In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions’ neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful. As for crisis resolution, the IMF's approaches to in Asia, Russia and Argentina have been controversial. In fact, one of the more successful responses to the challenge posed by the volatility of capital flows has been the introduction in Chile and Colombia, for example, of market-based controls on capital movements, which had been resisted by the IMF for years. These responses illustrate the practical relevance of the ‘theory of the second best’ by which, when an economy suffers a distortion, welfare may be improved by the judicious introduction of another distortion through some form of government intervention.

A second, related, challenge, which is yet to be addressed, is posed by the massive reversals of previously large capital flows, from the developed to the developing countries.

Abstract

A positive future for foreign private lending to developing countries requires reducing perceived risk through mechanisms for more permanent debtor-creditor ‘conversation’, and an accepted and effective ‘bankruptcy’ approach to orderly workouts from unavoidable sovereign defaults. The IMF began a serious debate on this issue by proposing a Sovereign Debt Restructuring Mechanism (SDRM) for orderly workouts of sovereign debts in default. Somewhat surprisingly, the creditor banks, the US Treasury, and the emerging market countries have all rejected the Fund's SDRM approach to debt restructuring. The emerging market countries are concerned that the SDRM approach would significantly increase the high ‘spread’ or the risk premium they already have to pay for foreign loans. The chapter makes certain suggestions and revisions to the Fund's SDRM approach to make it more acceptable to all parties involved, and to preserve its bite. For example, the chapter advocates including bilateral official creditors in SDRM negotiations, making a mediation service available to negotiating countries, retaining an effective but temporary ‘stay’ mechanism and, most importantly, separating the mechanism as a whole from the IMF by seeking to enact an international law through a stand-alone treaty. I conclude by warning that premature closure around this controversial, but extremely important, proposal could rob the international system of measures for increasing investor and citizen confidence. I thus call for further consideration of the matter in all relevant forums.

Abstract

1. Introduction

Reducible market uncertainty makes the perceived risk in foreign lending to the governments of developing countries higher than it need be. In part, the culprit is the shift in the composition of creditors in syndicated loans toward buyers of bonds. The open information and communication needs of bond investors are larger than those of multinational banks, which were the main intermediaries for international lending in earlier decades, and the mechanisms to work out from a default on sovereign bonds are not as developed as they have been for default on international bank loans. There are also controversies and thus uncertainties about how losses in a work out from a crisis should be shared among the various private and official creditors of a defaulting government, and between the country and its creditors as a whole.

In this chapter, I argue that the uncertainty can be reduced through a regular, ongoing dialogue between the borrowing government and its creditors, and that mechanisms can be conceived for carrying this out.

Abstract

1. Introduction

Recent crises in emerging markets have highlighted the importance of maintaining adequate levels of international reserves, and of identifying reliable indicators to assess both the current levels of reserves and any possible future pressures on them. Until relatively recently, the indicators most often used for this purpose were measurements such as the ratio of international reserves to merchandise imports or to a particular monetary aggregate. However, as capital movements have gained importance in emerging economies, the usefulness of indicators based on balance of trade flows has decreased markedly. In addition, in view of the instability of the demand for money and the use of increasingly sophisticated financial instruments, the value added of ratios focused on the relationship between international reserves and a monetary aggregate has been cast into doubt.

Abstract

I begin by posing a key question: Has the Poverty Reduction Strategy Paper (PRSP) process yielded benefits that exceed its considerable administrative costs? I first review the PRSP process and then examine some of the existing reviews, explain why these reviews tend to fall short of their goals, and finally try to answer the question stated above. I find that the first round of reviews of the PRSP approach have been dominated by little careful quantitative analysis, and instead by anecdotes and stories. I recommend that the future reviews of the PRSP process, from all sides, confront the difficult task of determining the marginal impact of the PRSP approach. I also present a detailed list of the types of household data that are needed for a successful PRSP implementation. I conclude with a specific suggestion: The Bank and the Fund or an NGO should undertake one careful, detailed and rigorous analysis of a specific PRSP process based on a multiple waves of a household survey, which can then serve as a model for future reviews and analyses.

Introduction

In 1999, the World Bank and the International Monetary Fund (IMF) adopted a new set of policies to guide lending to some of the world's poorest countries. Amid the blizzard of acronyms explaining the new policies, the Bank and the IMF laid out a framework to be followed by poor countries wishing to make use of various concessionary (low-cost) lending facilities.

In trying to find their way toward growth and economic and social development, policymakers in developing countries face multiple uncertainties. For most, the major sources of advice of external financial assistance are the Bretton Woods institutions. With large financial resources at their disposal, and their support conditional on the adoption of certain policy prescriptions, the influence of the International Monetary Fund (IMF) and the World Bank (WB) can hardly be exaggerated.

Their influence on economic policy has undoubtedly contributed to the strengthening of the macroeconomic framework of member countries, reducing public sector deficits and public debt accumulation, improving monetary control and reducing the distortions and misallocation of resources brought about by high rates of inflation. In addition, by fostering trade liberalization and privatization of state enterprises, the Bretton Woods Institutions (BWIs) have generally contributed to the growth of exports and the attraction of foreign direct investment. In the face of a number of recent challenges, however, these institutions' neoliberal paradigm would seem insufficient, and needs to be complemented by other elements.

The first of these challenges is posed by the explosive growth of capital markets and their extraordinary volatility, with the consequent potential for the emergence of multiple equilibria in exchange markets – and also for devastating financial crises. While the BWIs recognize these risks, and are trying to improve their capabilities to predict crisis, efforts at crisis prevention have not been successful.

Abstract

1. Introduction

Following the commitment of all participants in the Monterrey Consensus to increase the voice and participation of developing countries and transition economies in the Bretton Woods Institutions, the issue of governance has come to the fore of the IMF and World Bank. The Monterrey commitment was renewed in the IMFC and Development Committee communiqués of 12–13 April 2003, and has been reflected in recent administrative steps to strengthen the capacity of African constituencies.

Moreover, since 1997, following the Executive Board's approval of the Guidance Note on Governance, the IMF has increased its attention to governance issues among its member countries. The promotion of transparency and accountability are at the core of the IMF's efforts to ensure the efficient use of public resources, as well as the domestic ownership of IMF-supported reform programs. In recent years the IMF has developed instruments to help countries identify potential weaknesses in their institutional and regulatory frameworks that could give rise to poor governance, and to design and implement remedial measures well beyond the extent envisaged in 1997.

With resources of over $300 billion and an expanded mandate, the IMF is possibly the most powerful of all international institutions.

Abstract

1. Introduction

In 1999, the World Bank and the International Monetary Fund (IMF) adopted a new set of policies to guide lending to some of the world's poorest countries. Amid the blizzard of acronyms explaining the new policies, the Bank and the IMF laid out a framework to be followed by poor countries wishing to make use of various concessionary (low-cost) lending facilities. About two and a half years later, in the spring of 2002, the Bank and the IMF concluded a review of these policies. Contributors to this review included dozens of non-governmental organizations (NGOs) as well as the Bank and the IMF themselves. The Bank and the Fund, while acknowledging that the process could be improved, concluded that it worked pretty well based on the preliminary evidence so far available. The NGOs were, on the whole, less enthusiastic.

My reading of the record is that neither the Bank nor the outside commentators are asking the hard questions. The right question to ask is the following:

Relative to what would have happened absent the adoption of the Poverty Reduction Strategy Paper (PRSP) framework, has the implementation of the PRSP process yielded benefits that exceed its often considerable administrative costs?

Abstract

I present a critical examination of Goal 8 of the Millennium Development Goals (MDG), namely, to ‘develop a global partnership for development’. As of November 2002, seven targets were listed under this Goal, as well as seventeen indicators. Given the wide-ranging issues covered under Goal 8, I review only some aspects of the global economic system, their effects on development and what needs to be done to reach Goal 8. The main focus is on the international trade system and the implications of the rules of the World Trade Organization (WTO). I also offer some suggestions on clarifying or adding to the targets and indicators. A key argument of this review is that success in attaining ‘global partnership for development’ underpins or, at a minimum, is linked with efforts in reaching the other seven MDGs, and thus Goal 8 should be given a high priority and efforts to attain it should focus on getting international economic structures, policies and rules right.

Introduction

The origins of the Millennium Development Goals (MDGs) lie in the United Nations Millennium Declaration, which was adopted by all 189 UN Member States on 8 September 2000. The Declaration embodies many commitments for improving the lot of humanity in the new century. Subsequently, the UN Secretariat drew up a list of eight MDGs, each accompanied by specific targets and indicators. This paper addresses Goal 8, which is to ‘develop a global partnership for development’.

Abstract

1. Introduction

When people talk of the international financial institutions (IFIs), they usually mean the two Bretton Woods institutions, the International Monetary Fund and the World Bank. Of course, strictly speaking, any multilateral organization with financial operations is an IFI – for example, the regional multilateral banks, regional monetary authorities or some agencies of the UN that disburse funding. However, in practice, the term IFIs is understood to mean the two global IFIs – the Fund and the Bank. In recent years there has been growing discussion of the role of these institutions in the provision of international public goods (IPGs). An aid-fatigued public in the rich North, beset by its own internal budgetary problems (for example, the looming social security crisis associated with an aging population) and convinced by tales of waste and corruption in aid flows, has grown weary and wary of conventional country-specific development assistance. In contrast, the notion of IPGs seems attractive to Northern publics – at least, their representatives have adopted the IPG refrain in international fora.

But what exactly is an IPG? Given the ‘aura’ that the term seems to have developed, there is clearly an incentive to justify any activity by any agency as an IPG, and aid agencies have not been shy in doing this. At its most general level, development in poor countries is being defined as an IPG, and hence an argument for continuing conventional aid – disenchantment with which turned the Northern public to IPGs in the first place.

Abstract

We examine the experiences of five developing countries that employed various capital management techniques during the 1990s. By ‘capital management techniques’ we refer to policies of prudential financial regulation and controls that affect international capital flows to achieve national economic goals. One key finding is that by employing a diverse set of capital management techniques, policymakers in Chile, Colombia, Taiwan Province of China, Singapore and Malaysia were able to achieve critical macroeconomic objectives. These included the prevention of maturity and locational mismatch; attraction of favored forms of foreign investment; reduction in overall financial fragility, currency risk, and speculative pressures in the economy; insulation from the contagion effects of financial crises and enhancement of the autonomy of economic and social policy. We also examine the structural factors that contributed to these achievements and consider the costs associated with the capital management techniques employed. We conclude by considering the policy lessons of these experiences and the political prospects for other developing countries that wish to apply them.

Introduction

Developing countries can use capital management techniques to strengthen financial stability, support good macroeconomic and microeconomic policies and boost investment. Countries have, in fact, employed these techniques during the 1990s; and so we consider the experiences of five such countries.

We use the term capital management techniques (CMTs) to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows, called capital controls, and those that enforce prudential management of domestic financial institutions.

Abstract

1. Introduction

Developing countries can use capital management techniques to strengthen financial stability, support good macroeconomic and microeconomic policies and boost investment. Countries have, in fact, employed these techniques during the 1990s; and so we consider the experiences of five such countries.

We use the term capital management techniques (CMTs) to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows, called capital controls, and those that enforce prudential management of domestic financial institutions. A strict bifurcation between capital controls and prudential regulations often cannot be maintained in practice. Policymakers frequently implement multifaceted regimes of capital management, as no single measure can achieve the diverse objectives.

Moreover, the effectiveness of any single management technique magnifies the effectiveness of other techniques and enhances the efficacy of the entire regime of capital management. For example, certain prudential financial regulations magnify the effectiveness of capital controls (and vice versa). In this case, the stabilizing aspect of prudential regulation reduces the need for the most stringent form of capital control. Thus, a program of complementary CMTs reduces the necessary severity of any one technique and magnifies the effectiveness of the regime of financial control.

The research program of the Group of 24 is the world's only research effort devoted to evaluating the international economic system from the perspective of developing nations' needs. Multilateral development banks and other research organizations may put out a larger volume of studies, but their mandate and intended audience are not as clearly defined as the G24's. This makes the papers produced under the auspices of the G24 very special. Nowhere is the voice of the developing nations expressed as cogently and powerfully as in these papers.

This volume continues a tradition of dissemination that has long been part of the G24 agenda. It includes chapters on some of the most burning issues on the agenda: reform of the IMF and its conditionality, debt workouts and restructuring, management of capital flows, efficacy of self-insurance against crises, debt sustainability in the HIPC countries, poverty-reduction strategy papers (PRSP), international public goods, and the Millennium Development Goals and the ‘global partnership for development’. Readers will find fresh and controversial perspectives in each of these chapters.

Separating hype from fact and promise from reality has always been a hallmark of the G24 research tradition. If you are doubtful that there exist effective mechanisms for improving the governance of the IMF and its conditionality, read the chapters by Buira. If you believe that the HIPC initiative has a solid chance of placing poor countries on the path of debt sustainability, read the chapter by Gunter.

Abstract

In the context of the financial governance of the IMF, what are the equity implications of the manner in which the IMF distributes the cost of running its regular (non-concessionary) lending operations as well as the modalities of funding its concessionary lending and debt relief operations? While the IMF charges borrowers roughly what it pays its creditor members for the resources used in its regular lending operations, its overhead costs (administrative budget plus addition to reserves) are shared between the two groups of members in a less equitable manner. With the overhead costs rising inexorably to meet an increasing number and range of responsibilities being placed upon the institution – largely at the instance of the IMF's principal creditors by virtue of their dominant majority of voting power – the under-representation of the IMF's debtors undermines the legitimacy of its decision-making. With regard to the concessionary lending and debt-relief operations, some of the IMF's funding modalities have involved a substantial contribution by IMF debtors, sometimes under pressure. While this has been accepted as part of an intra-developing country burden-sharing exercise, it has also meant a significant burden shifting away from the developed countries in the cost of meeting their responsibilities to the poorest members of the international community.

Introduction

An important aspect of governance at the IMF relates to the cost of running the institution and the sharing of that cost between the industrial countries (the IMF's principal creditors) and low-income countries and emerging market economies (primarily borrowers).

Abstract

This chapter builds on the emerging consensus in the development literature that the enhanced HIPC Initiative does not fully remove the debt overhang in many poor and highly indebted countries. It examines the six most crucial problems of the enhanced HIPC initiative: the use of inappropriate eligibility and debt sustainability criteria; the use of overly optimistic growth assumptions; insufficient provision of interim debt relief; the delivery of some HIPC debt relief through debt rescheduling; non-participation and financing shortfalls of creditors; and the use of currency-specific short-term discount rates to calculate the net present value (NPV) of outstanding debt. To address these shortcomings, the chapter suggests: revising the HIPC eligibility and debt sustainability indicators; using lower bounds of growth assumptions; providing deeper and broader interim debt relief; delivering HIPC debt relief only through debt cancellation; adjusting the current equal burden-sharing concept by releasing the HIPC Trust Fund resources immediately to finance-constrained small regional MDBs; exempting minor creditors from the provision of HIPC debt relief; and using a single fixed low discount rate for all NPV calculations. However, even with these changes, the long-term debt sustainability of HIPCs would remain fragile. The chapter argues that more aid coordination is urgently needed for HIPCs that have not yet reached their decision points; that it makes sense to substitute some loans with grants; that HIPC debt relief has thus far been neither frontloaded nor additional and that 100 per cent debt relief would be feasible as well as desirable for the poorest debtors, irrespective of what their debt levels are.