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Mr. Eduardo Borensztein, Mr. Peter Wickham, Mr. Mohsin S. Khan, and Ms. Carmen Reinhart

Abstract

This paper analyzes global commodity trends and concludes that the marked decline in real commodity prices of the past decade should be regarded as largely permanent and irreversible. The authors contend that the analysis of commodity prices should be extended to include the role of the breakdown of major international commodity agreements. In addition, the authors analyze how developments in the former Soviet Union have affected commodity supply conditions.

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.

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. 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. 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.

Ms. Prachi Mishra and Mr. Peter J Montiel
This paper surveys the evidence on the effectiveness of monetary transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of monetary transmission in such countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong monetary transmission. We suspect that "facts on the ground" are an important part of the story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
Mr. Peter Wickham and Ms. Carmen Reinhart
Primary commodities still account for the bulk of exports in many developing countries. However, real commodity prices have been declining almost continuously since the early 1980s and there is evidence of renewed weakness. The appropriate policy response to a terms of trade shock depends importantly on whether the shock is perceived to be temporary or permanent. Our results indicate that the recent weakness in commodity prices is mostly of a secular nature, stressing the need for commodity exporting countries to concentrate on export diversification and other structural policies. There is, however, scope for stabilization funds and the use of hedging strategies since the evidence also suggests commodity prices have become more volatile.
Mr. Mauro Mecagni

Abstract

Nominal anchors—whether an exchange rate peg or a money supply rule—are widely recognized as an important component of a program to reduce or control inflation, or reinforce discipline in financial policies and wage developments. Therefore, the fact that nominal anchors have not been adopted in every IMF-supported stabilization program, particularly in those designed to lower inflation, may lead to the conjecture that these programs have not placed enough emphasis on the reduction or the containment of inflation. Rather, according to this argument, such programs have been geared toward addressing external crises, in which devaluations may play a major role and credit ceilings designed to achieve ambitious targets for reserve accumulation are favored over money rules.

James H.J. Morsink

Abstract

Despite the general move to reliance on market mechanisms in Central Europe in 1990 and 1991, wage determination remained under official control. Wage controls were part of the 1990 standby arrangements with Hungary, Poland, and Yugoslavia, the 1991 stand-by arrangements with Bulgaria, Czechoslovakia, and Romania, and the 1991 extended arrangements with Hungary and Poland. The arrangements with Poland and Yugoslavia included quarterly ceilings on wages as performance criteria, and the implementation of wage controls was a prior action in the arrangements with Bulgaria and Romania. Though wage controls have been either eliminated or suspended in Hungary, Poland, and the Slovak Republic, they remain in place in Bulgaria and Romania, and after a brief interlude were reimposed in the Czech Republic.

Miguel A. Savastano

Abstract

Raising national saving is a critical goal of many IMF-supported programs. Higher levels of national saving provide more resources for domestic investment—resources that are needed when increased reliance on foreign saving is either unlikely or undesirable. Yet raising national saving is often one of the most elusive goals of IMF-supported programs. The central problem is that, while ways to influence public saving are clear, public saving generally accounts for a small share—on average about 15 percent in the countries under review—of total national saving.1 Thus, sizable increases in total saving frequently must emanate from the private sector. However, because both the theoretical underpinnings and the empirical evidence on the effectiveness of policies to affect private saving are ambiguous, it has been difficult to identify and predict the effects of measures to meet this goal.