[stop-imf] Some thoughts for the 60th Birthday, by Kenneth Rogoff

[Robert Weissman]

Colleagues:

These are indeed some interesting thoughts. In particular, Rogoff calls for=
:

(1) the WB to only issue grants, not loans

"[Keynes] would agree that the IBRD's lending
window should be closed. So too should the Bank's much smaller Internationa=
l
Finance Corporation (IFC) window, which is also market-based. The Bank
should be reduced to its defensible aid core: that is, to its International
Development Assistance (IDA) window. And IDA funds should become 100%
outright grants, rather than 70% as they are now. This again is a conclusio=
n
reached by the Meltzer Commission and by myself ten years before. The idea
is not new=E2=80=93but it is still right, and has yet to be acted upon. "

AND

(2) the IMF not to loan money at all any more

"my long-held view is that the Fund would serve better
if it made no loans. In a nutshell, the Fund's current resources of $150
billion seem like enough to cause moral-hazard problems (that is, to induce
excessive borrowing) without being enough to deal with a really deep global
financial crisis. The Fund is just too politicised to be a consistently
effective lender of last resort, and if its financial structure is not
changed, there are always going to be Argentinas..... the right
future for the Fund, as for the IBRD, is to phase itself out of the lending
business. The Fund can still make itself very useful in co-ordinating the
global financial system, in offering technical advice, and perhaps even in
issuing debt ratings to countries that request it."

These demands seem very consistent with the demands that many of the social
movements are making. Good talking points, perhaps?

Cheers

Todd Tucker
International Programs
Center for Economic and Policy Research
1621 Connecticut Ave., NW; Suite 500
Washington, DC 20009
Phone: 202-293-5380, ext. 213
Fax: 202-588-1356
tucker@cepr.net
www.cepr.net


Kenneth Rogoff

The sisters at 60
Jul 22nd 2004
 >From The Economist print edition


[]


The World Bank and the IMF are not in good health. Kenneth Rogoff, a former
chief economist of the Fund, suggests a course of treatment

AS THE two Bretton Woods sisters turn 60, the tough love of the
International Monetary Fund and even the free love of the World Bank go
largely unrequited. Nowadays the twins, never universally admired, are
constantly attacked from the left, from the right, from the centre and,
sometimes, by each other. For the Fund and the Bank, another birthday all
too often means being the pi=C3=B1atas at their own party. Some of the crit=
icism
is justified, some bogus. Both institutions still have a useful role to pla=
y
and they remain a clear overall plus for the world=E2=80=93but they can and=
 should
be improved.

Start with the Bank, which is actually a complex hybrid of aid agency,
long-term development lending bank and technical-assistance outsourcing
centre. Famously, the Bank was conceived mainly to help Europe rebuild afte=
r
the second world war: hence the name of its main lending =E2=80=9Ewindow=E2=
=80=B0, the
International Bank for Reconstruction and Development, or IBRD.
[]

Without doubt, the most powerful leader the Bank ever had, at least until
its current president, was Robert McNamara, a former secretary of defence o=
f
the United States. (By convention the Bank's president has always been an
American.) During his time in charge, between 1968 and 1981, the Bank
littered the developing world with pharaonic infrastructure projects that
made it few friends among greens or budding anti-globalisation activists.
Worse still, many developing countries began accumulating debts to the Bank
which, whether originally granted on concessional terms or not, still grew =
a
lot faster than their economies, some of which were actually shrinking.
Small wonder, then, that the Bank also became unpopular in many developing
countries. (Mr McNamara is the star of a recent documentary =E2=80=9EThe Fo=
g of
War=E2=80=B0, in which he reminisces about his time as secretary of defence=
 during
the early years of the Vietnam war. The sequel, =E2=80=9EThe Fog of Develop=
ment=E2=80=B0, is
keenly awaited.)

Today, things are very much better on the public-relations front, albeit
partly thanks to the Bank's gargantuan external-relations department (of
more than 300 people). The Bank rightly gets a lot of credit for its growin=
g
recognition that =E2=80=9Esoft=E2=80=B0 issues such as governance and insti=
tutions are
fundamental to economic growth and the reduction of poverty. The Bank's
current president, James Wolfensohn, has spoken out early, often and boldly
about the corrosive effects of corruption. Meanwhile, the Bank's lending
priorities have changed over the past 20 years, with more support for
health, governance, women and education, in addition to lending for
traditional infrastructure projects. So far as technical assistance is
concerned, country clients can tap the Bank's world-class experts in divers=
e
areas such as education, nutrition, financial-sector regulation and the
prevention of AIDS. Finally, under the rubric of =E2=80=9Ecountry ownership=
=E2=80=B0, the
Bank has tried to tailor its lending policies so that clients have more say
in their design.

All of which is good. The bad news, though, is that the Bank still suffers
from a couple of fundamental structural flaws. At the very least, these
prevent it from realising its full potential. The first, and far more
serious, of the flaws has to do with the Bank's ill-conceived financial
structure.

In essence, the Bank is a =E2=80=9Ehedge fund with a heart=E2=80=B0. The Ba=
nk's main branch
for middle-income countries, the IBRD, has only a small amount of paid-in
capital. It finances most of its lending activities, which amount to more
than $100 billion, through borrowing. That is, the IBRD taps international
capital markets using its triple-A rating, and then lends to developing
countries and emerging markets at a mark-up of between =E2=88=8F% and =E2=
=89=A4%, generally
(but not always) far below the rate at which they could borrow on their own=
.
The Bank uses the difference to help defray the Bank's $1.5 billion in
operating expenses, including the cost of its 10,000-plus employees. If
borrowers and lenders (holders of the Bank's bonds) are satisfied with thes=
e
terms, the deal seems mutually beneficial: who could possibly object? Look =
a
little more closely.

To begin with, the Bank's developing-country junk-bond portfolio is patentl=
y
risky. The fact that the Bank has not yet seen mass defaults is partly just
a matter of luck (the boom of the 1990s kept many junk-bond portfolios
afloat). In addition, a complex maze of bilateral debt and aid deals has
periodically helped extricate the World Bank from some tight spots,
concealing what might otherwise have been default. Today, the Bank is
heavily invested in Argentina, a country that has defaulted on private
creditors and is openly voicing thoughts of defaulting on official ones. Of
course, everyone believes that the G7 group of rich countries and their
friends would bail the Bank out in an emergency. Hence it retains its
triple-A rating for now. But this means that there are hidden actuarial
costs to taxpayers, as the Meltzer Commission reported to Congress in 2000,
and as I had found in my own research published some ten years earlier.

A bank must lend

There is a potentially more serious problem, though. The Bank needs to push
out loans continuously. This sometimes leads it to seduce countries that ar=
e
already borrowing too much into borrowing more. Remember the 1990s? The Ban=
k
was piling all sorts of loans on to Latin American governments, whose
failure to strengthen their budget positions adequately was a major cause o=
f
debt crises in Argentina, Brazil and elsewhere. Today, the Bank is
apparently preparing to ramp up IBRD loans to India, a country whose
debt-to-GDP ratio already exceeds 80% and which is running general
government deficits of over 10% a year.

This is not to argue against giving aid to middle-income countries. The
problem arises when the aid takes the form of loans. Really, what possible
rationale can there be for the World Bank to make loans to investment-grade
borrowers such as China, with $470 billion in foreign-exchange reserves?
What of its activities in Russia, a country with gobs of oil, more than $80
billion in reserves, and a debt ratio that stands at less than 12% of
income? Some argue that there is an efficiency gain from Bank involvement;
that is why it can charge such low rates. More likely, the senior status
accorded to the Bank's loans just means that the country will have to pay
higher rates on all its other borrowing.

When Englishman John Maynard Keynes and American Harry Dexter White first
designed the Bank, one might have forgiven them for thinking that an
official loan window would deal with what economists call a missing market.
But if they were still alive, and could see today's highly liquid private
markets, I suspect that they, too, would agree that the IBRD's lending
window should be closed. So too should the Bank's much smaller Internationa=
l
Finance Corporation (IFC) window, which is also market-based. The Bank
should be reduced to its defensible aid core: that is, to its International
Development Assistance (IDA) window. And IDA funds should become 100%
outright grants, rather than 70% as they are now. This again is a conclusio=
n
reached by the Meltzer Commission and by myself ten years before. The idea
is not new=E2=80=93but it is still right, and has yet to be acted upon.

[]


If the case for shifting from loans to grants is so compelling, why haven't
politicians accepted it? One reason is tremendous resistance from
continental Europe, where many leaders are legitimately concerned that an
excessive reliance on aid will make the World Bank hostage to a fickle and
inward-looking United States Congress. But the problem of financing steady
flows of aid is surmountable. Britain's chancellor of the exchequer, Gordon
Brown, has made an excellent suggestion. Adopting the essentials of his
approach, countries would issue bonds whose proceeds would be dedicated by
treaty to the World Bank. Legislatures will still have to adopt the initial
treaty, but once locked in at an opportune moment, future Congresses would
find it harder to back out.

The second problem with the Bank today is accountability. It is good that
countries can call on Bank experts to help them with a wide range of
problems, but how can one really tell what kind of assistance the Bank
should prioritise if there is no market feedback? My own experience is that
countries will always tell you they loved your technical-assistance team.
Ask them to defray the slightest costs, however, and they may change their
tune. The Bank needs to come up with new ways to assess the performance of
its diverse empire, and to price its products appropriately. Still, my sens=
e
from the inside is that the Bank is doing a pretty good job in many areas.
At the very least its technical assistance conforms to the good physicians'
principle, =E2=80=9EFirst, do no harm.=E2=80=B0

Can one say the same of the International Monetary Fund? Is its policy
advice as horrible as some critics seem to think? And what missing market
does it fill? Should its lending window, like that of the IBRD, be scrapped=
?

In my view, the Fund's policy advice has usually been much better than it i=
s
given credit for. A book would be required to answer properly even some of
the many charges that have been made against the Fund. Briefly, though, the
most persistent and at the same time most confused accusation is that the
IMF insists on austerity during country-debt crises.

This simply confuses correlation and causality. A country calls on the Fund
precisely when all its other lenders have turned their backs, when even its
own citizens have lost confidence. In such a situation, the country would
have to close its deficit=E2=80=93that is, raise taxes or lower government
spending=E2=80=93with or without the Fund. Thanks to emergency Fund bridge =
loans,
such measures are less harsh than they would otherwise have to be. Just
because one sees doctors around plagues doesn't mean they cause them. Of
course, the Fund has made mistakes, notably at the outset of the Asian
crisis. There, although there was a run on countries' international debts,
many still had the capacity to lessen austerity by tapping domestic markets=
,
a reality the Fund was slow to acknowledge.

What about capital controls? Many leading scholars, including Dani Rodrik,
Joseph Stiglitz and Jagdish Bhagwati, portray the Fund as relentlessly
pushing countries to open their capital markets prematurely, making it the
prime culprit in every financial crisis. Speaking with old hands at the
Fund, my sense is that in the mid-1990s, there was some measure of truth in
this charge. However, for some time now, the Fund's advice has become almos=
t
too eclectic, given the growing body of research on the long-term perniciou=
s
effects of capital controls.

Besides, what, really, are the main lessons of the past 40 years of
international financial crises? Surely they are: (a) there are limits to ho=
w
much you can plug up capital markets as economies become more financially
sophisticated, and (b) overly rigid exchange-rate regimes are a recipe for
disaster, setting up one-way bets for speculators. I venture that if Asia
had had somewhat more flexible exchange rates in the 1990s, it would have
suffered a mini-crisis and not a maxi-crisis. Anyway, which middle-income
country is nowadays the exemplar for advocates of capital controls=E2=80=93=
Hugo
Ch=C3=A1vez's Venezuela?

Finally, many argue that the mere existence of the Fund has led to an
increase in international debt crises. Perhaps, but debt crises have been
going on for a long time. Turkey, Brazil, Mexico, Argentina and Venezuela
all defaulted numerous times before the advent of the Fund, and the results
were pretty ugly then as well.

The Fund should continue to develop and improve its advice. For example, in
today's world of very low inflation, the Fund probably remains a bit too
concerned about whether central banks are ambitious enough in their
inflation targets. Many countries rightly complain that no matter how low
they get their inflation, the Fund always wants them to lower it more. The
Fund's bias probably made sense in 1992, when 44 countries had inflation
rates over 40%, but it makes far less sense today when only a couple of
countries still have very high inflation. Perhaps also there is more scope
for giving borrowing countries greater control (=E2=80=9Eownership=E2=80=B0=
) of their
stabilisation policies. But beware: my sense is that whenever a country's
stabilisation programme fails, the Fund will be deemed the owner, no matter
how complete the country's control.

The worst call of all?

Making the right decisions in developing-country debt crises will always be
difficult. Famously, in the middle of the Asian crisis of the 1990s, the
World Bank sent its chief economist to China: he urged them to move off
their currency peg, evidently believing that a depreciation of the renmimbi
would stimulate demand in the region. The Fund was concerned that a Chinese
devaluation would have dealt a crushing blow to the other Asian countries,
which were just beginning to feel the benefits of their currency
depreciation through their exports to the West. In the event, the Chinese
held their peg, and the other Asian countries emerged from their recessions
faster than most predicted. With hindsight, the Bank's push to have China
devalue looks like the great wrong call of the Asian crisis. But who can be
sure? Making such calls in the confusion of the moment is hard, and always
will be.

Today, the situation is perhaps reversed. The Fund needs to press Asian
countries, especially China, to introduce more flexibility into their
exchange-rate systems, not least to help curb America's growing
current-account deficit. True, the weakness of the dollar has relieved the
pressure on some of the Fund's major problem debtors, including Brazil and
Turkey, and that is good. But the fear remains that the international
financial system is simply replacing a number of conventional
emerging-market debt bombs with an advanced-country nuke. With the United
States facing open-ended security costs and risks to its energy supplies,
the =E2=80=9EBretton Woods II=E2=80=B0 system of fixed exchange rates in As=
ia may be doomed
to break up, perhaps with the same unfortunate consequences, as the origina=
l
European version did in the 1970s. Many legal experts say that the Fund's
charter forbids it to challenge a country's exchange-rate regime. If so, th=
e
charter had better be changed.

Finally, a word on the financial structure of the Fund, which is admittedly
a tricky issue. Again, my long-held view is that the Fund would serve bette=
r
if it made no loans. In a nutshell, the Fund's current resources of $150
billion seem like enough to cause moral-hazard problems (that is, to induce
excessive borrowing) without being enough to deal with a really deep global
financial crisis. The Fund is just too politicised to be a consistently
effective lender of last resort, and if its financial structure is not
changed, there are always going to be Argentinas. (If nothing else, there
will always be Argentina.)

I am unimpressed by the superficial patches introduced during the era of th=
e
Clinton Treasury, and also by the latest push to introduce =E2=80=9Eaccess =
limits=E2=80=B0
to prevent the Fund from handing out over-sized bail-out packages. If Brazi=
l
had been given only an additional $15 billion in August 2002 instead of $30
billion, I believe its programme would have collapsed. What good is it to
throw a man ten feet of rope if he is drowning in 20 feet of water?

In Robert Rubin's memoir, the former Clinton Treasury secretary recounts
bail-out after bail-out during the 1990s, arguing in each case that the
Fund's actions did not stoke moral hazard. Why then did spreads rise so muc=
h
in the years after the Fund belatedly cut the cord in Russia? No, the right
future for the Fund, as for the IBRD, is to phase itself out of the lending
business. The Fund can still make itself very useful in co-ordinating the
global financial system, in offering technical advice, and perhaps even in
issuing debt ratings to countries that request it. If the global community
can work its way towards an improved bankruptcy procedure for sovereign
borrowers, this path will be far easier. I would recommend it regardless.

The Bretton Woods sisters have reinvented themselves more than once during
their first 60 years. They can do it once more=E2=80=93and they need to.

[]

[]


Kenneth Rogoff is a professor of economics at Harvard University. He was
previously chief economist and director of the research department at the
International Monetary Fund.