Reforming the International Monetary and Financial System

Comments: The Low-Income Countries’ Stake in IMF Reform

Alexander Swoboda, and Peter Kenen
Published Date:
December 2000
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Kwesi Botchwey

The paper by David Lipton puts all the issues on the table, so to speak—arguments on the origins of the recent financial crisis, issues relating to proposals for preventing future crises, and ways of dealing with them when they occur. It is not always clear where Lipton stands, especially in the debate on origins, but the issues are summed up admirably.

I agree entirely with his proposal that the burden for coping with crises be shifted more to markets and private sector participants. It is likely that if this were done in an environment characterized by wider adoption of flexible exchange rate regimes, it will permit a reversion to limits on access to IMF resources. I suspect, however, that the real world is much less tidy than we often acknowledge and that in the end, the strategy that Lipton puts forward is likely to meet with difficulties. Lipton himself cites two of them: (1) if a crisis reemerges before changes have been made in the international financial architecture, the IMF would likely be asked to stay with its firefighting role; and (2) if the Asian recovery holds and the turbulence in the market recedes, there would likely be little interest in any changes in the international system. But there is an added political problem—few governments will stand by and see big, powerful creditors suffer the consequences of their own indiscretion or greed. For reasons of political expediency, governments are more likely to succumb to the power and leverage of such creditors. Moreover, a lot more work will need to be done to define circumstances in which the IMF will intervene by way of “exceptional” large bailouts when there is a systemic threat, as Lipton suggests. Finally, given the power of the G-7 over the IMF, there is no guarantee that these exceptional bailouts will always be undertaken in a principled way and without the influence of geo-political considerations.

My substantive comments, however, relate to an issue that is often left out in discussions on the restructuring of the international financial architecture—namely, the asymmetry in the impact of financial crises on different regions and even within countries. I refer, in particular, to the way in which international financial crises and the way in which they are addressed affect the underdeveloped regions of the world, especially sub-Saharan Africa (SSA), that are as yet marginalized from private capital markets and world trade. In raising this subject in this context, I am not by any means suggesting that the IMF is a development finance institution like the World Bank. The point I am raising is that in the debate about the restructuring of the international financial system in the wake of major crises, some attention ought to be paid to the need to mitigate their impact on the poorer regions of the world and, in particular, to improve the flow of resources to them.

SSA faces a particularly daunting development challenge along with the countries of South Asia. Over the past few years there has been a significant change in the policy environment in many of these countries, marked by greater openness to world trade, although admittedly the agenda for policy reform is by no means finished in these regions. Even for countries that are recording high growth rates after a long period of stagnation, conditions remain difficult and domestic saving and investment levels remain low and are unlikely to increase significantly in the near future. Additionally, aid dependence remains high, as does the burden of external debt, and private capital flows remain insignificant. Now, although the primary responsibility for dealing with these difficult challenges remains with the countries themselves, there are external factors that need to be addressed to facilitate their recovery. Among other things, international financial crises often affect them detrimentally, as this most recent one has, through commodity price declines and a slowdown in growth performance.

While few SSA countries are likely to attract the scale of private capital whose sudden reversal brought on the East Asian crisis, nevertheless, there are lessons that they can ill afford to ignore. The recent crisis highlights important management issues for SSA. These include:

  • (1) the problem of real exchange rate appreciation and loss of competitiveness for traded goods;

  • (2) excessive and rapid accumulation of foreign debt, especially short-term debt;

  • (3) the use of foreign borrowing for speculation, especially in the real estate sector and in stock markets, resulting in unsustainable rates of asset price inflation; and

  • (4) the importance of timing, speed, and sequencing of liberalization of financial systems and the role of effective institutions in economic management.

Undoubtedly, therefore, these countries, marginalized as they are, must still heed the policy lessons coming out of the postcrisis debates. But for them it is even more important that the proposed changes in the international financial system facilitate the flow of development finance to support their development. A recent study by the Economic Commission for Africa suggests, for instance, that even with a near doubling of current domestic saving and investment rates, the Africa region will need external financing of something close to 35 percent of the region’s GDP in order to halve the levels of poverty over the next 25 years. Addressing the problem of the flow of development finance to these regions must, therefore, in our view, be an explicit objective on the agenda for the reform of the international financial system.

What does of all this mean regarding the financial role of the IMF? As I have already indicated, I do not mean, in raising these matters, to suggest that the IMF has a direct role in channeling development finance to these countries. The organization, however, does have an important catalytic role that, for these countries, is the essence of the IMF’s financial role. IMF-supported programs, of course, provide vital resources for countries that need balance of payment help, but more important, IMF-supported programs in low-income countries trigger official development assistance as well as private capital flows. Thus, in the wake of international crises that have hurt development in the poorest regions of the world, through lost export earnings and/or the further discouragement of private capital flows, the IMF’s financial role must be redesigned, among other things, to reinforce its catalytic role in mobilizing resources for development. In particular, this calls for more secure funding of the ESAF1 and improvement of its effectiveness.

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