PIIGS and a Spurious Correlation.

In this post I want to discuss some of the important issues the European Union is facing. Many of these problems have come to the surface with the mounting fiscal crisis in Greece and more broadly the PIIGS. PIIGS stand for the countries of Portugal, Italy, Ireland, Greece and Spain. The Economist magazine provides some basic facts about each countries debt and what steps have been taken to address the issues at FACTBOX-Eurozone's embattled fringe PIIGS economies which includes a link to the following chart.

It is easy to see that all the countries shown in the graph will surpass the 60% debt to GDP ratio and are fast approaching the 100% mark if they have not already surpassed it. The 60% debt ratio was a mandate for all economic and monetary union (EMU) countries and clearly no one is abiding by that rule. Whether debt levels of 60 or 100 is too much is an empirical question that I am not aware of the answer and of course based on the structure of each economy the level of debt that is sustainable might be different for each country. For example, a country with a reserve currency that is used widely to facilitate trade would theoretically have a higher potential debt ceiling limit (Hint: US).

According to Mail Online, Britain might also be vulnerable to the fiscal problems the PIIGS are experiencing at the article Britain's public finances declared 'vulnerable' thanks to bulging budget deficit. But unlike the PIIGS, UK has a flexible currency and can adjust its monetary base nearly at will. Dean Baker provides a blog post noting the differences between inside the Eurozone and outside using Hungary as the example at Hungary, Which Was Saved by Not Being in the Euro, Lectures Greece on the Virtues of the Euro, and the NYT Doesn't Notice. The ironic point is that Dean Baker did not mention George Soros from the NYT article as also being not very cognizant of the differences as Soros is a foreign currency trader {er, manipulator} he should definitely be more knowledgeable.

Graphic of sovereign risk ranking for selected countries of Europe from Mail Online.

What is the Way Forward?
Paul Krugman again provides us with some interesting insights into the problems with the PIIGS. He makes similar points as Dean Baker but uses Spain as the example. His theme was that Europe was not ready for a monetary union and was rushed into it by "policy elites" at his NYTs article The Making of a Euromess. From reading the history of the EMU, I am not sure how anyone can conclude that it was rushed in any way. Krugman supports this contention because of the problems in Spain, but he fails to show how any more time could have helped. In fact, the longer the time that the individual nation states were integrating then the more likely some unexpected event will prevent integration as happened to Britain as a result of Soros and others that broke the Bank of England.

It does not appear insurmountable the dismantling the euro or opting out of the Eurozone and would not necessarily cause "the mother of all financial crises" according to Barry Eichengreen. The process would unwind as easily as it was created and maybe a lot less painful. But that is a small possibility as most countries are enjoying the benefits of the Eurozone and many are willing to pay the the high price to join. The question forward is how to make it more beneficial to all participants-over the long term. This is where Krugman provides some useful guidance by contrasting the structural components of the USA as having a stronger central government (i.e. federal government) and the Eurozone with the nations set up as states but lacking the organization that can readily redistribute capital.

Krugman also shows the structural rigidity of the economy that is preventing the "free movement of people, goods, services, and capital" which is a tenet of the EU laws. A central government could in fact push through measures to make sure free movements occur and root out structural rigidities. In addition to this important function, it would also avoid the isolation paradox that each country is not willing to be the first to declare financial support. For example, Der Spiegel leaked a story about the German finance minister willingness to provide 20% of the bailout money. That amount of money is based on Germany being the largest economy in the EU and it provides around 20% of the European Central Banks (ECB) capital. But most recently, the EU, and Germany deny Greek bailout plans. I truly doubt that they have no plans. Only bad managers do not get contingency plans in place before crunch time.

Convergence of economies that are closely tied together economically can be another indicator of structural rigidity, that is, higher convergence (lack of divergence) indicates low levels of structural rigidity. Convergence does not mean a "race to the bottom" but by a process by which low income areas catch up to the higher income areas through higher growth rates. According to economists Sylvester Eijffinger and Edin Mujagic at The Euro’s Final Countdown?, the Eurozone is actually experiencing increasing divergence of the economies based the factors of "unit labor costs, productivity, and fiscal deficits and government debt" which in turn leads to a "convergence" of incomes if the factors are converging. Greek finance minister George Papaconstantinou summarized the situation by stating the following, "For a common currency area to work you need a convergence of economic policy ...or else you need compensation flows between member states". This again leads back to the need for a centralized government much as our Federal Government facilitates.

Andrew Willis suggests the answer may entail greater economic coordination among EU member states at Greek drama heightens debate on economic co-ordination. But coordination can only get so far in solving the structural problems. It may actually cause the problems to get worst especially concerning the debt problems. What the Eurozone has become is one big prisoner's dilemma. Everyone has a reason to "cheat" but not much incentive to make sure the other nations are following the rules, thus it has been manifested in Greece and it's falsifying and misleading its debt and deficit levels. This again points to the need for a federal bureaucracy under a representative government to insure the rules are followed and that shared resources are not unduly squandered.

For a breakdown of the concept of "coordination", I turn to Keith Pilbeam, International Finance, second edition. Pilbeam provides a "hiearchy of coordination" which he lists as: 1. exchange of information, 2. acceptance of mutually consistent policies, and 3. joint action. If the present system of coordination collapsed already due to fraudulent data about Greece's debt and deficit levels then how can the other steps be achieved? If the coordination breaks down even on the first phase, then how can it get to truly socially beneficial outcomes? For the most part, the policies have appeared to be mutually consistent as no nation has decided to severely cut back real spending but that is mostly due to ideological underpinnings of Keynesian economics. The joint action does not seem to be taking place and appears more ad hoc than a concerted effort to solve their mutually identifiable policy goals and in this case full employment is one.

What about this Spurious Correlation?
What initially got me interested in the most recent turn of events and the macroeconomic issues that went along with it came from reading a short informational report from the Center for Economic and Policy Research at An International Comparison of Small Business Employment. The graph below instantly had me thinking about the correlation between self employment rates and fiscal/financial soundness for an economy.

Of course correlation does not indicate causality, but there may be structural factors that lead to bad outcomes with excessive amounts of self-employed individuals. One aspect that might be playing out here is that the tax base might be too narrow. One of the first things that the IMF pushes for when dealing with developing countries is to try to broaden the tax base. High tax revenues that are sector specific {e.g. agriculture} can be very distorting to the market and provide suboptimal social outcomes. Self-employment incomes may be distortionary as income may be hidden or transferred and thus avoiding the full burden of the tax bite. That question along with selection bias for respondents would take more specific knowledge about each country's laws and regulations.

What does this mean?
Seeking Alpha provides three suggestions for Hedging PIIGS Risk with ETFs. The first is to directly purchase a CDS of the PIIGS. The spreads are now greater than the BRICS, which is simply amazing and maybe a signal that the market is expecting more shoes to drop. The second method is based on the assumption that the contagion effect from the PIIGS will bring down the euro and cause even slower growth in the Eurozone. The trend line for the past 3 months is showing continued strengthening of the US dollar and after February 10th has shown continuation of that trend. The third suggestion is to short ETFs for the specific PIIG countries.

Bill Ralls, CFA, Senior Vice President at Fidelity, labels the current crisis as a Greek Debt Drama, Act I. Ralls thinks the drama could result in even more weakening of the euro and no matter what happens the road to recovery will be like a Greek marathon, "stamina and grit will be required as the global economy heads down the long, bumpy path of recovery." This seems to imply that the Eurozone will continue to be a sick puppy. Whether this leads to more hot money flows into the US and increased fear of emerging markets in general is anyone's guess. The one aspect that I take exception with Ralls is he correlates Greece as similar to a US state and in this case Massachusetts. Krugman and others have provided information as how the individual states are still not like Eurozone member states. Thus the contagion effect and the lack of effective mechanisms to deal with the problems is increasing uncertainty in the markets. For example, when the rumors about Germany's willingness to bail out Greece the headline from the AP read as Optimism in Greece inspires market.

Additional links:
Can Greece Pull Out of the Euro?

America Should Pay Attention To Greece The differences between Greece's financial condition and America's are not as vast as one would wish. by Clive Crook

Stumbling and Mumbling: Trading nations

“Greek crisis over” – Our ability to delude ourselves has reached the next level

France24 - IMF aid for Greece ‘not a question of prestige’ says EU's Barroso

Game, Set and Match for Merkel – Greece will have to go to the IMF

Greece: The Curse of Three Generations of Papandreous

Fitch cuts Greece rating to BBB-, outlook negative - MarketWatch

Fitch Ratings on Friday said it downgraded Greece's credit rating to BBB- from BBB+, with a negative outlook. The agency said the move reflects intensifying fiscal challenges amid increasingly adverse prospects for economic growth and increased interest costs. The cut also reflects ongoing uncertainties about the government's financing strategy amid increased volatility in capital markets, Fitch said. Although aid for Greece is likely to be forthcoming, greater clarity regarding back-stop financial support in the form of an explicit IMF program is likely to be required to shore up market confidence in the face of substantial short-term funding needs, Fitch said

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)


Conclusion:
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.


References:
(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,
June.

(3.) http://www.imf.org/external/pubs/ft/aa/aa01.htm
Articles of Agreement of the International Monetary Fund/Article I – Purposes

(4.) http://www.imf.org/external/pubs/ft/aa/aa04.htm
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
http://www.glenvierk.com/School/IBUS%20273%20Term%20Paper%20HKCB.pdf

(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
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882305#PaperDownload

(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,
http://www.imf.org/external/about.htm

(11.) Balance of Payments Constraint and Inflation, Matias Vernengo, Working Paper No: 2003-06
http://www.econ.utah.edu/activities/papers/2003_06.pdf


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.

65/100

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 (http://www.imf.org/external/mmedia/view1.asp?eventId=54&file=1 (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.