Abstract

1. Introduction

An important aspect of governance at the IMF relates to the cost of running the institution and the sharing of that cost between the industrial countries (the IMF's principal creditors) and low-income countries and emerging market economies (primarily borrowers). Much larger issues of equity are involved with respect to the distribution of quotas (or capital shares) and of voting power in the IMF. This subject has attracted growing attention in recent years. A contribution to the literature by a former Secretary of the IMF from 1977 through 1996 concludes that:

Abstract

Introduction

Conditionality is perhaps the most controversial of the IMF's policies. Among the traditional criticisms of Fund conditionality are that it is short-run oriented, too focused on demand management, and does not pay adequate attention to its impact on growth and the effects of the programs it supports on social spending and income distribution.

The research program of the Group of 24 is the world's only research effort devoted to evaluating the international economic system from the perspective of developing nations’ needs. Multilateral development banks and other research organizations may put out a larger volume of studies, but their mandate and intended audience are not as clearly defined as the G24’s. This makes the papers produced under the auspices of the G24 very special. Nowhere is the voice of the developing nations expressed as cogently and powerfully as in these papers.

This volume continues a tradition of dissemination that has long been part of the G24 agenda. It includes chapters on some of the most burning issues on the agenda: reform of the IMF and its conditionality, debt workouts and restructuring, management of capital flows, efficacy of self-insurance against crises, debt sustainability in the HIPC countries, poverty-reduction strategy papers (PRSP), international public goods, and the Millennium Development Goals and the ‘global partnership for development’. Readers will find fresh and controversial perspectives in each of these chapters.

Separating hype from fact and promise from reality has always been a hallmark of the G24 research tradition. If you are doubtful that there exist effective mechanisms for improving the governance of the IMF and its conditionality, read the chapters by Buira. If you believe that the HIPC initiative has a solid chance of placing poor countries on the path of debt sustainability, read the chapter by Gunter. If you think the World Bank's PRSP approach is based on solid economic and statistical reasoning, read the chapter by Levinsohn. If you think financial markets have become so integrated that prudential controls on capital flows have become unfeasible, read the chapter by Epstein, Grabel and Jomo. If you are of the view that the IMF's proposal of a Sovereign Debt Restructuring Mechanism (SDRM) is harmful to ‘emerging’ economies, read the amended version that is offered in the chapter by Herman.

I hope the reader will not stop with individual chapters but take the volume in its entirety. It is a gripping reminder of the long road we need to travel before the governance of the world economy becomes truly hospitable to the aspirations of the developing world.

Abstract

1. Introduction

The origins of the Millennium Development Goals (MDGs) lie in the United Nations Millennium Declaration, which was adopted by all 189 UN Member States on 8 September 2000. The Declaration embodies many commitments for improving the lot of humanity in the new century. Subsequently, the UN Secretariat drew up a list of eight MDGs, each accompanied by specific targets and indicators. This paper addresses Goal 8, which is to ‘develop a global partnership for development’. As of November 2002, seven targets were listed under Goal 8, as well as 17 indicators. The selection of indicators is subject to further refinement. Goal 8 covers a wide range of issues but this chapter focuses on only some aspects of the global economic system, and mainly on international trade and multilateral rules under the World Trade Organization (WTO).

Goal 8 is crucial, as it is the only development goal that generally and specifically covers international relations. As is generally accepted, successful development efforts require appropriate policies at both the domestic and international levels. International factors have become increasingly important in recent years as a result of globalization. Developing countries have generally become more integrated in the world economy and their development prospects and performance are thus more dependent on global economic structures and trends.

Abstract

What is the nature and purpose of IMF conditionality, and is it required to safeguard Fund resources? This chapter reviews these issues and then poses some key questions. For example, can program ownership by a country be made compatible with externally imposed conditionality? To what extent is conditionality of the international financial institutions (IFIs) power without responsibility? What, if any, are the consequences for the IMF of imposing programs that fail more often than not? It looks into the reasons for increased conditionality during the 1980s and 1990s and reviews the recent debate on conditionality. As the number of conditions – in particular structural ones – grew rapidly during the 1980s and the 1990s, the rate of compliance with IMF-supported programs saw a parallel and sharp decline. The chapter also presents an analysis that distinguishes between different types of external crises: short-term imbalances that result from excess demand and expansionary policies; mediumterm structural disequilibria such as those resulting from time lags in production (future supply) from investment spending (current demand); and currency and external crises resulting from sudden reversals of capital flows, noting that different types of underlying causes of imbal-ances call for different sets of policy conditionality.

Abstract

1. Introduction

Achieving long-term debt sustainability is a complex and challenging task that requires a combination of appropriate macroeconomic, structural, investment and debt management policies. In poor countries, long-term debt sustainability is also heavily influenced by such external factors as terms of trade, donor financing, and the provision of debt relief. Debt sustainability, however, can be defined in a variety of ways. As EURODAD, Northover and Sachs et al. illustrate, if debt sustainability is approached from a human and social development perspective, most of the poorest countries have an unsustainable debt regardless of their debt levels. The rationale of such a definition of debt sustainability is that countries with large proportions of their populations living below the poverty line have a more urgent need to spend their resources on poverty reduction than on debt service.

Abstract

The chapter reviews the elements that constitute the power structure (basic votes, quotas and the qualified majorities) by which the IMF is governed, following the commitment made by all participants in the Monterrey Consensus to increase the voice and participation of the developing countries and transition economies in the Bretton Woods institutions.

It finds that the small economies have been marginalized as a result of the relative erosion of basic votes and that quotas are far from representative of the size of members' economies. As a result, developing economies are under-represented while certain industrial countries, notably those in Europe, are over-represented. It finds that the governance of the IMF does not meet the standards of transparency and accountability needed to ensure the legitimacy of its decisions and the proper use of the resources at its disposal.

Finally, the question is addressed of how the decision-making process can be reformed to attain political legitimacy without weakening the credibility in financial markets.

Introduction

Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.

In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions’ neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful. As for crisis resolution, the IMF's approaches to in Asia, Russia and Argentina have been controversial. In fact, one of the more successful responses to the challenge posed by the volatility of capital flows has been the introduction in Chile and Colombia, for example, of market-based controls on capital movements, which had been resisted by the IMF for years. These responses illustrate the practical relevance of the ‘theory of the second best’ by which, when an economy suffers a distortion, welfare may be improved by the judicious introduction of another distortion through some form of government intervention.

A second, related, challenge, which is yet to be addressed, is posed by the massive reversals of previously large capital flows, from the developed to the developing countries.

Abstract

A positive future for foreign private lending to developing countries requires reducing perceived risk through mechanisms for more permanent debtor-creditor ‘conversation’, and an accepted and effective ‘bankruptcy’ approach to orderly workouts from unavoidable sovereign defaults. The IMF began a serious debate on this issue by proposing a Sovereign Debt Restructuring Mechanism (SDRM) for orderly workouts of sovereign debts in default. Somewhat surprisingly, the creditor banks, the US Treasury, and the emerging market countries have all rejected the Fund's SDRM approach to debt restructuring. The emerging market countries are concerned that the SDRM approach would significantly increase the high ‘spread’ or the risk premium they already have to pay for foreign loans. The chapter makes certain suggestions and revisions to the Fund's SDRM approach to make it more acceptable to all parties involved, and to preserve its bite. For example, the chapter advocates including bilateral official creditors in SDRM negotiations, making a mediation service available to negotiating countries, retaining an effective but temporary ‘stay’ mechanism and, most importantly, separating the mechanism as a whole from the IMF by seeking to enact an international law through a stand-alone treaty. I conclude by warning that premature closure around this controversial, but extremely important, proposal could rob the international system of measures for increasing investor and citizen confidence. I thus call for further consideration of the matter in all relevant forums.

Abstract

1. Introduction

Reducible market uncertainty makes the perceived risk in foreign lending to the governments of developing countries higher than it need be. In part, the culprit is the shift in the composition of creditors in syndicated loans toward buyers of bonds. The open information and communication needs of bond investors are larger than those of multinational banks, which were the main intermediaries for international lending in earlier decades, and the mechanisms to work out from a default on sovereign bonds are not as developed as they have been for default on international bank loans. There are also controversies and thus uncertainties about how losses in a work out from a crisis should be shared among the various private and official creditors of a defaulting government, and between the country and its creditors as a whole.

In this chapter, I argue that the uncertainty can be reduced through a regular, ongoing dialogue between the borrowing government and its creditors, and that mechanisms can be conceived for carrying this out.

Abstract

1. Introduction

Recent crises in emerging markets have highlighted the importance of maintaining adequate levels of international reserves, and of identifying reliable indicators to assess both the current levels of reserves and any possible future pressures on them. Until relatively recently, the indicators most often used for this purpose were measurements such as the ratio of international reserves to merchandise imports or to a particular monetary aggregate. However, as capital movements have gained importance in emerging economies, the usefulness of indicators based on balance of trade flows has decreased markedly. In addition, in view of the instability of the demand for money and the use of increasingly sophisticated financial instruments, the value added of ratios focused on the relationship between international reserves and a monetary aggregate has been cast into doubt.

Abstract

I begin by posing a key question: Has the Poverty Reduction Strategy Paper (PRSP) process yielded benefits that exceed its considerable administrative costs? I first review the PRSP process and then examine some of the existing reviews, explain why these reviews tend to fall short of their goals, and finally try to answer the question stated above. I find that the first round of reviews of the PRSP approach have been dominated by little careful quantitative analysis, and instead by anecdotes and stories. I recommend that the future reviews of the PRSP process, from all sides, confront the difficult task of determining the marginal impact of the PRSP approach. I also present a detailed list of the types of household data that are needed for a successful PRSP implementation. I conclude with a specific suggestion: The Bank and the Fund or an NGO should undertake one careful, detailed and rigorous analysis of a specific PRSP process based on a multiple waves of a household survey, which can then serve as a model for future reviews and analyses.

Introduction

In 1999, the World Bank and the International Monetary Fund (IMF) adopted a new set of policies to guide lending to some of the world's poorest countries. Amid the blizzard of acronyms explaining the new policies, the Bank and the IMF laid out a framework to be followed by poor countries wishing to make use of various concessionary (low-cost) lending facilities.

In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions' neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful.

Abstract

1. Introduction

Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.

Moreover, since 1997, following the Executive Board's approval of the Guidance Note on Governance, the IMF has increased its attention to governance issues among its member countries. The promotion of transparency and accountability are at the core of the IMF's efforts to ensure the efficient use of public resources, as well as the domestic ownership of IMF-supported reform programs. In recent years the IMF has developed instruments to help countries identify potential weaknesses in their institutional and regulatory frameworks that could give rise to poor governance, and to design and implement remedial measures well beyond the extent envisaged in 1997.

With resources of over $300 billion and an expanded mandate, the IMF is possibly the most powerful of all international institutions.

Abstract

1. Introduction

In 1999, the World Bank and the International Monetary Fund (IMF) adopted a new set of policies to guide lending to some of the world's poorest countries. Amid the blizzard of acronyms explaining the new policies, the Bank and the IMF laid out a framework to be followed by poor countries wishing to make use of various concessionary (low-cost) lending facilities. About two and a half years later, in the spring of 2002, the Bank and the IMF concluded a review of these policies. Contributors to this review included dozens of non-governmental organizations (NGOs) as well as the Bank and the IMF themselves. The Bank and the Fund, while acknowledging that the process could be improved, concluded that it worked pretty well based on the preliminary evidence so far available. The NGOs were, on the whole, less enthusiastic.

My reading of the record is that neither the Bank nor the outside commentators are asking the hard questions. The right question to ask is the following:

Relative to what would have happened absent the adoption of the Poverty Reduction Strategy Paper (PRSP) framework, has the implementation of the PRSP process yielded benefits that exceed its often considerable administrative costs?

Abstract

I present a critical examination of Goal 8 of the Millennium Development Goals (MDG), namely, to ‘develop a global partnership for development’. As of November 2002, seven targets were listed under this Goal, as well as seventeen indicators. Given the wide-ranging issues covered under Goal 8, I review only some aspects of the global economic system, their effects on development and what needs to be done to reach Goal 8. The main focus is on the international trade system and the implications of the rules of the World Trade Organization (WTO). I also offer some suggestions on clarifying or adding to the targets and indicators. A key argument of this review is that success in attaining ‘global partnership for development’ underpins or, at a minimum, is linked with efforts in reaching the other seven MDGs, and thus Goal 8 should be given a high priority and efforts to attain it should focus on getting international economic structures, policies and rules right.

Introduction

The origins of the Millennium Development Goals (MDGs) lie in the United Nations Millennium Declaration, which was adopted by all 189 UN Member States on 8 September 2000. The Declaration embodies many commitments for improving the lot of humanity in the new century. Subsequently, the UN Secretariat drew up a list of eight MDGs, each accompanied by specific targets and indicators. This paper addresses Goal 8, which is to ‘develop a global partnership for development’.