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Role

of Mul)lateral Lending
Agencies

IMF and World Bank


The Interna)onal Monetary Fund (IMF) and
the World Bank were both established as a
result of the BreAon Woods Conference
(1944)
Similari)es Both based in Washington
- both provide loans
- interlocking boards of directors

IMF and World Bank


Dierences the IMF may only lend to
sovereigns
- IMF emphasizes macroeconomic and
nancial sector issues
- World Bank emphasizes infrastructure and
structural reforms

IMF and World Bank


Both ins)tu)ons have grown both in
membership and in the scope of the problems
they deal with
- big jump in membership in the 1960s as
former colonies gained independence
greater diversity

IMF and World Bank


Growth in scope of IMF
- Big expansion in cross-border nancial ows
during the last 30 years

Interna)onal Monetary Fund


The IMF has three main func)ons:
(1) Surveillance
(2) Lending of hard currencies
(3) Technical Assistance

Surveillance

Ar)cle IV Consulta)ons
- regular consulta)ons with member countries
- emphasis on preven)on of nancial crises
- stress on adequacy of reserves, ability to
nance budget decits, policy making,
nancial regula)on

Surveillance
IMF Focus in Ar)cle IV Consulta)ons
(1) Macroeconomic Policies (e.g. monetary
policy)
(2) Macroeconomic performance (e.g. GDP)
(3) Balance of Payments
(4) Financial sector policies
(5) Structural Policies

IMF Lending Policies


IMF usually lends less than the country needs
IMF loans act as a signal to ocial and private
sector lenders

IMF Loans
There are three major categories of IMF
Loans:
(1) Stand-By Arrangements and the
Supplemental Reserve Facility

IMF Loans
(2) Extended Fund Facility
- helps countries deal with balance of
payments problems related to structural
programs
- overlap with World Bank SALs

IMF Loans
(3) Poverty Reduc)on and Growth Facility
- loans with interest rates of 0.5 % and
maturi)es of ten years to poorest member
countries
Exogenous Shocks Facility (since 2005)

IMF Technical Assistance


The IMF is not a development ins)tu)on but it
can help poor countries to improve their
access to nancial markets
Policy Support Instrument introduced in 2005

Control of the IMF


24 execu)ve directors
- 8 appointed by individual countries (US,
Japan, Germany, France, UK, China, Russia,
Saudi Arabia)
- 16 elected for two year terms by
cons)tuencies

Control of the IMF


Vo)ng weighted system based on quotas
Emphasis on consensus but obviously some
issues not even considered worth raising,
given the distribu)on of vo)ng power
cri)cisms of IMF decision making

Cri)cisms of IMF
Joseph S)glitz, a former chief economist of
the World Bank, is a strong cri)c of both the
IMF and the World Bank.
S)glitz states that globaliza)on has not lived
up to its poten)al
- in the 1990s the number of people living in
poverty increased by almost 100 million

Cri)cisms of IMF
- nancial contagion has increased instability
S)glitz accuses western countries of hypocrisy
- they push LDCs to eliminate trade barriers
but prac)ce agricultural protec)onism
- emphasis on intellectual property rights
benets western drug companies.

IMF and World Bank


S)glitz observes that both the IMF and the
World Bank were originally designed to oset
aws in markets but have switched to become
advocates of free markets.

IMF
The original func)on of the IMF was to
(a) provide loans to countries facing economic
downturns, and
(b) put pressure on countries not maintaining
global aggregate demand
Based on a belief that markets were awed

IMF
In the 1980s (by the latest) the IMF had
changed its views
- missionary for free market system
- put pressure on countries to deate

World Bank
S)glitz sees a similar shih in World Bank
thinking aher the replacement of Robert
McNamara as President by William Clausen in
1981, with Anne Krueger as Chief Economist
- new emphasis on free markets as the
solu)on to the problems of the LDCs

World Bank
Structural Adjustment Loans (SALs) introduced
in the 1980s but )ed to IMF-imposed
condi)ons
IMF and World Bank marching in lockstep
Washington Consensus

IMF Imperialism
At the same )me as it acquired greater faith in
free markets in the 1980s the IMF saw its role
as greatly expanded.
It was supposed to limit itself to
macroeconomic and nancial issues but
almost any structural issue could be seen as
aec)ng the government budget or the
balance of payments.

Washington Consensus
The consensus developed in response to
problems in La)n America
- a result of out of control budgets and loose
monetary policies
- for this region an emphasis on cujng budget
decits and )ghtening monetary policy was
appropriate

Washington Consensus
The emphasis on capital market liberaliza)on
was less appropriate
Kenneth Rogo, former Chief Economist at
the IMF, concedes that this was pursued too
has)ly

Washington Consensus
Sequencing of reforms is important
- it was unwise to insist on capital market
liberaliza)on before the establishment of
strong nancial ins)tu)ons

In Defense of the IMF


Anne Krueger defends IMF policies on the
grounds that the nature of nancial crises
changed in the 1970s.
Un)l the 1970s crises were usually the result
of current account problems but since then,
and especially since the 1990s, they have
been caused by problems on the capital
account.

Capital Account Crises


Why does this maAer?
Capital account crises dier from current
account crises in the following ways:
(1) They require a much more rapid response.

Capital Account Crises


(2) They occur when investors lose condence
in a countrys ability to service its debt
can occur even if macroeconomic policies
are sound
importance of reassuring markets

Capital Account Crises


(3) Debt sustainability is crucial
greater emphasis on structural reforms
greater emphasis on transparency of policy
These are necessary to reassure markets.

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