♠ Posted by Emmanuel in Bretton Woods Twins,Development
at 3/16/2009 12:13:00 PM
Although rather overstated, the graphic I found above isn't far from how many LDCs view the IMF when it comes to crunch time, like now. I was always reluctant to buy into the lovey-dovey hullabaloo surrounding the IMF circa 2008-09. In this version of the story, the IMF is now helmed by a soft-hearted French Socialist, albeit one with an eye for the (married) ladies--Dominique Strauss-Kahn. From being a hard*ss tightwad that imposed innumerable conditionalities on Asian countries that weren't in particular need of them, the IMF had literally morphed into a super swingin' sexy IFI.Unfortunately, I must now disabuse you of this notion--and how! Dani Rodrik held out hope that new IMF facilities would lessen the conditionality burden on LDCs. Quite eerily, today's Financial Times has news of Thailands' new PM Abhisit Vejjajiva expressing wariness about still-onerous loan conditionalities during a time when its ability to attract foreign exchange is dwindling due to falling exports. I certainly hope this is not going to end up as a replay:
Many developing countries will be unable or unwilling to use increased loan facilities from the International Monetary Fund in the present crisis unless there is a relaxation of the tough conditions normally imposed on borrowers, Abhisit Vejjajiva, the Thai prime minister, has said.You see, here we get into the trouble over IMF double standards. Principally due to China funding US deficits year in and year out, the country most in need of "structural adjustment" has been able to get off pretty lightly in deficit financing terms considering the collateral damage it has imposed on the rest of the world. (You could probably say the same for Britain.) Given America's towering and fast-growing obligations, why shouldn't it move towards bolstering its export-competitive industries instead of trying to reflate a consumption bubble? Certainly its days selling securutized riffraff are over. When you have these double standards--frou-frou for those able to attract funding due to issuing international reserve currencies and pinpricks for most everyone else, people question the fairness of the entire framework.
In an interview in London with the Financial Times, he issued an urgent appeal for the Group of 20 summit in April to focus on the plight of emerging economies. “When the G20 talks about reform of international financial institutions, it is not just a question of increasing capital, but also of how that capital is used,” said Mr Abhisit, who will attend the meeting as the chairman of Asean, the Association of South-East Asian Nations. “That means making sure there are new facilities for fiscal stimulus, continued development and social safety nets for developing economies.”
He said the poorest people would bear the brunt of the global recession. “When your exports are down 20 or 30 per cent, you are going to have unemployment shoot up. We do not have the social safety nets and welfare programmes to the same degree as western economies. The IMF will need to review its role. We are still concerned that the Fund when it does grant credit [imposes] conditionality that makes it difficult for a number of countries to use the facilities without affecting their development plans.”
He said one of the lessons of the 1997 financial crisis in Asia, which began in Thailand, was that the conditions enforced by the IMF had caused “unnecessary pain. Some was necessary but it could be excessive, particularly the credit constraints and interest rates,” he said. It was clear that neither the US nor European economies were obeying normal IMF conditions in seeking to counter the crisis and nor should emerging economies in the current “extraordinary” circumstances [emphasis mine].
As a significant exporting country, Thailand has seen its exports badly hit by the downturn, recording a 26 per cent decline in January. It is keen to see the IMF set up some form of trade credit insurance scheme to provide the essential finance for continuing trade flows, according to Korn Chatikavanij, the finance minister, who accompanied Mr Abhisit.
I bookmarked the following article for a very long time and did not excerpt from it for a very good reason: its authorship is the (American-funded) Radio Free Europe. With that caveat in mind, here's the descriptively titled "As Rich Countries Spend, IMF Borrowers Have to Swallow the Bitter Pill":
Last week, President Barack Obama signed a $787 billion spending program designed to revive the U.S. economy, just the latest in a series of government interventions aimed at "stimulating" growth as consumer demand and industrial production slump. Other rich countries have also opened the taps of government spending. But countries like Ukraine and Latvia, which have been forced to turn to the International Monetary Fund (IMF) for loans, are being told they must do the opposite -- slash spending and balance their budgets.I would've liked more on the point emphasized above. As it stands, I fault China for being a buster of Global South solidarity in funding America's reckless policies. If I were countries in the South seeking more influence in international affairs, then I'd ask China to support its fellow LDCs by not funding the country most in need of "structural adjustment." Heaven knows China isn't gaining anything by funding Sammy; in fact, it's quite the opposite. I would really like to ask Premier Wen, "Whose side are you really on, anyway?" Here's the bottom line: America acts like a punk because China lets it. The US needs a swift kick in the *ss, pronto. If it takes the US foolhardily slapping punitive tariffs on China for "currency manipulation" to provoke some action, so be it. The sooner the better
The key difference between Ukraine or Latvia and most industrialized Western countries is the ability to deal with growing debt. Basically, countries like the United States and Britain can afford large stimulus packages because they can afford to create more government debt. For now, at least. They will fund their debts by issuing a record amount of government bonds in 2009 and investors are expected to keep buying them.
But when it comes to countries like Ukraine of Latvia, they have already borrowed so much from abroad that borrowing further to fund more deficits is simply not an option. Outside investors will no longer buy their government bonds in the required quantity. And printing more money would just lead to high inflation.
As a result, large government stimulus just can't be done. That's when the IMF steps in, as a lender of last resort. "Basically [the difference is] between those countries who can take on extra debt, where markets have confidence that their wider budget deficits will remain under control, and those that don't have the resources to take on extra debt, either because they would face very high borrowing costs or they're already highly indebted," says IMF spokesman David Hawley. "And the distinction isn't strictly between the industrial economies and the rest of the world -- for example emerging-market countries such as China, which have quite rightly undertaken fiscal stimulus."
Hawley says the IMF can help countries that can't afford to mount stimulus campaigns in two ways: by providing temporary loans to help stabilize a country's currency, and provide what he calls "policy advice," which is designed to help a country emerge more quickly from the crisis. And that advice often includes cutting social spending, raising taxes, and balancing the budget.
The goal is to ensure that those countries can once again become attractive to outside investors when the IMF stops lending. In Hawley's view, Ukraine is a textbook example. "Ukraine is not in a position to undertake the kind of fiscal stimulus that a country like the U.S. is undertaking," he says. "Ukraine needs the help of others to emerge from its difficulties, and that means a combination of some budget adjustment and some external financing, a portion of which comes from the IMF."
Desmond Lachman, an economist who worked for the IMF for 22 years, says the fact that Latvia and Ukraine are both postcommunist countries isn't really relevant. It's not a case of double standards, he argues [my emphasis].
Make no mistake: International financial institutions are still Darwinian, and as long as the US is still at the controls, you will get your share of Blanchards and Lipskys.
UPDATE: The January TICS data is an encouraging way to start off the year in the junking American junk department, regardless of what Obama says.
