SPE_Willeet_IMFCapital-Account-Crises
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SPE_Willeet_IMFCapital-Account-Crises
CHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-CrisesGraduate University and Claremont McKenna College1. IntroductionWhat has happened to the push tor reform of the international financial architecture that had such momentum during the rash of international financial crises in the 1990s?1 While not the stuff of dramatic news headlines, a great deal of SPE_Willeet_IMFCapital-Account-Crises progress has been made, especially in the areas of increased transparency at the IMF and the growing acknowledgement of the danger of trying to run aSPE_Willeet_IMFCapital-Account-Crises
stickily pegged exchange rate regime in a world of substantial international capital mobility. Less progress has been made, however, in dealing with CHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisesquasi international lender of last resort (ILOLR)?As Barry Eichengreen (2002a) has put it, “On prevention, a number of useful steps have been taken. In terms of how to manage and resolve crisis, in contrast, disappointingly little has been achieved...disagreement and confusion continue to rein" p. 5 SPE_Willeet_IMFCapital-Account-Crises2.Ranis. Vreeland. and Kosack1/19’2005 6:16 PM Page 2 of 52In a similar vein. Park and Wang (2002) argue that “the G-7 and international financial insSPE_Willeet_IMFCapital-Account-Crises
titutions appear to have lost the zeal to gamer the support they need for reform. The ongoing debate on the future direction of international financiaCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crises" p. 124-5. They go on to argue that much of the interest in regional monetary institutions in Asia has come from frustration at the limited scope of the reforms at the global level.To be sure, the international conununity through the International Monetary Fund has not been idle. Two new financing SPE_Willeet_IMFCapital-Account-Crisesmechanisms have been created within the IMF for crisis prevention and management. In the judgment of many experts, however, these reforms are far fromSPE_Willeet_IMFCapital-Account-Crises
sufficient. One. the Supplemental Reserve Facility (SRF). has been quite usefill but does not go far enough in the view of those who think we need a CHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisesarchers, public attention largely moved on to the proposal by Anne Krueger. Deputy Managing Director of the IMF. to create some type of debt restructuring facility. The Krueger proposal addressed an important issue but has met with strong political opposition. While current official interest in both SPE_Willeet_IMFCapital-Account-Crises ILOLR and debt restructuring mechanisms seems highly muted at the present time, we shouldn’t infer from this that our current institutional frameworkSPE_Willeet_IMFCapital-Account-Crises
for dealing with international monetary and financial issues is in satisfactory shape.There have been sharp disagreements in the recent discussions oCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crises of 52disagreement can be clarified by emphasizing the differences in political assumptions made by the disputants. As the reader will see. I share the view of those who argue that there arc limes where imperfectly functioning markets do present a case for 1LOLR type lending by the 1M1 (or some othe SPE_Willeet_IMFCapital-Account-Crisesr international organization), f urthermore, the growth of international capital mobility and the limited catalytic role played by recent IMF programsSPE_Willeet_IMFCapital-Account-Crises
in bolstering confidence imply that very large programs will sometimes be called for. Thus there is a strong case for a well-functioning 1LOLR type fCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisess have often been far from first-best. Some economists and politicians, mostly on the right, have even argued that past IMF programs have worked so badly that it would be best to shut down the institution all together.Most middle of the road experts argue that this is too extreme a response, but rec SPE_Willeet_IMFCapital-Account-Crisesognize that the poor-track-record IMF programs presents a serious problem. The recent discussion by Barry' Eichengreen (2002a) is typical of such viewSPE_Willeet_IMFCapital-Account-Crises
s. He notes that because there arc strong political pressures on the IMF to lend "the IMF rarely if ever says no the first time; it says no only- afteCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crises would be absurd for the IMF to continue lending" p. 55. “The problem is not just dial politicians or 1M1 management like to lend; it is that they fear the uncertain consequences of doing otherwise" p. 7.Ranis. Vreeland. and Kosack1'19 2005 6:16 PM Page 4 of 52Waste of IMF reserves is not the only c SPE_Willeet_IMFCapital-Account-Crisesonsequence of excessive lending. These programs have “...permitted governments to cling longer...to unsustainable policies, allowing economic and finaSPE_Willeet_IMFCapital-Account-Crises
ncial vulnerabilities to build up and creating the potential for very severe political and social dislocations when support is ultimately withdrawn...CHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crises current crises. A vicious circle is at work.In recent years the IMF has shown greater recognition of this problem - and there have been efforts to be tougher under the new management team of Horst Kohler and Anne Krueger. It is still too soon to tell, however, how major a change in IMF policies is SPE_Willeet_IMFCapital-Account-Crisesat hand, and the guesses of independent experts vary widely. Thus we see that the sources of dispute about a new ILOLR-type facility for the IMF restSPE_Willeet_IMFCapital-Account-Crises
as much on judgments about the extent of bureaucratic and political failure as on the extent of market failure.This suggests that instead of just impoCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisesstrate sufficient reforms in their lending practices is the international community likely to provide the IMF with the increase in resources necessary to operate an effective ILOLR-type facility.We may interpret in this light the proposals of the majority report of the recent U.S Congressional Commi SPE_Willeet_IMFCapital-Account-Crisesssion (commonly called the Meltzer Report). This report called for abolishing all traditional IMF programs and replacing them with a new ILOLR type faSPE_Willeet_IMFCapital-Account-Crises
cility that could make large loans, but only for short time periods and under strictRanis. Vreeland. and Kosack1/19/2005 6:16 PM Page 5 of 52conditionCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisesper will argue, however, that while it is unsatisfactory as a comprehensive blueprint, the Meltzer Report and the debate it has stimulated makes an important contribution.Ironically, while one of the major criticisms of the IMF has been its excessive leniency in lending, another has been the excessi SPE_Willeet_IMFCapital-Account-Crisesve breath and stringency of the conditions that it imposes. Of course some of the seemingly contradictory nature of these criticisms is that some comeSPE_Willeet_IMFCapital-Account-Crises
from the right and some from the left, but another important cause is the Fund's spotty record of enforcement. The Meltzer Majority Report recommendeCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisese there have been a number of criticisms of the specific pre-conditions recommended by the Meltzer Report, it has helped spark a valuable debate about ex ante versus ex post conditionality.This paper ar gues that there is a useful role for some of the types of traditional IMF conditionality programs SPE_Willeet_IMFCapital-Account-Crises rejected by the Meltzer Report and that we should not yet give up entirely on the ability of the IMF and its political stakeholders to do a better joSPE_Willeet_IMFCapital-Account-Crises
b of running such policies. It has been increasingly widely recognized, however, that the conditions under which such programs can be effective are liCHAPTER 13:THE IMF AND C APITAL ACCOUNT ( RISES:THE CASE FOR SEPARATE LENDER OF LAST RESORT AND C ONDITIONALITY FUNCTIONS*Thomas D. WillettClaremont G SPE_Willeet_IMFCapital-Account-Crisesever, but in the midst of currency crises rapid action is needed. This paper proposes that this inherent conflict can be reduced by separating IMF programs into two major categories. An ILOLR type facility would provide short term financing to countries facing liquidityRanis. Vreeland. and Kosack1/1 SPE_Willeet_IMFCapital-Account-Crises9 2005 6:16 PM Page 6 of 52crises who meet a set of pre-conditions or ex ante conditionality. In a pure liquidity crisis this is all that will be needSPE_Willeet_IMFCapital-Account-Crises
ed, as the Meltzer Report assumed. Frequently, however, crises are a combination of liquidity crisis and genuine problems that aren't hopeless, but reGọi ngay
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