF caters not only to the agenda of the industrialized nations that primarily fund it, but also to the corporations that fuel the industrialized nations’ success. Ironically, they are the very same corporations that often bring human rights injustices into developing nations in the form of low-expense manufacturing jobs.27
Case Study One: The East Asian Financial Crisis In many ways, the East Asian Financial Crisis was unexpected. The crisis most seriously affected three of the most rapidly developing nations in Asia: Thailand, South Korea, and Indonesia; although its effects spread as far as the Philippines, Malaysia, Hong Kong, China, Taiwan, and Singapore, and had a negative impact on the global economy. Prior to the economic disaster, all three nations had high rates of capital intake and welldeveloped domestic economies. At first, analysts looked for clues within Asia to determine the cause of the crisis, such as corrupt or mismanaged banking systems, lack of transparency in corporate governance, or the overall shortcomings of state-managed capitalism.28
27
“A Fund by Design,” The Economist Steven Radalet and Jeffrey Sachs, “The Onset of the East Asian Financial Crisis”, Harvard Institute for International Development, http://pdf.dec.org/pdf_docs/PNACC340.pdf (accessed February 2, 2006)
28
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The Root of the Problem: Pegging the Thai Baht to the Dollar In actuality, the cause of the crisis began in Thailand.
In 1997, the value of
Thailand’s currency, the Thai Baht, was pegged to the United States Dollar. The Thai government declared that any individual could trade twenty-five Thai Baht for USD $1 through the government, and the transactions would be backed through Thailand’s foreign exchange reserve. People began to lose confidence in the Baht after influential economic officials began to sell off millions of Dollars worth of Baht. Seeing this trend, people everywhere began to sell Thai Baht back to the government. This drained the foreign exchange reserves and began the currency scare that was the main impetus for the East Asian Financial crisis. Due to the lack of confidence in the Baht and the alarming rate at which the foreign exchange reserve was decreasing, in July 1997 the Thai government decided to unpeg the Baht from the Dollar and let the currency float. This move left the Baht subject to international markets and even more vulnerable to fluctuation. Within the month, the Baht had depreciated by twenty-five per cent, a serious problem as it caused tremendous inflation in Thailand. At the same time it made
Thai
exports
much
more
competitive in international markets. The depreciation of the Baht enabled exports to be sold at cheaper prices than Thailand’s regional competitors.
In
response, other nations in East Asia like South Korea, the Philippines, Indonesia devalued their own currencies in order to remain competitive with cheap Thai exports. By the end of September, the Baht was 42 per cent
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below its starting 1997 level, the Indonesian Rupiah 37 per cent below, the Malaysian Ringgit 26 per cent below and the Philippine Peso 29 per cent below.
29
Perhaps one of the biggest challenges of a devaluating currency, however, is the affect that it has on investments. Much of Asia was dependent upon loans to fund both government and commercial operations. Loans are traditionally transferred in Dollars, and are then converted into local currencies. As the value of the local currency declines, the loan is not recalculated based on Dollars. So in the example above, the value of a USD $5 million loan given in January 1997 was worth just USD $2.1 million by that September. The loan likely no longer was sufficient to pay for the services for which it was initially designed.30 Nations were falling into further economic crises because of loans they had taken out from financial institutions like the IMF. Prior to June 1997, many of the nations involved in the East Asian Financial Crisis were reported to be experiencing rapid economic growth. What reports failed to say was that much of the capital intake from all three countries came as a result of international lending. Once the nations were on their feet, the loans were withdrawn, as they were not necessary anymore, resulting not in continued growth, but instead in a decrease in domestic investor confidence, thereby making the crisis all but certain. In 1997, the economies of Thailand, South Korea, and Indonesia caved, and the world faced a serious economic crisis in East Asia.
IMF Response The IMF’s response to this economic crisis is one of the most highly criticized actions in its history. In an effort to ameliorate the crisis, the Fund offered nations the option of taking IMF relief packages aimed at relieving the increasing debt load of the affected Asian nations and their people. Like all IMF loans, the packages came with conditions. Through the packages and structural adjustment programs, the IMF addressed the crisis in three main ways: financing, macroeconomic policies, and structural reforms.31 29
The structural
Giancarlo Corsetti, Paolo Pesenti, and Nouriel Roubini, “What Caused the Asian currency and financial crisis?” Stern School of Business, New York University, 1998 (accessed by www.jstor.org). 30 Yi-Chi Chen, “Asian Crisis Project: Country Report on Taiwan,” University of Washington, October 13, 1998 http://faculty.washington.edu/karyiu/Asia/booklet/tn-report.pdf (accessed February 2, 2006). 31 “The IMF-Supported Programs,” Recovery From the Asian Crisis and the Role of the IMF, http://www.imf.org/external/np/exr/ib/2000/062300.htm#III (accessed February 1, 2006)
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adjustment programs were atypical of the traditional economic methods of slowing recession. Usual strategies to curb economic decline include increasing government spending, stabilizing major companies, and lowering interest rates. Instead, the structural adjustment programs enforced the neo-liberal economic policies of the IMF and called for crisis nations to cut government spending to reduce deficits, to allow insolvent banks and financial institutions to fail, and to aggressively raise interest rates.32 The IMF believed that these steps would restore confidence in the economic systems of the region, punish insolvent companies, and protect falling currency values.
Results of IMF Actions The results of the Fund’s initiatives have been interpreted in varying ways. Even the IMF acknowledges that the “programs were initially less successful than hoped in restoring confidence in all three countries, with capital outflows
and
currency
depreciations continuing after the programs were introduced.” After much analysis, the Fund concluded that negative results were not caused directly by the programs, but through varying factors including the following: • Initial hesitations and policy reversals in program implementation, such as premature rollbacks of monetary tightening, together with political and electoral uncertainties that cast doubt on prospective policies; • The overwhelming imbalances between reserves and maturing short-term debt. In Korea and Thailand, investors became even more acutely aware of this as information on the level of usable reserves was revealed in connection with the Fund-supported programs; and • Uncertainties over the official financing packages; in particular, the “second lines of defense” for Korea and Indonesia, announced at the outset of their programs, were not disbursed.33
32
ibid “Initial Outcomes and Assessment of the IMF-Supported Programs,” Recovery From the Asian Crisis and the Role of the IMF, http://www.imf.org/external/np/exr/ib/2000/062300.htm#V (accessed February 1, 2006)
33
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Critics of the IMF’s role in the Asian Financial Crisis not only blame structural adjustment programs as exacerbating the problem but also the “over-generous lending from financial institutions in advanced countries,”34 particularly the IMF. The IMF has been blamed for imposing incentives for banks to take on too much risk, including foreign exchange rate risk. Such risks were some of the greatest causes for the Asian Financial Crisis, as it was not a broad sector decline, but more of a currency exchange failure. Chung Hoon Lee, president of Korea America Economic Association, said, “These bankers took the opportunity to make very risky, profitable loans, knowing that if the loans went bad, the IMF… would bail them out.”35 The structural programs also generated much criticism among economists and government officials alike. Critics see the IMF as relying too heavily on raising interest rates instead of trying to enable nations to pay off debts in the first place. In this way, the IMF’s policies can be seen as contributing to the weakening of the currency instead of the strengthening of the economy, since raising interest rates can hurt the economy and increase the risk of defaulting on loans.36 That said, the goal of raising interest rates is to reign in inflation so as to avoid a failure of currency exchange stability. Imposing IMF-standard austerity programs on nations dealing with a quickly mounting economic crisis is also seen by some as an unwise move. These factors, combined with the IMF-ordered removal of price controls led to sudden rises of food and fuel prices, exacerbating economic hardship and causing avoidable malnutrition and suffering.37 Potentially as troubling was the IMF’s stance on the crisis, as then Managing Director Michel Camdessus repeatedly referred to the crisis as a “blessing in disguise.” He reasoned that the crisis would enable the Fund to curb government intervention in the economy, and it would give the Fund greater control over the economies of involved nations through the use of conditionalities.38
34
Bong-Chan Kho and Rene M. Stulz, “Banks, The IMF, and The Asian Crisis”, National Bureau of Economic Resarch, http://www.nber.org/papers/W7361.pdf (accessed February 2, 2006) 35 Louis Uchitelle, “Economists blame short-term loans for Asian crisis” New York Times, January 8, 1999 36 “ACID WORDS FOR THE IMF “, Business Week, April 24, 2004, Issue 3678 37 “AUSTERITY ISN’T WORKING IN ASIA,” Business Week, Issue 3591, August 17,1998 38 Robert Weissman, “IMF on the Run,” Multinational Monitor, April 2000, Vol 21, Issue 4, accessed via Academic search premier, http://web32.epnet.com/
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The challenge of the IMF regards its true goals. On the one hand, the IMF is positioned as a benevolent provider of financial support to assist states in times of economic crisis. They have a wealth of information regarding how economies work, especially in different situations. So, on the one hand, the IMF is almost and economic consultant working to assist states has they establish proper economic strategies. On the other hand, the IMF is a fully-functioning bank, reliant upon profit to be able to loan more money to more states. Globally, the economic crisis of 1997 is known as the East Asian Financial Crisis or the Asian Financial crisis. However, in the region affected by the economic downturn, the events of 1997 are known as the IMF Crisis. In East Asia, there is growing resentment against both the IMF and the empirically detrimental effects of the structural adjustment programs imposed on many nations. Moreover, the initial over-investment of international financial institutions like the IMF is seen as a central cause of the crisis since it caused artificial increases in capital. The IMF is thus considered even more accountable which leads to intensified hostility toward the Fund. Regardless of what name the crisis is given, the role of the IMF in instigating and possibly prolonging the crisis is still widely debated today.
Case Study Two: Argentina Argentina joined the IMF in 1956 and has borrowed money from the IMF thirty-nine out of the sixty years since it has been a member.39
After seventy years of political
upheavals and economic uncertainty, Argentina’s economic recession led to one of the greatest national depressions of the 21st Century.
Beginning in 1971, Argentina was
overwhelmed with high inflation rates and growing public debt. Military juntas led to a series of ineffective presidents and political instability, and severe mismanagement of government funds caused the need for external economic intervention. Argentina continued to worsen economically, despite loans from other states as well as from the IMF and other lending institutions. Since 1983, Argentina has been granted nine bailouts and extensions of 39
L. Jacobo Rodriguez, “Argentina’s Addiction to IMF Money,” The Cato Institute, January 27 2001, http://www.cato.org/pub_display.php?pub_id=4387&print=Y (accessed April 25, 2006)
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IMF loans to seemingly no avail.40 Economists are still puzzled as to what exactly caused this crisis, but four likely culprits helped to spin Argentina’s economy out of control: political instability, improper management of government funds, dependence upon foreign and IMF loans, and Argentina’s convertibility plan. The convertibility plan was flawed in that it overvalued the Argentine Peso by pegging it to the Dollar at an unnaturally high rate.41
Import Substitution Industrialization Argentina also undertook a strategy oft-used by developing economies, especially those in Latin America.
As the state emerged from periods of political upheaval, its
economy was laden with infant industries unable to compete in the global market. Argentinean goods were priced above the equilibrium price set by the market, and therefore made them less attractive. When industries are not competitive, they are often forced to either radically change their operating model to become competitive, or to move out of that industry.
The Argentinean government recognized an opportunity to protect what it
considered to be infant industries by enacting significant trade barriers, thereby dramatically increasing the prices of imported goods, essentially closing off Argentina from the world market in terms of imports. The state then invested considerable sums of money building and improving industries so that they could better compete on the open market. In essence, Argentina solved its balance of trade problem by stopping most imports, and by relying on a faltering export base. This process, known as Import
Substitution
Industrialization, works well in theory, but in practice has seldom been
successful.
Argentina
became an industrialized nation,
Import Substitution Industrialization: Import substitution industrialization also called ISI is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes. This usually involves government subsidies and high tariff barriers to protect local industries and hence import substitution policies are not favored by advocates of absolute free trade. Source: en.wikipedia.org/wiki/Import_substitution_industrialization
but at government, and not investor, expense. Moreover, instead of importing goods at 40
Ana I. Eiras and Brett D. Schaefer, “Argentina’s Economic Crisis: An ‘Absence of Capitalism’,” The Heritage Foundation, April 19 2001, http://www.heritage.org/Research/LatinAmerica/BG1432ES.cfm (accessed April 2, 2006) 41 Jim Saxton, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee of United States Congress, June 2003, http://www.agendaestrategica.com.ar/Argentina-long-jun03.pdf (accessed April 3, 2006)
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relatively cheap prices, the economy favored domestic suppliers at considerably higher prices, meaning that while exports were now significantly higher than imports, there was virtually no wealth being created. Since Argentina’s industry was not as efficient as its foreign competitors, while the money to purchase domestically produced goods remained in the local economy, the cost of those goods was considerably higher than foreign imports, meaning that wealth was being lost in the system instead of being reinvested.
The
government took out considerable loans at high interest rates to fund its industrial development, only to lack the funds necessary to repay these loans over time, and the value of exports was not nearly enough to support this government intervention.
When this
economic policy was replaced by open markets, economic collapse was almost unavoidable. When tariff barriers were lowered, imports streamed into Argentina, undermining the price of Argentinean goods.
The newly industrialized economy also suffered from an
improperly valued currency, meaning that the value of the Peso was actually less than it was believed to be, making the purchase of goods considerably more expensive, and successive loans flooded the market with Pesos, further devaluing the currency. The result was an economy that could only work with severe protectionist policies, a currency not nearly worth its implied value, and a reliance on domestic production when imports were considerably cheaper.
This combination of factors, combined with the state of the Latin American
economy caused considerable economic difficulty for Argentina.
The Convertibility Plan: Pegging the Peso to the Dollar In 1991, Argentina passed a currency board system called the convertibility plan, calling for the Argentinean Peso to be pegged to the United States Dollar at a one to one ratio.
Similar to Taiwan, Argentina passed legislation saying that for every Peso in
circulation there was to be a Dollar in government reserves. To Argentineans, the one to one ratio meant that the Peso was as good as a Dollar.42 In actuality, the Peso was being overvalued because the increasing false success of the Argentine economy ignored the growing internal and external debt. 42
The reason the
Domingo F. Cavallo and Joaquin A. Cottani, “Argentina’s Convertibility Plan and the IMF,” The American Economic Review, 1997, accessed via JSTOR, http://www.jstor.org
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“success” of the Argentine economy was not valid was because much of the capital gains made by Argentina in the 1990s was due to the influx of foreign monies loaned to them by external creditors like the IMF.
The growing debt that was ignored by the Argentine
government was due to widespread tax evasion by citizens, out of control government spending, and corruption in the government.43 The pegging of the Peso to the Dollar combined with Argentina’s trade policy and falling confidence from foreign investors also led to an increasing imbalance of trade. In general, states try to export more than they import, as that means more money is coming into the state than is leaving it. At worst, they try to have balanced trade – should the value of imports exceed exports, then the difference must be made up through loans and other costly borrowing programs. Argentina imports far more than exports due to the farming resources of the surrounding countries, like Brazil, and the economic and manufacturing dominance of areas like Europe. Argentina’s trade policy alone dooms the state to a trade deficit.44 Trade deficits are not necessarily unmanageable. The United States, for instance, has a substantial trade deficit and is widely considered to be one of the most economically successful
Trade Deficit: an excess of imports over exports
nations in the world. However, this stability is due
Source: wordnet.princeton.edu/perl/webwn
to the United States’ ability to sustain its trade deficit, mostly thanks to confidence from foreign investors willing to loan the United States money in order to equalize these trade imbalances. These investors also continue to buy United States currency to keep it strong. At first, foreign investors were willing to invest in Argentina as long as they had IMF backing, because IMF loans were seen as a safeguard against an unstable investment. Over time, the mounting trade deficit in conjunction with the overvaluing of the Peso only exacerbated Argentine debts. Foreign investors began to lose confidence in Argentina, and in many cases, withheld any investment from the risky economy.45
43
Martin Feldstein, “Argentina’s Fall: Lessons from the Latest financial Crisis,” Foreign Affairs, March/April 2002, pp 8 - 13 44 Rodriguez, “Argentina’s Addiction to IMF Money” 45 Joseph Stiglitz, “Argentina, Shortchanged,” The Washington Post, May 12 2001, http://www.globalpolicy.org/socecon/bwi-wto/imf/2002/0512shortchange.htm (accessed April 25, 2006)
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In the mid-1990s, both domestic
and
foreign
investors began to convert Pesos
to
Dollars
after
recognizing the fragility of the Argentine economy.
The
increase in the strength of the Dollar
in
1995
also
contributed to the widespread currency conversion as the relative value of the Peso began to drop considerably. In an effort to curb the collapse of the currency, the government sharply increased interest rates, forcing the economy into recession. Meanwhile, foreign creditors like the IMF poured money into Argentina in an effort to keep the state’s economy under control, causing Argentina to fall farther into debt. Growing economic instability in the region caused concern in the international community, for good reason.46
Impact of Currency Devaluation In 1999, after years of recession, a harsh blow to the Argentine economy came from an external source. The Brazilian currency, the Real, fell sharply as a result of ongoing economic instability in that country. Comparable to how the devaluation of the Thai Baht led to increased competitiveness in global markets due to considerable drops in prices, the economy of Argentina was greatly threatened by the devaluation of the Real. An additional similarity to the crisis in East Asia was how the devaluation of the Baht sparked widespread devaluation of currency in Asia in order to keep markets competitive.
Loss of Investor Confidence The worsening situation in Argentina led to a loss of confidence from investors who were selling the Peso in tremendous amounts on the world currency market causing a glut. 46
“A Victory by Default?” The Economist, March 3 2005, http://www.economist.com/business/displayStory.cfm?story_id=3715779 (accessed April 1, 2006)
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From a simple supply and demand aspect, one can understand the impact this had on the relative value of the Argentine currency. The overwhelming supply of the Peso on the world market outstripped demand, therefore significantly decreasing the value of the currency. In 2001, Argentineans began withdrawing large sums of money from their bank accounts for fear of economic collapse. Banks, Money Multiplier: There are several ways that a government, in coordination with the country’s commercial banks, can increase or decrease the money supply of a country. If a country follows a fractional-reserve banking regime, as virtually all countries do, not all of the money in circulation needs to be backed by other currencies, physical assets such as gold, or government assets. Instead, the country’s currency is backed by the economic potential of the country. Source: en.wikipedia.org/wiki/Money_multiplier
as a matter of course, loan deposits to other customers causing what is defined as a money multiplier. This money is often then deposited in other banks, and loaned again.
As this
process continues, money is created that does not truly exist – if one were to add the value of all the deposits and loans, it would be considerably more than the amount of money
that was initially deposited. As a result, banks do not have money on hand in the value of all of the deposits held by the bank – in fact, they are only required to maintain a “reserve ratio,” which is typically around 20 per cent in developed states. The result is that banks do not have nearly enough cash on hand to be able to give money to everyone with deposits. The In an effort to stop the massive cash-flight of currency from Argentina, the government passed a
number
of
measures
that
caused
bank
Argentineans were prevented from withdrawing
Required Reserve Ratio: The proportion of deposits a depository institution is legally required to hold in the form of reserves.
money from their own bank accounts. What little
Source: www.crfonline.org/orc/glossary/r.html
transactions to come to a virtual halt, and
transactions were allowed were for meager sums of money.
These measures only exacerbated recession, as the purchasing power of
Argentineans was effectively stripped by these measures. The inability to withdraw their own money caused Argentineans to take to the streets, protesting and rioting against government actions.47
47
Feldstein, 16
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Effects of Floating the Peso and IMF’s Response Argentina faced a recession, high unemployment, a state of emergency, a severe imbalance of trade, and insurmountable debt both internal and external. In 2002, after defaulting on close to USD $100 million in debt, the government of Argentina finally decided to abandon the Convertibility Plan and unpegged the Argentinean currency, allowing it to float. The ensuing situation in Argentina is easily compared to that of the situation in Asia during the East Asian Financial Crisis. The Peso was now valued far less than the Dollar, causing many people and businesses to go bankrupt, largely because of loans taken out in Dollars when the value of the Peso and Dollar were the same. Now, when they tried to repay their debts, they would have to convert Pesos to Dollars. The much lower exchange rate means that the value of the debt was considerably higher than it had been when the loans were initially taken out. The ensuing crash led to an eleven per cent decline in Argentine output in 2002. Meanwhile, unemployment was increasing and the state went through political upheaval as people were frustrated with the leadership and took out their anxiety on their elected officials. Chaos was rampant in a country that the IMF had once hailed as a model of free-market reform and development.48 Throughout the crisis, the IMF remained in constant interaction with the Argentinean government. In addition to loaning Argentina money, the IMF also suggested austerity programs in an effort to cut back on excessive government spending. Unfortunately, many of the austerity programs backfired, leaving Argentina in worse economic shape than prior to implementation. In 1999, the Argentine Congress passed, at the urging of the IMF, a fiscal responsibility law, calling increases in personal income and wealth taxes and renewed efforts to increase tax compliance.49 Unsurprisingly, the response of the Argentinean elite and companies alike was to evade taxes or to leave the country, both of which exacerbated the already difficult situation.
IMF regulations and adherence to Structural Adjustment
Programs caused Argentina to have one of the most regulated labor markets in the world. Excessive rules and regulations make it difficult and costly for employers to dismiss workers, 48
Paul Blustein, “IMF Says Its Policies Crippled Argentina Internal Audit Finds Warnings Were Ignored,” The Washington Post, July 30 2004, page E01 49 Rodriguez, “Argentina’s Addiction to IMF Money”
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leading companies to abstain from hiring workers in the first place. Tight regulation of the labor market makes it nearly impossible for Argentine companies to react to rapidly changing conditions and new opportunities in the world economy, further hindering the Argentinean economy.50 J. Onno de Beaufort Wijinholds, a member of the IMF Executive Board from 1994 to 2000, accuses the IMF of focusing only on the budget deficit as opposed to the government as a whole, especially problematic in a government notorious for overspending and mismanagement of funds. Wihjinholds argues that IMF policies were the central cause of the unsustainable debt of Argentina, fueling unhealthy strategies by providing excessive levels of external funding which caused massive debt.51 Critics fault the IMF on four main points: the IMF did not adequately warn Argentina of the implications of its economic policy throughout the 1990s, the IMF forced Argentina to adopt its restrictive structural adjustment programs and implement austerity programs that only worsened Argentina’s economy, the IMF encouraged the crisis by continuing to loan Argentina money, and the IMF encouraged the fixed exchange rate instead of advising Argentina to gradually devalue its currency.
Current Status In 2003, newly-elected president Nestor Kirchner came into power, leading to widespread governmental changes. Aggressive tax collection initiatives were launched in addition to a new effort to curb frivolous government spending. Kirchner’s administration took advantage of the currency devaluation by using it to help even the balance of payments, and by slowing Argentina’s dependence on imported goods. Despite improvements made to the government, Argentina was still billions of Dollars in debt. Kirchner, convinced that the IMF was the cause of Argentina’s crisis, saw no reason to pay back the Fund. In 2003, tired of IMF programs and ever-
50 51
Ibid. J. Onno de Beaufort Wijinholds, “The Argentine Drama: A View from the IMF Board”
Nestor Kirchner
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increasing debt, Argentina made history by defaulting on a USD $2.9 billion payment to the IMF.52 Defaulting on the debt effectively ostracized Argentina from international financial markets and significantly lowered Argentina’s credit rating, as the company now represented a significant risk to investors. Even so, the Argentinean economy gradually improved thanks to Kirchner’s domestic programs and the new freedom from IMF-imposed austerity plans. The Argentinean government held its ground, refusing to pay the IMF, until a fair debt settlement was made. Finally, the IMF and the Argentinean government agreed to refinance seventy-six per cent of the debt, at lower rates and at longer repayment periods.
In
December 2005, Kirchner announced his plan to pay the last of the IMF debt, and the final payment of USD $9.81 million was delivered on 3 January 2006.53 In March 2006, Latin America states took another step away from the IMF and towards regional integration when Venezuelan President Hugo Chávez Frías announced that the Venezuelan government would be buying USD $307 million of Argentine bonds in an effort to “help Argentina end its dependence on the IMF.” This maneuver brought the total amount of bonds purchased by the Venezuelan government since December 2005 to USD $2.5 billion. The purchasing of bonds and the regional cooperation toward the stabilization of the Argentine economy is a step toward the Latin American goal of creating a Bank of the South to finance the region.54 In response to the situation in Argentina, in 2001 the IMF established a new internal auditing unit called the Independent Evaluation Office (IEO). The IEO “provides objective and independent evaluation on issues related to the IMF. The Office operates independently of IMF management and at arm’s length from the IMF’s Executive Board.”55 In 2004, the IEO found that the IMF’s handling of the crisis in Argentina almost certainly deepened the economic recession. The report issued by the IEO concluded that Argentina’s growing indebtedness was furthered by the IMF’s continual lending of money when the debt burden 52
“The Events that Triggered Argentina’s Crisis,” BBC World, December 21 2001, http://news.bbc.co.uk/1/hi/business/1721103.stm (accessed March 31, 2006) 53 Alan Cibilis, “Argentina’s IMF Agreement: The Dawn of a New Era?” Foreign Policy in Focus, October 10 2003, http://www.globalpolicy.org/socecon/bwi-wto/imf/2003/1010argentina.htm (accessed March 31,2006) 54 Oscar Serrat, “Venezuela to Buy More Argentine Bonds” Associated Press, March 07 2003, http://www.miami.com/mld/miamiherald/business/14034293.htm (accessed April 24, 2006) 55 “Independent Evaluation Office (IEO) of the IMF,” IMF, http://www.imf.org/np/ieo/gai.htm (accessed April 20,2006)
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had become unsustainable. This meant that the Fund significantly contributed to one of the most devastating financial crises in history.
Even though the IEO’s report is valuable
internal criticism of the IMF, it does not lend credit to critic’s accusations that austerity policies caused much of the economic recession. Instead, the report argues that the IMF was actually too lenient in its policies. Isabelle Mateos y Lago, an economist from the IMF’s Independent Evaluation Office, said on the crisis, “It would have been an ugly crisis anyway, but perhaps not quite as bad if the fund had supported a change in strategy earlier.”56
Reasons for Criticism The IMF is widely criticized for its policies and methods; however, much of the condemnation often ignores the deeply entrenched domestic problems in indebted nations such as corruption or government mismanagement. There are numerous examples of wasted IMF funds at the hands of the governments receiving them. A notable instance is Cambodia, whose USD $81.6 million loan program was revived in 1999 after a period of suspension. Armed factional fighting in Phnom Penh underlined government mismanagement concerning the illegal logging industry, collecting and generating funds for the national budget, and in the wider political arena as well.57 Nigeria is another prime example of government mismanagement.
Nigeria has
generated more than USD $350 billion in oil revenues since 1965, but since 1970, the number of Nigerians surviving on wages of under a Dollar a day has risen from thirty-six per cent to seventy per cent.
An IMF working paper exposed the Nigerian’s government
extreme mismanagement of oil revenues, calculating that if oil funds were managed correctly, there would approximately be USD $750 per Nigerian adult, meaning that real wages would have increased considerably. According to the IMF working paper, oil profitdriven government misconduct has had a ripple effect on all aspects of the Nigerian government. The imprudent use of government funds led to increased corruption, unwise
56
Blustein, “IMF Says Its Policies Crippled Argentina Internal Audit Finds Warnings Were Ignored,” “IMF Resumes Loans to Cambodia,” Asian Economic News, November 1 1999, http://www.findarticles.com/p/articles/mi_m0WDP/is_1999_Nov_1/ai_57432393 (accessed March 30,2006)
57
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expenditures on costly and unprofitable projects, and a budget vulnerable to price volatility, and overvalued currency.58 In 1997, the Office of the United Nations High Commission on Human Rights (UNHCHR) called for an independent study on the lending practices of the IMF in order to properly address the effects of structural adjustment policies on human rights.59 In exploring the causes behind the need for structural adjustment programs and IMF intervention, the report asserted the following: The primary responsibility for prudent debt management and for responsible use of external financial resources rests with national Governments. However, many developing country Governments have often proved faithless to their responsibility to further development by and for their people. Many have completely mismanaged their economies. Many have let loose their predatory instincts and indulged in corruption, abuse of office and repression. Ill-conceived projects and programmes, fiscal imprudence, corruption and permitting capital flight have subsequently increased many countries’ external debt burden and substantially reduced the economic base available to service it.60
In addition to widespread government mismanagement and wasteful use of IMF loans, criticism often arises because the IMF’s supposed blunders are much more noticeable than the everyday successful impact an IMF loan has on a state. The IMF usually lends money during times of balance of payment disparities in order to avoid financial crisis. This means that success of IMF structural adjustment programs is not easily evident considering their goal is to maintain the status quo. The many successes are certainly not as visible as alleged IMF failures, such as the aforementioned East Asian Financial Crisis.
IMF Successes Brazil In 2005, Brazil announced it would be repaying the entirety of an IMF loan, totaling USD $15 billion by the end of that year. The repayment was originally set to conclude in 2008, but because of the economic turnaround in Brazil, Finance Minister Antonio Palocci said Brazil would repay the loan early. Brazil repaid its debt to the Fund from its reserves, 58
“Nigeria should give oil wealth to people-IMF paper,” Reuters, August 01, 2003, http://www.forbes.com/work/newswire/2003/08/01/rtr1046043.html (accessed March 30, 2006) 59 Fantu Cheru, “Effects of structural adjustment policies on the full enjoyment of human rights,” Economic and Social Council, February 24 1999, http://www.unhchr.ch/Huridocda/Huridoca.nsf/0811fcbd0b9f6bd58025667300306dea/f991c6c62457a28580256751 00348aef?OpenDocument#C_1 (accessed April 2, 2006) 60 ibid
Rutgers Model United Nations 2006 Debt Service: Repayments of principal and interest. The debt service ratio is a measure of a country's debt burden and it expresses debt service as a percentage of total export revenues or GDP. Source: highered.mcgraw-hill.com/sites/ 0072487488/student_view0/glossary.html
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which had grown to USD $66.7 billion from USD $15 billion two years prior. According to Palocci, paying off the debt early was expected to save Brazil USD $900 million in debt service.61 IMF Managing Director Rodrigo Rato praised Brazil’s economic policy record:
This decision reflects the growing strength of Brazil’s external position, especially continuing substantial trade and current account surpluses and strong capital inflows that have greatly boosted reserves and reduced external debt.62
However, like many other IMF “successes,” Brazil’s freedom from IMF debt came largely as a result of IMF initiatives seen as detrimental to Brazil’s economy. Briefly mentioned in the Argentina case study, the Brazilian Real fell sharply in 1999. Like Argentina, Brazil was plagued by a tradition of wasteful and irresponsible government spending, and reliance on import substitution industrialization, exacerbated by the country’s loose federal structure, allowing provincial authorities to add their share to the growing budget deficit.63 Hyperinflation was the only way to finance the fiscal irresponsibility of the Brazilian government. In 1993, after pegging the devalued Real to the United States Dollar in an effort to establish the Real as a currency pillar in South America, prices began to drop for imported and tradable goods. Brazil enjoyed a period of stability until the late 1990s.64 In response to the East Asian Financial Crisis, Brazil was forced to defend its currency by spending billions from its foreign reserves in 1998, causing both foreign and domestic investors to become nervous. The increasingly politically unstable climate in Brazil was also cause for concern. When the Russian economy collapsed later that year, immediate repercussions were felt by Brazil, a nation that heavily relied on investing in foreign currency, including the Russian Ruble. Investors began converting their money into
61
“Brazil to Pay Off IMF Debts Early,” http://news.bbc.co.uk/2/hi/business/4527438.stm (accessed February 6, 2005) 62 ibid 63 “The Economy In Brazil: A Disaster in the Making?” BBC News, January 22 1999, http://news.bbc.co.uk/1/hi/business/the_economy/260777.stm (accessed April 23, 2006) 64 Ibid
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United States Dollars, and billions of Dollars left Brazil, causing a significant increase in interest rates. As Brazil’s budget deficit approached seven per cent of its gross domestic product, the IMF coordinated a USD $41 billion loan which would gradually be disbursed if Brazil met its targets, including the further implementation of austerity programs already laid out by the IMF but largely neglected by the frivolous spending of the Brazilian government. At the same time, the governor of the Brazilian central bank resigned, and his successor called for the devaluation Real. Moderate devaluations produced no significant results and growing inflation and mounting debt battered the Brazilian economy, causing the Real to finally be unpegged and allowed to float in 1999.65 Debts generated because of fiscal irresponsibility and unwise economic practices prior to the flotation of the Real led to inevitable IMF intervention. The IMF was also compelled to act because of the sharp devaluation of currency caused by Brazilian debt. Critics say the IMF’s strategy of government austerity and propping up overvalued currencies actually deepens the economic plight of troubled countries. The Fund is blamed for causing unnecessary suffering amongst the poor and weakening the political leadership of the states it seeks to serve.66 The ever present distrust toward the IMF and the billions owed due to inadequate policy advice was the impetus for the Brazilian government to make debt repayment one if its primary goals. As a result, Brazil has made a concerted effort to free itself of IMF loans, paying back the last of its debt in December 2005.67
Iraq The IMF approved a USD $685 million loan to Iraq over a fifteen month period in an effort to help rebuild the war-ravaged economy. The agreement is regarded as a crucial step to help Iraq borrow money from foreign investors, as an agreement from the IMF implies an establishment of verifiable credit. The IMF’s decision has influenced other creditors into helping Iraq such as the wealthy Paris Club, an informal group of financial officials from 65
Ibid “The Last Stand” PBS Online News Hour, November 28 1998, http://www.pbs.org/newshour/forum/november98/imf_brazil.html (accessed April 26, 2006) 67 “Brazil to Pay Off IMF Debts Early” 66
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nineteen of the world’s richest countries.68 After the IMF’s seal of approval, the Paris Club implemented its own proposed 80 per cent reduction in the USD $38.9 billion debt owed to them by Iraq.69 Without the backing of the IMF, Iraqi officials would not have the resources necessary to get itself free from seemingly unending debt, built up during the Saddam Hussein regime.
Debt Cancellation for Developing Nations The IMF has recently been making headlines due to successful initiatives. Developing nations take loans from the IMF in order to improve their economic situations, and the IMF gives the nations the loans with the intent of bettering economies. However, attached to these loans are high interest rates that have the potential to exacerbate the debt of a developing nation. Developing states struggle to pay off the debts as well as the interest; often indebted nations are forced to spend economic surplus that could be used for infrastructural improvement on paying off loans.
This vicious cycle often keeps
economically weak nations with fragile infrastructures in debt. As a result of the rapidly growing gap between industrialized and developing states, NGOs such as Jubilee: Drop the Debt and some developed states have been campaigning for lending institutions like the IMF and the World Bank to write-off the debts of heavilyindebted states. It is highly unlikely that such highly indebted states will have the capability of repaying their creditors due to high debt loads and similarly high interest rates. After much pressure from NGOs and member nations, on 21 December 2005, the IMF agreed to cancel the debts of nineteen of the twenty most impoverished nations in the world. Mauritius, the only nation without debt relief, will be considered for debt cancellation once it makes “satisfactory progress in a few policy areas.”70 The debt forgiveness has garnered
68
“Description of the Paris Club”, Paris Club, http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B01WP01 (accessed April 20, 2006) 69 “IMF approves $685m Loan for Iraq,” http://news.bbc.co.uk/2/hi/business/4557032.stm (accessed February 6, 2006) 70 “IMF Backs Poverty Death Write-Off,” http://news.bbc.co.uk/2/hi/business/4550778.stm (accessed February 3, 2005)
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praise from even the IMF’s staunchest critics as the cancellation of debt is considered to be a key element in the goal to eliminate poverty throughout the world.71
HIPC and MDRI Initiatives In 1996, The IMF decided to take expand opportunities for aid for what it considered the poorest nations in the world. The Highly Indebted Poor Countries (HIPC) initiative, introduced in 1996 by both the IMF and the World Bank, was the first debt relief measure to relieve multilateral support. The IMF aimed not only to cancel debt between HIPC nations and itself, but also debt between HIPC nations and other international lenders like the Paris Club and the World Bank. HIPC initiatives also aided in the relief of bilateral debt, which is money owed by one state to another. The goal of the IMF was to ensure that “no poor country faces a debt burden it cannot manage.”72 The HIPC program is structured in a three step system aimed at preventing government mismanagement of funds and ensuring the absolute adherence to IMF policies. The process begins with an evaluative period where experts from both the World Bank and the IMF evaluate the progress of a heavily indebted state. At this point, the IMF and World Bank will formally recognize a state as qualifying for the initiative, provided that the state was deemed to be making sufficient progress during the evaluative period by adhering to IMF policies. Once formally recognized, it immediately moves into the second step of interim relief where part of their debt is cancelled. In order to receive the maximum amount of debt relief the HIPC promises, the country must continue to establish a good track record of IMF compliance as well as carrying out measures and meeting goals agreed to at the decision point. After a period of time, a state will reach the final step, when lenders are expected to provide the full relief committed at the decision point.73 Of course, as groundbreaking as the HIPC initiative is, it is not without criticism. Much of the disapproval regarding the HIPC is due to the misunderstanding of the purpose of 71
“IMF Discuss Debt Relief for 20 Countries,” BBC News, http://www.bbc.co.uk/worldservice/learningenglish/newsenglish/witn/2005/12/051223_imf_debt_mtg.shtml (accessed February 3, 2005) 72 “Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative,” IMF, http://www.imf.org/external/np/exr/facts/hipc.htm (accessed March 31, 2006) 73 ibid
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the initiative. The HIPC initiative was not intended to be an all-encompassing panacea to third world debt. Instead, the HIPC is an effort to provide short term debt relief, allowing countries to use all available resources for building infrastructure, for strengthening fledging markets, and for stabilizing their economies. Critics see the HIPC as a reward for states with shoddy money management skills and government corruption, ensuring debt relief for any state that manages to spend itself into absolute poverty. However, critics fail to recognize the rigorous and highly interactive evaluation periods that are in place to prevent states from taking advantage of the program. In order to quell some of the criticism against the HIPC initiative, the IMF and World Bank have worked together to create the Multilateral Debt Relief Initiative (MDRI). In June 2005, the G-8 nations proposed that the IMF, the International Development Association of the World Bank, and the African Development fund cancel 100 per cent of debts to HIPC nations that have reached the final stage of the HIPC initiative. The
Members of the Group of Eight Industrialized Nations (G-8): Canada China France Germany Japan Russian Federation United Kingdom United States
MDRI initiative was the impetus for the widespread debt cancellation in December 2005, when the IMF forgave the debts of twenty countries.74
International Opinion Despite the negative portrayal that many critics and NGOs depict of the IMF, the overall global opinion of the Fund is solidly positive. In a survey conducted by Princeton Research Associates, the majority of people polled from each world region believe that the IMF has a “somewhat good”
74
“The Multilateral Debt Relief Initiative,” IMF, http://www.imf.org/external/np/exr/facts/mdri.htm (accessed April 1, 2006)
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or “very good” influence in his or her own country.75 A separate poll of 37,572 respondents conducted for the BBC World Service had similar results. Results showed that forty-seven per cent of those polled considered the IMF to have a positive influence, as opposed to the twenty-one per cent of those polls who see the IMF as having a negative influence. Interestingly, African states that rely heaviest on IMF support polled most strongly in favor of the IMF, with Kenya at seventy-three per cent approval and both Nigeria and Senegal at sixty-seven per cent approval. Developed nations in Asia and Europe are more muted in their support. The United States has only a thirtyseven per cent approval of the IMF as opposed to a twenty-six per cent disapproval rating. The only two countries in which a majority views the IMF in a negative manner are Argentina, sixty per cent, and Brazil at fifty-seven per cent. Both nations have recently paid off their loans from the IMF. Positive views rise slightly with education (but not income) and decline with age.76 Polls show that those affected by IMF loans are typically in support of the work of the institution. Developed nations that monetarily support the IMF are more inclined to be disapproving of the Fund. Overall, the opinion of the IMF is positive, and polls show that the global community recognizes the IMF’s role in maintaining economic stability by preventing and fixing dire economic situations around the world.
75
“The Global Poll: Multinational Survey of Opinion Leaders 2002”, Princeton Survey Research Associates, May 2003, http://siteresources.worldbank.org/NEWS/Resources/globalpoll.pdf (accessed April 1, 2006) 76 Ibid
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Summary The impact the IMF has had on the global economy through history is undeniable. While the current task of crisis prevention through the implementation of structural adjustment programs is starkly different from the original task of regulating currency, the power and influence of the IMF has only increased over time. Implementing austerity programs and structural adjustment programs has had a profound impact on economies around the world, though whether the impact is positive or negative is highly subjective. There are many areas where the IMF must improve, and it must find a way to keep governments more accountable for their spending. Many cases of external debt come as a result of corrupt governments and money mismanagement.
The IMF has made some
progress with the MDRI and HIPC initiatives with the evaluation periods and strict conditions for loans; however, criticism of the Fund’s lending policies remain, suggesting that the policies only encourage government mismanagement. At the same time, better surveillance over economically unstable areas is needed in order to prevent crises like the East Asian Financial Crisis and the Argentinean economic crisis. Much of the IMF’s criticism comes as a result of people blaming the IMF for not foreseeing major financial crises like those in Asia and South America. Critics believe that the IMF should have given the appropriate policy advice in terms of currency pegging in order to prevent these massive crises. Even recognizing the Fund’s shortcomings, one must understand that the IMF, while a powerful economic institution with an in-depth knowledge of global economies, cannot be clairvoyant and is not able to foresee every impending economic issue that faces the world. Arguably, without the IMF’s presence in today’s world, the prevalence of economic crises would be much higher. With the debt of twenty HIPC nations on the verge of full cancellation, the IMF has made great strides towards eradicating third world debt.
The IMF must continue to assist
impoverished, indebted states in order to improve the global economy as a whole. While the questionable repercussions of the Fund’s initiatives are what generate the most publicity, the most important aspect of the IMF is that it serves a pillar of globalization, industrialization, and capitalism throughout the world.
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Discussion Questions • What is the importance of currency exchange stability and currency devaluation? How did both contribute to the East Asian Financial Crisis and the Argentinean economic crisis? • What is the IMF’s main source of political clout? What kinds of programs does the IMF implement with this power? • What are some of the criticisms of the IMF’s policies? Is the IMF at fault, or do the problems relate more to the manner in which states manage their money? • How do the IMF’s purpose and goals differ from that of the World Bank? How do the purpose and goals differ from its original purpose as laid out by the Bretton Woods Conference? • What was the impact of the United States’ decision to stop using the gold standard? How did the United States’ decision affect other nations? The IMF? • How could the IMF be more effective? What reforms would you suggest? Why? • What is your opinion on the HIPC and MDRI initiatives? Are the effective, or are HIPCs doomed to repeat the same cycle of debt? • Is the proportional voting system of the IMF a fair and effective one? If not, how would you propose to change it? • Why are there so many critics of the IMF when the majority of people in indebted nations consider the IMF a positive influence? Why do more people in industrialized, economically strong nations disapprove of the IMF? • Why do some nations choose to peg their currency to a stronger, more stable currency? What are some possible effects of a pegged currency (think of examples given about China and Argentina).
• How has the IMF encouraged liberalized trade and free markets? Has the IMF made a positive impact on global trade? • Would you agree or disagree to the statement, “The IMF is necessary to today’s global economy?” If you agree, what is your response to the copious amounts of criticism towards the IMF? If you disagree, why?
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Appendix: IMF Executive Directors and Voting Power77 The Executive Board (the Board) is responsible for conducting the day-to-day business of the IMF. It is composed of 24 Directors, who are appointed or elected by member countries or by groups of countries, and the Managing Director, who serves as its Chairman. The Board usually meets several times each week. It carries out its work largely on the basis of papers prepared by IMF management and staff. Last updated March 06, 2006 Director
Casting Votes of
Alternate
Votes
Total
Percent
By Country
Votes 1
of Fund Total2
Appointed Nancy P. Jacklin
United States
371,743
371,743
17.08
Japan
133,378
133,378
6.13
Germany
130,332
130,332
5.99
France
107,635
107,635
4.95
United Kingdom
107,635
107,635
4.95
111,696
5.13
105,412
4.84
Meg Lundsager Shigeo Kashiwagi Michio Kitahara Karlheinz Bischofberger Gert Meissner Pierre Duquesne Olivier Cuny Tom Scholar Andrew Hauser Elected Willy Kiekens (Belgium)
Austria
Johann Prader (Austria)
Belarus
4,114
Belgium
46,302
Czech Republic Hungary
18,973
8,443 10,634
Kazakhstan
3,907
Luxembourg
3,041
Slovak Republic
3,825
Slovenia
2,567
Turkey
9,890
Jeroen Kremers (Netherlands)
Armenia
1,170
Yuriy G. Yakusha (Ukraine)
Bosnia and Herzegovina
1,941
Bulgaria
6,652
Croatia
3,901
Cyprus
1,646
Georgia
1,753
Israel
9,532
Macedonia, former Yugoslav Republic of Moldova
77
939 1,482
Netherlands
51,874
Romania
10,552
Ukraine
13,970
“IMF Executive Directors and Voting Power�
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MoisĂŠs Schwartz (Mexico)
Costa Rica
1,891
Mary Dager (Venezuela)
El Salvador
1,963
Guatemala
2,352
Honduras
1,545
Mexico Nicaragua
30,739
Venezuela, RepĂşblica Bolivariana de
26,841
Albania
Miranda Xafa (Greece)
Greece Italy
Peter Charleton (Ireland)
1,550
Spain
Arrigo Sadun (Italy)
Vacant
26,108
1,270
San Marino
420
Timor-Leste
332
Antigua and Barbuda
385
Canada
332
Ireland
8,634
Jamaica
2,985
St. Kitts and Nevis
339
St. Lucia
403
St. Vincent and the Grenadines
333
Tuomas Saarenheimo (Finland)
Denmark
Jon Thorvardur Sigurgeirsson (Iceland)
Estonia
902
Finland
12,888 1,426
Latvia
1,518 1,692
Norway
16,967
Sweden
24,205
Jong Nam Oh (Korea)
Australia
32,614
Richard Murray (Australia)
Kiribati
306 16,586
Marshall Islands
285
Micronesia,
301
Federated States of
Palau
3.51
16,678
Iceland
New Zealand
76,276
438 63,942 367
Mongolia
3.71
925
Grenada
Korea
80,636
1,553
Dominica
Lithuania
4.18
70,805 8,924
Belize
90,968
737
Portugal
Bahamas, The
4.27
8,480
Malta
Barbados
92,989
761 9,196 281
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Papua New Guinea
1,566
Philippines
9,049
Samoa
366
Seychelles
338
Solomon Islands
354
Vanuatu
420
A. Shakour Shaalan (Egypt)
Bahrain
1,600
Samir El-Khouri (Lebanon)
Egypt
9,687
Iraq
1,955
Kuwait
14,061
Libya Arab Jamahiriya Maldives
Sulaiman M. Al-Turki (Saudi Arabia)
3.33
12,134
Jordan Lebanon
72,423
2,280 11,487 332
Oman
2,190
Qatar
2,888
Syrian Arab Republic
3,186
United Arab Emirates
6,367
Yemen, Republic of
2,685
70,852
3.26
70,105
70,105
3.22
69,019
3.17
Saudi Arabia
Abdallah S. Alazzaz (Saudi Arabia) Hooi Eng Phang (Malaysia)
Brunei Darussalam
2,402
Made Sukada (Indonesia)
Cambodia
1,125
Fiji Indonesia Lao People’s Democratic Republic
953 21,043 779
Malaysia
15,116
Myanmar
2,834
Nepal
963
Singapore
8,875
Thailand
11,069
Tonga
319
Vietnam
3,541
Peter J. Ngumbullu (Tanzania)
Angola
3,113
Peter Gakunu (Kenya)
Botswana Burundi Eritrea Ethiopia Gambia, The Kenya Lesotho Malawi Mozambique
880 1,020 409 1,587 561 2,964 599 944 1,386
Namibia
1,615
Nigeria
17,782
Rutgers Model United Nations 2006 Sierra Leone
1,287
South Africa
18,935
Sudan Swaziland Tanzania
WANG Xiaoyi (China)
45
1,947 757 2,239
Uganda
2,055
Zambia
5,141
65,221
3
63,942
63,942
2.94
China
GE Huayong (China) Fritz Zurbrügg (Switzerland)
Azerbaijan
1,859
Andrzej Raczko (Poland)
Kyrgyz Republic
1,138
Poland Serbia and Montenegro Switzerland
Aleksei V. Mozhin (Russian Federation)
13,940 4,927 34,835
Tajikistan
1,120
Turkmenistan
1,002
Uzbekistan
3,006
61,827
2.84
59,704
59,704
2.74
53,662
2.47
53,634
2.46
52,112
2.39
Russian Federation
Andrei Lushin (Russian Federation) Abbas Mirakhor (Islamic Republic of Iran)
Afghanistan, Islamic Republic of
Mohammed Daïri (Morocco)
Algeria Ghana Iran, Islamic Republic of
Eduardo Loyo (Brazil)
1,869 12,797 3,940 15,222
Morocco
6,132
Pakistan
10,587
Tunisia
3,115
Brazil
30,611
Roberto Steiner (Colombia) Colombia
7,990
Dominican Republic
2,439
Ecuador
3,273
Guyana
1,159
Haiti
1,069
Panama
2,316
Suriname
1,171
Trinidad and Tobago
3,606
B.P. Misra (India)
Bangladesh
5,583
Amal Uthum Heart (Sri Lanka)
Bhutan India
313 41,832
Sri Lanka
4,384
Héctor R. Torres (Argentina)
Argentina
21,421
Javier Silva-Ruete (Peru)
Bolivia
1,965
Rutgers Model United Nations 2006 Chile
8,811
Paraguay
1,249
Peru
6,634
Uruguay
3,315
Damian Ondo Mañe (Equatorial Guinea)
Benin
Laurean W. Rutayisire (Rwanda)
Burkina Faso Cameroon
346
Chad
810
1,096
Côte d’Ivoire
3,502
Guinea
1,321 392
Madagascar
1,472
Mali
1,183
Mauritius Niger Rwanda São Tomé and Príncipe Senegal Togo
99.976
576 1,793
Mauritania
2,175,3453 4 5
409
Gabon Guinea-Bissau
1.41
339 5,580
Congo, Republic of
Equatorial Guinea
30,749
852
807
Djibouti
1.99
2,107
Cape Verde
Congo, Democratic Republic of
43,395
869
Central African Republic Comoros
Total
46
894 1,266 908 1,051 324 1,868 984
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“IMF Discuss Debt Relief for 20 Countries,” BBC News, http://www.bbc.co.uk/worldservice/learningenglish/newsenglish/witn/2005/12/05 1223_imf_debt_mtg.shtml “IMF Executive Directors and Voting Power,” http://www.imf.org/external/np/sec/memdir/eds.htm “IMF Hails World Recovery,” BBC News, http://news.bbc.co.uk/1/hi/business/710963.stm “IMF Lending, 1950-1989”, www.imf.org “IMF Organization Chart,” http://www.imf.org/external/np/obp/orgcht.htm “IMF Resumes Loans to Cambodia,” Asian Economic News, November 1 1999, http://www.findarticles.com/p/articles/mi_m0WDP/is_1999_Nov_1/ai_57432393 “IMF Quotas”, IMF, http://www.imf.org/external/np/exr/facts/quotas.htm “Independent Evaluation Office (IEO) of the IMF,” IMF, http://www.imf.org/np/ieo/gai.htm “Initial Outcomes and Assessment of the IMF-Supported Programs,” Recovery From the Asian Crisis and the Role of the IMF, http://www.imf.org/external/np/exr/ib/2000/062300.htm# International Monetary Fund, “About the IMF,” International Monetary Fund, http://www.imf.org/external/about.htm Kahn, Joseph. “IMF’s Hand Often Heavy, A Study Says,” New York Times, October 21, 2000, Proquest Historical Newspapers, http://proquest.umi.com Kho, Bong-Chan and Stulz, Rene M. “Banks, The IMF, and The Asian Crisis”, National Bureau of Economic Resarch, http://www.nber.org/papers/W7361.pdf Radalet, Steven and Sachs, Jeffrey. “The Onset of the East Asian Financial Crisis”, Harvard Institute for International Development, http://pdf.dec.org/pdf_docs/PNACC340.pdf Rodriguez, L. Jacobo, “Argentina’s Addiction to IMF Money,” The Cato Institute, January 27 2001
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Saxton, Jim, “Argentina’s Economic Crisis: Causes and Cures,” Joint Economic Committee of United States Congress, June 2003 Serrat, Oscar, “Venezuela to Buy More Argentine Bonds” Associated Press, March 07 2003, http://www.miami.com/mld/miamiherald/business/14034293.htm Stiglitz, Joseph, “Argentina, Shortchanged,” The Washington Post, May 12 2001. “The Economy in Brazil: A Disaster in the Making?” BBC News, January 22 1999, http://news.bbc.co.uk/1/hi/business/the_economy/260777.stm “The Events that Triggered Argentina’s Crisis,” BBC World, December 21 2001, http://news.bbc.co.uk/1/hi/business/1721103.stm “The Global Poll: Multinational Survey of Opinion Leaders 2002”, Princeton Survey Research Associates, May 2003, http://siteresources.worldbank.org/NEWS/Resources/globalpoll.pdf “The IMF at A Glance,” International Monetary Fund, www.imf.org/external/np/exr/facts/glance.htm “The IMF and the European Economic Monetary Union,” March 1999, http://www.imf.org/external/np/exr/facts/emu.htm “The IMF-Supported Programs,” Recovery From the Asian Crisis and the Role of the IMF, http://www.imf.org/external/np/exr/ib/2000/062300.htm#III “The Last Stand” PBS Online News Hour, November 28 1998. “The Multilateral Debt Relief Initiative,” IMF, http://www.imf.org/external/np/exr/facts/mdri.htm Uchitelle, Louis. “Economists blame short-term loans for Asian crisis” New York Times, January 8, 1999 Weissman, Robert. “IMF on the Run,” Multinational Monitor, April 2000, Vol 21, Issue 4, accessed via Academic search premier, http://web32.epnet.com/ “Where the IMF Gets Its Money,” IMF, http://www.imf.org/external/np/exr/facts/finfac.htm