The Fund's Misuse of Bullion Reserves is Crucial to its Plan to Use the Financial Crisis to Expand its Power.
By Judy Shelton
The Wall Street Journal
Monday, April 27, 2009
http://online.wsj.com/article/SB124078772568857401.html
The International Monetary Fund deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month's G-20 summit in London -- where President Barack Obama signed off on tripling the IMF's lending resources -- should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.
Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales. While IMF officials insinuate that the receipts would be used to help poor countries, the real goal is to set up a permanent endowment fund for the IMF.
The U.S. should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on Aug. 15, 1971 -- the day President Richard Nixon "closed the gold window" and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF's dismantlement and restitution of its assets.
The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world's third largest official holder. Actually, it's a misnomer to say the IMF "owns" the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.
Nevertheless, the IMF is now seeking to sell a considerable chunk of those gold holdings -- some 12.9 million ounces -- which it insists are exempt from restitution to members in the event of IMF liquidation.
Its reason? Between December 1999 and April 2000, to fund its Heavily Indebted Poor Countries (HIPC) initiative, the IMF arranged to sell gold it held on its books at a price of roughly $50 to two member countries, Brazil and Mexico, at the market price of $355. It put the profits of close to $4 billion in a special HIPC account; simultaneously, the IMF accepted back the gold sold to Brazil and Mexico in settlement of their financial obligations of that amount.
Bottom line: The balance of IMF holdings of physical gold was left unchanged, although it raked in the substantial difference between the gold's market price and its book value. The IMF asserts a propriety claim over the 12.9 million ounces it "acquired" through these transactions.
Unfortunately, artful accounting -- from the deceptive practice of carrying gold at its former official price (about $52) rather than its current market value (about $914), to the arcane usage of an intangible monetary unit called a Special Drawing Right (SDR) -- has become the IMF's defining characteristic.
The IMF once served as administrator for the gold-anchored Bretton Woods system of fixed exchange rates among currencies. It now stands for laxity, for endless government fixes, for ineptitude, and political compromise. The IMF preaches budgetary discipline one moment, only to abandon it under pressure from the current crop of presidents, prime ministers, and potentates who authorize its spending.
Now the IMF is attempting an end run around Congress, as it quietly moves toward selling gold, most likely to China. Why does the IMF need the money? Just three years ago the bloated organization (half of its 2,600 staff are economists) was nearly defunct; headquartered in Washington, the IMF was desperate to create an endowment fund to provide for its continued existence.
But in 2007 a specially convened committee of "eminent persons" helpfully suggested that if the IMF could sell those 12.9 million ounces of gold and set up a trust fund with the windfall profits, the investment returns could plug the gap between its administrative expenditures and the amount it earns as an intermediary that channels funds from rich countries to poor countries.
Sound familiar? Only one problem: IMF gold sales must be approved by an 85 percent voting majority of its members. The U.S. has a 17 percent vote; thus the IMF cannot sell gold without the explicit consent of Congress. But Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, has indicated his openness to approving IMF gold sales -- conditional that some of the receipts be used to "help finance debt relief for poor countries."
Ah, yes, it is always about helping the poor. Which is why the IMF emphasized its willingness to assist "poor countries" in its carefully calibrated request for additional resources from G-20 nations. Not surprisingly, the London stratagem proved successful. It was readily embraced by G-20 leaders eager to demonstrate how much they care about the human consequences of economic meltdown. Ironically, the IMF has been widely blamed by recipient nations in Africa and Latin America for perpetuating poverty. Excessive transfers to less-developed countries have the perverse effect of suppressing the entrepreneurial reserves of citizens. It is only when nations manage to get off the global dole that they are taken seriously by global capital markets and can start to achieve bankable growth.
The IMF has shown an uncanny ability to transmogrify into whatever politically acceptable form necessary to ensure its survival. Throughout the intervening decades since the end of Bretton Woods, the IMF has scrambled to redefine itself as (in rough chronological order): a global debt-collection agency, an economic-research organization, a referee for financial disputes among the Group of Seven leading industrialized nations, and a front to permit Western nations to avoid being blamed for problems arising in the transition to democratic capitalism for formerly communist nations.
In its latest manifestation as global financial surveillance monitor and G-20 sidekick, the IMF has taken to delivering somber pronouncements about the world economic outlook, concluding in mid-April: "The current recessions are likely to be unusually severe, and the forthcoming recoveries sluggish." And what does the IMF recommend? "Aggressive monetary and, particularly, fiscal policies could strengthen and bring forward recoveries."
This sage advice conveniently dovetails with the agenda of Mr. Obama, who, as mentioned earlier, agreed to tripling the IMF's lending resources at the London summit. And to remain au courant with British Prime Minister Gordon Brown, IMF chief Dominique Strauss-Kahn has also called for expanding "the regulatory perimeter to encompass all activities that pose economy-wide risks."
Zhou Xiaochuan, China's powerful central banker, has authored a proposal for international monetary reform that would replace the dollar with "a super-sovereign reserve currency managed by a global institution." Citing "the inherent deficiencies caused by using credit-based national currencies," he suggests the SDR could assume this role. In the view of Mr. Zhou, the way to enhance international monetary and financial stability is to have member countries gradually entrust their reserves "to the centralized management of the IMF."
Before anyone gives any credence to the notion of having the IMF take on the task of issuing a new global currency, however, we need to remember that the original Bretton Woods system worked precisely because the dollar was convertible into gold at a fixed price. And gold is real money.
Congress should just say no.
-----
Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).
Showing posts with label imf. Show all posts
Showing posts with label imf. Show all posts
27 April 2009
IMf Bond sales needed to fund stimulus
The move, announced after the IMF's annual spring meeting, indicates the world's leading economies are having difficulty following through on a pledge made in London on April 2 to boost an IMF emergency-lending facility $500 billion. The bonds will contribute toward that goal, but will provide shorter-term financing than the loans that Japan, the European Union, and the United States have promised.
The Group of 20, which includes wealthy and developing countries, pledged in London to provide a total of $1.1 trillion to the IMF and other international lending institutions.
"The major emerging markets have made it clear that they . . . will no longer be pushed around by the advanced economies," said Eswar Prasad, an economics professor at Cornell University and former IMF official. While "the net effect" on IMF resources of loans or bond sales is the same, Prasad said, "the symbolic difference between these two types of contributions is huge."
Meanwhile, more than 100 demonstrators angered by how world leaders have handled the economic crisis took on police outside the headquarters of the IMF and World Bank. Authorities used batons and pepper spray when activists tried to march onto a prohibited street, and several people were pushed to the ground by police. The protesters swarmed officers, and police had to respond, said D.C. Police Capt. Jeffrey Harold.
Treasury Secretary Timothy Geithner yesterday urged world finance officials to pony up more money to meet the $500 billion goal. Progress toward that target "must be an important outcome of these meetings," he said.
President Obama is seeking congressional approval for up to $100 billion, matching commitments for the same amount made by Japan and the European Union. Canada and Switzerland have pledged $10 billion, and Norway about $4.5 billion. But the full $500 billion has not yet been raised.
A Japanese official said Friday that countries would meet again with the hope of closing the gap before the end of June.
The additional funds reflect the growing importance of the IMF in dealing with the global downturn, the worst the world economy has experienced in six decades. Just a year ago, the 185-member organization was seen as increasingly irrelevant as the economies of many developing countries boomed.
The additional money could aid countries in Latin America, Eastern Europe, and elsewhere that are reeling from sharp drops in exports and foreign investment. Many poor countries and nongovernmental organizations have long criticized the IMF for failing to give sufficient voice to emerging economies.
Geithner urged that developing countries be given a greater voice. He called for reducing the number of seats on the IMF's governing board to 20 from 24 over the next three years, while maintaining the same number of seats for developing countries. The IMF "needs a more representative, responsive, and accountable governance structure," he said.
http://www.philly.com/inquirer/world_us/20090426_IMF_plans_bond_sales_to_raise_money.html
The Group of 20, which includes wealthy and developing countries, pledged in London to provide a total of $1.1 trillion to the IMF and other international lending institutions.
"The major emerging markets have made it clear that they . . . will no longer be pushed around by the advanced economies," said Eswar Prasad, an economics professor at Cornell University and former IMF official. While "the net effect" on IMF resources of loans or bond sales is the same, Prasad said, "the symbolic difference between these two types of contributions is huge."
Meanwhile, more than 100 demonstrators angered by how world leaders have handled the economic crisis took on police outside the headquarters of the IMF and World Bank. Authorities used batons and pepper spray when activists tried to march onto a prohibited street, and several people were pushed to the ground by police. The protesters swarmed officers, and police had to respond, said D.C. Police Capt. Jeffrey Harold.
Treasury Secretary Timothy Geithner yesterday urged world finance officials to pony up more money to meet the $500 billion goal. Progress toward that target "must be an important outcome of these meetings," he said.
President Obama is seeking congressional approval for up to $100 billion, matching commitments for the same amount made by Japan and the European Union. Canada and Switzerland have pledged $10 billion, and Norway about $4.5 billion. But the full $500 billion has not yet been raised.
A Japanese official said Friday that countries would meet again with the hope of closing the gap before the end of June.
The additional funds reflect the growing importance of the IMF in dealing with the global downturn, the worst the world economy has experienced in six decades. Just a year ago, the 185-member organization was seen as increasingly irrelevant as the economies of many developing countries boomed.
The additional money could aid countries in Latin America, Eastern Europe, and elsewhere that are reeling from sharp drops in exports and foreign investment. Many poor countries and nongovernmental organizations have long criticized the IMF for failing to give sufficient voice to emerging economies.
Geithner urged that developing countries be given a greater voice. He called for reducing the number of seats on the IMF's governing board to 20 from 24 over the next three years, while maintaining the same number of seats for developing countries. The IMF "needs a more representative, responsive, and accountable governance structure," he said.
http://www.philly.com/inquirer/world_us/20090426_IMF_plans_bond_sales_to_raise_money.html
23 April 2009
IMF chides US bailout strategy? Maybe.
BEING a donor rather than a creditor nation, America and its Treasury are under no obligation to follow IMF recommendations. Nonetheless, Derek Thompson reckons the IMF approves of the America's handling of the economic crisis so far. After all, the fund advocates tough provisions on firms taking government money and is sensitive to sticky political constraints. But, I thought I read some thinly veiled disapproval in the report on America's plan to remove toxic assets from bank balance sheets.
Among the methods being used so far, the United Kingdom has favored keeping the assets in the banks but providing guarantees that limit the impact of further losses. An alternative is to place the bad assets in a separate asset management company (AMC) (a so-called “bad bank”), an approach that Switzerland has adopted with UBS and that Ireland is also pursuing. This latter approach has the advantage of being relatively transparent and, if the bulk of the bank’s bad assets are transferred to the AMC, leaves the “good bank” with a clean balance sheet. The United States has provided a guarantee against a pool of assets that are either troubled or vulnerable to large losses in the case of Citibank and Bank of America, as well as proposing to establish private/public partnerships to purchase impaired assets from banks. The current proposal has elements to encourage private sector participation, but it is not clear yet whether banks will have enough incentive to actually sell their impaired assets. In general, different approaches can work depending on country circumstances.
That may not sound like fierce disapproval, but in policy speak it's pretty harsh.
http://www.economist.com/blogs/freeexchange/2009/04/what_does_the_imf_think_of_ppi.cfm
Among the methods being used so far, the United Kingdom has favored keeping the assets in the banks but providing guarantees that limit the impact of further losses. An alternative is to place the bad assets in a separate asset management company (AMC) (a so-called “bad bank”), an approach that Switzerland has adopted with UBS and that Ireland is also pursuing. This latter approach has the advantage of being relatively transparent and, if the bulk of the bank’s bad assets are transferred to the AMC, leaves the “good bank” with a clean balance sheet. The United States has provided a guarantee against a pool of assets that are either troubled or vulnerable to large losses in the case of Citibank and Bank of America, as well as proposing to establish private/public partnerships to purchase impaired assets from banks. The current proposal has elements to encourage private sector participation, but it is not clear yet whether banks will have enough incentive to actually sell their impaired assets. In general, different approaches can work depending on country circumstances.
That may not sound like fierce disapproval, but in policy speak it's pretty harsh.
http://www.economist.com/blogs/freeexchange/2009/04/what_does_the_imf_think_of_ppi.cfm
22 April 2009
Global toxic assets could reach $5.7 trillion:IMF~AAP
http://business.smh.com.au/business/world-business/global-toxic-assets-could-reach-57-trillionimf-20090422-ae8l.html
Bank writedowns associated with so-called "toxic assets" clogging up the global financial system could eventually reach $US4 trillion ($5.73 trillion), the International Monetary Fund says.
This is nearly double the amount the IMF predicted in January.
With this in mind, the IMF warns in its latest Global Financial Stability Report that costs to taxpayers could be greater if governments do not continue with policies to restore confidence in the financial system.
The IMF estimates writedowns on US-originated assets since the outbreak of the crisis will increase to $US2.7 trillion from its previous forecast of $US2.2 trillion.
This, it says, is largely as a result of the worsening base-case scenario for economic growth.
"In this GSFR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $US4 trillion," it said.
It said while there had been some improvements in interbank money markets over the last few months, funding strains were persisting and banks' access to longer-term funding had diminished.
"While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large," it said.
"As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields."
Australia's major banks failed to pass on in full this month's 25-basis-point cut in the official interest rate, blaming higher wholesale funding costs.
The IMF says that despite unprecedented initiatives to stop the downward spiral in advanced economies, further policy action would be required to relieve the uncertainties in financial markets that were undermining the prospects for an economic recovery.
However, it said political support for such action appeared to be waning as the public was becoming disillusioned by what it perceived as abuse of taxpayers' funds.
"There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," it said.
It said that without a thorough cleansing of impaired assets on bank balance sheets, accompanied by restructuring and, where needed, recapitalisation, risks remained that problems being experienced by banks would continue to exert downward pressure on economic activity.
A recent IMF analysis showed that past episodes of financial crisis have shown that restoring the banking system to normal operation takes several years, and that recessions tend to be deeper and longer lasting when associated with a financial crisis.
"This same experience shows that when policies are unclear and implemented forcefully and promptly, or are not aimed at the underlying problem, the recovery process is even more delayed and the costs, both in terms of taxpayer money amd economic activity, are even greater," it said.
Bank writedowns associated with so-called "toxic assets" clogging up the global financial system could eventually reach $US4 trillion ($5.73 trillion), the International Monetary Fund says.
This is nearly double the amount the IMF predicted in January.
With this in mind, the IMF warns in its latest Global Financial Stability Report that costs to taxpayers could be greater if governments do not continue with policies to restore confidence in the financial system.
The IMF estimates writedowns on US-originated assets since the outbreak of the crisis will increase to $US2.7 trillion from its previous forecast of $US2.2 trillion.
This, it says, is largely as a result of the worsening base-case scenario for economic growth.
"In this GSFR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $US4 trillion," it said.
It said while there had been some improvements in interbank money markets over the last few months, funding strains were persisting and banks' access to longer-term funding had diminished.
"While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large," it said.
"As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields."
Australia's major banks failed to pass on in full this month's 25-basis-point cut in the official interest rate, blaming higher wholesale funding costs.
The IMF says that despite unprecedented initiatives to stop the downward spiral in advanced economies, further policy action would be required to relieve the uncertainties in financial markets that were undermining the prospects for an economic recovery.
However, it said political support for such action appeared to be waning as the public was becoming disillusioned by what it perceived as abuse of taxpayers' funds.
"There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," it said.
It said that without a thorough cleansing of impaired assets on bank balance sheets, accompanied by restructuring and, where needed, recapitalisation, risks remained that problems being experienced by banks would continue to exert downward pressure on economic activity.
A recent IMF analysis showed that past episodes of financial crisis have shown that restoring the banking system to normal operation takes several years, and that recessions tend to be deeper and longer lasting when associated with a financial crisis.
"This same experience shows that when policies are unclear and implemented forcefully and promptly, or are not aimed at the underlying problem, the recovery process is even more delayed and the costs, both in terms of taxpayer money amd economic activity, are even greater," it said.
The IMF's damning verdict on an overleveraged UK
Forget the Budget. The IMF's Global Financial Stability Report has just produced the figures Gordon Brown didn't want you to read: the cost to the UK taxpayer of the banking crisis. The Treasury's approach is to airbrush banks out of the picture, and kid us on that we'll get the money back eventually. The IMF gives it to us straight. It estimates (p44, pdf) that when this is over British taxpayers will have the largest bill in the G7. The bank crisis will cost the UK some 13.7% of GDP - which works out as about £190bn (see graph below). The figure for the US is 12.1% and Canada just 2.8%. Again: this isn't a paper loss. This isn't made-up money. This is the net fiscal cost to the taxpayer of the bank rescues: money that can only be recovered by raiding our wallets, pay packets or pension funds.
Why so big? As the IMF report makes devastatingly clear, no country has ever experienced the credit/financing dependency that the UK had developed. From page six:
"The buildup of leverage that preceded this crisis was substantial, and certainly on a par with other periods in history that have ended in a collapse in credit. Figure 1.4 compares the ratio of bank credit to GDP in the current crisis to that of Japan and Sweden in the runup to their crises in the early 1990s. Three features are apparent. First, the rise in bank credit in the UK has been massive... and greater than Japan preceding its bubble. Second, the crisis in Japan and Sweden both caused the bank-credit-to-GDP ratio to drop by a quarter. Third, Sweden achieved its deleveraging rapidly and then started to rebuild while redeveraging in Japan continued over more than a decade."
The IMF also suggests (p xiii) that a further $250bn of capital will be needed for UK banks. Don't expect to see any of this in the Budget - this is the truth that dare not speak its name. It is airbrushed out, there will be small print in tomorrow's Budget saying "excluding financial interventions". As the IMF makes crystal clear, this is anything but a footnote. The £190 bn figure is for what is described by the IMF report (p45) as "net costs of direct support to banks, expected eventual costs of guarantees; and costs, net of recoveries, of central bank liquidity provision." When all is done and dusted, flogged and floated, the UK banking crisis will go down in history as the biggest fiscal disaster in peacetime history. And the Brown-Balls tripartite bank regulation system will go down as perhaps the biggest single calamity in modern UK economic history.
http://www.spectator.co.uk/business/trading-floor/3554446/the-imfs-damning-verdict.thtml
Rear Vision on the IMF
Reporter: The G20 Summit in London has ended with a regulatory blueprint designed to derail the worst financial crisis since the Great Depression.
Central to the plan is agreement to triple the resources available to the International Monetary Fund which in turn will help troubled economies.
Barack Obama: In a world that's more and more interconnected, we all have responsibilities to work together to solve common challenges and, although it will take time, I am confident that we will rebuild global prosperity if we act with a common sense of purpose and the optimism that the moment demands.
Keri Phillips: At the recent G20 meeting in London, world leaders agreed to put the International Monetary Fund centre stage in the battle to restore global economic health. Today on Rear Vision, we'll look at the history of the IMF, an organisation with a chequered past that has moved far beyond its original role.
David Vines is Professor of Economics, Balliol College, Oxford.
David Vines: Towards the end of the Second World War, the US and the UK and their allies were inspired by the possibility offered by John Maynard Keynes in his general theory of managing economies to avoid disaster. They had in their memory the end of the First World War which had seen a catastrophic collapse, followed ten years later by the Great Depression, and they were determined that countries should be able to manage their economies to keep full employment, and they saw that doing this might lead to balance of payments difficulties. And they wanted a world where this shadow didn't hang over them any longer.
Keri Phillips: Even as World War II continued, allied leaders were looking beyond the conflict in a belief that cooperation between nations would allow for future economic stability and growth for all. The International Monetary Fund, along with the World Bank specifically to help developing nations, was created even before the war ended. James M Boughton is the historian of the IMF.
James M. Boughton: Now then, the founding of the IMF is quite an interesting story because it was founded during World War II at a time when it was very difficult, and even dangerous for government officials to try to get together and meet in one place. But they all came together in 1944 at the what is now the very famous Bretton Woods conference in Bretton Woods, New Hampshire, up in the north-east part of the United States. And what they were trying to do, these were all finance officials from all the allied countries fighting against the axis in World War II, and what they were trying to do was to avoid the kind of conflicting policies and really destructive policies that countries had followed in the period between World War I and World War II, and that had led to the Great Depression; it had led to all kinds of policies where countries tried to get an advantage over their neighbours.
The term that was popular in the 1930s was 'Beggar thy neighbour policies', and what this meant was countries would devalue their currencies; they would cheapen their currencies relative to others, and that would make their products cheaper in foreign trade, and so that they, in the hope that they could sell more goods. And they would set up tariffs against, or other barriers, against imports from other countries. And what that led to was a lot of currency instability and it led to a drastic reduction in international trade, and that reduction in trade then led to a great increase in unemployment, reductions in output, and ultimately it was a contributing factor at least in leading to a Second World War, because the poverty and the despair that came out of the Depression led to an increase in dictatorships and other disastrous political decisions.
Keri Phillips: The primary role of the IMF would be to oversee a system of fixed exchange rates. The ultimate goal was to help countries maintain an equilibrium between imports and exports, without having to resort to devaluing their currencies to keep what they produced cheap and their workers employed.
This kind of economic discipline was difficult for the many democracies which emerged throughout the late 19th and early 20th centuries, according to James Raymond Vreeland, Associate Professor of International Relations in the Edmund A Walsh School of Foreign Service, Georgetown University.
James Raymond Vreeland: Under democracy, a government survives by keeping the population happy, and if the population recognises that they can't buy as much as they used to, consumption goes down, then they find that government not to be very popular. And so the government actually finds it very difficult to impose discipline on its population. When I've talked about discipline, I'm talking precisely about people earning less and sometimes just not having jobs. And if you have an authoritarian form of government you might be able to manage that, but under democracy, the government's going to be voted out of office and so either they should pursue populist policies or they'll be voted out, and a new populist government will come to power. And that populist government may be willing to actually burn the currency in order to maintain employment, but that's not sustainable over a long run with a fixed exchange rate. And the idea of having an IMF was to deal with temporary problems, loans to countries for 6 to 18 months and that basically as I said before, softened the blow of that adjustment period.
Keri Phillips: So the idea was that instead of devaluing their currencies, members would borrow from the IMF while they made the adjustments necessary to get a balance back between imports and exports. But almost from the very beginning, governments found it politically impossible to stick to the fixed rates.
Ben Chifley: Good morning, listeners. The Australian government has carefully considered the implications for Australian and the movement in the sterling-dollar rate. The government has decided that the rate of 125 pounds Australian to 100 pounds sterling, shall remain unchanged. Accordingly, the Australian pound will be devalued as against the United States dollar in the same proportion as sterling. The International Monetary Fund has been consulted and has agreed.
Keri Phillips: Australian prime minister Ben Chifley, announcing Australia's response to Britain's devaluing of its currency by almost a third in September, 1949. IMF members would struggle with the fixed exchange rate arrangements until they were finally abandoned in the 1970s when the US got into trouble. But there were other features of the fledgling fund that would distort its operation as well. Professor Ngaire Woods is director of the Global Economic Governance Program, University College, Oxford.
Ngaire Woods: One of the elements that they built into the IMF was that each country would be assigned a quota and that quota would reflect their weight in the global economy. So it's a very complicated formula that ostensibly represents their share of global trade and so forth, and on the basis of that quota they would be assigned certain voting rights and also a figure of how much they would have to lodge with the organisation. What's rather fun is that when you look at the formula you think it's all terribly scientific, but in fact Raymond Mikesell, the author of the formula, reveals in his memoirs that he was actually simply told by the United States and Britain, to go off into a corner and come up with whatever formula it took to ensure that the United States had a certain share of votes and that Britain had a certain smaller share of votes, and then to sort the rest.
Right from the start, the IMF had an executive board created, which would sit permanently and the executive board is five countries who had their own representative on the board, and so those representatives are not particularly independent. If the United States or Britain isn't very happy about what their executive director is doing, they can actually recall and replace them instantly. But all the other countries in the IMF are represented in groups, called constituencies and those constituencies elect a director. And why I'm going into that detail is because once they elect a director, they can't touch that director for two years. So in fact, those directors are very independent, they can do whatever they like.
The negotiations for creating the IMF took place at Bretton Woods in the United States, and the countries came up with an agreement, and for example, within that agreement was an agreement that gold would be the reserve currency, and that there would not be conditionality attached to IMF loans. But very quickly after that conference, in subsequent actions, the dollar very quickly became the reserve currency. The United States produced something it called their interpretation of the Articles of Agreement, and in their interpretation, they laid out that there would be conditionality. Right at the outset it was agreed by all countries that the IMF should safeguard its resources, it shouldn't just be wanton and profligate with its resources. What the United States then leapt upon which this definition of what it meant to safeguard the resources, and it's that that then they expanded, and has expanded further and further through the decades to imply a huge program of conditionality, so that by the 1990s countries were being asked to do 120 different very specific policy measures in return for their IMF loan. So both through formal politics, the United States ensured that in the Charter it had a veto, that the organisation would be in Washington DC, that it would have a controlling voice on senior management and staffing.
But also through this informal means of simply announcing what they understood the Articles of Agreement to mean afterwards, the United States quite quickly asserted its dominance.
Keri Phillips: You're listening to ABC Radio National. I'm Keri Phillips. Today's Rear Vision looks at the history of the International Monetary Fund, the agency designed to foster global economic co-operation and prevent global economic catastrophe.
John Maynard Keynes, the British economist behind the Bretton Woods system, had proposed an IMF of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. But the US was not prepared to give that much power to a division of the United Nations.
Nonetheless, many countries, including Australia, did make use of this global credit union.
James Raymond Vreeland: There was this stigma attached to turning to the IMF and taking on IMF austerity conditions. These austerity conditions were supposed to get countries to follow the good policies, the policies deemed by the IMF to be the proper ones to address balance of payments problems, and the loan was supposed to soften the blow while they adjusted. So you did see from time to time, developed countries borrowing from the IMF. Australia borrowed from the IMF in 1961; around that time, so did the United States and Japan. The United Kingdom and France also borrowed from the IMF in the 1970s but those agreements already started to have much more austerity attached to them, and in the case of the British, it became quite a politically distasteful thing to do.
So developed countries started to steer away from the IMF and really cut down on borrowing from the IMF in the late 1970s, such that only Spain and Portugal, which probably we wouldn't really consider developed countries at that time, but they were the last Western European countries to borrow from the IMF in the 1980s.
Now one thing that's kind of interesting is that a lot of people are aware of the fact that the IMF shifted its operations in the 1970s, the early 1970s, when the US went off the gold standard, right? So between 1971 and 1973, you see the world shift away from the gold standard, and the IMF ceases to, over that decade, ceases to lend to the developed world.
In the meantime, however, they had already been loaning to the developing world. You have countries like South Korea that borrowed from the IMF throughout the 1960s, straight, they actually borrowed for 12 years straight; you have a country like Panama that borrowed in the 1970s and 1980s for 20 years straight; a country like Zaire, now the Democratic Republic of Congo, they borrowed for about 14 years straight. Now it's no accident that I just threw out South Korea, Panama and Zaire; these were all Cold War allies of the United States, and so there is some correlation between who borrows from the IMF and who's favoured by the United States, who is the largest shareholder of the IMF.
So what you see is sometimes the IMF is used for political purposes to prop up governments and maybe the loans go towards helping those governments survive in power, as opposed to helping soften the blow as they adjust. If they just adjusted, maybe their program would last 6 months to 18 months, but because they don't adjust, they keep needing more loans and because they're favoured or important to the United States, they keep getting those loans.
Richard Nixon: We must protect the position of the American dollar as a pillar of monetary stability around the world. In recent weeks the speculators have been waging an all-out war on the American dollar. Accordingly, I have directed the Secretary of the Treasury, to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Ngaire Woods: The real pivot point for the IMF came in 1969 when President Nixon announced America's first step away from the Gold Standard, which finally in 1971 he abandoned entirely. Now what that meant was the whole system the IMF had been created to oversee was smashed in one blow. It would no longer be a rule-based exchange system. By announcing that it would no longer back dollars with gold, smashed the fixed exchange rate system, floating the dollar and then all the other major currencies floated in the wake of the dollar. And that created a problem which is still with us today, which is that there is no rule-based exchange rate system, and so countries accuse each other of cheating on their exchange rates.
The reason why you could have fixed exchange rates in the 1950s and '60s, is because countries used capital control. That means they kept the windows and doors closed to foreign capital coming in and out of their systems. Investors couldn't speculate on the value of exchange rates. That's what changed in the '60s and '70s.
Keri Phillips: Once countries, especially industrialised countries, decided that market driven floating exchange rates were a more appealing alternative to the Bretton Woods system, the original raison d'etre of the IMF was gone.
Ngaire Woods: In the 1970s the IMF just seems to be an institution with no purpose, and no role; it looked completely marginal. It was no longer overseeing a fixed exchange rate system, countries weren't particularly in need of its loans, in fact in the 1970s there weren't in need of its loans because the oil price increase of '73 had created vast amounts of wealth which was in search of investment opportunities, and commercial banks took up that money and very quickly started lending it to developing countries. So in the 1970s you saw this fiesta of private lending. And because inflation was high, the real interest rate on the loans that these commercial banks were making to developing country governments, like Mexico and Argentina, were negative.
In other words, banks were going to governments and saying, 'We'll lend you money, and we'll pay you to take it', because the interest rate didn't cover the rate of inflation. Needless to say all those governments did not resist the temptation. They took out millions and millions of dollars in these loans. And the IMF was simply put into a cupboard with the door closed, and it wasn't till that great party of lending crashed and came to a halt after 1979 that the IMF was pulled out of the cupboard and pushed into centre stage.
John Arden: Tremendous efforts have been made to narrow the gap between exports and incomes. In the first six months of this year alone, Brazil had a visible trade surplus of $6 billion, but the interest payments on massive loans wiped out the benefit.
The government failed to impose austerity measures demanded of it for fear of social unrest. Two riotous days in the industrial city of Sao Paolo last April were evidence of that. But convinced that the IMF could get tough, the government has now gone ahead with new measures, and they include reducing the indexation of wages to inflation.
In the '70s, the so-called Brazil Economic Miracle saw growth rates of 10% with inflation rates of only 20% to 30%. Now growth rates are negligible and inflation is running at 127% a year. The foreign debt is $90 billion.
Ngaire Woods: In 1979, the United States Federal Reserve decided dramatically to increase its interest rate, to try to stem inflation. And that very quickly affected these massive loans that had been made to developing countries. You can picture your own mortgage: if you thought you had a mortgage which you paid no interest on and then suddenly overnight you were told that you were going to start paying 13% interest on it, which is what happened, you'd either go bankrupt or start looking distinctly unstable financially. And that's what happened to these countries.
Now that might not have been a problem for the United States and Europe if it weren't for the fact that it was their banks that were hugely over-exposed in their loans to those countries, and so it became very quickly apparent that there would be an international financial crisis unless you found a way to ensure that countries like Mexico and Venezuela and Brazil and Argentina repaid the banks their loans to stop the banks from going bust. If they had all collectively defaulted it would have brought down the international financial system.
So the IMF was wheeled out and sent in to provide loans to these countries and to require these countries to adjust. And that was the deal. On the one hand, some financing, and on the other hand some adjustment. The financing was modest, it was just enough money to ensure that for example, Mexico repaid its loans to the banks. The problem of course from the Mexican point of view was that this IMF loan came with a high interest rate of its own, in fact it wasn't bailing out the countries, it was bailing out the banks through the countries, because the loans it was making to these countries had high interest rates, and these countries became more and more indebted through the 1980s. You saw riots and social unrest immediately in these countries, because the places that governments could most easily cut back were things like food subsidies, education for the poor, health for the poor, different kinds of welfare activities, and these were the places that governments first cut back.
What's interesting about the 1980s Latin American debt crisis is that the IMF was sent into a crisis, which it actually didn't have the toolkit to deal with. The approach was premised on the idea that by taking these quite draconian adjustment policies, countries would begin to grow, but by the mid-'80s, it was clear that none of the governments that were undertaking these policies were growing, and that made their debt burden more and more unsustainable.
Keri Phillips: This is Rear Vision on ABC Radio National. I'm Keri Phillips, here with a history of the agency designed to foster global economic cooperation and prevent global economic catastrophe, the International Monetary Fund.
In the decades since the Latin American debt crisis the IMF has found itself at the centre of a continuing series of economic crises.
Ginny Stein: Thailand's financial woes started a domino reaction across South East Asia. It led to Thailand seeking a US$17.2 billion rescue package from the International Monetary Fund. In accepting the bail-out package, Thailand agreed to a number of conditions, including bringing in a budget surplus in 1998, keeping its current account deficit in check, and restructuring its financial sector.
Tarrin Nimmanahaeminda (Thai Finance Minister, 1997): We will work very closely with the IMF. We will try to make our policies, our plans, which will be transparent, concise and implementable, and hopefully creditable.
James Raymond Vreeland: Now with the East Asian financial crisis, there was a major turning point, because a lot of the policies that they imposed in the late 1990s, during the East Asia financial crisis, turned out to be the wrong ones, and exacerbated the crisis, and so many emerging market countries decided to stop borrowing from the IMF. That coupled with reasonably good economic conditions, led to very little borrowing from the IMF and the IMF actually found itself tightening its own belt. And in the early 2000s, it was the IMF going through their own austerity and trimming their own budget. A major problem for the IMF is that it actually generates its own revenue through the loans that it provides. Now because it does charge some interest on the loans, and it's the interest that actually goes towards the operations, make funding the operations of the IMF.
Now with this new financial crisis, there's going to be a new round of lending and the IMF is going to be flush once again with loan repayments, and interest repayments that will help finance them. But this leads to this strange kind of a, what you'd call a perverse incentive, that the IMF does better when there are economic crises, and yet the IMF's job is supposed to be in part to prevent these crises.
Keri Phillips: After the debacle of the Asian crisis and before the current global financial crisis the IMF appeared to be sliding into irrelevance. Although the GFC may have thrust it into the spotlight once more, world leaders will have to commit more money to keep it there.
James M. Boughton: Well the IMF has a very limited amount of money to lend, and part of the discussion that's taking place among major countries now is trying to determine the best way to make sure that the IMF does have enough money to lend. We're not like a central bank that can just create money at will; our members keep the IMF on a pretty tight leash, but by the same token, they want to make sure that the IMF does have enough resources to do its job properly.
James Raymond Vreeland: The first thing that I would point out is that the IMF is still a relatively small organisation in terms of how much money it has to lend. Now on the one hand, they have, depending on the value of the dollar on any given day, they have say roughly $250 billion that they can loan out. That's sizeable, but when you consider the size of the stimulus packages that are being put together in the developed world where we're in the magnitude of trillions of dollars, you can see that the IMF certainly isn't large enough to address any of the crises in the developed world. It's really not even big enough to address crises in the emerging market countries.
Keri Phillips: As everyone keeps telling us, we're travelling through unchartered economic waters, but whatever lies ahead, one thing is certain, the current trade imbalances are unsustainable.
David Vines: What we are seeing now is a transition in the world economy from a world led by the US to a world which will be a really multi-polar world of the US, Europe, and crucially China, India, East Asia and Latin America. And we need a financial system which is stable during the period that this transformation happens and the fund is crucial to make that possible.
Let me just explain to you: a really big circumstance in the world at the minute has been the huge growth in China through very rapid export-led growth. 10% of China's GDP is exported and less than half of China's output is consumed. It's a very extraordinary growth process.
The other side of the coin has been borrowing from the rest of the world, the US, UK, Australia too, the counterparty to the Chinese selling a lot and others borrowing in order to buy it. This can't go on forever, and a stable international system in which these international imbalances are unwound, is absolutely crucial and the Fund's maintaining that stable system is central to us not degenerating into the kind of chaos we've had the last year and the kind of problem that many of us believe will continue to apply until this adjustment of international imbalance has happened. There's a real danger of competitive scrambles for devaluation in a floating rate world, by countries in debt when they get into crisis, and the Fund and the managed international system is necessary now just like it was after the Second World War to stop such a scramble.
Ngaire Woods: I think the key problem for the IMF began first when the rule-based exchange rate system collapsed because what the United States and its partners didn't do was work out what was going to replace the old rule-based system, and they didn't use the IMF as a forum to do that. And I think that's what they're going to be having to sit down to do now.
The other crucial element for the IMF was being forced in the 1980s to become this rather draconian debt collector, rather than a forum of international co-operation, and that gave the institution habits, habits of imposing conditions on countries, rather than really listening to them. So if we look at the world economy today, it's clear that the world very much needs a forum for international monetary cooperation and that it should be a role that the IMF plays. But the play that role, the IMF has to be seen by all of its members as a neutral forum for those conversations, and as an impartial arbiter and enforcer of the rules. And that's a lot of ground that it's going to have to catch up. And the very first steps it's going to have to make to do that are going to be on the representation of countries. The world is no longer a world in which America is the largest creditor. America is now the world's largest debtor. China is the world's largest creditor, and China is going to need not just a seat at the table, but a very important seat at the table.
Keri Phillips: Ngaire Woods, Director of the Global Economic Governance Program at Oxford University.
We also heard from James Raymond Vreeland, Associate Professor of International Relations at Georgetown University; David Vines, Professor of Economics, Balliol College, Oxford, and the historian of the IMF, James M. Boughton.
http://www.abc.net.au/rn/rearvision/stories/2009/2538035.htm#transcript
Central to the plan is agreement to triple the resources available to the International Monetary Fund which in turn will help troubled economies.
Barack Obama: In a world that's more and more interconnected, we all have responsibilities to work together to solve common challenges and, although it will take time, I am confident that we will rebuild global prosperity if we act with a common sense of purpose and the optimism that the moment demands.
Keri Phillips: At the recent G20 meeting in London, world leaders agreed to put the International Monetary Fund centre stage in the battle to restore global economic health. Today on Rear Vision, we'll look at the history of the IMF, an organisation with a chequered past that has moved far beyond its original role.
David Vines is Professor of Economics, Balliol College, Oxford.
David Vines: Towards the end of the Second World War, the US and the UK and their allies were inspired by the possibility offered by John Maynard Keynes in his general theory of managing economies to avoid disaster. They had in their memory the end of the First World War which had seen a catastrophic collapse, followed ten years later by the Great Depression, and they were determined that countries should be able to manage their economies to keep full employment, and they saw that doing this might lead to balance of payments difficulties. And they wanted a world where this shadow didn't hang over them any longer.
Keri Phillips: Even as World War II continued, allied leaders were looking beyond the conflict in a belief that cooperation between nations would allow for future economic stability and growth for all. The International Monetary Fund, along with the World Bank specifically to help developing nations, was created even before the war ended. James M Boughton is the historian of the IMF.
James M. Boughton: Now then, the founding of the IMF is quite an interesting story because it was founded during World War II at a time when it was very difficult, and even dangerous for government officials to try to get together and meet in one place. But they all came together in 1944 at the what is now the very famous Bretton Woods conference in Bretton Woods, New Hampshire, up in the north-east part of the United States. And what they were trying to do, these were all finance officials from all the allied countries fighting against the axis in World War II, and what they were trying to do was to avoid the kind of conflicting policies and really destructive policies that countries had followed in the period between World War I and World War II, and that had led to the Great Depression; it had led to all kinds of policies where countries tried to get an advantage over their neighbours.
The term that was popular in the 1930s was 'Beggar thy neighbour policies', and what this meant was countries would devalue their currencies; they would cheapen their currencies relative to others, and that would make their products cheaper in foreign trade, and so that they, in the hope that they could sell more goods. And they would set up tariffs against, or other barriers, against imports from other countries. And what that led to was a lot of currency instability and it led to a drastic reduction in international trade, and that reduction in trade then led to a great increase in unemployment, reductions in output, and ultimately it was a contributing factor at least in leading to a Second World War, because the poverty and the despair that came out of the Depression led to an increase in dictatorships and other disastrous political decisions.
Keri Phillips: The primary role of the IMF would be to oversee a system of fixed exchange rates. The ultimate goal was to help countries maintain an equilibrium between imports and exports, without having to resort to devaluing their currencies to keep what they produced cheap and their workers employed.
This kind of economic discipline was difficult for the many democracies which emerged throughout the late 19th and early 20th centuries, according to James Raymond Vreeland, Associate Professor of International Relations in the Edmund A Walsh School of Foreign Service, Georgetown University.
James Raymond Vreeland: Under democracy, a government survives by keeping the population happy, and if the population recognises that they can't buy as much as they used to, consumption goes down, then they find that government not to be very popular. And so the government actually finds it very difficult to impose discipline on its population. When I've talked about discipline, I'm talking precisely about people earning less and sometimes just not having jobs. And if you have an authoritarian form of government you might be able to manage that, but under democracy, the government's going to be voted out of office and so either they should pursue populist policies or they'll be voted out, and a new populist government will come to power. And that populist government may be willing to actually burn the currency in order to maintain employment, but that's not sustainable over a long run with a fixed exchange rate. And the idea of having an IMF was to deal with temporary problems, loans to countries for 6 to 18 months and that basically as I said before, softened the blow of that adjustment period.
Keri Phillips: So the idea was that instead of devaluing their currencies, members would borrow from the IMF while they made the adjustments necessary to get a balance back between imports and exports. But almost from the very beginning, governments found it politically impossible to stick to the fixed rates.
Ben Chifley: Good morning, listeners. The Australian government has carefully considered the implications for Australian and the movement in the sterling-dollar rate. The government has decided that the rate of 125 pounds Australian to 100 pounds sterling, shall remain unchanged. Accordingly, the Australian pound will be devalued as against the United States dollar in the same proportion as sterling. The International Monetary Fund has been consulted and has agreed.
Keri Phillips: Australian prime minister Ben Chifley, announcing Australia's response to Britain's devaluing of its currency by almost a third in September, 1949. IMF members would struggle with the fixed exchange rate arrangements until they were finally abandoned in the 1970s when the US got into trouble. But there were other features of the fledgling fund that would distort its operation as well. Professor Ngaire Woods is director of the Global Economic Governance Program, University College, Oxford.
Ngaire Woods: One of the elements that they built into the IMF was that each country would be assigned a quota and that quota would reflect their weight in the global economy. So it's a very complicated formula that ostensibly represents their share of global trade and so forth, and on the basis of that quota they would be assigned certain voting rights and also a figure of how much they would have to lodge with the organisation. What's rather fun is that when you look at the formula you think it's all terribly scientific, but in fact Raymond Mikesell, the author of the formula, reveals in his memoirs that he was actually simply told by the United States and Britain, to go off into a corner and come up with whatever formula it took to ensure that the United States had a certain share of votes and that Britain had a certain smaller share of votes, and then to sort the rest.
Right from the start, the IMF had an executive board created, which would sit permanently and the executive board is five countries who had their own representative on the board, and so those representatives are not particularly independent. If the United States or Britain isn't very happy about what their executive director is doing, they can actually recall and replace them instantly. But all the other countries in the IMF are represented in groups, called constituencies and those constituencies elect a director. And why I'm going into that detail is because once they elect a director, they can't touch that director for two years. So in fact, those directors are very independent, they can do whatever they like.
The negotiations for creating the IMF took place at Bretton Woods in the United States, and the countries came up with an agreement, and for example, within that agreement was an agreement that gold would be the reserve currency, and that there would not be conditionality attached to IMF loans. But very quickly after that conference, in subsequent actions, the dollar very quickly became the reserve currency. The United States produced something it called their interpretation of the Articles of Agreement, and in their interpretation, they laid out that there would be conditionality. Right at the outset it was agreed by all countries that the IMF should safeguard its resources, it shouldn't just be wanton and profligate with its resources. What the United States then leapt upon which this definition of what it meant to safeguard the resources, and it's that that then they expanded, and has expanded further and further through the decades to imply a huge program of conditionality, so that by the 1990s countries were being asked to do 120 different very specific policy measures in return for their IMF loan. So both through formal politics, the United States ensured that in the Charter it had a veto, that the organisation would be in Washington DC, that it would have a controlling voice on senior management and staffing.
But also through this informal means of simply announcing what they understood the Articles of Agreement to mean afterwards, the United States quite quickly asserted its dominance.
Keri Phillips: You're listening to ABC Radio National. I'm Keri Phillips. Today's Rear Vision looks at the history of the International Monetary Fund, the agency designed to foster global economic co-operation and prevent global economic catastrophe.
John Maynard Keynes, the British economist behind the Bretton Woods system, had proposed an IMF of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. But the US was not prepared to give that much power to a division of the United Nations.
Nonetheless, many countries, including Australia, did make use of this global credit union.
James Raymond Vreeland: There was this stigma attached to turning to the IMF and taking on IMF austerity conditions. These austerity conditions were supposed to get countries to follow the good policies, the policies deemed by the IMF to be the proper ones to address balance of payments problems, and the loan was supposed to soften the blow while they adjusted. So you did see from time to time, developed countries borrowing from the IMF. Australia borrowed from the IMF in 1961; around that time, so did the United States and Japan. The United Kingdom and France also borrowed from the IMF in the 1970s but those agreements already started to have much more austerity attached to them, and in the case of the British, it became quite a politically distasteful thing to do.
So developed countries started to steer away from the IMF and really cut down on borrowing from the IMF in the late 1970s, such that only Spain and Portugal, which probably we wouldn't really consider developed countries at that time, but they were the last Western European countries to borrow from the IMF in the 1980s.
Now one thing that's kind of interesting is that a lot of people are aware of the fact that the IMF shifted its operations in the 1970s, the early 1970s, when the US went off the gold standard, right? So between 1971 and 1973, you see the world shift away from the gold standard, and the IMF ceases to, over that decade, ceases to lend to the developed world.
In the meantime, however, they had already been loaning to the developing world. You have countries like South Korea that borrowed from the IMF throughout the 1960s, straight, they actually borrowed for 12 years straight; you have a country like Panama that borrowed in the 1970s and 1980s for 20 years straight; a country like Zaire, now the Democratic Republic of Congo, they borrowed for about 14 years straight. Now it's no accident that I just threw out South Korea, Panama and Zaire; these were all Cold War allies of the United States, and so there is some correlation between who borrows from the IMF and who's favoured by the United States, who is the largest shareholder of the IMF.
So what you see is sometimes the IMF is used for political purposes to prop up governments and maybe the loans go towards helping those governments survive in power, as opposed to helping soften the blow as they adjust. If they just adjusted, maybe their program would last 6 months to 18 months, but because they don't adjust, they keep needing more loans and because they're favoured or important to the United States, they keep getting those loans.
Richard Nixon: We must protect the position of the American dollar as a pillar of monetary stability around the world. In recent weeks the speculators have been waging an all-out war on the American dollar. Accordingly, I have directed the Secretary of the Treasury, to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Ngaire Woods: The real pivot point for the IMF came in 1969 when President Nixon announced America's first step away from the Gold Standard, which finally in 1971 he abandoned entirely. Now what that meant was the whole system the IMF had been created to oversee was smashed in one blow. It would no longer be a rule-based exchange system. By announcing that it would no longer back dollars with gold, smashed the fixed exchange rate system, floating the dollar and then all the other major currencies floated in the wake of the dollar. And that created a problem which is still with us today, which is that there is no rule-based exchange rate system, and so countries accuse each other of cheating on their exchange rates.
The reason why you could have fixed exchange rates in the 1950s and '60s, is because countries used capital control. That means they kept the windows and doors closed to foreign capital coming in and out of their systems. Investors couldn't speculate on the value of exchange rates. That's what changed in the '60s and '70s.
Keri Phillips: Once countries, especially industrialised countries, decided that market driven floating exchange rates were a more appealing alternative to the Bretton Woods system, the original raison d'etre of the IMF was gone.
Ngaire Woods: In the 1970s the IMF just seems to be an institution with no purpose, and no role; it looked completely marginal. It was no longer overseeing a fixed exchange rate system, countries weren't particularly in need of its loans, in fact in the 1970s there weren't in need of its loans because the oil price increase of '73 had created vast amounts of wealth which was in search of investment opportunities, and commercial banks took up that money and very quickly started lending it to developing countries. So in the 1970s you saw this fiesta of private lending. And because inflation was high, the real interest rate on the loans that these commercial banks were making to developing country governments, like Mexico and Argentina, were negative.
In other words, banks were going to governments and saying, 'We'll lend you money, and we'll pay you to take it', because the interest rate didn't cover the rate of inflation. Needless to say all those governments did not resist the temptation. They took out millions and millions of dollars in these loans. And the IMF was simply put into a cupboard with the door closed, and it wasn't till that great party of lending crashed and came to a halt after 1979 that the IMF was pulled out of the cupboard and pushed into centre stage.
John Arden: Tremendous efforts have been made to narrow the gap between exports and incomes. In the first six months of this year alone, Brazil had a visible trade surplus of $6 billion, but the interest payments on massive loans wiped out the benefit.
The government failed to impose austerity measures demanded of it for fear of social unrest. Two riotous days in the industrial city of Sao Paolo last April were evidence of that. But convinced that the IMF could get tough, the government has now gone ahead with new measures, and they include reducing the indexation of wages to inflation.
In the '70s, the so-called Brazil Economic Miracle saw growth rates of 10% with inflation rates of only 20% to 30%. Now growth rates are negligible and inflation is running at 127% a year. The foreign debt is $90 billion.
Ngaire Woods: In 1979, the United States Federal Reserve decided dramatically to increase its interest rate, to try to stem inflation. And that very quickly affected these massive loans that had been made to developing countries. You can picture your own mortgage: if you thought you had a mortgage which you paid no interest on and then suddenly overnight you were told that you were going to start paying 13% interest on it, which is what happened, you'd either go bankrupt or start looking distinctly unstable financially. And that's what happened to these countries.
Now that might not have been a problem for the United States and Europe if it weren't for the fact that it was their banks that were hugely over-exposed in their loans to those countries, and so it became very quickly apparent that there would be an international financial crisis unless you found a way to ensure that countries like Mexico and Venezuela and Brazil and Argentina repaid the banks their loans to stop the banks from going bust. If they had all collectively defaulted it would have brought down the international financial system.
So the IMF was wheeled out and sent in to provide loans to these countries and to require these countries to adjust. And that was the deal. On the one hand, some financing, and on the other hand some adjustment. The financing was modest, it was just enough money to ensure that for example, Mexico repaid its loans to the banks. The problem of course from the Mexican point of view was that this IMF loan came with a high interest rate of its own, in fact it wasn't bailing out the countries, it was bailing out the banks through the countries, because the loans it was making to these countries had high interest rates, and these countries became more and more indebted through the 1980s. You saw riots and social unrest immediately in these countries, because the places that governments could most easily cut back were things like food subsidies, education for the poor, health for the poor, different kinds of welfare activities, and these were the places that governments first cut back.
What's interesting about the 1980s Latin American debt crisis is that the IMF was sent into a crisis, which it actually didn't have the toolkit to deal with. The approach was premised on the idea that by taking these quite draconian adjustment policies, countries would begin to grow, but by the mid-'80s, it was clear that none of the governments that were undertaking these policies were growing, and that made their debt burden more and more unsustainable.
Keri Phillips: This is Rear Vision on ABC Radio National. I'm Keri Phillips, here with a history of the agency designed to foster global economic cooperation and prevent global economic catastrophe, the International Monetary Fund.
In the decades since the Latin American debt crisis the IMF has found itself at the centre of a continuing series of economic crises.
Ginny Stein: Thailand's financial woes started a domino reaction across South East Asia. It led to Thailand seeking a US$17.2 billion rescue package from the International Monetary Fund. In accepting the bail-out package, Thailand agreed to a number of conditions, including bringing in a budget surplus in 1998, keeping its current account deficit in check, and restructuring its financial sector.
Tarrin Nimmanahaeminda (Thai Finance Minister, 1997): We will work very closely with the IMF. We will try to make our policies, our plans, which will be transparent, concise and implementable, and hopefully creditable.
James Raymond Vreeland: Now with the East Asian financial crisis, there was a major turning point, because a lot of the policies that they imposed in the late 1990s, during the East Asia financial crisis, turned out to be the wrong ones, and exacerbated the crisis, and so many emerging market countries decided to stop borrowing from the IMF. That coupled with reasonably good economic conditions, led to very little borrowing from the IMF and the IMF actually found itself tightening its own belt. And in the early 2000s, it was the IMF going through their own austerity and trimming their own budget. A major problem for the IMF is that it actually generates its own revenue through the loans that it provides. Now because it does charge some interest on the loans, and it's the interest that actually goes towards the operations, make funding the operations of the IMF.
Now with this new financial crisis, there's going to be a new round of lending and the IMF is going to be flush once again with loan repayments, and interest repayments that will help finance them. But this leads to this strange kind of a, what you'd call a perverse incentive, that the IMF does better when there are economic crises, and yet the IMF's job is supposed to be in part to prevent these crises.
Keri Phillips: After the debacle of the Asian crisis and before the current global financial crisis the IMF appeared to be sliding into irrelevance. Although the GFC may have thrust it into the spotlight once more, world leaders will have to commit more money to keep it there.
James M. Boughton: Well the IMF has a very limited amount of money to lend, and part of the discussion that's taking place among major countries now is trying to determine the best way to make sure that the IMF does have enough money to lend. We're not like a central bank that can just create money at will; our members keep the IMF on a pretty tight leash, but by the same token, they want to make sure that the IMF does have enough resources to do its job properly.
James Raymond Vreeland: The first thing that I would point out is that the IMF is still a relatively small organisation in terms of how much money it has to lend. Now on the one hand, they have, depending on the value of the dollar on any given day, they have say roughly $250 billion that they can loan out. That's sizeable, but when you consider the size of the stimulus packages that are being put together in the developed world where we're in the magnitude of trillions of dollars, you can see that the IMF certainly isn't large enough to address any of the crises in the developed world. It's really not even big enough to address crises in the emerging market countries.
Keri Phillips: As everyone keeps telling us, we're travelling through unchartered economic waters, but whatever lies ahead, one thing is certain, the current trade imbalances are unsustainable.
David Vines: What we are seeing now is a transition in the world economy from a world led by the US to a world which will be a really multi-polar world of the US, Europe, and crucially China, India, East Asia and Latin America. And we need a financial system which is stable during the period that this transformation happens and the fund is crucial to make that possible.
Let me just explain to you: a really big circumstance in the world at the minute has been the huge growth in China through very rapid export-led growth. 10% of China's GDP is exported and less than half of China's output is consumed. It's a very extraordinary growth process.
The other side of the coin has been borrowing from the rest of the world, the US, UK, Australia too, the counterparty to the Chinese selling a lot and others borrowing in order to buy it. This can't go on forever, and a stable international system in which these international imbalances are unwound, is absolutely crucial and the Fund's maintaining that stable system is central to us not degenerating into the kind of chaos we've had the last year and the kind of problem that many of us believe will continue to apply until this adjustment of international imbalance has happened. There's a real danger of competitive scrambles for devaluation in a floating rate world, by countries in debt when they get into crisis, and the Fund and the managed international system is necessary now just like it was after the Second World War to stop such a scramble.
Ngaire Woods: I think the key problem for the IMF began first when the rule-based exchange rate system collapsed because what the United States and its partners didn't do was work out what was going to replace the old rule-based system, and they didn't use the IMF as a forum to do that. And I think that's what they're going to be having to sit down to do now.
The other crucial element for the IMF was being forced in the 1980s to become this rather draconian debt collector, rather than a forum of international co-operation, and that gave the institution habits, habits of imposing conditions on countries, rather than really listening to them. So if we look at the world economy today, it's clear that the world very much needs a forum for international monetary cooperation and that it should be a role that the IMF plays. But the play that role, the IMF has to be seen by all of its members as a neutral forum for those conversations, and as an impartial arbiter and enforcer of the rules. And that's a lot of ground that it's going to have to catch up. And the very first steps it's going to have to make to do that are going to be on the representation of countries. The world is no longer a world in which America is the largest creditor. America is now the world's largest debtor. China is the world's largest creditor, and China is going to need not just a seat at the table, but a very important seat at the table.
Keri Phillips: Ngaire Woods, Director of the Global Economic Governance Program at Oxford University.
We also heard from James Raymond Vreeland, Associate Professor of International Relations at Georgetown University; David Vines, Professor of Economics, Balliol College, Oxford, and the historian of the IMF, James M. Boughton.
http://www.abc.net.au/rn/rearvision/stories/2009/2538035.htm#transcript
17 April 2009
India and China want IMF to sell its $100b gold
India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries.
The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion.
A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.
“We have been discussing with China a common position on the subject,” a senior finance ministry official told Financial Chronicle.
Both prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington.
The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20.
The World Bank has estimated that over 90 million people may be pushed into poverty in the global economic turmoil.
“We are working on a more ambitious proposal of selling the entire gold as it is an idle asset with the IMF,” said the official.
India and China are looking at three ways of using the money so raised. 1) The $100 billion be invested to improve IMF’s liquidity. 2) The money be committed to improving incomes of the poorest countries. 3) A mix of the first two options be considered.
How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered.
Globally gold prices now are in the $870 - $950 per ounce range. India and Turkey, traditionally big buyers of gold, have not bought much lately because of low domestic demand. During January to March, India bought a paltry 1.2 tonnes. (Normally, India imports about 700 tonnes a year.) Turkey bought just 40 kg last month.
K Shivram, vice- president of the World Gold Council, said, “Whether the gold will be sold or not is an open question.” If the sale did take place it would be staggered, he said. There could be a temporary correction in gold prices but the market would bounce back.
He added that when G20 announced the limited sale of gold, the prices that had been ruling around $950, dropped to $875. “But they are again moving up.”
In India, gold now quotes at Rs 14,500 to 15,000 per 10 gm. Karvy Comtrade, a commodity brokerage, expected the price to drift to Rs 13,000 by the end of June. He did see an impact of IMF gold sales in the short- to- medium term.
Vibhu Ratandhara, assistant vice- president of Bonanza Commodity, said much depended on the US, which had 17 per cent equity in gold at the IMF.
The gold, if cold, would go mostly to central banks. He said there could be some impact on retail prices which might drop by Rs 400 per 10 gm.
The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold.
http://www.mydigitalfc.com/news/india-and-china-want-imf-sell-its-100b-gold-897
The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion.
A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.
“We have been discussing with China a common position on the subject,” a senior finance ministry official told Financial Chronicle.
Both prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington.
The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20.
The World Bank has estimated that over 90 million people may be pushed into poverty in the global economic turmoil.
“We are working on a more ambitious proposal of selling the entire gold as it is an idle asset with the IMF,” said the official.
India and China are looking at three ways of using the money so raised. 1) The $100 billion be invested to improve IMF’s liquidity. 2) The money be committed to improving incomes of the poorest countries. 3) A mix of the first two options be considered.
How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered.
Globally gold prices now are in the $870 - $950 per ounce range. India and Turkey, traditionally big buyers of gold, have not bought much lately because of low domestic demand. During January to March, India bought a paltry 1.2 tonnes. (Normally, India imports about 700 tonnes a year.) Turkey bought just 40 kg last month.
K Shivram, vice- president of the World Gold Council, said, “Whether the gold will be sold or not is an open question.” If the sale did take place it would be staggered, he said. There could be a temporary correction in gold prices but the market would bounce back.
He added that when G20 announced the limited sale of gold, the prices that had been ruling around $950, dropped to $875. “But they are again moving up.”
In India, gold now quotes at Rs 14,500 to 15,000 per 10 gm. Karvy Comtrade, a commodity brokerage, expected the price to drift to Rs 13,000 by the end of June. He did see an impact of IMF gold sales in the short- to- medium term.
Vibhu Ratandhara, assistant vice- president of Bonanza Commodity, said much depended on the US, which had 17 per cent equity in gold at the IMF.
The gold, if cold, would go mostly to central banks. He said there could be some impact on retail prices which might drop by Rs 400 per 10 gm.
The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold.
http://www.mydigitalfc.com/news/india-and-china-want-imf-sell-its-100b-gold-897
16 April 2009
The logic behind putative US capital controls; split old/new dollars
Only way to inflate without destroying the current monetary order....
Decouple the world from the dollar
By Korkut A Erturk
"While an emphasis on reviving banks and an injection of public spending are both important, the trouble is that neither one directly addresses the main source of global deflation, which is that global imbalances are no longer being recycled effectively. Because US households and banks are now bankrupt, the United States has lost much of its capacity to absorb and recycle foreign trade surpluses. That, in a nutshell, is the driving force behind the global deflationary trend.
Substituting massive public spending for private consumption and putting banks on life support are at best stopgap measures, and it is unlikely that they will bring back the ability to recycle trade surpluses. Even in the best-case scenario, where confidence in the dollar holds up, the broken machinery that produced the world's credit supply cannot not be reassembled because too many borrowers and intermediaries are insolvent. There is no easy way to make the debt overhang go away, and neither tax cuts nor cleansing banks of toxic assets will bring about a lasting increase in private consumption............
The extreme monetary easing and a massive fiscal stimulus being implemented amounts to fighting deflation by trying to destabilize the monetary standard to induce inflation. If it fails, the current slump can turn into a great depression worse than the last, and if it works, the resulting inflation will probably make the 1970s look good................
....
That requires that the global monetary standard, and by extension the integrity of monetary reserves, is safeguarded as more stimulus is implemented.
A credible plan to achieve this would involve figuring out a way to draw a wedge between the global dollars accumulated in foreign reserves and the domestic dollars that the US will be creating at a much faster clip. That way, the world economy can reinflate at the same time, since everyone would be able to devalue in relation to a stable monetary standard.
Technically, this wouldn't be hard to do. An idea such as setting up a substitution account at the International Monetary Fund (IMF) to convert unwanted dollars to special drawing rights (SDRs) can be considered. The idea was considered before in the late 1970s when international confidence in the dollar was ebbing, only to be shelved once the political swing to the right made it redundant. In principle, the IMF could issue as many new SDRs as demanded without being inflationary and could even refashion itself as the asset manager of the world. The IMF could even help generalize new instruments such as the proposed Asia bond by using Chinese reserves.
The real question is whether there will be the political will to carry out these proposals....
http://www.atimes.com/atimes/Global_Economy/KD16Dj03.html
Decouple the world from the dollar
By Korkut A Erturk
"While an emphasis on reviving banks and an injection of public spending are both important, the trouble is that neither one directly addresses the main source of global deflation, which is that global imbalances are no longer being recycled effectively. Because US households and banks are now bankrupt, the United States has lost much of its capacity to absorb and recycle foreign trade surpluses. That, in a nutshell, is the driving force behind the global deflationary trend.
Substituting massive public spending for private consumption and putting banks on life support are at best stopgap measures, and it is unlikely that they will bring back the ability to recycle trade surpluses. Even in the best-case scenario, where confidence in the dollar holds up, the broken machinery that produced the world's credit supply cannot not be reassembled because too many borrowers and intermediaries are insolvent. There is no easy way to make the debt overhang go away, and neither tax cuts nor cleansing banks of toxic assets will bring about a lasting increase in private consumption............
The extreme monetary easing and a massive fiscal stimulus being implemented amounts to fighting deflation by trying to destabilize the monetary standard to induce inflation. If it fails, the current slump can turn into a great depression worse than the last, and if it works, the resulting inflation will probably make the 1970s look good................
....
That requires that the global monetary standard, and by extension the integrity of monetary reserves, is safeguarded as more stimulus is implemented.
A credible plan to achieve this would involve figuring out a way to draw a wedge between the global dollars accumulated in foreign reserves and the domestic dollars that the US will be creating at a much faster clip. That way, the world economy can reinflate at the same time, since everyone would be able to devalue in relation to a stable monetary standard.
Technically, this wouldn't be hard to do. An idea such as setting up a substitution account at the International Monetary Fund (IMF) to convert unwanted dollars to special drawing rights (SDRs) can be considered. The idea was considered before in the late 1970s when international confidence in the dollar was ebbing, only to be shelved once the political swing to the right made it redundant. In principle, the IMF could issue as many new SDRs as demanded without being inflationary and could even refashion itself as the asset manager of the world. The IMF could even help generalize new instruments such as the proposed Asia bond by using Chinese reserves.
The real question is whether there will be the political will to carry out these proposals....
http://www.atimes.com/atimes/Global_Economy/KD16Dj03.html
28 January 2009
Global economy grinds to a stop, according to the International Monetary Fund
THE world economy is at a standstill, with the major developed countries in deep recession, according to leaked forecasts prepared by the International Monetary Fund.
The third downward revision to the IMF's forecasts in the last four months comes as layoffs affecting more than 70,000 workers were announced around the world on Monday.
The IMF is due to release new official economic forecasts before the end of the week. However, a well-sourced report carried by Reuters news agency says it expects global growth of just 0.5per cent this year.
The fund has been struggling to keep up with the rapidly deteriorating world economy, having cut its estimate for world growth next year from 3.8 per cent last April to 3 per cent in October and 2.2 per cent in November.
The latest update anticipates sharply slowing growth in China and India.
The US economy is expected to contract by 1.6 per cent, while Europe will shrink by 2 per cent and Japan by 2.6 per cent.
The fund expects the world economy to recover in 2010, with a return to 3 per cent global growth and the major economies recording small positive results.
Wayne Swan said that although he could not comment on the reports of the IMF's forecasts, it was clear the world economy was deteriorating.
"We're now facing the prospect of a deeper and more protracted global recession. This will clearly have an impact on growth and jobs," the Treasurer said.
"There are no quick fixes, but the Government will continue to take whatever action is necessary and responsible to support jobs and growth amid these very difficult global conditions."
The Reserve Bank, which on Tuesday meets for the first time since last month, is expected to respond to the worsening outlook with a large cut in interest rates.
Financial markets are tipping a one percentage point reduction, which would cut the official interest rate to 3.25 per cent and, if passed on in full by the banks, would reduce standard home loan rates to about 5.9 per cent.
The increasing severity of the downturn has been marked by a rapid rise in the number of redundancies being announced as businesses face shrinking sales revenue. A spate of announcements on Monday, including 45,000 job losses in the US, reached a total of 70,000.
Earthmoving equipment company Caterpillar announced 20,000 redundancies, drugs company Pfizer laid off 8000 workers, and Dutch electronics firm Philips made 4000 positions redundant.
In Australia, unions warned yesterday the manufacturing sector was "drowning" and predicted workers would suffer.
The Australian Manufacturing Workers Union said Caterpillar planned to shut down the night shift at its Tullamarine plant in Melbourne. Union organiser Tony Mav said about 30 workers were employed on the shift.
National Australia Bank's latest business survey found there was some recovery in business confidence and sales last month following the federal Government's stimulus package.
However, more companies are shedding labour, with businesses planning to cut their work force outnumbering by 17 per cent those planning an increase.
Additional reporting: Ewin Hannan
The third downward revision to the IMF's forecasts in the last four months comes as layoffs affecting more than 70,000 workers were announced around the world on Monday.
The IMF is due to release new official economic forecasts before the end of the week. However, a well-sourced report carried by Reuters news agency says it expects global growth of just 0.5per cent this year.
The fund has been struggling to keep up with the rapidly deteriorating world economy, having cut its estimate for world growth next year from 3.8 per cent last April to 3 per cent in October and 2.2 per cent in November.
The latest update anticipates sharply slowing growth in China and India.
The US economy is expected to contract by 1.6 per cent, while Europe will shrink by 2 per cent and Japan by 2.6 per cent.
The fund expects the world economy to recover in 2010, with a return to 3 per cent global growth and the major economies recording small positive results.
Wayne Swan said that although he could not comment on the reports of the IMF's forecasts, it was clear the world economy was deteriorating.
"We're now facing the prospect of a deeper and more protracted global recession. This will clearly have an impact on growth and jobs," the Treasurer said.
"There are no quick fixes, but the Government will continue to take whatever action is necessary and responsible to support jobs and growth amid these very difficult global conditions."
The Reserve Bank, which on Tuesday meets for the first time since last month, is expected to respond to the worsening outlook with a large cut in interest rates.
Financial markets are tipping a one percentage point reduction, which would cut the official interest rate to 3.25 per cent and, if passed on in full by the banks, would reduce standard home loan rates to about 5.9 per cent.
The increasing severity of the downturn has been marked by a rapid rise in the number of redundancies being announced as businesses face shrinking sales revenue. A spate of announcements on Monday, including 45,000 job losses in the US, reached a total of 70,000.
Earthmoving equipment company Caterpillar announced 20,000 redundancies, drugs company Pfizer laid off 8000 workers, and Dutch electronics firm Philips made 4000 positions redundant.
In Australia, unions warned yesterday the manufacturing sector was "drowning" and predicted workers would suffer.
The Australian Manufacturing Workers Union said Caterpillar planned to shut down the night shift at its Tullamarine plant in Melbourne. Union organiser Tony Mav said about 30 workers were employed on the shift.
National Australia Bank's latest business survey found there was some recovery in business confidence and sales last month following the federal Government's stimulus package.
However, more companies are shedding labour, with businesses planning to cut their work force outnumbering by 17 per cent those planning an increase.
Additional reporting: Ewin Hannan
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