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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 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?
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
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?
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
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
Nixon ends Bretton Woods http://www.youtube.com/watch?v=iRzr1QU6K1o http://www.popmodal.com/video/8803/Nixon-Ends-Bretton-Woods-International-Monetary-System
One solution: • IMF to the rescue? • THE WHOLE POINT OF THE IMF: • Soften the blow of adjustment • Moral hazard? • Conditionality? • Bretton Woods just falls apart… • The IMF never really worked as intended
What is the IMF? • 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)
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
Stepping back a moment… • Who is the IMF? • Where do the resources for “loans” come from?
Changes to Global Governance Who has the power at the IMF?
Who is the IMF? • Currently 188 members. • (Non-member independent countries: Andorra, Liechtenstein, Nauru, Taiwan, Cuba, and North Korea) • 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: 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)
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%)
New vote-shares (for ???) • 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
Take-aways • TRILEMMA • Economic growth re-election • Power at the IMF: The Executive Board (18824) • 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