Download Washington Consensus via IFIs - Law & Finance Institutional

INT’L FINANCIAL SYSTEM
JOINT CLASS FIVE
IMF BASICS & LOIs
Prof. David K. Linnan
Univ. of South Carolina
School of Law
UI-UGM-USC-UNDIP
Joint Videoconferenced Class
September 10, 2002
ORIGINAL BRETTON WOODS SYSTEM
Late 1940s
Concept to avoid economic problems of 1930s & WW II
again
Idea of three major institutions, International Monetary
Fund (IMF), International Bank for Reconstruction &
Development (World Bank), plus International Trade
Organization (ITO failed in adoption, but Havana
Charter and GATT, leading to WTO finally 1994)
Economic concepts of fixed currency parities but low or
no tariffs in relatively open economy was attempt to
avoid 1930s policies andissues like Commonwealth
Preference (economist claims that late New Order
economy with monopolies, etc run like 1930s)
BRETTON WOODS IN TRANSITION
Original IMF Role
Originally, IMF was a special purpose lender for
countries with balance of payment
problems under older fixed rate currency
exchange system
Monitoring function only for countries in trouble
under original system
BRETTON WOODS IN TRANSITION
Once World Went to Floating Exchange Rates Matching
General Economic & Currency Changes
Tensions with US conduct of economy (deficit spending)
1960s-1970s with Vietnam War & Social
spending led to loss of U$ & gold reference
Exchange (floating) rates then subject to ups and downs
following domestic policy even while concerns
about costs of volatility (Prof Cathy Bonser-Neal
lectures covered)
Parallel effect of change is that currency crises
themselves may now drive balance of payments
problems and IMF has constant monitoring
function in anticipation
IMF BASICS-WASHINGTON
CONSENSUS
Current “Washington Consensus” Created for Latin
America in 1980s Structural Adjustment Approach
under which Policy Reform Consists of 10 Elements
(NB– Washington Consensus means IFIs, not US
government)
1) Eliminating fiscal deficits for stability purposes (but
problem of limiting idea of Keynesian growth
enhancement in stimulative spending)
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
2) Reviewing public expenditure priorities
(increasing revenues versus decreasing
expenses)
a) Military spending sovereign prerogative, off table
b) Subsidies strongly disfavored as distorting economy &
expensive
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
2) Reviewing public expenditure priorities
(increasing revenues versus decreasing
expenses)
c) Education & health spending viewed as proper, but issue
of actual composition (investment versus consumption
and helping disadvantaged
d) Public infrastructure investment as productive
Concept of switching expenditures from subsidies to education
& health or public infrastructure
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
3) Tax Reform
Ultimately just reverse of cutting expenditures in raising
revenues, but disfavored by politicians while favored by
technocrats
This is the revenue side of public expenditure priorities
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
4) Interest Rates
a) market determined to avoid misallocation of funds
bureaucratic credit rationing (efficiency hidden good)
in
b) positive real interest rates to discourage capital flight and
perhaps encourage savings
East Asian disagreement on picking industrial champions
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
5) Exchange Rates
a) Concept of “competitive” exchange rate versus technical
question of how determined (export competitiveness)
b) Ambivalence on liberalization of foreign capital flows
from developing country perspective (capital account)
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
6) Trade Policy
a) Import liberalization & outward oriented economic
policy
b) Disfavoring import substitution protection for
developing domestic industry (costliness argument & who
profits)
c) Import licensing
protection tariffs
&
corruption
problems,
so
if
d) free trade idea subject to (temporary) infant industry
issues, plus phase out versus big bang approach bringing
costs
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
7) Foreign Direct Investment
a) Idea adding bricks & mortar capital good for real
economy (current account-Prof Cathy Bonser-Neal lectures)
b) distinguish it from liberalizing financial flows (capital
account-Prof Cathy Bonser-Neal lectures)
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
8) Privatization
a) Efficiency (hidden view markets better allocator than
governments through State Owned Enterprises (SOEs or
BUMNs in Indonesia)
b) Market preference as change since 1950s, linked with
competition ideals
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
9) Deregulation
Idea ultimately is again
deregulation for cheaper
efficiencies
competition through
prices and greater
IMF BASICS-WASHINGTON
CONSENSUS
Washington Consensus (cont’d)
10)Property rights
Concept of property rights ties into contracting &
incentives, to make markets work
IMF BASICS
IMF BASICS
CURRENT IMF VIEW OF ITS ROLES
1)
Surveillance
2)
Technical Assistance
3)
Financing
All roles are essentially to help countries in macroeconomic
economic difficulties, with practical pressure on conditionality
concerning which more later legally plus at heart of letters of
intent (LOIs)-- But newer pattern of financial sector difficulties
as trigger for macroeconomic and exchange
rate problems
IMF BASICS
Is IMF process with LOIs a “legal” or a “policy” process?
Compared to what, like WTO? Does it matter in
economics versus financial sector areas?
Why is it either regularized in “rule” form (legal format)
versus “policy” form (flexibility from
economists’ standpoint)?
What about sovereignty arguments, are they more
appropriate in legal versus policy format?
Does a private bank infringe on sovereignty in
conditioning a loan on behavior?
IMF LOIs
Indonesia Memorandum of Economic and Financial Policies
January 15, 1998
Policy Framework
Fiscal Policy
Problems from currency depreciation
Subsidy decreases
Taxation system improvements & new excise
taxes
Transparency in off-budget funds
Investment project cutbacks
IMF LOIs
LOI Policy Framework (cont’d)
Monetary & Exchange Rate Policy
Complications with banking system problems (runs &
insolvencies)
High interest rates in face of uncertainties regarding
rupiah exchange rate and liquidity generally
(tight monetary policy)
Financial Sector Restructuring
Closing insolvent banks
State versus private bank issues
Strengthening legal and supervisory
framework
IMF LOIs
LOI Policy Framework (cont’d)
Structural Reforms
Liberalization
Deregulation
Privatization
Foreign Trade & Investment
Move towards freer trade (removing export taxes,
quotas & other NTBs)
Opening up investment list for foreigners
IMF LOIs
LOI Policy Framework (cont’d)
Deregulation and Privatization
(For Dr. Suad Husnan’s presentation next)
Social Safety Net
Targeted assistance to poor
Environment
Sustainability & pollution issues
IMF LOIs
Indonesia Supplementary Memorandum of Economic and
Financial Policies
April 10, 1998
More details on Jan 15, 1998 LOI in face of further
deterioration
IMF LOIs
Link Back LOIs to Washington Consensus Points
Big difference lies in prominence of financial sector
problems
Blending of technical & system financial system issues
with macroeconomic difficulties lender role of
IMF
How accurate is IMF role description read against
LOIs themselves
How have changes in the financial systems
worldwide led to chnages in IMF roles &
activities
IMF BASICS
WHAT IS LINK BETWEEN FINANCIAL SYSTEM EXPERTISE
AND IMF’S ROLE IN BEING AN ADVISER/LENDER FOR
COUNTRIES
EXPERIENCING
MACROECONOMIC
DIFFICULTIES?