IMF

Simon J. Evenett, Professor of International Trade and Economic Development and Academic Director of MBA programmes, University of St. Gallen, Switzerland

Christine Lagarde, IMF managing directorF

Christine Lagarde, IMF managing director

On the face of it, the recently agreed expansion of the IMF’s lending capacity suggests that the IMF is back in business. Since the global economic crisis began no UN or other global public agency has had their resources expanded by governments as much as the IMF. The IMF has also been at the centre of several crisis-era surveillance and reporting initiatives. So is the IMF now even better placed to better contribute to the recovery of the global economy? Maybe not. 

By Kevin P. Gallagher

Rio de Janeiro, Brazil. AFP/Getty Images

Rio de Janeiro, Brazil. AFP/Getty Images

Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.

Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it. 

By Domenico Lombardi and Sarah Puritz Milsom

Following the unprecedented downgrade of the European Financial Stability Facility and nine eurozone sovereigns by Standard & Poor’s, there is a renewed impetus for the International Monetary Fund to step up its involvement in the deepening euro area crisis. In an executive board meeting earlier this week, managing director Christine Lagarde requested that the membership step up the fund’s own war chest in an effort to better equip the institution to adequately confront the growing global threat. The move follows an earlier reshuffle at the helm of the European department of the IMF, signalling that the fund has been quietly preparing itself for the gloomiest scenario in which the situation in Europe develops into a full-blown systemic crisis.

Credit: Hannelore Foerster/Bloomberg

Currently, the IMF is unable to ring-fence the euro area and contain any spillovers to the global financial system unless its global membership agrees to provide a significant boost to its resources. As it stands, the organisation has some $385bn in its forward commitment capacity, including the activation of the contingent facility — the new arrangements to borrow — that can be used “to cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system.” 

By Domenico Lombardi

The IMF has just elected the first woman to its managing directorship, and already Christine Lagarde’s new desk in Washington is piling up with folders eagerly awaiting her arrival. 

By Kevin P. Gallagher

At the recent annual meeting of the Asian Development Bank Taiwan’s Central Bank governor Perng Fai-nan urged emerging market nations in Asia to use capital controls to promote financial stability.

Yesterday, this call was echoed by Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific. She singled out China, India, Singapore, Indonesia and South Korea as the most vulnerable nations in need of controls

These statements would have been unthinkable a decade ago, and shows how much has changed.

Part of the stigma attached to capital controls has been dampened by the new tune at the International Monetary Fund (IMF). In a February 2010 staff position note and in the IMF‘s Global Financial Stability Report (GSFR) the IMF said that capital controls are a legitimate part of the toolkit for emerging markets. What’s more, the IMF’s economists found that those countries that deployed capital controls in the run-up to the current crisis were among the least hard hit from the global financial crisis.

It is time for the debate over capital controls to shift from whether to deploy controls to how and when.

The problem is that many of the world’s trade and investment treaties, especially those with the US, make it very difficult to effectively use capital controls. 

By Michael Pomerleano

Developing and developed countries alike are inextricably connected in the international financial system. Yet this system is heading into strong headwinds and a dangerous period in which vulnerabilities will increase in the international financial system. 

By Kevin P. Gallagher

Clear and consistent proposals toward crisis recovery and prevention are needed at the International Monetary Fund upcoming annual meetings. Unfortunately, the IMF has been sending mixed messages over the past two months on the subject of capital controls. 

By Michael Pomerleano

In Growth in a Time of Debt, presented at the AEA 2010 Annual Meetings in Atlanta (www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=460) Carmen Reinhart and Kenneth Rogoff study the link between different levels of debt and countries’ economic growth over the last two centuries. The paper reviews 200 years of economic data from 44 nations and reaches the conclusion that countries that are as highly indebted as the UK and US will, at the end of the crisis, grow at sub-par rates. While there is a discontinuity in the data (growth is affected only over a certain debt threshold) the findings are ominous. One explanation is fairly straight forward: more resources are diverted away from the private sector. Governments do not create, but consume wealth.

A second, more subtle explanation focuses on the massive transfer of private debt onto government balance sheets. The message is fairly simple. The nationalisation of private debt injects considerable inefficiency into the economic system, inhibiting Schumpeter’s process of Creative Destruction that is essential in a market economy and needed to maintain the private sector. In short, the recent massive bailouts by national authorities of their financial systems in some countries amount to nationalising private sector debt with fiscal resources. In countries without fiscal headroom and lacking reserve currencies, such as Hungary, Romania and Ukraine, the IMF jumped to the rescue with sovereign lending that has basically nationalised the losses of the private sector – what Joe Stiglitz calls ‘Ersatz Capitalism’: the privatising of gains and the socialising of losses. 

Ingram Pinn illustration

Financial crises have devastating impacts on the public finances. The impact is also most severe where the pre-crisis excesses were greatest. Among members of the Group of Seven leading high-income countries, this means the bubble-infected US and UK. The question both countries confront is how soon and how far to tighten. Tightening will have to be substantial. But premature action could be a devastating error. 

By Kumiharu Shigehara

Japan‘s economic expansion stumbled by late 2007, and in the context of the global economic crisis, it has been trapped in the deepest recession of the post-war era. Initially, the impact of the global crisis on the Japanese economy was expected to be limited because Japanese banks and other financial institutions were relatively insulated from financial turmoil. However, between the third quarter of 2008 and the first quarter of this year, Japan’s exports fell at an annual rate of some 55 per cent in volume terms, the sharpest among OECD countries and double the area’s average rate of decline.