INTERNAITONAL MONETARY FUND

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ORIGINAL BRETTON WOODS SYSTEM

Late 1940s Concept to avoid economic problems of 1930s & WW II again Idea of three major institutions, International Monetary Fund (IMF), International Bank for Reconstruction & Development (World Bank), plus International Trade Organization (ITO failed in adoption, but Havana Charter and GATT, leading to WTO finally 1994) Economic concepts of fixed currency parities but low or no tariffs in relatively open economy was attempt to avoid 1930s policies andissues like Commonwealth Preference (economist claims that late New Order economy with monopolies, etc run like 1930s)

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BRETTON WOODS IN TRANSITION

Original IMF Role Originally, IMF was a special purpose lender for countries with balance of payment problems under older fixed rate currency exchange system Monitoring function only for countries in trouble under original system

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BRETTON WOODS IN TRANSITION

Once World Went to Floating Exchange Rates Matching General Economic & Currency Changes Tensions with US conduct of economy (deficit spending) 1960s-1970s with Vietnam War & Social spending led to loss of U$ & gold reference Exchange (floating) rates then subject to ups and downs following domestic policy even while concerns about costs of volatility Parallel effect of change is that currency crises themselves may now drive balance of payments problems and IMF has constant monitoring function in anticipation
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IMF BASICS-WASHINGTON CONSENSUS

Current Washington Consensus Created for Latin America in 1980s Structural Adjustment Approach under which Policy Reform Consists of 10 Elements (NB Washington Consensus means IFIs, not US government)

1) Eliminating fiscal deficits for stability purposes (but problem of limiting idea of Keynesian growth enhancement in stimulative spending)

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 2) Reviewing public expenditure priorities (increasing revenues versus decreasing expenses) a) Military spending sovereign prerogative, off table b) Subsidies strongly disfavored as distorting economy & expensive

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd)

2) Reviewing public expenditure priorities (increasing revenues versus decreasing expenses) c) Education & health spending viewed as proper, but issue of actual composition (investment versus consumption and helping disadvantaged d) Public infrastructure investment as productive

Concept of switching expenditures from subsidies to education & health or public infrastructure

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 3) Tax Reform Ultimately just reverse of cutting expenditures in raising revenues, but disfavored by politicians while favored by technocrats This is the revenue side of public expenditure priorities

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 4) Interest Rates a) market determined to avoid misallocation of funds bureaucratic credit rationing (efficiency hidden good) in

b) positive real interest rates to discourage capital flight and perhaps encourage savings

East Asian disagreement on picking industrial champions

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 5) Exchange Rates a) Concept of competitive exchange rate versus technical question of how determined (export competitiveness) b) Ambivalence on liberalization of foreign capital flows from developing country perspective (capital account)

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd)

6) Trade Policy
a) Import liberalization & outward oriented economic policy b) Disfavoring import substitution protection for developing domestic industry (costliness argument & who profits) c) Import licensing protection tariffs & corruption problems, so if

d) free trade idea subject to (temporary) infant industry issues, plus phase out versus big bang approach bringing costs
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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 7) Foreign Direct Investment a) Idea adding bricks & mortar capital good for real economy (current account-Prof Cathy Bonser-Neal lectures) b) distinguish it from liberalizing financial flows (capital account-Prof Cathy Bonser-Neal lectures)

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 8) Privatization a) Efficiency (hidden view markets better allocator than governments through State Owned Enterprises (SOEs or BUMNs in Indonesia) b) Market preference as change since 1950s, linked with competition ideals

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 9) Deregulation Idea ultimately is again deregulation for cheaper efficiencies competition through prices and greater

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IMF BASICS-WASHINGTON CONSENSUS

Washington Consensus (contd) 10)Property rights Concept of property rights ties into contracting & incentives, to make markets work

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IMF BASICS

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IMF BASICS
CURRENT IMF VIEW OF ITS ROLES 1) 2) Surveillance Technical Assistance

3)

Financing

All roles are essentially to help countries in macroeconomic economic difficulties, with practical pressure on conditionality concerning which more later legally plus at heart of letters of intent (LOIs)-- But newer pattern of financial sector difficulties as trigger for macroeconomic and exchange rate problems
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IMF BASICS
Is IMF process with LOIs a legal or a policy process? Compared to what, like WTO? Does it matter in economics versus financial sector areas? Why is it either regularized in rule form (legal format) versus policy form (flexibility from economists standpoint)? What about sovereignty arguments, are they more appropriate in legal versus policy format? Does a private bank infringe on sovereignty in conditioning a loan on behavior?
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IMF LOIs
Indonesia Memorandum of Economic and Financial Policies January 15, 1998 Policy Framework Fiscal Policy Problems from currency depreciation Subsidy decreases Taxation system improvements & new excise taxes Transparency in off-budget funds Investment project cutbacks

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IMF LOIs
LOI Policy Framework (contd) Monetary & Exchange Rate Policy Complications with banking system problems (runs & insolvencies) High interest rates in face of uncertainties regarding rupiah exchange rate and liquidity generally (tight monetary policy) Financial Sector Restructuring Closing insolvent banks State versus private bank issues Strengthening legal and supervisory framework
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IMF LOIs
LOI Policy Framework (contd) Structural Reforms Liberalization Deregulation Privatization Foreign Trade & Investment Move towards freer trade (removing export taxes, quotas & other NTBs) Opening up investment list for foreigners

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IMF LOIs
LOI Policy Framework (contd) Deregulation and Privatization (For Dr. Suad Husnans presentation next)

Social Safety Net Targeted assistance to poor

Environment Sustainability & pollution issues

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IMF LOIs
Indonesia Supplementary Memorandum of Economic and Financial Policies April 10, 1998 More details on Jan 15, 1998 LOI in face of further deterioration

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IMF LOIs
Link Back LOIs to Washington Consensus Points Big difference lies in prominence of financial sector problems Blending of technical & system financial system issues with macroeconomic difficulties lender role of IMF How accurate is IMF role description read against LOIs themselves How have changes in the financial systems worldwide led to chnages in IMF roles & activities
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IMF BASICS
WHAT IS LINK BETWEEN FINANCIAL SYSTEM EXPERTISE AND IMFS ROLE IN BEING AN ADVISER/LENDER FOR COUNTRIES EXPERIENCING MACROECONOMIC DIFFICULTIES?

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Introduction to IMF
The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.
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Definition IMF
International Monetary Fund (IMF) is an administrative unit that is international in nature and whose objective is to regulate and administer the financial system of the world. The IMF does this by observing the payments balance and exchange rates of the world. International Monetary Fund also offers technical and financial help to the member nations. Its head office is in Washington D.C, USA
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Cooperation and reconstruction (194471)

As the Second World War ends, the job of rebuilding national economies begins. The IMF is charged with overseeing the international monetary system to ensure exchange rate stability and encouraging members to eliminate exchange restrictions that hinder trade.

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Continued
Par value system The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This par value systemalso known as the Bretton Woods system prevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

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Continued
By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system of fixed exchange rates, was seen as overvalued. The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold.
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Continued
Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold).

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Helping poor countries

Trust Fund: From the mid-1970s, the IMF sought to respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing. Structural Adjustment Facility: In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.
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IMF
The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s.

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The loans provided by IMF to India

SDR 3,260,405,000 in 1992 SDR 3,584,905,000 in 1993 SDR 2,763,180,833 in 1994 SDR 1,966,633,125 in 1995 SDR 1,085,250,003 in 1996 SDR 589,791,667 in 1997 SDR 284,916,664 in 1998 SDR 38,500 in 1999
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The current relationship between IMF and India

The relationship between the IMF and India has grown strong over the years. In fact, the country has turned into a creditor to the IMF and has stopped taking loans from it.

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IMFs Managing Director

Mr. Dominique Strauss-Kahn, from France, began his five-year term as IMF Managing Director and Chairman of the Executive Board on November 1, 2007.

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