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The IMF Part 2: Governance at The International Monetary Fund. James Raymond Vreeland Georgetown University. The Plan. Review: Why did we build an IMF? Trilemma Fixed Exchange Rates IMF to the Rescue? What is the IMF? Conditionality Who is the IMF? Where to IMF resources come from?.

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The IMF Part 2: Governance at The International Monetary Fund

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The IMF Part 2:Governance atThe International Monetary Fund

James Raymond Vreeland

Georgetown University


The Plan

  • Review: Why did we build an IMF?

    • Trilemma

    • Fixed Exchange Rates

  • IMF to the Rescue?

  • What is the IMF?

  • Conditionality

  • Who is the IMF?

  • Where to IMF resources come from?


Review…


Fixed Exchange Rate

The Trilemma

Open Capital Flows

Sovereign Monetary Policy


  • Under “autocracy,” governments could maintain fixed exchange rates with high capital mobility.

  • Under democracy, they could not.

Growing #’s of democracies

Few democracies

Fixed exchange rates

+

Open capital flows

Degree of global capital mobility

Fixed exchange rates

+

Capital controls

Floating exchange rates

+

Open capital flows

1870

Interwar period

1971-3

1944


GLOBAL FINANCIAL INTEGRATION

(World external assets as % of GDP)

Source: WEO 9/02, 4/05 and 10/07


Hazard Rate over Time for Democracies (Solid Line) & Dictatorships (Dotted Line) – Time in years


Under authoritarianism:

Let them eat cake

Under democracy:

Incumbents lose elections

People don’t eat


http://www.youtube.com/watch?v=3_ex0sTsb_I


The international collective action problem:

  • How can we allow for the free flow of goods, service, and capital without:

    • Imbalances leading to beggar-thy-neighbor policies?


https://www.youtube.com/watch?v=GVytOtfPZe8


One solution:

  • IMF to the rescue?

  • THE WHOLE POINT OF THE IMF:

    • Soften the blow of adjustment

  • A form of insurance…

  • Problem?

  • Moral hazard?

  • Conditionality?

  • “Bretton Woods” falls apart…

  • The IMF never really worked as intended


What is the IMF solution to Moral Hazard?

  • CONDITIONALITY!

    • Quid pro quo

    • Loans in return for policy change

  • How does it work?

    • Letter of Intent – describes policy changes

    • Loan comes in disbursements (“tranches”)

    • If policies have not been changed, no new “tranche” (maybe)


Policy conditions have traditionally entailed:

  • Fiscal austerity

    • cutting government services and increasing taxes

  • Tight monetary policy

    • raising interest rates and reducing credit creation

  • Currency devaluation

  • What are the goals of IMF programs?

    • Economic stability 

    • Economic growth


Why did the West stop using the IMF?

  • Bretton Woods fixed XR system constraining

    • IMF loan: Softens the blow of adjustment

    • Conditionality: Still enforces adjustment

    • Impinges on NATIONAL SOVEREIGNTY

  • Eventually, the West abandoned fixed exchange rates!


The trade-off:

Stability of INTERNATIONAL prices

VS

Stability of DOMESTIC prices

For large-economies, DOMESTIC price stability is more important to most voters

Democracyfloating XR


Nixon ends Bretton Woods

http://www.youtube.com/watch?v=iRzr1QU6K1o

http://www.popmodal.com/video/8803/Nixon-Ends-Bretton-Woods-International-Monetary-System


Under democracy,

  • The “pocketbook voter model”

    • people vote according to changes in their income

    • http://www.youtube.com/watch?v=loBe0WXtts8

    • http://www.popmodal.com/video/13134/Michael-Reagan-talkes-with-Meygn-Kelly-about-his-dads-question-Are-You-Better-Off-Now-than-You-Were-4-Years-Ago


Stylized history

  • Late 19th century:

    • Mobile capital, authoritarian governments

  • Interwar years:

    • Mobile capital + democracy  beggar-thy-neighbor

    • http://www.youtube.com/watch?v=3_ex0sTsb_I&feature=channel

  • Bretton Woods (1944-1971/3):

    • Capital controls + democracy

    • http://www.youtube.com/watch?v=GVytOtfPZe8

  • Post Bretton Woods:

    • Floating exchange rates

    • http://www.youtube.com/watch?v=iRzr1QU6K1o

    • http://www.youtube.com/watch?v=loBe0WXtts8


Stepping back a moment…

  • Who is the IMF?

  • Where do the resources for “loans” come from?


Who is the IMF?

  • Currently 188 members

    • https://www.imf.org/external/np/sec/memdir/memdate.htm

  • Who’s not a member?

    • Andorra, Liechtenstein, Nauru, Cuba, and North Korea

    • Special case: Taiwan

  • Members have “votes” according to the size of their subscription to the IMF…


Where do the resources for “loans” come from?

  • Members provide a contribution called the member’s quota (held on reserve)

  • The size of the quota is supposed to be a function of the country’s economy:

    • GDP

    • current account transactions

    • official reserves

  • Largest: USA, Smallest: Palau

  • Actually a political process

    • Changes require an 85% majority of current vote shares!

    • CHECK UPDATE: http://www.imf.org/external/np/sec/memdir/members.aspx

  • LARGEST:

    SMALLEST:


    Quotas & the Executive Board

    • Determine vote shares

      • @ the Board of Governors

    • Board of Governors elects

      • The Executive Board

    • Top 5 vote-holders get an APPOINTED director

    • Rest of the world: elects the remaining seats (19)

    • 24 total seats

    • Great powers + rest of the world


    Great Powers have changed over time

    • The IMF

      • Allocates votes according to economic importance

      • Great variation over its history…

    • 1946-1960:

    • 1961-1970:

    • 1971 onwards:

    • Otherwise the same top 5 for over 30 years

    • Change is coming? #3:

      • Will US ratify the change?


    For the flag-challenged:Great Powers have changed over time

    • The IMF

      • Allocates votes according to economic importance

      • Great variation over its history…

    • 1946-1960: US, UK, China, France and India

    • 1961-1970: US, UK, France, Germany, and India

    • 1971 onwards: US, Japan, Germany, France, and UK

    • Otherwise the same top 5 for over 30 years

    • Change is coming? (China #3!)

      • Will US ratify the change?


    How are decisions made?Or: Who controls the IMF?

    • Other important members:

      • 3.81%

      • 2.8%

      • 2.39%

      • 1.93% ???

      • 2.67% ??

      • 1.79% ??!!??

      • 2.44% ?

      • 1.41% ?

    • Top 5 members:

      • 16.75%

      • 6.23%

      • 5.81%

      • 4.29%

      • 4.29%

      • (% of total votes)


    For the flag-challenged:How are decisions made?Or: Who controls the IMF?

    • Top 5 members:

      • United States (16.75%)

      • Japan (6.23%)

      • Germany (5.81%)

      • France (4.29%)

      • UK (4.29%)

      • (% of total votes)

    • Other important members:

      • China (3.81%)

      • Saudi Arabia (2.8%)

      • Russia (2.39%)

      • Belgium? (1.93%)

      • Canada? (2.67%)

      • Brazil? (1.79%)

      • India? (2.44%)

      • Korea? (1.41%)


    http://www.imf.org/external/np/sec/memdir/members.aspxaccessed 2 May 2012


    New vote-shares (for 2012)??Has not happened yet!

    • United States: 16.48

    • Japan: 6.14

    • China: 6.07

    • Germany: 5.31

    • France: 4.02

    • United Kingdom: 4.02

    • Italy: 3.02

    • India: 2.63

    • Russia: 2.59

    • Brazil: 2.22

    • Canada: 2.21

    • Saudi Arabia: 2.01

    • Spain: 1.92

    • Mexico: 1.80

    • Netherlands: 1.76

    • Korea: 1.73

    • Australia: 1.33

    • Belgium: 1.30


    Why the delay?


    What is the IMF? (in one slide)

    • Like an international “credit union”

    • Almost all the countries in the world are members (188)

    • All hold currency on reserve

    • The IMF can use these reserves to loan to countries in “crisis”

    • Moral Hazard?  Conditionality!

    • IMF programs = loans + conditions

    • Decisions at the IMF are by majority rule

    • Influence over decisions pegged to “economic size”

      • MAJOR SHAREHOLDERS

      • Votes are determined by contributions (“quota”), Quota set by an 85% majority rule

      • Most other decisions by simple majority rule (CONSENSUS)


    Take-aways

    • TRILEMMA

    • Economic growth  re-election

    • Power at the IMF: The Executive Board (18824)

    • Governance is changing bc the world is changing!


    Some concepts/facts to study:

    • Moral Hazard

    • Conditionality

    • IMF programs = loans + conditions

    • Most decisions at the IMF are by majority rule

    • Influence over decisions pegged to “economic size”

    • Votes are determined by contributions (“quota”), Quota set by an 85% majority rule

    • (US has veto power to changes in governance! >15% of votes)

    • What is special about the top 5 members of the IMF?

      • Have they always been the same countries?

    • Elected v. appointed directors


    Thank youWE ARE GLOBAL GEORGETOWN!


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