The IMF and its Critics

The IMF is the first economic institution in line to protect countries from the effects of financial crises and to insulate the world economy from possible systemic risk. However, many argue that the IMF is insufficiently equipped to do this job, while others argue almost the opposite: the IMF’s well-intentioned actions induce other countries to take risks which increase their exposure to the same problems. This book, written by leading economists from both universities and the multilateral agencies, combines rigorous economic analysis with insider perspectives on key policy debates. It analyses the Asian and Argentine financial crises of the late 1990s, issues of policy ownership, the more general quest for financial stability and governance of the IMF. It is an essential reference for anyone interested in the role of international financial institutions in our globalised economy.

DAVID VINES is Professor of Economics at Oxford University, Adjunct Professor of Economics at the Australian National University and a Research Fellow of CEPR. He is co-editor of The Asian Financial Crisis: Causes, Contagion and Consequences (Cambridge University Press, 2000), The World Bank: Structure and Policies (Cambridge University Press, 2000), and Europe, East Asia and APEC (Cambridge University Press, 1998).

CHRISTOPHER L. GILBERT is Professor of Finance in the Department of Finance at Vrije University, Amsterdam, Professor of Econometrics at the Università degli Studi di Trento, and a Fellow of the Tinbergen Institute. He is co-editor of The World Bank: Structure and Policies (Cambridge University Press, 2000).

The IMF and its Critics

Reform of Global Financial Architecture

edited by
David Vines and Christopher L. Gilbert

PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE
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© David Vines and Christopher L. Gilbert, 2004

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First published 2004

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A catalogue record for this book is available from the British Library

Library of Congress cataloguing in publication data
Cooper, Randolf G. S.
The IMF and its critics: reform of global financial architecture/edited by David Vines
and Christopher L. Gilbert.
    p. cm.– (Global economic institutions)
Includes bibliographical references and index.
ISBN 0 521 82154 1
1. International Monetary Fund. 2. Financial institutions, International.
3. International economic relations. 4. Financial crises – Case studies. Ⅰ. Vines,
David. Ⅱ. Gilbert, C. L. Ⅲ. Series.
HG3881.5.1581384   2004
332.1′52 – dc21   2003051539

ISBN 0 521 82154 1 hardback

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This is the fifth of a series of books produced under the auspices of the Global Economic Institutions Research Programme of the UK Economic and Social Research Council. The earlier titles have been on Europe, East Asia and regionalism, on the Asian Financial Crisis, on the World Bank and on international financial governance.

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Contents

Figures

Tables

Contributors

Graham Bird is Professor of Economics at the University of Surrey and Director of the Surrey Centre for International Economic Studies. He is a Visiting Professor at The Fletcher School of Law and Diplomacy, Tufts University in the USA, and has acted as a consultant to many international organisations. He has recently been a high-level expert adviser to the Independent Evaluation Office of the IMF, and has also been a Visiting Scholar with the Fund’s Research Department. He has published 22 books and monographs and more than 150 articles in leading academic journals. His most recent book is The IMF and the Future: Issues and Options Facing the Fund (Routledge, 2003).

James M. Boughton is Assistant Director of the Policy Development and Review Department at the International Monetary Fund (IMF). He also has been an Advisor in the Research Department at the IMF, and from 1992–2001 he was the Fund’s Historian. His publications include a textbook on money and banking, a book on the US Federal funds market, two IMF books that he co-edited, and articles in professional journals on international finance, monetary theory and policy and international policy coordination. His latest book, Silent Revolution, on the history of the IMF from 1979 to 1989, was published in October 2001.

Michel Camdessus is President of the Board of the CEPII and former Managing Director of the IMF. He has held numerous appointments in the French Civil Service, culminating in his appointment as Director of the Treasury in the Ministry of Finance and Economic Policies. He has served as Financial Attaché to the French delegation at the European Economic Community, Chairman of the Paris Club, Chairman of the Monetary Committee of the European Economic Community, Deputy Governor of the Bank of France, and he was appointed Governor of the Bank of France in November 1984, a position he held until his appointment as Managing Director of the IMF in January 1987. Michel Camdessus is also President of the Semaines Sociales de France.

Andrew Crockett was appointed President, JP Morgan Chase International, with effect from 1 October 2003. Before that, he was General Manager of the Bank for International Settlements (BIS) from January 1994 to March 2003, and was Chairman of the Financial Stability Forum from April 1999 to March 2003. From 1972 to 1989 he was a staff member of the IMF, and from 1989 to 1993, an Executive Director of the Bank of England. In the latter capacity, he was a member of the Monetary Committee of the European Union, Alternate Governor of the IMF for the United Kingdom and a member (subsequently Chairman) of Working Party 3 of the OECD. He is a member of the Group of Thirty and of the Board of Trustees of the International Accounting Standards Board.

Gordon de Brouwer is Professor of Economics in the Asia Pacific School of Economics and Government at the Australian National University. He is Executive Director of the Australia–Japan Research Centre within the School. He previously worked as Chief Manager, International Markets and Relations at the Reserve Bank of Australia, and was Visiting Professor at the Australian Treasury in 2002. His interests include: open economy macroeconomics; the economies of Australia, Japan and East Asia; financial markets; central banking and monetary policy; the economics of national security; and international relations.

Brian M. Doyle is an Economist in the Division of International Finance at the Federal Reserve Board. He was educated at Queens University at Kingston (BA) and Princeton University (PhD). He has served as an Adjunct Professor of Economics at Johns Hopkins University and Syracuse University. His research work includes articles on business cycle co-movement, causes of business cycles and new open economy macroeconomics.

Joseph E. Gagnon is an Assistant Director in the Division of International Finance at the Federal Reserve Board. He was educated at Harvard University (BA) and Stanford University (PhD). Previously, he was Director of the Office of Industrial Nations and Global Analyses at the US Department of the Treasury and a Lecturer in Economics at the University of California at Berkeley. His research focuses on international trade and capital flows and the macroeconomic linkages between the United States and foreign economies.

Christopher L. Gilbert is Professor of Finance in the Department of Finance at Vrije University, Amsterdam, Professor of Econometrics at the Università degli Studi di Trento and a Fellow of the Tinbergen Institute. He was previously Professor of Applied Econometrics at Queen Mary, University of London, and prior to that a Fellow of Wadham College, Oxford. His academic research falls into four areas: primary commodity and commodity futures markets (on which he has worked extensively with the World Bank), global economic institutions (he was joint editor with David Vines of a Global Economic Institutions Research volume on the World Bank), applied finance and financial econometrics, and the history and methodology of econometrics.

Andrew G. Haldane is Head of the Division of International Finance at the Bank of England, focusing on emerging market risks and the redesign of the international financial architecture. His research interests include monetary and financial stability frameworks, monetary policy rules and the international financial architecture on which he has published extensively, including books on inflation-targeting and crisis resolution.

Dale W. Henderson is a Senior Adviser in the Division of International Finance at the Federal Reserve Board and an Adjunct Professor of Economics at Georgetown University. He was educated at Wesleyan University (BA), the London School of Economics (MSc Econ) and Yale University (PhD). Previously, he was a Professor of Economics at Georgetown University and a Lecturer in Economics at the University of Pennsylvania and held visiting positions at the University of Virginia, Georgetown University, and Yale University. His research work includes books on pollution control and on monetary policy in open economies and articles on the gold market and on several topics in macroeconomics, including stabilisation policy and foreign exchange market intervention.

Gregor Irwin is an Economic Adviser at HM Treasury. Previously he was a Fellow in Economics at University College, Oxford and at Lady Margaret Hall, Oxford.

Malcolm Knight is General Manager of the Bank for International Settlements (BIS). From 1999 to 2003 he was Senior Deputy Governor of the Bank of Canada, responsible for overseeing strategic planning and coordinating all the Bank’s operations as well as acting for the Governor and sharing responsibility for the conduct of monetary policy as a member of the Bank’s Governing Council.

Mark Kruger is currently an Advisor to the Executive Director for Canada, Ireland and the Caribbean at the International Monetary Fund. He is on leave from the Bank of Canada, where he was an Assistant Chief in the International Department. His research interests are international policy issues and international finance.

Allan H. Meltzer is University Professor of Political Economy and Public Policy at Carnegie Mellon University. Since 1989, he has also been a Visiting Scholar at the American Enterprise Institute in Washington. In 1999–2000, he served as Chairman of the International Financial Institution Advisory Commission, known as the Meltzer Commission, which proposed major reforms of the IMF and the development banks. His writings have appeared in numerous journals; he is the author of several books and more than 300 papers on economic theory and policy. From 1973 to 1996, he was co-editor of the Carnegie-Rochester Conference Series on Public Policy, the Journal of Economic Literature and the Journal of Finance.

Laurence H. Meyer is a Distinguished Scholar at the Center for Strategic and International Studies in Washington, DC and Senior Advisor and Director for Macroeconomic Advisors. He served as a member of the Board of Governors of the Federal Reserve System from June 1996 to January 2002. He was educated at Yale University (BA) and the Massachusetts Institute of Technology (PhD). Previously, he was a Professor of Economics at Washington University and co-founder and President of Laurence H. Meyer & Associates. He has written numerous articles in professional journals, has authored a textbook on macro- economic modelling and has testified before the Congress on macroeconomic policy issues.

Paul Mosley is Professor and Head of the Department of Economics at Sheffield University, and was President of the Development Studies Association from 1998 to 2001. He is author of Overseas Aid; Its Defence and Reform (1987) and co-author of Aid and Power (2nd edn., 1995) and Finance against Poverty (1996).

Alex Mourmouras is Deputy Chief of the European Division in the IMF Institute. His current areas of research include the political economy of international financial institutions, IMF conditionality and the effectiveness of Fund-supported programmes, and problems of real and nominal convergence of transition and other developing countries. He has previously served as an economist in the IMF’s Fiscal Affairs Department and as Associate Professor and Director of Graduate Studies at the University of Cincinnati.

Michael Mussa is a Senior Fellow at the Institute for International Economics and former Director of Research at the IMF. He served as a member of the US Council of Economic Advisors from August 1986 to September 1988, and has been a member of the faculty at the University of Rochester and the Graduate School of Business of the University of Chicago.

Andrew Powell is Professor in the Universidad Torcoauto Di Tella Business School and is Director of graduate programmes in Finance in the Business School. Previous to that he was the Chief Economist of the Central Bank of Argentina, joining the Central Bank in March 1995 and leaving at the end of April 2001. During this period at the Central Bank he was directly responsible for the areas of research and regulation and was intimately involved in the banking sector reforms in the post-Tequila period. He represented Argentina as a member of a G10 working party on emerging debt market instability, as a G20/G22 deputy and member of all three G22 working groups (on crisis resolution, financial system strengthening and transparency) and was a member of a Financial Stability Forum working group on incentives. He has published widely and recently completed papers on inflation targeting, on the Argentine crisis, on the role of the IMF, on the effect of Basel Ⅰ on emerging countries and on the role of foreign banks in Latin America.

James Powell is Chief of the International Department of the Bank of Canada, focusing on international financial architecture and exchange rate regimes. Recent published work includes research on dollarisation in Canada as well as a history of the Canadian dollar.

Lawrence Schembri is Director of Research in the International Department of the Bank of Canada and Adjunct Professor of Economics at Carleton University. He was educated at the University of Toronto (BCom), London School of Economics (MSc) and the Massachusetts Institute of Technology (PhD). He has published research in the areas of international macroeconomics and international trade.

David Vines is Professor of Economics at the University of Oxford and a Fellow of Balliol College. He is also Adjunct Professor of Economics in the Research School of Pacific and Asian Studies at the Australian National University, and a Research Fellow of CEPR. From 1994 onwards he was Director of the ESRC Research Programme on Global Economic Institutions. His research is on macroeconomics and international economics, European monetary union, and regional integration in the Asia-Pacific region. He is also working on global economic institutions and was editor, with Pierre-Richard Agénor, Marcus Miller and Axel Weber, of a volume on the Asian Financial Crisis, and with Christopher Gilbert of a volume on the World Bank, both for the Global Economic Institutions Programme.

Dominic Wilson is a Senior Global Economist at Goldman Sachs & Co., where he is primarily responsible for the firm’s research on global thematic issues and the world economy. His published work covers a range of topics including the links between trade and development in East Asia, the management of international capital flows, and Japan’s economic crisis.

Ngaire Woods is Director of the Global Economic Governance Programme and Fellow in Politics and International Relations at University College, Oxford. She has a forthcoming book, The Economic Missionaries: The IMF, The World Bank and International Relations, having previously published The Political Economy of Globalization (Macmillan, 2000), Inequality, Globalization and World Politics (with Andrew Hurrell, Oxford University Press, 1999), Explaining International Relations since 1945 (Oxford University Press, 1986) and numerous articles on international institutions, globalization and governance.

Acknowledgements

From 1994 until 2000, the UK Economic and Social Research Council (the ESRC) funded the Global Economic Institutions (GEI) Research Programme, whose objectives were to fund academic research on the functioning of multilateral economic organisations and about the global institutional structures within which economic activity takes place. As part of this programme, a group of researchers considered reform of the policies of the IMF. Some of that work was published in The Asian Financial Crisis: Causes, Contagion, and Consequences (edited by Pierre-Richard Agénor, Marcus Miller, David Vines and Axel Weber, Cambridge University Press, 1999). This book brings together further work on this theme. It was edited by Christopher L. Gilbert (Vrije Universiteit, Amsterdam) and David Vines (Balliol College, Oxford, Australian National University and CEPR) who was Director of the GEI Programme.

   The initial presentation of some of the chapters in this volume took place at the final conference of the GEI Programme which was held at the Bank of England in June 2000. We are extremely grateful to the Bank for acting as host to that meeting, to those who presented papers at the meeting, and to others who attended and made the meeting such a success. That conference ranged widely over the future of global economic institutions as a whole, and we took the view that the perspective of papers at that meeting was too wide to make a useful book. Instead, discussion there suggested to us that it would be valuable to bring together some of the presenters of papers at that conference with others to produce a volume specifically focused on the future of the IMF within the international financial architecture.

   We are glad to acknowledge the funding by the ESRC of work in this important area. We are also much indebted to Andrew Crockett, Chairman of the Steering Committee of the GEI Programme and then General Manager of the Bank for International Settlements, and Jim Rollo, also a member of the Steering Committee of the GEI Programme, then Chief Economist at the UK Foreign and Commonwealth Office and now Professor of Economics at Sussex University, for jointly hosting the June 2000 meeting at the Bank of England.

   Some of our first chapter makes use of work which Gregor Irwin has done with David Vines, and we are very grateful to be able to build on that work. In addition David Vines worked on this volume while at the Bank of England as a Houblon Norman Fellow during 2002 and we are happy to acknowledge the Bank’s support in this additional respect.

   We thank the IIE for permission to reproduce figures 8.1–8.8 from IIE Policy Analyses in International Economics, 76 (2002).

   At Cambridge University Press, Chris Harrison has worked hard to expedite our plans, and arranged for referees to comment on initial drafts of a set of chapters. We are grateful for those comments, since they helped us to improve considerably the general shape of the book. The production of the book would also not have been possible without the continuing assistance and enthusiasm of the Publications staff at CEPR, in particular Anil Shamdasani.