Download What is the IMF? - UCLA Division of Social Sciences

Tanzania and the IMF during
the 1980s
James Raymond Vreeland
Political Science Department, Yale University
International Institute, UCLA
Plan of the lecture:

What is the IMF?

Conventional story of why governments enter into
IMF programs.

Tanzania and the IMF in the 1970s.

What happened in 1983? (No agreement – a
strange case!)

Why did Tanzania enter in 1986?
What is the
International Monetary Fund?

1944: 44 countries signed the Bretton
Woods agreement
– International Monetary Fund (stability)
– World Bank (development)

The “Bretton Woods” Institutions.
The IMF was given 2 tasks:
1.
Monitor exchange rates.
2.
Act as “lender of last resort.”
Monitor exchange rates
standard – each currency’s value
was ultimately backed up by gold.
 Gold
 Required
high maintenance monitoring.
 Surveillance
is still an important part of
what the IMF does…

But when the world shifted away from the
gold standard in the 1970s, the old exchange
system collapsed.

The new system did not require intense
monitoring.

The IMF faced A CRISIS OF PURPOSE.

Shifted its attention to the 2nd function.
Lender of last resort

Mitigate balance of payments crises by
providing “loans.”

This is intended to discourage
competitive/destructive policies the are
believed to have led to the Great
Depression.
– Trade barriers, competitive devaluations.

Who is the IMF?

Where do the resources for “loans” come from?

Who is the IMF?
– Currently 184 members.
– Members have “votes” according to the size of their
subscription to the IMF…
Where do the resources for “loans” come from?

Members provide a contribution (“capital
subscription”) called the member’s quota
denoted in SDRs

The size of the quota is a function of the
country’s economy:

GDP

current account transactions

official reserves
Largest: USA (SDR 37,149.3 million). Smallest: Palau (SDR 3.1 million).
Quotas
 Determine
“vote share.”
– US: 17%
– G-7: 45%
(Canada, France, Germany, Italy, Japan, UK,
+ US)
So…as a lender of last resort,

If a country gets into a balance of payments crisis
(or for whatever reason) has a shortfall in its
foreign reserves,

The IMF can provide a loan (lest this country
enter into destructive policies).

Problem: This “bailing out” option lowers the
incentive to pursue sound policy.

“Moral Hazard.”
Solution?

If the IMF determines that the need for an IMF loan is due
to bad policy,

The Fund imposes policy conditions in return for the loan.

This arrangement of conditions for loans is known as
“Conditionality.”

How does the IMF determine if need is due to bad policy?
If the required loan is >25% of the member’s quota.

Note that the loan is not provided upfront, but disbursed in
“tranches,” subject to reviews of compliance with
conditions.
Policy conditions usually entail:

Fiscal austerity
– cutting government services and increasing
taxes

Tight monetary policy
– raising interest rates and reducing credit
creation

Since 1982: Structural reforms
 (Currency devaluation)
Conventional wisdom

We often hear that governments turn to the
IMF only when they have no choice.

Governments enter into IMF programs if
and only if they need a loan, and must
accept IMF conditionality in return.
Tanzania’s early experience
fits the conventional story
Figure 8: Tanzania 1970-1988
Foreign reserves (in terms of monthly imports)
4.5
4
Foreign reserves
3.5
3
2.5
2
1.5
1
0.5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
Year
The “conventional story” aptly
describes the early experience of
Tanzania with the IMF:

Foreign reserves dropped in 1974.

President Nyerere needed foreign exchange but
avoided IMF conditions as long as possible.
– Government draws down 25% of quota (10.5 million SDR ).
– Obtains 2 Oil Fund Facility Arrangements (6.3 & 3.15 mill SDR ).

Finally, the government succumbs in 1975, but
negotiates for weak conditions:
– IMF required only that domestic credit usage by the public sector
be constrained.
Nyerere did not want IMF
conditions

When reserves plummeted again in the late
1970s:

“People who think Tanzania will change her
cherished policies of socialism because of the
current economic difficulties are wasting their
time” –President Nyerere

1980 Agreement
– Nyerere negotiates for soft conditions
 Nyerere uses prominence as a world figure
 takes advantage new Managing Director’s (de La
Rosière) reach out to Africa
– Only 2 conditions
 a joint Tanzanian-IMF study of the exchange rate
 ceiling on government borrowing

Even these conditions were too much. The
agreement fell apart.
Important points from 1970s

Why did Nyerere turn to the IMF?

Why was he able to negotiate for soft conditions?

What was Nyerere’s negotiation posture?
– Arusha Declaration
– Non-aligned movement

What was the IMF’s negotiation posture?
– Crisis of purpose
– Budget constraint weak
Tanzania’s experience:
What happened in 1983?
Figure 8: Tanzania 1970-1988
Foreign reserves (in terms of monthly imports)
4.5
4
Foreign reserves
3.5
3
2.5
2
1.5
1
0.5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
Year
Tanzania is not typical…
The typical experience:

Once a country enters into an IMF program,
consecutive agreements are signed until the
economic situation improves (and
sometimes even after the situation
improves).

Extreme examples from around the world:
South Korea spent 13 years under consecutive agreements
from 1965 to 1977.

Zaire 14 years straight (1976-1989).

Liberia 15 years (1963-1977).

Peru participated in consecutive agreements from 1954 to
1971 (18 years).

Panama from 1968 to 1987 (20 years of consecutive
agreements)

After a stint of seven years (1961 to 1967), Haiti entered into
agreements again from 1970 to 1989, for a total of 27 out of 29
years.

By the way: Tanzania from ’86-2000? Under 14 out of 15 years.
But Nyerere said NO!

In the aftermath of the Latin American Debt
Crisis, IMF conditions became tougher.

Also, the IMF faced a tighter budget constraint,
with more countries participating than ever.

Nyerere’s negotiation posture was weakened and
he could not get soft conditions.

So no agreement!
A note on case selection:
Lagged Foreign reserves, BoP and current account
for countries that did not turn to the IMF for at least 3 years
Country
Guinea-Bisau
Liberia
Year
1987
1986
ForRes/mly
impts
-0.10
0.00
BoP/GDP
-25.03
-18.58
Current
Acct/GDP
-56.70
-3.20
Tanzania
1983
0.00
-4.15
-9.80
Benin
1989
0.10
-6.05
-12.30
Tanzania is a stark case:

It helps to sharply illustrate the importance
of domestic political preferences.

When governments turn to the IMF, they
may actually want the IMF to impose
conditions.

Nyerere did not, so he said no.
What happened in 1986?
Figure 8: Tanzania 1970-1988
Foreign reserves (in terms of monthly imports)
4.5
4
Foreign reserves
3.5
3
2.5
2
1.5
1
0.5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
Year
What happened in 1986?

Did the economic crisis worsen?

Did the IMF’s position soften?

Did Tanzania suddenly gain international
prominence?
Domestic politics changed…

1985 Ali Hassan Mwinyi elected president
 Nyerere remains president of CCM
Struggle
for leadership
IMF finds domestic allies who in turn find supporters within
the state
Mwinyi brings in the IMF to help push
through economic reforms.
How does bringing in the IMF help
push through economic reform?
Key Features (non-ratification / enforcement):

Agreements are entered into by executives and the IMF.

The approval of other actors (veto players) may be
required for policy change…

But their approval is not required for an IMF agreement
to be put in place.

Once an IMF agreement has been signed, failure to
change policy becomes more costly (“rejection costs”).
“Rejection costs”
1.
Restriction of access to IMF loan.
2.
Preclude debt rescheduling.
3.
Decreased investment.
Figure 9: Tanzania 1980-1986
Investment (percentage of GDP)
Penn World Tables 5.6
Investment
15
10
5
80
81
82
83
Year
84
85
86
Figure 1: The logic of bringing in the IMF
Payoff to veto player
Accept
-1 (change policy)
Veto
player
Without
the IMF
Reject
0 (maintain the status quo)
Executive
With the IMF
Accept
-1 (change policy)
Veto
player
Reject
-r (reject the IMF)
Why study Tanzania?
1.
It is an intrinsically fascinating case.
2.
As an economic outlier, we gain leverage
over the question of domestic politics:
 It is the most extreme case of a country NOT
turning to the IMF during an economic crisis.
 When the government does turn it is because
of political preferences, not a change in the
economic situation.
Cocktail Party Phrases:

Substance:
– Tanzania 1983 is the most extreme case of a country not turning
to the IMF despite a need for foreign exchange.
– Mwinyi signed in 1986 to pressure anti-reformists in the CCM.

Methodology:
– The case of Tanzania illustrates the importance of doing both
large-n and small-n research.

Political Science:
– The case of Tanzania is at the crossroads of International
Relations and Comparative Politics.