Wednesday, January 17, 2007

Part Two: Globalization in Retreat

A friend of mine asked me to respond to this paragraph.
Fourth, there has been too much dissonance between the promise of globalization and free trade and the actual results of neoliberal policies, which have been more poverty, inequality, and stagnation. One of the very few places where poverty diminished over the last 15 years is China. But interventionist state policies that managed market forces, not neoliberal prescriptions, were responsible for lifting 120 million Chinese out of poverty. Moreover, the advocates of eliminating capital controls have had to face the actual collapse of the economies that took this policy to heart. The globalization of finance proceeded much faster than the globalization of production. But it proved to be the cutting edge not of prosperity but of chaos. The Asian financial crisis and the collapse of the economy of Argentina, which had been among the most doctrinaire practitioners of capital account liberalization, were two decisive moments in reality’s revolt against theory.

Without a long dissertation about how free trade is good, trade has brought millions up from poverty and raised the standard of living of billions. Has there been structural and governance problems? Yes. Just there is shows 120 million Chinese raised out of poverty.

So what about China? China's leap into the heart of the twenty-first century

The thing I want to point out here is that per capita growth occurred during the opening up process and not during the "The Great Leap Forward" (more like the killing of millions) and the "Cultural Revolution". As the article puts it:
Deng urged China to cross the river of development by "groping with our feet at the stones under the water". Since then, Chinese reforms have advanced one step at a time in a systematic and logical manner that relies on a detailed analysis of objective reality and policy adjustment at each stage of transformation. This experimental pragmatism is described as follows by a government researcher: "Reform will lose direction if there is no opening. If there is only opening without reform, it will be difficult for the country to maintain economic stability and political independence. The so called "gradualist reform" model practiced in China is actually a continuous process of exploration, that is of opening the door a bit, discovering a problem, solving it through reform, and then opening the door yet a bit wider". [Ding, 1998]

So this indicates that there are some important issues with regard to sequencing and timing of events. This is not an indictment on the model only that logical steps are needed in the liberalization process. And structural concerns need to be addressed in any discussion of liberalization.

While this article is very interesting and makes many important points, I would have addressed democratic concerns if I had written it. It only ends with:
Indeed, in the context of our democratic constitution, it is impossible (and undesirable) for South Africa to replicate the coercion of both labour and capital that continues to form a key component of this model. South Africa's development must rely to a much greater extent on the construction of a 'shared vision' through the mobilisation of consent.

Sunday, January 14, 2007

Globalization in Retreat

And remember that from Frank Luntz:
5. A Global Economy/Globalization/Capitalism - Free Market Economy
NEVER SAY: Global Economy/Globalization/Capitalism
INSTEAD SAY: Free Market Economy

More Americans are afraid of the principle of globalization than even privatization. The reason? Globalization represents something big, something distant and something foreiwi. it.s the same reason why Americans like their local government but dislike Washington -- the closer you are, the more control you have. So instead of talking about the principles of globalization, instead emphasize "the value and benefits of a free market economy." Similarly, capitalism reminds people of harsh economic competition that yields losers as well as winners. Conversely, the free market economy provides opportunity to all and allows everyone to succeed. From: Frank Luntz Republican Playbook -- Searchable Text-Version: PART X "APPENDIX: THE 14 WORDS NEVER TO USE"

Actually economic terms are never very explicit in the meaning. I wonder why economists can never come up with good descriptors. Maybe they need a better PR person!
Well globalization is a vague term that has more to do with non-economic factors, as in:
# industrial globalization (alias transnationalization) - rise and expansion of multinational enterprises
# financial globalization - emergence of worldwide financial markets and better access to external financing for corporate, national and subnational borrowers
# political globalization - spread of political sphere of interests to the regions and countries outside the neighbourhood of political (state and non-state) actors
# informational globalization - increase in information flows between geographically remote locations
# cultural globalization - growth of cross-cultural contacts

And capitalism was never a good word to describe an economic concept since don't communist or socialist countries also have to deal with accumulation of capital?

And even Free Market Economy seems to not describe various economic aspects of an economy. Free Markets to me can be with regard to microeconomics, where there are many firms competing with little restrictions for entry and exit into the market. There is also a macroeconomic vague theory that has little restrictions on businesses and then the question is to what degree is an economy a free market or not? And lastly there is a concept of free trade between countries.

Well anyway back to the issue at hand. The title link is by Walden Bello, who is professor of sociology at the University of the Philippines, that wants to describe economic Globalization.
Globalization, in fact, has reached its high water mark and is receding.

Good, another intellect that has a scheme to measure economic globalization, because he has to realize that the other forms of globalization will continue for a long time to come. Because I hope he realizes that blogs (if he knows what that is) will continue to grow. That this is a process of globalization of information and ideas. Someone in Lebanon, Israel, Palestine, Iran or even Iraq can be a journalist and post about his individual experiences and what information he is most familiar with. We are no longer confined by borders that limit who and when we can 'talk' to others.

Fifteen years ago, we were told to expect the emergence of a transnational capitalist elite that would manage the world economy. Indeed, globalization became the “grand strategy” of the Clinton administration, which envisioned the U.S. elite being the primus inter pares -- first among equals -- of a global coalition leading the way to the new, benign world order. Today, this project lies in shambles. During the reign of George W. Bush, the nationalist faction has overwhelmed the transnational faction of the economic elite. These nationalism-inflected states are now competing sharply with one another, seeking to beggar one another’s economies.

Well, I guess that is good that corporations did not rule the world. So if they were wrong about it before, could they be wrong about the globalization also? Shambles, I guess it was time for another spin word. But no proof that it is shambles. Only that its supposed vision did not work out by the critics. And lastly the only time that beggar thy neighbors became effective was just before The Great Depression and we can see how that turned out.
But now Sebastian Mallaby, the influential pro-globalization commentator of the Washington Post, complains that “trade liberalization has stalled, aid is less coherent than it should be, and the next financial conflagration will be managed by an injured fireman.” In fact, the situation is worse than he describes. The IMF is practically defunct. Knowing how the Fund precipitated and worsened the Asian financial crisis, more and more of the advanced developing countries are refusing to borrow from it or are paying ahead of schedule, with some declaring their intention never to borrow again. These include Thailand, Indonesia, Brazil, and Argentina. Since the Fund’s budget greatly depends on debt repayments from these big borrowers, this boycott is translating into what one expert describes as “a huge squeeze on the budget of the organization.”

So why should we not try to improve the performance of aid? Sounds like a good thing since much of aid did not help and in many cases hurt. Edit, I guess I did very poorly to describe what I was thinking. One of the main functions of the IMF is for Technical Assistance and this is used not only in its funds but also coordinating financial flows. It has been shown that even large inflows or inconsistent flows can actually hurt more than help a country in the end. One tragic example is when food aid arrives in mass. This depresses the local markets for food and as a result the market tells farmers that their work is no longer as much value and they then do not plant as much or invest in as much food crops. And this leads to further food shortages in the end. So the point of my question is to say that the IMF still has relevance in the technical assistance part of its mandate.

Ok so now it is practically defunct. Again no proof of worsening the Asian Crisis, and no addressing of the vast amount of technical resources to address some of his concerns. So this is good if no one wants to borrow from the Fund then that will mean that the economies are doing good and that the Fund will have money to lend when and if it is needed. There has been some discussion that the Fund may be delaying some lending because a shortage of fund availability. So then how can he say that debt repayment from those countries are creating a huge squeeze on the budget. Especially since the bank has the same amount of SDRs as before and the quotas are the same.
Second, rather than forge a common, cooperative response to the global crises of overproduction, stagnation, and environmental ruin, national capitalist elites have competed with each other to shift the burden of adjustment. The Bush administration, for instance, has pushed a weak-dollar policy to promote U.S. economic recovery and growth at the expense of Europe and Japan. It has also refused to sign the Kyoto Protocol in order to push Europe and Japan to absorb most of the costs of global environmental adjustment and thus make U.S. industry comparatively more competitive. While cooperation may be the rational strategic choice from the point of view of the global capitalist system, national capitalist interests are mainly concerned with not losing out to their rivals in the short term.

Again more buzz words with little proof. I know this is directed at people that view the world is ending but at least a link or two might help. But the highlighted text is a pure falsity. They have promoted a strong dollar, thus benefiting the consumer at the expense of our exports. Most all countries in the world have devalued their currencies with respect to the Dollar, so the opposite is true and not strong dollar. Europe and Asia are having trouble meeting their requirements so no shifting. And yes businesses in a nation state are likely to ask for protections, just as Unions do.
A third factor has been the corrosive effect of the double standards brazenly displayed by the hegemonic power, the United States. While the Clinton administration did try to move the United States toward free trade, the Bush administration has hypocritically preached free trade while practicing protectionism. Indeed, the trade policy of the Bush administration seems to be free trade for the rest of the world and protectionism for the United States.

Yes, I can agree with some of his policies were bending over backwards for certain industries (steel, textiles, timber...). And so I would be just as harsh on those than anything Clinton has done. On this topic I imagine that Hillary would be close to her husbands position and as such I would count this is a positive for her. But on a positive note for Bush he signed more Free Trade Agreements than most of his predecessors.
While corporate-driven globalization may be down, it is not out. Though discredited, many pro-globalization neoliberal policies remain in place in many economies, for lack of credible alternative policies in the eyes of technocrats. With talks dead-ended at the WTO, the big trading powers are emphasizing free trade agreements (FTAs) and economic partnership agreements (EPAs) with developing countries. These agreements are in many ways more dangerous than the multilateral negotiations at the WTO since they often require greater concessions in terms of market access and tighter enforcement of intellectual property rights.

OOOPs WTO talks are not out. So when are enforcing intellectual property rights a bad thing. I am sure Walden Bello wouldn't mind having his intellectual property stolen and then sold for a profit. I am sure he only does his job for the advancement of mankind. But I do agree that the bigger market (country economy) should be the one to accept more in a negotiation than the smaller or Less Developed countries, but aside from intellectual property rights.

Minimum Wage|Costco-ization of America

Minimum wage tends to do two things when it rises above the market clearing price (equilibrium) of supply and demand. One is that it tends to increase non-tradeable jobs for a loss in tradeable jobs. And secondly a reduction in labor intensive service jobs for an increase in less labor intensive jobs.

And this I call the Costco-ization. It is the transfer of labor from service in stores to a self serve retail environment. I think for me it started in the 1970s when I noticed the first effect. That was when Fred Meyer's stopped taking the items out of the cart and ringing it up. They set up a conveyor system and the customer would place the items on that conveyor. Then during the 1980s FM implemented a bag your own groceries. And now they have the self-checkout where the customer does the whole transaction including coupons. Now for small purchases, it actually is very fast and convenient.

So how does this relate to Costco where there is less than zero customer service, and they don't even give you bags? It is another process of shifting from labor intensive retail outlets to a capital intensive bulk out-lets. I think it is funny the way they ask if we (my wife and me) want a box for our stuff. My wife says yes, but I see this more as a way to get rid of their industrial waste. Since recycled cardboard costs are relatively low now then they want to dump the waste on the customers. If it was truly a value then they would recycle it and sell it to bulk wholesalers.

Instead of The Long Tail as Walmart can be interpreted as, Costco is a broad range of products but very shallow depth on any product line-up. The store is designed that it takes very little labor for any given amount of sales.

Now liberals think this model is great because it tends to have a higher wage rate than other retail outlets. But for every extra dollar it gives to some employees, it could be used to hire more employees. Of course there tends to be positive effects of higher wage rates, so the question is the positives greater than the increased costs?

I have had several discussions with libs and pointed out that Costco and WalMart are different business models and markets and thus even their labor markets they compete in are different.

Saturday, January 13, 2007

Minimum Wage/For $7.93 an Hour, It’s Worth a Trip Across a State Line

As always there is an ongoing debate about Minimum Wage laws.
From title link:
Idaho teenagers cross the state line to work in fast-food restaurants in Washington, where the minimum wage is 54 percent higher. That has forced businesses in Idaho to raise their wages to compete.

Business owners say they have had to increase prices somewhat to keep up. But both states are among the nation’s leaders in the growth of jobs and personal income, suggesting that an increase in the minimum wage has not hurt the overall economy.

This seems to indicate that the equilibrium price in Washington was above the minimum wage for most markets and as a result there began a shortage of workers in Washington at the prevailing rate. This in turn dried up the market surplus in Idaho and raised the prevailing equilibrium price to closer to the Washington prevailing wages. For me this indicates the importance of a tight labor market more than forcing businesses to maintain a certain wage. Wage prices are already sticky and having a minimum wage makes it even more sticky in the downward direction.
Several studies have concluded that modest changes in the minimum wage have little effect on employment. A study two months ago by an economist at Washington State University seemed to back the experience of Clarkston and other border towns in Washington. The economist, David Holland, said job loss was minimal when higher wages were forced on all businesses. About 97 percent of all minimum-wage workers were better off when wages went up, he wrote.

I did not see the study, but does this mean that 3% of workers lost their jobs? That does not sound so good to me. And of course most studies are short term, does this take the effect of capital substitution that takes a longer period to study?
Here on this border, business owners have found small ways to raise their prices, and customers say they have barely noticed.

“We used to have a coupon, $3 off on any family-size pizza, and we changed that to $2 off,” said Mr. Singleton, of Papa Murphy’s. “I haven’t heard a single complaint.”

Now, this is interesting. So the people most likely to use coupons are the ones that are probably least likely to afford such measures. This also indicates that the demand curve from price minus $2 and price minus $3 is fairly inelastic. So the consumer surplus in this range is fairly small because they don't see a drop in quantity demanded with a rise in the price in the discounted market.

More later...

Friday, January 12, 2007

The International Monetary Fund/Assignment 1 FE 201

Ronald Rutherford
Assignment #1
FE 201
The International Monetary
Fund & Economic Policy

Write an essay discussing some of the key criticisms of the IMF’s financial programming approach. With reference to country examples, discuss whether or not you consider these criticisms to be valid.

Before I get into the key criticisms, I would like to mention one important aspect of any macroeconomic policy is to consider the health and vitality of the banking system including the role of the central bank. As Hoggarth and Saporta (2001) have pointed out, the costs to the economy as well as the Fiscal costs (of a financial crisis?) can be substantial and the effects long lasting. While the crisis typically is longer in developed countries, it can be much deeper in developing countries with widespread disruptions. But I do have a problem with methods used to calculate the trend lines to identify the effects of crises. By taking a simple average as a point estimate instead of using a confidence intervals it may either underestimate or overestimate the true (or expected) trend line in less economically stable countries. If the variance is wider then it may even under or overestimate the duration of the crisis also. (11)

During this discussion of the criticisms of the IMF Financial Programming Approach I will focus on the following seven criticisms (1. Unit 3 pages 3-17):
1. Problems arising from overstepping the IMF’s traditional Mandate.
2. Failure to recognize the importance of the financial sector.
3. A one-size-fits-all approach to stabilization.
4. Imbalanced representation and imbalanced policy advice.
5. IMF policy on conditionality.
6. The challenge of inadequate growth.
7. Excessive social costs arising from IMF-supported financing arrangements.

It would be useful to describe or at least outline the financial programming approach. The question does not explicitly ask for this, but the Assignment Guide does suggest you refer to the extensive literature challenging the behavioural assumptions which underlie the financial programming approach.

Problems arising from overstepping the IMF’s traditional Mandate:
To more fully understand the IMF’s traditional mandate, I will now explore the Articles of Agreement. In summation of the points of Article One-Purposes (3), the IMF is to: promote international monetary cooperation, facilitate the expansion and balanced growth of international trade, promote exchange stability, assist in the establishment of a multilateral system of payments, give confidence to members by making the general resources of the Fund temporarily available, and shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. As this clearly shows nothing mentions long term growth or structural matters to be addressed. It might also be good to point out the mandate to oversee the exchange rate policies of its member countries. Article IV - Obligations Regarding Exchange Arrangements provides the mandate for surveillance under Section 3 Surveillance over exchange arrangements. And this allows the IMF to provide the necessary service of technical assistance (4).
So now that the IMF has gone past its initial mandate, and it is claimed that it has gone into areas that it has not the expertise to fully handle. Although the IMF can call upon the resources of the World Bank and other IFI (International Financial Institutions), it may end up being the ‘Lead Agency’ to handle the situation and thus be in even more areas it is not suited to handle.

Failure to recognize the importance of the financial sector:
The experiences of the IMF with regard to Indonesia was marked by correctly identifying areas of vulnerability, namely, large capital inflows increasing foreign debt, an unstable banking system that was linked to nepotism and cronyism combined with lack of strict government oversight, and interventionist policies in the market. But it underestimated the seriousness of the situation and thus failed to provide sufficient warning. (5, Pages 12, 48) Indonesia was a special case because of governance issues and corruption. It would be better to use Korea as an example.

Even though the “[s]urveillance identified the central problems in Brazil reasonably accurately” (5, Page 48), there was “[i]nsufficient attention paid to the buildup of short-term debt.” (5, Page 140) But even here the authorities had conflicting data as well as a reluctance to be completely transparent by the authorities.

As mentioned in my opening paragraph, the financial sector is very important to the stability of the entire economy. So having better and more complete data could help the IMF to identify areas of vulnerability, but it does not mean that actions can and will be able to be implemented in time, given the reluctance of various governments to take the advice of the IMF until a crisis occurs. This was especially pronounced in the situation with Indonesia.

But for an East Asian country that weathered the storm, Hong Kong maintained its fixed exchange rate to the US dollar during the East Asian financial crisis without major disruption. So when other nations suffered from one way speculations on the currency depreciation, Hong Kong was still able to maintain the exchange rate: at US$ 1 to HK$ 7.8. This was done through the stability of the currency board. While its proactive Monetary Authority effectively lacks the ability to control the money supply, it has a variety of ways to maintain the peg to the US dollar. Two of those methods are through cash arbitrage and specie-flow mechanism. (6). Argentina adopted a similar policy to that of HK and it ended in disaster. Eventually the link to the $ had to be abandoned.

A one-size-fits-all approach to stabilization:
This is an important consideration in that since all crises are neither created the same nor have the same actors involved, it seems to not make sense that nearly all of the IMF stabilization policies include the following:
1. Targets for net international reserves and for government borrowing. The government borrowing aspect turned out to be an incorrect judgment with respect to Indonesia and Korea as this caused a severe collapse of aggregate demand and thus output. (5, Page 48) This was especially apparent with regard to Korea when public debt was only 6% of GDP and the deficits were projected at .2% in 1997 and a projected surplus in 1998 of .25%. (5, Page 106) A better approach is to target discretionary expenditures as the target rather than fiscal deficits. This allows for automatic fiscal stabilizers and the freedom for the government to address crises outside the normal budgetary process and still maintain overall fiscal discipline. (5, Page 53)
2. All programs include similar types of conditionality. Financial programming is used in all IMF lending.
3. All negotiations use the same identical process.
4. Structural conditions are nearly always included in the financial programming approach. (1, Unit 3, Page 8)

I wish to address point two, three and four separately now. This is due to the fact that all financial programming approaches have a basis on the simple four key identities by Polak. (1, Unit 2, Pages 27-36) Even though the model has been tried to be used on medium-term models it has failed to deliver results, which includes some of the “transition countries” (former Soviet Empire States) in the early 1990s. (8)
The identities and the behavioural assumptions made for the Polak model could be discussed in more detail and their weaknesses identified.
Structuralist theory does not assume that inflation is simply a money supply issue, but can arise from distributional conflict and the set of rules for price information. (7, Page 13) One way that this is manifested in is through ‘market makers’ that have economic power to control prices in their sector and can price push inflation. (7, Page 149) Even Lance Taylor acknowledges the contributions that Jacques J. Polak has contributed to macroeconomic theories. (7, Page 162) But he does have 8 recommendations for improving the methodology of the IMF stabilization programs along with adding some macroeconomic equations that are missing. (7, Pages 159-164) And lastly Taylor does not want to do away with the present models but to add to and enhance the models with more realistic theoretical formulations. (7, Page 169)

Matias Vernengo places the Structuralists, Post-Keynesians, and Inertialists as having the view that inflation is caused by distributive conflict, propagation mechanisms or balance of payments problems. In his paper from 2003, the inflation model he describes is a cost push based on external constraints. (11.)

This arrangement seems more like a mechanic that always wants to fine tune the car than to do a simple oil change. Instead of being a lender of last resort and following the mandates to help out countries in temporary Balance of Payments problems, the staff and management see the need to tamper with the structural economy of a country. Considering that “The Three Crisis Cases” programs failed in their initially stated objectives, and then it is easy to suspect a knee jerk reaction to crisis instead of considering some of the true causes of the crisis. (5, Page 11)

Going along with the last paragraph, the IMF should give countries the benefit of the doubt when the IMF is first approached by a member country at least initially, since its “mandate gives it an obligation to support member countries necessary efforts to address their economic difficulties.” (9, Page 207)

Imbalanced representation and imbalanced policy advice:
I think this is best summed up by: “For developing countries to be able to carry a decision in their favour, they therefore clearly require to build alliances with creditor members.” (1, Unit 3, Page 11)
But since the IMF is basically like a bank then it seems reasonable that the creditors are given preferential treatment in the decisions of the funds. If creditors decided to take their money and go, then the bank (no matter how many debtors) will cease to exist. This of course does not mean that other ideas of management or governance should be avoided.
The debtor countries would have fewer resources to make loans but they could perhaps follow the example of mutual societies. All contributing to the fund and loans being made to some members.
It should also be noted that no program will work if there is not a sense of ownership of the program by authorities that are to administer and carry out such policy changes. The general problem on hardening to conditionality is manifested in the following examples:
1. By enacting a law but not implementing it.
2. Making so many exceptions to the new tax laws that it minimizes new tax revenue streams.
3. Creating new exemptions while abolishing others, thus creating no net effect.
4. Reversing or suspending measures either before implemented or shortly after. (9, Page 199)
And when all else failed, there was a tendency to blame the IMF as a scapegoat in both Pakistan and Indonesia. (9, Page 200) (5, Page 15, Footnote 9)

IMF policy on conditionality:
This is broken down into five broad types of criticism:
1. IMF conditionality is too extensive and intrudes on the sovereign decision-making authority. Recommendation #6 in the IEO has some good advice for the IMF in regard to this. Basically the IMF needs to develop political economy skills of the staff while encouraging sufficient country specific knowledge is retained over the long term. (5, Page 54)
2. IMF structural conditionalities are not politically feasible and may place too much burden on the leaders of a sovereign country. Which this issue was addressed in the IEO Evaluation Report 2003 by trying to develop staff that had a greater understanding of the political constraints that affect decision makers in the member country. (5, Page 49)
3. The time frame between stabilization policies and structural conditionalities is mismatched. And as stated in the IEO evaluation: “A crisis should not be used as an opportunity to force long-outstanding reforms…” (5, Page 53)
4. And going back to the mandate, some conditionalities are clearly beyond its mandate. I believe that in the case of Pakistan, the IMF overstepped its bound by having conditions on the Fiscal reforms without proper implementation and timing of the shift in taxes which resulted in adverse affects especially in tax revenues and thus the budget. (9, Page 194-195)
5. Too many conditions placed on the terms of the IMF, as for example Indonesia with 130 conditions. (1, Unit 3, Page 13)
This can definitely cause governments to be hesitant about asking for assistance. It can also create reluctance to ask for help early enough, instead of waiting until the situation becomes worse. If the role of the IMF is similar to central banks (Federal Reserve Board), then why should the IMF always ask for conditions when the problems may be just temporary illiquidity and not insolvency?

The challenge of inadequate growth:
While any manmade system is in need of constant scrutiny and processes of always trying to improve the designs of the program, I am not sure that this criticism takes the IMF farther away from its mandate of temporary imbalance of payments and in areas more suited for long term growth facilities such as the World Bank or other IFIs. Many of the new members of the IMF, including sub Saharan countries, do not face temporary imbalances in their balance of payments. They have fundamental long-term problems. So the question could be raised: Is the fault of the IMF objectives of the stabilization programs not being achieved or that the wrong objectives are chosen given the IMF’s mandates?

Excessive social costs arising from IMF-supported financing arrangements:
There is no doubt that reducing absorption in the economy can have dire effects on the people (sectors of society) that have the least ability to handle a drop in income and spending. Development of social safety nets should be of concern when implementing any financial programs, which we will study in Unit 8.

“In the future, one could also think of stabilizations ‘with a human face’, which would at least maintain the income and welfare positions of the poor and vulnerable groups in the society.” (7, Page 23)

I think the IMF needs to decide which direction to take before we can adequately decide if the criticisms are merited. If the IMF’s mandate is to maintain the present articles then it clearly has overstepped its mandate. Before the late 1980’s, the IMF narrowly focused on macroeconomic policies and a few structural areas, but then when concessional facilities were created the IMF broadened into more structural and long-term financing packages. (9, Page 190) Presently it states on the ‘Introductory Information’ page on the IMF web site: “It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.”

Since the world has changed drastically since the Bretton-Woods agreements, then maybe the IMF needs to change also (Surely, it has made substantial changes including new lending programs). After the collapse of the gold standard and most developed and many developing countries changing to a strictly floating exchange-rate, then maybe the IMF mandate is no longer necessary. And this would open it up for mid-term financing and not just short financing of Balance of Payments problems. The World Bank and other IFIs would still provide financing for long-term projects, but the IMF could look for helping out countries that have structural concerns that need financing and especially advice on the transitions.

So if we accept that the IMF’s mandate should change, then yes many of the criticisms are justified. With the exception of one, being that the governance issue will continue to plague multinational organizations. Is it fair that the EU gets more votes (United Nations) because of the individual states or should it get only one vote with a veto such as the USA? (Europe has two vetoes France’s and the UK’s. The IMF voting structure is more complicated and is related to quotas – which are based on measures of the size of economies. This gives the USA and other advanced economies a large share of the votes.)Who decides what is fair or not fair? And can an organization be truly a democracy when not all people in the world are free to decide their own potentates.

(1.) The International Monetary Fund & Economic Policy Unit 1-8, Dr. Cyrus Rustomjee, 2005.

(2.) Hoggarth G, R Reis and V Saporta (2001) ‘Costs of Banking System Instability: Some
Empirical Evidence’, Bank of England Working Paper, Financial Stability Review,

Articles of Agreement of the International Monetary Fund/Article I – Purposes

Article IV - Obligations Regarding Exchange Arrangements

(5.) Independent Evaluation Office, ‘The IMF and Recent Capital Account Crises,
Indonesia, Korea and Brazil’

(6.) Strength of the Hong Kong Dollar:
The Defiance and Stability of the Hong Kong Currency Board
During the 1997 Asian Financial Crisis, Glen Vierk

(7.) Taylor, Lance (1991) Varieties of Stabilisation Experience: Towards Sensible Macroeconomics in the Third World; Oxford: Clarendon, Chapters 2 and 5.

(8.) Polak, Jacques (April 1997), The IMF Monetary Model at Forty: IMF Working Paper No. 97/49

(9.) A case study of Pakistan’s experience with IMF financial programmes since the late-1980s by the IMF Independent Evaluation Office, ‘The Evaluation of Prolonged Use of IMF Resources’

(10.) About the International Monetary Fund, IMF, Introductory Information,

(11.) Balance of Payments Constraint and Inflation, Matias Vernengo, Working Paper No: 2003-06

The essay demonstrates familiarity with the sources and raises a number of interesting issues. Ideally, the IMF’s financial programming approach would at least be outlined early on in the essay. Also, the progress the IMF has made adapting its policies to the different requirements of its newer members could be given more weight. It has made many changes in part in response to criticisms.


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Monday, January 08, 2007

FE 201 (The International Monetary Fund & Economic Policy),Assignment Two, Uganda Case Study

Ronald Rutherford
Assignment Two
FE 201

Write an essay discussing how the IMF engages with its low-income country members. Use country case studies to illustrate your answer

In this assignment I will discuss these issues raised in the above questions with-in the prism of Uganda’s development process. And one of the most important things to consider is the “Human Face” of the issues that has been brought up in this course. The video from the IMF: Uganda: A Different Drummer ( (11)) does a good job in explaining the programs and how Uganda has benefited from the IMF involvement while allowing the country itself to develop its own programs and goals not the least being the use of grassroots political organizations.

It is also important to consider the context of the nation in question. Uganda has been plagued by political and social strife since independence from Great Britain in 1962 (12) starting with a coup from Prime Minister Milton Obote in 1966 (13) in which he declared himself president but not before suspending the constitution. While Obote was not as bad a tyrant as Idi Amin’s who reigned from 1971-1979 (14) he did not reform the government or commit to structural reforms needed to develop the country after his reinstatement as President during 1980-1985.

Which eventually led to the current President Yoweri Museveni (15) taking over in 1986. But it has not been easy for him to follow his own words: "The people of Africa, the people of Uganda, are entitled to a democratic government. It is not a favour from any regime. The sovereign people must be the public, not the government." While the 2006 elections were marked by multi-party polls, there continues to be severe restrictions and acts of intimidations that prevent political parties from advertising, although the press is given fairly free latitude in free speech. This was under the guise of factional divisions of the Nation prevented open forum candidacy since 1986(16). Last year also marked the signing of a ceasefire between the Lords Resistance Army and the Ugandan Government, with ongoing negotiations with the Southern Sudan Government and the other parties (17).

From the US Department of State: “Uganda's economy has great potential. Endowed with significant natural resources, including ample fertile land, regular rainfall, and mineral deposits [copper, gold and cobalt (22)], it appeared poised for rapid economic growth and development at independence. However, chronic political instability and erratic economic management produced a record of persistent economic decline that left Uganda among the world's poorest and least-developed countries.” (20) But hopefully with the help of the IMF these conditions are expected to change and according to the last estimates for 2006 and 2007 from the IMF are Real GDP Growth of 5.5% and 6% respectively and Consumer Price increases of 6.7% and 7% respectively (21).

Uganda is under the Executive Director Ismalia Usman from Nigeria with a quota of 180.5 millions of SDRs which represents .08% of total number of SDRs and thus has a vote total of 2,055 which brings their total vote percent to .09% of the total with the addition of their 250 basic votes (2 Page 12) (18). The additional vote for each country beyond the 250 basic votes per country is 1 vote for every 100,000 of SDRs of quota (1, Unit 8, Page 6). It is easy to see from their small percentage of the total votes that Uganda lacks any real power in the outcomes of vote counts. One suggestion to alleviate this situation is to increase the amount of basic votes for each country and have the proportion of total basic votes be some agreed upon percentage of the total voting rights and then evenly divided between all nations at the time. Basic votes were 11.3% in 1944 of total voting rights and the original member’s basic vote now counts for only .5% of the total. This was the result of quadrupling of total membership as well as a nearly 37 times increase in quotas while basic votes have not changed (3, Page 15).

While Low Income Countries (LIC) have little political power or chance to increase the basic votes (based on their vote totals themselves), the 85% requirement also makes it nearly impossible for members who fail to cooperate with the IMF to have their membership revoked (1, Unit 8, Page 7). And even to suspend a member from voting rights require a 70% approval. Thus even countries in protracted arrears are still members as in Liberia, Somalia and Zimbabwe (2, Page 12). While there is ongoing talks and payments that are being received from Zimbabwe and Liberia, Somalia does not even have a mention in the most current IMF Current Members Quotas and Current Voting Power notes (18) and shows no interest in making any payments (19).

In September of 2006 at the International Monetary and Financial Committee, Executive Director Usman (representing Africa Group 1) included this in his statement: “The [more fundamental reforms], we understand would include: (a) a new quota formula; (b) a commitment that quotas will be adjusted on a more timely basis in future in line with changing economic weight in the world economy; and (c) an increase in basic votes to protect the voice of small economies, and measures to alleviate disproportionate workload of large chairs, including African chairs.” (23, Paragraph 8) He later gets more specific by asking for a tripling of basic votes which he concedes may not be enough to bring it to back to the 11.3% of original level but enough to retain to give a larger voice to the Sub Saharan African Countries. (23, Paragraph 9) Ariel Buira also suggests that “…no Executive Director should represent more than, say, 10 countries.” (3, Page 25) But if Africa becomes even more Balkanized than it already has been then there must be a point where the number of Executive Directors becomes diminishing marginal productivity to the goals of the IMF.

But now let me focus back on the beginning of the Poverty Reduction and Growth Facility (PRGF) transition and how Uganda went through it. Uganda has been a consistent and long term user of the facilities of the IMF starting with its membership in September 27, 1963. A recap of the Transactions with the Fund from May 01, 1984 to November 30, 2006 can be found on the IMF website (24). The PRGF was established in September of 1999 after an external review of the then Extended Structural Adjustment Facility (which the ESAF followed the Structural Adjustment Facility (SAF)). The external review conducted in 1998 showed that in some instances poverty actually increased and failed to reduce poverty in most cases and thus failed to achieve their objectives (1, Unit 7, Page 5).

One of the main reasons for the change from the ESAF to the PRGF was the lack of ownership on the part of the borrowing countries. The funds were needed for stability but lacked a strong commitment to implementation and follow through on the structural reforms that needed to be completed. One of the biggest changes has been in the introduction of the Poverty Reduction Strategy Paper (PRSP) that must be completed first by the governments asking for the loans and prior to applying for the PRGF. While it is considered that this paper takes a significant amount of institutional resources, the IMF would consider ‘Interim PRSP’ as the first step (1, Unit 7, Page 9). And it would not be a stretch to see the IMF to use its Technical Assistance to help LDCs that may lack such resources.

Uganda’s Poverty Reduction Strategy was ahead of the curve in this regard by already implementing the “Poverty Eradication Action Plan (PEAP) (first formulated in 1997). The third version of the PEAP was finalized in December 2004.” (26, 11) Or as Jim Levinsohn said, “Uganda though, put together its ‘Poverty Eradication Action Plan’ in 1997 so it was ready to go when the PRSP approach was announced in 1999 (3, Chapter 5, Page 128) It is interesting to note that the IMF does not differentiate ESAF and PRGF on its web site by marking even programs started in 1994 as PRGF (25, V. Latest Financial Arrangements).

“Has the Poverty Reduction Strategy Paper (PRSP) process yielded benefits that exceed its considerable administrative costs?” was the opening question posed by Jim Levinsohn. As such I was expecting his paper to be a quantitative study of costs and benefits of the PRSP process. Instead it contained a lot of issues and questions without addressing the underlying question he asks. While the papers average 100 pages and take up to two years to complete, he provides no evidence of what this would cost a country to produce. It seems that someone with a Masters degree could possibly complete this with help from the Technical Assistance that the IMF, World Bank and other IFIs could provide. And the benefits could include substantial externalities that he does not acknowledge. NGOs may continue to gripe but providing information on a timely and continuous basis can not hurt in targeting and directing funds to the areas most needed. In trying to manage problems that are complex such as this, the first task should be to identify how to measure the progress and then to measure it. (3, Chapter 5)

Levinsohn analyzes the intent of the PRGF changes. 1. That the plans of action come from the recipient country. This was mentioned earlier in implementing the PRSP with the expectation that the recipient country would seek out and get advice from many of the countries ministries, other internal stakeholder groups, external aid providers and NGOs, and even the poor (which may need a variety of outreach programs). 2. Measuring and monitoring the results and thus to emphasize a ‘results oriented’ process. 3. Understanding the many dimensions of poverty and not relying strictly on income based measures of poverty. 4. Emphasize medium to long-term progress.

Since the funds are highly concessional or subsidized, there has been much demand for these facilities, with 77 countries becoming eligible by September 2003 and by 2004 over 30 countries completed fully the Poverty Reduction Strategy Paper (PRSP) (1, Unit 7, Pages 6, 10). The subsidization has come mostly from the industrialized countries as well as the general funds of the IMF. The PRGF-HIPC (Heavily Indebted Poor Country) trust fund borrows at general market rates and lends through to the PRGF-eligible countries at a rate of 0.5% (1, Unit 7, Page 6).

Uganda was in a very good position for implementing the HIPC process and was the first country to benefit from this process (26). During the first stage Uganda was already demonstrating the prudent use of resources. While corruption is still a concern, much has been done to address these problems. And during the second stage (Full-Fledged Poverty Reduction Strategy), Uganda was well under way on implementing and carrying out its PEAP programs. The Enhanced HIPC was not meant to forgive all indebtedness but to reduce the amount to a sustainable level. This sustainable level is measured as either 150% of its exports or 250% of its government revenue and this was the result of reduced percentages in the transition from the original HIPC initiative to the Enhanced HIPC of 200-250% of exports and 280% of government revenue under the original initiative.

In terms of actual amounts Uganda has benefited tremendously, with total debt forgiveness being around 2 billion US Dollars (22). But in 2002, Uganda stated in their PRSP that “Uganda’s external debt sustainability has deteriorated since its enhanced HIPC Initiative completion point.” And Iraq and some commercial creditors were filing suit against the Uganda government (5, Page 19). When the creditor and debtor countries have been industrialized vs. developing countries respectively, then the industrialized countries usually forgive unsustainable debt on the developing countries as part of their commitment to providing assistance to developing countries or out of public sentiment. But if both are HIPC countries then it is considered unfair to have them have to litigate each other for debts and this issue has not been solved as of yet.

As of November 2003, “Uganda still has an unsustainable external debt situation.” But there was some progress with India canceling its claims, the OPEC fund and Korea providing debt relief and Libya agreeing to enact legislature to allow debt relief to Uganda (6). As of July 2004, Uganda said it still faced unsustainable external debt (7).

Uganda is still working hard with creditors as shown in the Uganda: Sixth Review under the Three-Year Arrangement under the Poverty Reduction and Growth Facility 2006(4, Page 29). This paper also states that “Uganda’s risk of debt distress is moderate.” But notes that “The full implementation of the MDRI would substantially lower Uganda’s probability of debt distress” (4, Pages 60-67). So the good news is that the World Bank has approved the Multilateral Debt Relief Initiative (MDRI) on March of 2006 and cancelled Uganda’s IDA debts on July 2006 (26). Now that things are looking better for Uganda and it no longer appears a need for PRGF services, Uganda has and continues to receive assistance under the Policy Support Instrument (PSI) (4, Pages 8-11).

“PSIs are designed to address the needs of low-income members that may not need Fund financial assistance, but seek Fund endorsement and assessment of their economic policies. A PSI will be available only upon request of a member and will add to the toolkit of instruments from which low-income countries can choose their desired form of engagement with the Fund.” (8) This form of technical assistance, which Uganda has completed its first review of its 16 month PSI and was approved for a 3 year PSI as of December 2006 (9). And this will be looked on favorably if new shocks should affect Uganda and as a result Uganda may need rapid access to the PRGF funds in the future, according to the directors (8). Hopefully Uganda will continue to get timely and important TA from all departments and the four broad areas: designing and implementing fiscal and monetary policy; institution building; collecting and refining statistical data; and drafting and reviewing financial legislation (1, Unit 7, Page 18) “Uganda has received extensive technical assistance from the Fund in recent years,” including from the MAE and FAD as early as 1992, INS conducted a financial programming seminar in 1994, LEG provided technical assistance on income tax legislation, and the Fund has maintained a resident representative in Uganda since 1982 (5, Appendix II).

From what I read, Uganda has not defaulted or fallen into arrears with their private sector creditors. Most of Uganda’s unsustainable debt has come from the BWIs and other governments. They have also shown a willingness to work with a variety of creditors including other governments in a timely and early dialogue process and a willingness to share non-confidential information, although some creditors still took the litigation approach. Thus the issue the IMF being reluctant to lend to members that were in default did not appear a problem in any negotiations with Uganda.

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Saturday, January 06, 2007

References: FE 201, The International Monetary Fund and Economic Policy, Uganda Case study

FE 201
Ronald Rutherford
Session 5, 2006
(1.) The International Monetary Fund & Economic Policy Unit 1-8, Dr. Cyrus Rustomjee, 2005.
(2.) IMF Survey Supplement (2004) IMF in Focus: A Supplement of the IMF Survey, Vol. 33, Washington DC: International Monetary Fund.
(3.) Buira, Ariel (Ed.) (2003) Challenges to the World Bank and IMF – Developing
Country Perspectives, London: Anthem Press.
(4.) Uganda: Sixth Review Under the Three-Year Arrangement Under the Poverty
Reduction and Growth Facility, Request for Waiver of Performance Criteria, and
Request for a Policy Support Instrument—Staff Report; Press Release on the Executive
Board Discussion; and Statement by the Executive Director for Uganda, February 2006.
(5.) IMF (2002) ‘Uganda: Request for a Three-Year Arrangement Under the Poverty
Reduction and Growth Facility’, Washington DC: International Monetary Fund.
(6.) Uganda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, Kampala, Uganda, November 26, 2003.
(7.) Uganda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, Kampala, July 13, 2004.
(8.) IMF Executive Board Approves the Establishment of Policy Support Instruments for Aiding Low-Income Countries, October 14, 2005.
(9.) IMF Executive Board Completes the First Review under the Policy Support Instrument for Uganda and Approves a New Three-Year Policy Support Instrument, December 15, 2006.

(11.) Video: Uganda: A Different Drummer Copyright: 2002
From Link:

(12.) Uganda:

(13.) Milton Obote:

(14.) Idi Amin:

(15.) Yoweri Museveni:

(16.) BBC “Country profile: Uganda”

(17.) Lord’s Resistance Army:

(18.) IMF Members’ Quotas and Voting Power:

(19.) Transactions with the Fund, Somalia:

(20.) USA State Department on Uganda:

(21.) Uganda and the IMF:

(22.) CIA World Factbook (Uganda):

(23.) International Monetary and Financial Committee, Fourteenth Meeting September 17, 2006
Statement by Mrs. Nenadi E. Usman, Minister of Finance, Nigeria

(24.) Transactions with the Fund from May 01, 1984 to November 30, 2006:

(25.) Financial Position in the Fund as of November 30, 2006:

(26.) World Bank, The Government's Poverty Reduction Strategy/ World Bank Assistance to Uganda:,,menuPK:374947~pagePK:141132~piPK:141107~theSitePK:374864,00.html