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Mr. Michael Mussa, Mr. Giovanni Dell'Ariccia, Mr. Barry J. Eichengreen, and Ms. Enrica Detragiache

Abstract

Capital account liberalization - orderly, properly sequence, and befitting the individual circumstances of countries- is an inevitable step for all countries wishing to realize the benefits of the globalized economy. This paper reviews the theories behind capital account liberalization and examines the dangers associated with free capital flows. The authors conclude that the dangers can be limited through a combination of sound macroeconomic and prudential policies.

NADEEM UL HAQUE and RATNA SAHAY

Real wage declines have been common in the public sector in many countries over substantial periods of time. In several cases, such wage reductions have coincided with declines in the efficiency of the public sector. In a simple analytical framework, it is shown that higher wage levels alter the incentive-compatible equilibrium by attracting relatively skilled human capital to the government sector, which raises the quality of public output—tax revenue collection in this paper, increases in wages should complement appropriate monitoring and penalty rates for effective tax administration; prescriptions of raising the statutory tax rate alone, however, may not increase revenue collection.

International Monetary Fund. External Relations Dept.
THE SOVIET experience teaches at least one cautionary lesson: development strategies emphasizing state-administered investment may produce rapid growth at first but are prone to eventual stagnation.
Mr. Adam Bennett, Mr. Louis Dicks-Mireaux, Mr. Miguel A Savastano, Ms. María Vicenta Carkovic S., Mr. Mauro Mecagni, Ms. Susan M Schadler, and Mr. James A John

Abstract

The IMF staff periodically carries out reviews of adjustment programs supported by IMF financial resources with the broad aim of evaluating the appropriateness of policies and the progress made toward sustainable economic conditions. The present review, which is part of this process, describes and assesses the design of programs supported during a recent period by the IMF’s stand-by and extended facilities—two windows through which the IMF lends at market-related interest rates subject to conditions that commit countries to implementing agreed-upon adjustment policies (a requirement known as “IMF conditionality”). The specific objectives of this study are to understand the nature and strength of the economic adjustment undertaken, whether adjustment strategies were appropriately tailored to the problems being addressed, and the extent of sustained improvement in macroeconomic performance.

Mr. Michael Mussa, Mr. Giovanni Dell'Ariccia, Mr. Barry J. Eichengreen, and Ms. Enrica Detragiache

Abstract

The explosive growth of international financial transactions and international capital flows is one of the single most profound and far-reaching economic developments of the late twentieth and early twenty-first centuries. This growth has several origins. Prominent among them are the removal of statutory restrictions on capital account transactions, itself a concomitant of economic liberalization and deregulation in both industrial and developing countries; macroeconomic stabilization and policy reform in the developing world, which have created a proliferation of attractive destinations for foreign capital; enterprise privatization, which has created a growing pool of commercial issuers of debt instruments; the multilateralization of trade, which has encouraged international financial transactions designed to hedge exposure to currency and commercial risk; and the growth of derivative financial instruments, which has permitted international investors to assume some risks while limiting their exposure to others.

Adam Bennett,, Maria Carkovic,, and Mr. Louis Dicks-Mireaux

Abstract

Unsustainable financial imbalances in the public sector were the source of developments that precipitated the need for IMF support in virtually all the 36 countries with Fund arrangements approved between mid-1988 and mid-1991 (see Chart 1-1). Fiscal adjustment was, therefore, at the heart of every program. Typically, large public sector borrowing requirements had led to combinations of unmanageable external current account deficits, heavy domestic and foreign indebtedness, reliance on arrears, crowding out of private activity, and high inflation. The mix of these consequences in any particular country depended most importantly on the size and duration of the fiscal imbalances and how they were financed.1

Mr. Michael Mussa, Mr. Giovanni Dell'Ariccia, Mr. Barry J. Eichengreen, and Ms. Enrica Detragiache

Abstract

This section describes the remarkable growth of international capital flows and places it in historical perspective.

Mr. Adam Bennett

Abstract

The ultimate objective for interest rates in IMF-supported programs is to contribute to the allocation of savings according to competitive market principles, free of distortions or market failures. In this ideal situation real interest rates would normally be positive at moderate levels and reflective of underlying market forces such as the return on investments and the marginal utility of deferred consumption. Over short periods, of course, even market-determined interest rates may deviate from these benchmarks because the authorities may have to react to transient pressures in international or domestic capital markets by tightening credit. Moreover, high or time-varying risk premia—not uncommon in countries undertaking adjustment programs—can also cause a departure from these norms.

Mr. Michael Mussa, Mr. Giovanni Dell'Ariccia, Mr. Barry J. Eichengreen, and Ms. Enrica Detragiache

Abstract

This section reviews three strands of theoretical literature on the effects of financial liberalization: the classic case for liberalized financial markets, models of asymmetric information, and models of domestic distortions.

Mr. Adam Bennett, Mr. Louis Dicks-Mireaux, Mr. Miguel A Savastano, Ms. María Vicenta Carkovic S., Mr. Mauro Mecagni, Ms. Susan M Schadler, and Mr. James A John

Abstract

This paper is part II of a two-volume study conducted as a part of the IMF's ongoing process of evaluating its lending facilities. It focuses on IMF-supported programs and macroeconomic performance during 1988-92, reflecting information available through the end of 1993. Part I (Occasional Paper No. 128) provides an overview of the principal issues and findings and distills the main message for future programs. Part II presents detailed examinations of selected policy issues in five background papers.