formal paper (Politics of Economic)
6 UN & other multilateral approaches/Barnett and Finnemore Rules for the Road.pdf
6 UN & other multilateral approaches/McArthur Own the Goals .pdf
Own the Goals. By: Mcarthur, John W., Foreign Affairs, 00157120, Mar/Apr2013, Vol. 92, Issue 2
What the Millennium Development Goals Have Accomplished
For more than a decade, the Millennium Development Goals -- a set of time- bound targets agreed on by heads of state in 2000 -- have unified, galvanized, and expanded efforts to help the world's poorest people. The overarching vision of cutting the amount of extreme poverty worldwide in half by 2015, anchored in a series of specific goals, has drawn attention and resources to otherwise forgotten issues. The MDGS have mobilized government and business leaders to donate tens of billions of dollars to life-saving tools, such as antiretroviral drugs and modern mosquito nets. The goals have promoted cooperation among public, private, and nongovernmental organizations (NGOS), providing a common language and bringing together disparate actors. In his 2008 address to the UN General Assembly, the philanthropist Bill Gates called the goals "the best idea for focusing the world on fighting global poverty that I have ever seen."
The goals will expire on December 31, 2015, and the debate over what should come next is now in full swing. This year, a high-level UN panel, co- chaired by British Prime Minister David Cameron, Liberian President Ellen Johnson Sirleaf, and Indonesian President Susilo Bambang Yudhoyono, will put forward its recommendations for a new agenda. The United States and other members of the UN General Assembly will then consider these recommendations, with growing powers, such as Brazil, China, India, and Nigeria, undoubtedly playing a major role in forging any new agreement. But prior to deciding on a new framework, the world community must evaluate exactly what the MDG effort has achieved so far.
WORKING ON A DREAM The MDGS are not a monolithic policy following a single trajectory. Ultimately, they are nothing more than goals, established by world leaders and subsequently reaffirmed on multiple occasions. The MDGS were not
born with a plan, a budget, or a specific mapping out of responsibilities. Many think of the MDGS as the UN'S goals, since the agreements were established at UN summits and UN officials have generally led the follow-up efforts for coordination and reporting. But the reality is much more complicated. No single individual or organization is responsible for achieving the MDGS. Instead, countless public, private, and nonprofit actors -- working together and independently, in developed and developing countries -- have furthered the goals. Amid this complexity, the achievements toward reaching the MDGS are all the more impressive. The goals have brought the diffuse international development community closer together.
Before the MDGS were crafted, there was no common framework for promoting global development. After the Cold War ended, many rich countries cut their foreign aid budgets and turned their focus inward, on domestic priorities. In the United States, for example, the foreign aid budget hit an all-time low in 1997, at 0.09 percent of gross national income. Meanwhile, throughout the 1990s, institutions such as the World Bank and the International Monetary Fund (IMF) encouraged developed and developing countries to scale back spending on public programs -- in the name of government efficiency -- as a condition for receiving support.
The results were troubling. Africa suffered a generation of stagnation, with rising poverty and child deaths and drops in life expectancy. Economic crises and the threat of growing inequality plagued Asia and Latin America. The antiglobalization movement gained such force that in November and December 1999, at what has come to be called "the Battle in Seattle," street protesters forced the World Trade Organization to cancel major meetings midstream.
The suspicions on the part of civil society carried over into policy debates. In the late 1990s, the Organization for Economic Cooperation and Development proposed "international development goal" benchmarks for donor efforts. The OECD'S proposal was later co-signed by leaders of the IMF, the World Bank, and the UN. In response, Konrad Raiser, then head of the World Council of Churches, hardly a fire-breathing radical, wrote UN Secretary-General Kofi Annan to convey astonishment and disappointment that Annan had endorsed a "propaganda exercise for international finance institutions whose policies
are widely held to be at the root of many of the most grave social problems facing the poor all over the world."
That proposal never got off the ground, but the international community made other progress in the lead-up to 2000 that helped set the groundwork for the MDGS. Most notably, G-8 leaders took a major step forward when they crafted a debt-cancellation policy at their 1999 summit in Cologne, Germany. Under this new policy, countries could receive debt relief on the condition that they allocated savings to education or health. This helped reorient governments toward spending in social sectors after many years of cutbacks.
At the 2000 UN Millennium Summit, which was the largest gathering of world leaders to date, heads of state accepted that they needed to work together to assist the world's poorest people. Looking at the challenges of the new century, all the UN member states agreed on a set of measurable, time- bound targets in the Millennium Declaration. In 2001, these targets were organized into eight MDGS: eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and forge global partnerships among different countries and actors to achieve development goals. Each goal was further broken down into more specific targets. For example, the first goal involves cutting in half "between 1990 and 2015, the proportion of people whose income is less than $1 a day."
In practical terms, the MDGS were actually launched in March 2002, at the UN International Conference on Financing for Development, in Monterrey, Mexico. The attendees, including heads of state, finance ministers, and foreign ministers, agreed that developed countries should step in with support mechanisms and adequate financial aid to help poor countries committed to good governance meet the MDG targets. Crucially, leaders set a benchmark for burden sharing when they urged "developed countries that have not done so to make concrete efforts towards the target of 0.7 percent of gross national income (GNI) as official development assistance to developing countries." At the time of the conference, the 22 official OECD donor countries allocated an average of 0.22 percent of GNI to aid. Thus, working toward a 0.7 target implied more than tripling total global support. The Monterrey conference
established the MDGS as the first global framework anchored in an explicit, mutually agreed-on partnership between developed and developing countries.
THE GLOBAL CONVERSATION These historic intergovernmental agreements have inspired much debate. Some NGO leaders, including participants in the annual World Social Forum, distrusted any agreement that involved international financial institutions and was negotiated behind closed doors. Human rights activists were dismayed that the MDGS excluded targets for good governance, which they considered a contributor to development and a key outcome unto itself. Some environmental activists were bothered by the narrow formulation of the targets, which ignored major issues, such as climate change, land degradation, ocean management, and air pollution.
To be sure, the MDG framework is imperfect. Several issues, such as gender equality and environmental sustainability, are defined too narrowly. The education goal is limited to the completion of primary school, overlooking concerns about the quality of learning and secondary school enrollment levels. In addition, some academics, such as the economist William Easterly, argue that the remarkable ambition of the goals is unfair to the poorest countries, which have the furthest to go to meet the targets, and minimizes what progress those countries do achieve. Sure enough, if the child survival goal were to cut mortality by half, instead of by two-thirds, 72 developing countries would already have met the target by 2011. Instead, the two-thirds goal has been achieved by only 20 developing countries so far. In addition, the MDGS' emphasis on human development issues, such as education and health, sometimes downplays the importance of investments in energy and infrastructure that support economic growth and job creation.
Nonetheless, the framework has provided a global rallying point. In 2002, with a mandate from Annan and Mark Malloch Brown, then the administrator of the UN Development Program, the economist Jeffrey Sachs launched the UN Millennium Project, which brought together hundreds of experts from around the world from academia, business, government, and civil-society organizations to construct policy plans for achieving the goals. Sachs also tirelessly lobbied government leaders in both developed and developing countries to expand key programs, especially in health and agriculture, in
order to meet the MDG targets.
In the lead-up to the 2005 G-8 summit, in Gleneagles, Scotland, advocacy organizations worldwide championed the MDGS. In developing countries, NGO leaders, such as Amina Mohammed, Kumi Naidoo, and Salil Shetty encouraged civil-society leaders to hold their governments accountable for meeting the goals. In developed countries, organizations such as ONE, co- founded by the activist Jamie Drummond, the rock star Bono, and others, petitioned politicians and conducted public awareness campaigns to demand that world leaders step up their efforts to meet the targets. At the summit, British Prime Minister Tony Blair and Gordon Brown, then British chancellor of the exchequer, put the MDGS and foreign aid commitments at the top of the agenda. Leaders at Gleneagles committed to increasing global aid by $50 billion by 2010 and set the groundwork for larger commitments to be made by 2015. However, one powerful player on the world stage, the United States, remained hesitant to embrace the MDG agenda.
PLAYERS ON THE BENCH U.S. President George W. Bush launched the Millennium Challenge initiative in 2002, promising a 50 percent increase in U.S. foreign aid within three years, with money going to countries committed to good governance. The initiative drew inspiration from the MDGS, as the name suggests, but confusingly, it did not directly link to the targets. Ten months later, in his 2003 State of the Union address, Bush launched the President's Emergency Plan for AIDS Relief, which has dramatically improved access to AIDS treatment in the developing world. This program was in many ways in line with the MDG effort but did not explicitly link to the goals. Bush even endorsed the UN Millennium Declaration and the Monterrey agreements, but he refused to support the MDGS, largely because his administration viewed them as UN-dictated aid quotas.
Holding a similar view, State Department officials regularly claimed that they supported the targets of the Millennium Declaration but not the MDGS, despite the fact that the MDG targets were drawn directly from the Millennium Declaration. U.S.-UN tensions over the Iraq war were a critical backdrop, with the Bush administration reticent to support a major UN initiative. Washington's aversion was so strong that many U.S. advocacy
groups avoided using the term "Millennium Development Goals" for fear of losing influence. When John Bolton became the U.S. ambassador to the UN in August 2005, one of his first actions was to suggest deleting all references to the MDGS in the drafted agreement of the upcoming UN World Summit. The subsequent uproar from other countries and U.S. media outlets forced Washington to modify its position. In his summit speech, Bush finally endorsed the MDGS, using the phrase "Millennium Development Goals" publicly for the first time.
By refusing to directly engage with the MDGS in their early years, the United States missed an opportunity to highlight its contributions to development efforts and foster international goodwill. In the early years of this century, the United States helped revolutionize global health, a central pillar of the MDGS, first through Bush's AIDS initiative and later through efforts on malaria and other deadly diseases. Furthermore, by resisting a project on which most of the world was actively collaborating, Washington missed easy opportunities to build political capital for solving much thornier and divisive international issues.
Diplomatic tensions have subsided under the Obama administration, which has given much stronger rhetorical support to the MDGS and has continued the previous administration's basic development policies, in addition to launching a major initiative to reduce poverty by supporting small farms around the world. Nevertheless, many officials in Washington remain either skeptical or disengaged when it comes to the MDGS, most likely because of a long-standing aversion to fixed foreign aid spending, especially when defined by an international agreement. This fear, however, is baseless. The MDGS do not dictate any aid commitments, and the only related figure, the 0.7 aid target, which countries agreed to work toward in Monterrey in 2002, was endorsed by Bush. It was only later that some countries, such as the United Kingdom, made timetables to meet this aid target.
The World Bank has similarly missed out. Although the bank has championed the framework at senior political levels, it has not adequately facilitated MDG efforts on the ground. Early resistance was in part due to bureaucratic resentment of the UN for its having been given such a prominent role on development issues. In addition, as an institution dominated by
economists, the bank is prone to prioritize economic reforms over investment in social sectors. Even more, there is widespread distrust among the bank's staff that donor countries will provide adequate financing for the MDGS. Such concerns are not without merit, as the G-8 ended up falling more than $10 billion short on its Africa pledges for 2010 alone.
Nevertheless, the bank, as a main interlocutor with the developing world, should have helped poor countries assess how they could achieve the MDGS and sounded the alarm about donor financing gaps. Furthermore, the bank has a self-serving reason to get onboard: the MDGS spurred a major budgetary expansion for the International Development Association, the branch of the bank devoted to supporting the poorest countries. Fortunately, the United States and the World Bank are coming around on the MDGS, attracted by the proven success of the framework.
IT'S A SMALL WORLD AFTER ALL As of late 2010, five years before the deadline, the world had already met the overarching MDG of cutting extreme poverty by half. The estimated share of the developing-world population living on less than $1.25 per day (the technical MDG measurement of extreme poverty) had dropped from 43 percent in 1990 to roughly 21 percent in 2010. This statistic is somewhat skewed by progress that was under way in China and other Asian countries long before the MDGS were adopted. The framework is not solely responsible for all of the advancements of the past 12 years. Many other forces, such as the expansion of global markets and the creation of groundbreaking health and communications technologies, have helped the developing world. Moreover, the goals relating to hunger, sanitation, and the environment have not been met. Poverty reduction, however, has progressed in every region since 2000. Even excluding China from the global calculation, the world's share of impoverish people fell from 37 percent in 1990 to 25 percent in 2008, and forthcoming data should show an even greater drop.
Most important, the MDGS have kick-started progress where it was lacking, especially in Africa, where unprecedented economic growth and poverty reduction are now taking place. From 1981 to 1999, extreme poverty in sub- Saharan Africa rose from 52 percent of the population to 58 percent. But
since the launch of the MDGS, it has declined sharply, to 48 percent in 2008. Much of this was likely driven by MDG-backed investments in healthier and better-educated work forces in the region. The global MDG campaign has also prompted support for small subsistence and cash-crop farms, which has boosted growth in many low-income countries, such as Malawi.
Primary education rates have increased around the world, too, with South Asia and sub-Saharan Africa experiencing particularly big jumps in enrollment. Much of this has been the result of funding from MDG-linked initiatives, such as the Global Partnership for Education, launched in 2002 by the World Bank and other development organizations to help poor countries "address the large gaps they face in meeting education MDG 2 and 3, in areas of policy, capacity, data, finance." These same efforts have helped nearly every world region achieve gender parity in classrooms.
The greatest MDG successes undoubtedly concern health. The MDGS have invigorated multilateral institutions, such as the GAVI Alliance (formerly called the Global Alliance for Vaccines and Immunization), which seeks to achieve MDGS "by focusing on performance, outcomes and results." The goals have also inspired a huge increase in private-sector aid. Ray Chambers, a respected philanthropist and co-founder of a New York private equity firm, first learned of the goals in 2005. Since then, working with Sachs and others, Chambers has coordinated a worldwide coalition of policy, business, and NGO leaders in an effort to help the developing world meet the goal for malarial treatment and prevention. Thanks in part to this global effort, malaria-related mortality has dropped by approximately 25 percent since 2000, with most of those gains probably occurring since 2005. Many pharmaceutical companies have also put forth major efforts to make their medicines more widely available in poor countries, and new initiatives are continuing to take shape. The MDG Health Alliance, founded in 2011, is comprised of business and NGO leaders around the world working toward the MDG health targets, including the elimination of mother-to-child HIV transmission.
The combined results of these campaigns are remarkable. For example, in Senegal, child mortality has plummeted by half since 2000. In Cambodia, it has dropped by 60 percent. Rwanda has recorded a ten percent average
annual reduction since 2000, one of the fastest declines in history. Even China has seen a significant decrease in child deaths, possibly because the expanded global emphasis on health has encouraged the country's policymakers to pay more attention to relevant issues. Overall, despite rapid global population growth, there has been a decrease in children dying worldwide before their fifth birthdays, from 11.7 million in 1990 to 9.4 million in 2000 and 6.8 million in 2011.
No issue has been more closely interconnected with the MDGS than the HIV/ AIDS treatment campaign. In 2000, nearly 30 million people were infected, the vast majority in Africa, where only approximately 10,000 people were in treatment and over one million people were dying every year from the disease. The next year, the head of the U.S. Agency for International Development publicly deemed large-scale AIDS treatment in Africa impossible. Undeterred, Annan launched the Global Fund to Fight AIDS, Tuberculosis and Malaria, which aims to achieve "long-term outcome and impact results related to the Millennium Development Goals."
Spurred by the launch of the MDGS, Jim Yong Kim, then head of the World Health Organization's HIV/AIDS department, introduced the "3 by 5" initiative in 2003, which aimed to have three million people living with AIDS in the developing world receiving treatment by 2005. By the end of 2005, only 1.3 million people were receiving treatment -- fewer than half of the target. But thanks to the interwoven AIDS-MDG campaign, the notion of service delivery targets has sunk in globally, helping expand AIDS treatment by orders of magnitude: also in 2005, the G-8 and the UN General Assembly endorsed a target of universal access to treatment by 2010, backed by major financial commitments. The MDG movement has expanded the world's ambitions in tackling health crises and made extraordinary progress. In 2011, more than eight million people worldwide were receiving AIDS treatment.
NEXT-GENERATION GOALS The MDGS have proved that with concentration and effort, even the most persistent global problems can be tackled. The post-2015 goals should remain focused on eliminating the multiple dimensions of extreme poverty, but they also need to address emerging global realities. These new challenges include the worsening environmental pressures affecting the livelihoods of hundreds
of millions of people, the growing number of middle-income countries with tremendous internal poverty challenges, and rapidly spreading noncommunicable diseases.
The new goals also need to be matched with resources. Without the Monterrey agreements of 2002 and the financial commitments made at the Gleneagles summit in 2005, the MDGS might well have faded from the international agenda. It is crucial that the post-2015 negotiations not be left solely to foreign and development ministries. Finance ministries will need an equal say on many of the most central issues and therefore need to be included from the beginning. Other relevant ministries, such as those that deal with health and environmental issues, should be consulted regularly. Additionally, in preparation for 2015, multilateral organizations, such as the World Bank and UN agencies, should conduct independent external reviews of their contributions to the MDGS and identify benchmarks for post-2015 success based on the results. And the United States needs to join the international community in making a solid commitment to long-term, goal- oriented foreign aid.
The MDGS have helped mobilize and guide development efforts by emphasizing outcomes. They have encouraged world leaders to tackle multiple dimensions of poverty at the same time and have provided a standard that advocates on the ground can hold their governments to. Even in countries where politicians might not directly credit the MDGS, the global effort has informed local perspectives and priorities. The goals have improved the lives of hundreds of millions of people. They have shown how much can be achieved when ambitious and specific targets are matched with rigorous thinking, serious resources, and a collaborative global spirit.
Looking forward, the next generation of goals should maintain the accessible simplicity that has allowed the MDGS to succeed and also facilitate the creation of better accountability mechanisms both within and across governments. In addition, the new goals need to give low-and middle-income countries a greater voice in shaping the agenda. Most important, momentum matters. Just as progress in individual MDG areas has inspired other campaigns, so work done now, in the final stretch, will affect what happens in the future. The results achieved by 2015 will mark an endpoint, but even
more, they will provide a springboard for the next generation of goals. There is no time to lose.
PHOTO (BLACK & WHITE): Pump it up: children in the Central African Republic, March 2010
~~~~~~~~
By John W. Mcarthur
JOHN W. MCARTHUR is a Senior Fellow at the Fung Global Institute and the UN Foundation and a Nonresident Senior Fellow at the Brookings Institution. From 2002 to 2006, he was Manager and Deputy Director of the UN Millennium Project. Follow him on Twitter @mcarthur.
6 UN & other multilateral approaches/Rogoff IMF strikes back.pdf
Washingtonpost.Newsweek Interactive, LLC
The IMF Strikes Back Author(s): Kenneth Rogoff Source: Foreign Policy, No. 134 (Jan. - Feb., 2003), pp. 38-46 Published by: Washingtonpost.Newsweek Interactive, LLC Stable URL: http://www.jstor.org/stable/3183520 . Accessed: 04/11/2013 11:21
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THE IMF
trikes
Slammed by antiglobalist protesters, developing-country politicians, and
Nobel Prize-winning economists, the International Monetay Fund (IMF) has become Global Scapegoat Number One. But IMF economists are not evil,
nor are they invariably wrong. It's time to set the record straight and focus on
more pressing economic debates, such as how best to promote global growth and financial stability. By Kenneth Rogoff
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itriol against the IMF, including per- sonal attacks on the competence and
Sintegrity of its staff, has transcended into an art form in recent years. One best-
selling author labels all new fund recruits as "third- rate," implies that management is on the take, and discusses the IMF's role in the Asian financial crisis of the late 1990s in the same breath as Nazi Ger- many and the Holocaust. Even more sober and bal- anced critics of the institution-such as Washington Post writer Paul Blustein, whose excellent inside account of the Asian financial crisis, The Chas-
Kenneth Rogoff is economic counsellor and director of the research department at the International Monetary Fund.
tening, should be required reading for prospective fund economists (and their spouses)-find them- selves choosing titles that invoke the devil. Really, doesn't The Chastening sound like a sequel to 1970s horror flicks such as The Exorcist or The Omen? Perhaps this race to the bottom is a natural outcome of market forces. After all, in a world of 24-hour business news, there is a huge return to being intro- duced as "the leading critic of the IMF."
Regrettably, many of the charges frequently leveled against the fund reveal deep confusion regarding its policies and intentions. Other criticisms, however, do hit at potentially fundamental weak spots in current IMF practices. Unfortunately, all the recrimination and finger pointing make it difficult to separate spu-
JANUARY I FEBRUARY 2003 39
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t The IMF Strikes Back
rious critiques from legitimate concerns. Worse yet, some of the deeper questions that ought to be at the heart of these debates-issues such as poverty, appro- priate exchange-rate systems, and whether the global financial system encourages developing countries to take on excessive debt-are too easily ignored.
Consider the four most common criticisms against the fund: First, IMF loan programs impose harsh fiscal austerity on cash-strapped countries. Second, IMF loans encourage financiers to invest recklessly, confident the fund will bail them out (the so-called moral hazard problem). Third, IMF advice to coun- tries suffering debt or currency crises only aggravates economic condi- tions. And fourth, the fund has irresponsibly pushed countries to open themselves up to volatile and destabilizing flows of foreign capital.
Some of these charges have important merits, even if critics (including myself in my former life as an academ- ic economist) tend to overstate them for emphasis. Others, however, are both polemic and deeply misguided. In addressing them, I hope to clear the air for a more focused and cogent dis- cussion on how the IMF and others can work to improve conditions in the global econo- my. Surely that should be our common goal.
THE AUSTERITY MYTH Over the years, no critique of the fund has carried more emotion than the "austerity" charge. Anti- fund diatribes contend that, everywhere the IMF goes, the tight macroeconomic policies it imposes on governments invariably crush the hopes and aspi- rations of people. (I hesitate to single out individual quotes, but they could easily fill an entire edition of Bartlett's Quotations.) Yet, at the risk of seeming heretical, I submit that the reality is nearly the oppo- site. As a rule, fund programs lighten austerity rather than create it. Yes, really.
Critics must understand that governments from developing countries don't seek IMF financial assis- tance when the sun is shining; they come when they have already run into deep financial diffi-
culties, generally through some combination of bad management and bad luck. Virtually every
Scountry with an IMF program over the past 50 years, from Peru in 1954 to South Korea in
1997 to Argentina today, could be described in this fashion.
Policymakers in distressed economies know the fund will intervene where no private creditor dares tread and will make loans at rates their countries could only dream of even in the best of times. They understand that, in the short term, IMF loans allow a distressed debtor nation
to tighten its belt less than it would have to oth- erwise. The economic policy conditions that the fund attaches to its loans are in lieu of the stricter discipline that market forces would impose in the IMF's absence. Both South Korea and Thailand, for example, were facing either outright default or a pro- longed free fall in the value of their currencies in 1997-a far more damaging outcome than what
actually took place. Nevertheless, the institution pro-
vides a convenient whipping boy when politicians confront theil
populations with a less profligate budget. "The
IMF forced us to do it!" is the familiar refrain when govern-
ments cut spending and subsidies. Never mind that the country's gov- ernment-whose macro-
Seconomic mismanagement often had more than a little to do with the crisis in the first
40 FOREIGN POLICY
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place--generally retains considerable discretion over its range of policy options, not least in deter- mining where budget cuts must take place.
At its heart, the austerity critique confuses cor- relation with causation. Blaming the IMF for the real- ity that every country must confront its budget con- straints is like blaming the fund for gravity.
Admittedly, the IMF does insist on being repaid, so eventually borrowing countries must part with foreign exchange resources that otherwise might have gone into domestic programs. Yet repayments to the fund nor- mally spike only after the crisis has passed, making payments more manageable for borrowing govern- ments. The IMF's shareholders-its 184 member countries-could col- lectively decide to convert all the fund's loans to grants, and then recipient countries would face no
have been sharply down during the past couple of years.
Private creditors ought to be willing to take large write-downs of their debts in some instances, par- ticularly when a country is so deeply in hock that it is effectively insolvent. In such circumstances, trying to force the debtor to repay in full can often be counterproductive. Not only do citizens of the debtor country suffer, but creditors often receive less than they might have if they had lessened the country's
Developing countries don't seek IMF assistance
when the sun is shining; they come when they have
already run into deep financial difficulties.
costs at all. However, if IMF loans are never repaid, industrialized countries must be willing to replenish continually the organization's lending resources, or eventually no funds would be available to help deal with the next debt crisis in the developing world.
A HAZARDOUS CRITIQUE Of course, in so many IMF programs, borrowing countries must pay back their private creditors in addition to repaying the fund. Yet wouldn't fiscal aus- terity be a bit more palatable if troubled debtor nations could compel foreign private lenders to bear part of the burden? Why should taxpayers in devel- oping countries absorb the entire blow?
That is a completely legitimate question, but let's start by getting a few facts straight. First, private investors can hardly breathe a sigh of relief when the fund becomes involved in an emerging-market financial crisis. According to the Institute of Inter- national Finance, private investors lost some $225 billion during the Asian financial crisis of the late 1990s and some $100 billion as a result of the 1998 Russian debt default. And what of the Latin Amer- ican debt crisis of the 1980s, during which the IMF helped jawbone foreign banks into rolling over a substantial fraction of Latin American debts for almost five years and ultimately forced banks to accept large write-downs of 30 percent or more? Certainly, if foreign private lenders consistently lose money on loans to developing countries, flows of new money will cease. Indeed, flows into much of Latin America-again the current locus of debt problems--
debt burden and thus given the nation the will and means to increase investment and growth. Sometimes debt restructuring does happen, as in Ecuador (1999), Pakistan (1999), and Ukraine (2000). How- ever, such cases are the exception rather than the rule, as current international law makes bankrupt- cies by sovereign states extraordinarily messy and chaotic. As a result, the official lending communi- ty, typically led by the IMF, is often unwilling to force the issue and sometimes finds itself trying to keep a country afloat far beyond the point of no return. In Russia in 1998, for example, the official community threw money behind a fixed exchange- rate regime that was patently doomed. Eventually, the fund cut the cord and allowed a default, prov- ing wrong those many private investors who thought Russia was "too nuclear to fail." But if the fund had allowed the default to take place at an earlier stage, Russia might well have come out of its subsequent downturn at least as quickly and with less official debt.
Since restructuring of debt to private creditors is relatively rare, many critics reasonably worry that IMF financing often serves as a blanket insurance pol- icy for private lenders. Moreover, when private cred- itors believe they will be bailed out by the IMF, they have reason to lend more-and at lower interest rates-than is appropriate. The debtor country, in turn, is seduced into borrowing too much, resulting in more frequent and severe crises, of exactly the sort the IMF was designed to alleviate. I will be the first to admit the "moral hazard" theory of IMF lending is clever (having introduced the theory in the 1980s), and I think
JANUARY IFEBRUARY 2003 41
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The IMF Strikes Back ]
it is surely important in some instances. But the empir- ical evidence is mixed. One strike against the moral hazard argument is that most countries generally do repay the IMF, if not on time, then late but with full interest. If the IMF is consistently paid, then private lenders receive no subsidy, so there is no bailout in any simplistic sense. Of course, despite the IMF's strong repayment record in major emerging-market loan packages, there is no guarantee about the future, and it would certainly be wrong to dismiss moral hazard as unimportant.
FISCAL FOLLIES
Even if IMF policies are not to blame for budget cut- backs in poor economies, might the fund's programs still be so poorly designed that their ill-advised con- ditions more than cancel out any good the interna- tional lender's resources could bring? In particular, critics charge that the IMF pushes countries to increase domestic interest rates when cuts would better serve to stimulate the economy. The IMF also stands accused of forcing crisis economies to tight- en their budgets in the midst of recessions. Like the austerity argument, these critiques of basic IMF pol- icy advice appear rather damning, especially when wrapped in rhetoric about how all economists at the IMF are third-rate thinkers so immune from outside advice that they wouldn't listen if John Maynard Keynes himself dialed them up from heaven.
Of course, it would be wonderful if govern- ments in emerging markets could follow Keynesian
"countercyclical policies"-that is, if they could stimulate their economies with lower interest rates, new public spending, or tax cuts during a recession. In its September 2002 "World Economic Outlook" report, the IMF encourages exactly such policies where feasible. (For example, the IMF has strong- ly urged Germany to be flexible in observing the budget constraints of the European Stability and Growth Pact, lest the government aggravate Ger- many's already severe economic slowdown.) Unfor- tunately, most emerging markets have an extreme- ly difficult time borrowing during a downturn, and they often must tighten their belts precisely when a looser fiscal policy might otherwise be desirable. And the IMF, or anyone else for that matter, can only do so much for countries that don't pay attention to the commonsense advice of building up surpluses during boom times-such as Argentina in the 1990s-to leave room for deficits during downturns.
According to some critics, though, a simple solution is staring the IMF in the face: If those stubborn fund economists would only appreciate how successful expansionary fiscal policy can be in boosting output, they would realize countries can simply wave off a debt crisis by borrowing even more. Remember former U.S. President Ronald Reagan's economic guru, Arthur Laffer, who the- orized that by cutting tax rates, the United States would enjoy so much extra growth that tax rev- enues would actually rise? In much the same way,
When Economists Attack "And the IMF could have offered Argentina guidance on how to escape from its mone- tary trap, as well as political cover for Argentina's leaders as they did what had to be done. Instead, however, IMF offi- cials-like medieval doctors who insisted on bleeding their patients, and repeated the pro- cedure when the bleeding made them sicker-prescribed aus- terity and still more austerity, right to the end."
-Paul Krugman (2002)
"However useful the IMF may be to the world community, it defies logic to believe that the small group of 1,000 economists on 19th Street in Washington should dictate the economic con- ditions of life to 75 developing countries with around 1.4bn people." -Jeffrey Sachs ('997)
"In the past, countries with IMF programs were able to recover because financial markets had confidence in the IMF and were
willing to follow its lead .... Since the 1997-99 crisis, how- ever, the emperor has no clothes: IMF programs fail to impress the markets." -George Soros (2002)
"[T]he IMF is not particularly interested in hearing the thoughts of its 'client countries' on such topics as development strategy or fiscal austerity. All too often, the Fund's approach to develop- ing countries has had the feel of a colonial ruler." -Joseph Stiglitz (2002)
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some IMF critics-ranging from Nobel Prize-win- ning economist Joseph Stiglitz to the relief agency Oxfam-claim that by running a fiscal deficit into a debt storm, a country can grow so much that it will be able to sustain those higher debt levels. Creditors would understand this logic and happily fork over the requisite extra funds. Problem solved, case closed. Indeed, why should austerity ever be necessary?
Needless to say, Reagan's tax cuts during the 1980s did not lead to higher tax revenues but instead result- ed in massive deficits. By the same token, there is no magic potion for troubled debtor countries. Lenders simply will not buy into this story.
The notion that countries should
CAPITAL CONTROL FREAKS
Although currency crises and financial bailouts dom- inate media coverage of the IMF, much of the agency's routine work entails ongoing dialogue with the fund's 184 member countries. As part of the fund's surveil- lance efforts, IMF staffers regularly visit member states and meet with policymakers to discuss how best to achieve sustained economic growth and stable inflation rates. So, rather than judge the fund solely on how it copes with financial crises, critics should consider its ongoing advice in trying to help countries stay out of trouble. In this area, perhaps the most con- troversial issue is the fund's advice on liberalizing international capital movements-that is, on how
reduce interest rates-rather than raise them-to fend off debt and exchange-rate crises is even more absurd. When investors fear a coun- try is increasingly likely to default on its debts, they will demand high- er interest rates to compensate for that risk, not lower ones. And when a nation's citizens lose confidence in
Blaming the IMF for the reality that every country must confront its budget constraints
is like blaming the fund for gravity.
their own currency, they will require a large premium to accept debt denominated in that currency or to keep their deposits in domestic banks. No surprise that interest rates in virtually all countries that experienced debt crises during the last decade-from Mexico to Turkey-skyrocketed even though their currencies were allowed to float against the dollar.
The debate over how far interest rates should be allowed to rise in defending against a specula- tive currency attack is a legitimate one. The high- er interest rates go, the more stress on the econo- my and the more bankruptcies and bank failures; classic cases include Mexico in 1995 and South Korea in 1998. On the other hand, since most cri- sis countries have substantial "liability dollariza- tion"-that is, a lot of borrowing goes on in dol- lars-an excessively sharp fall in the exchange rate will also cause bankruptcies, with Indonesia in 1998 being but one example among many. Gov- ernments must strike a delicate balance in the short and medium term, as they decide how quickly to reduce interest rates from crisis levels. At the very least, critics of IMF tactics must acknowledge these difficult trade-offs. The simplistic view that all can be solved by just adopting softer "employment friendly" policies, such as low interest rates and fis- cal expansions, is dangerous as well as naive in the face of financial maelstrom.
fast emerging markets should pry open their often highly protected domestic financial markets.
Critics such as Columbia University economist Jagdish Bhagwati have suggested that the IMF's zeal in promoting free capital flows around the world inadvertently planted the seeds of the Asian financial crisis. In principle, had banks and com- panies in Asia's emerging markets not been allowed to borrow freely in foreign currency, they would not have built up huge foreign currency debts, and international creditors could not have demanded repayment just as liquidity was drying up and for- eign currency was becoming very expensive. Although I was not at the IMF during the Asian cri- sis, my sense from reading archives and speaking with fund old-timers is that although this charge has some currency, the fund was more eclectic in its advice on this matter than most critics acknowledge. For example, in the months leading to Thailand's currency collapse in 1997, IMF reports on the Thai economy portrayed in stark terms the risks of lib- eralizing capital flows while keeping the domestic currency (the baht) at a fixed level against the U.S. dollar. As Blustein vividly portrays in The Chas- tening, Thai authorities didn't listen, still hoping instead that Bangkok would become a financial center like Singapore. Ultimately, the Thai baht succumbed to a massive speculative attack. Of
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The IMF Strikes Back -
course, in some cases-most famously South Korea and Mexico-the fund didn't warn coun- tries forcefully enough about the dangers of open- ing up to international capital markets before domestic financial markets and regulators were prepared to handle the resulting volatility.
However one apportions blame for the financial crises of the past two decades, misconceptions regarding the merits and drawbacks of capital-mar- ket liberalization abound. First, it is simply wrong to conclude that countries with closed capital mar- kets are better equipped to weather stormy financial markets. Yes, the relatively closed Chinese and Indi- an economies did not catch the Asian flu, or at least not a particularly bad case. But neither did Australia nor New Zealand, two countries that boast extremely open capital markets. Why? Because the latter countries' highly developed domes- tic financial markets were extremely well regulated. The biggest danger lurks in the middle, namely for those economies-many of which are in East Asia and Latin America-that combine weak and under- developed financial markets with poor regulation.
Moreover, a country needs export earnings to support foreign debt payments, and export indus- tries do not spring up overnight. That's why the risks of run-
ning into external financing problems are higher for countries that fully liberalize their capital mar- kets before significantly opening up to trade flows. Indeed, economies with small trading sectors can run into problems even with seemingly modest debt levels. This problem has repeatedly plagued countries in Latin America, where trade is rela- tively restricted by a com- bination of inward-look- , ing policies and remote location.
Perhaps the best evi- dence in favor of open capital markets is that, despite the international -
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financial turmoil of the last decade, most develop- ing countries still aim to liberalize their capital mar- kets as a long-term goal. Surprisingly few nations have turned back the clock on financial and capital- account liberalization. As domestic economies grow increasingly sophisticated, particularly regarding the depth and breadth of their financial instruments, pol- icymakers are relentlessly seeking ways to live with open capital markets. The lessons from Europe's failed, heavy-handed attempts to regulate international capital flows in the 1970s and 1980s seem to have been increasingly absorbed in the devel- oping world today.
Even China, long the high- growth poster child for capital-con- trol enthusiasts, now views increased openness to capital mar- kets as a central long-term goal. Its economic leaders understand that it's one thing to become a $1,000 per capita economy, as China is today. But to continue such stellar growth per- formance-and one day to reach the $20,000 to $40,000 per capita incomes of the industrialized countries-China will eventually require a world- class capital market.
Even though a continued move toward greater capital mobility is emerging as a global norm, absolute unfet- tered global capital mobility
is not necessarily the best long-term outcome. Tem- porary controls on capital outflows may be important in dealing with some modern-day financial crises, while various kinds of light-handed taxes on capital inflows may be useful for countries faced with sudden surges of inflows. Chile is the classic example of a coun- try that appears to have successfully used market- friendly taxes on capital inflows, though a debate continues to rage over their effectiveness. One way or
Perhaps poor nations won't need the IMF's macroeconomic expertise in the future-but
they will need something awfully similar.
another, the international community must find ways to temper debt flows and at the same time encourage equity investment and foreign direct investment, such as physical investment in plants and equipment. In industrialized countries, the pain of a 20 percent stock market fall is shared automatically and fairly broad- ly throughout the economy. But in nations that rely on foreign debt, a sudden change in investor sentiment can breed disaster.
Nevertheless, financial authorities in developing economies should remain wary of capital controls as an easy solution. "Temporary" controls can easily
become ensconced, as political forces and budg- et pressures make them hard to remove. Invite capital controls for lunch, and they will try to stay for dinner.
STRIKING A GLOBAL BARGAIN
Should the international community just give up on global capital mobility and encourage countries to shut their doors? Looking further ahead in the 21st century, does the world really want to adopt greater financial isola- tionism?
Perhaps the greatest challenge facing indus- trialized countries in this century is how to deal
with the aging bulge in their populations. With that in mind, wouldn't it be more helpful if rich
countries could find effective ways to invest in much younger developing nations, and later use the
proceeds to support their own increasing number of retirees? And let's face it, the world's developing
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[The IMF Strikes Back I
countries need funds for investment and education now, so such a trade would prove mutually benefi- cial-a win-win. Yes, recurring debt crises in the developing world have been sobering, but the poten- tial benefits to financial integration are enormous. Full-scale retreat is hardly the answer.
Can the IMF help? Certainly. The fund provides a key forum for exchange of ideas and best practices. Yes, one could go ahead and eliminate the IMF, as some of the more extreme detractors wish, but that is not going to solve any fundamental problems. This increasingly globalized world will still need a global economic forum. Even today, the IMF is pro- viding such a forum for discussion and debate over a new international bankruptcy procedure that could lessen the chaos that results when debtor countries become insolvent.
And there are many other issues where the IMF, or some similar multilateral organization, seems
essential to any solution. For example, the current patchwork system of exchange rates seems too unsta- ble to survive into the 22nd century. How will the world make the transition toward a more stable, coherent system? That is a global problem, and deal- ing with it requires a global perspective the IMF can help provide.
And what of poverty? Here, the IMF's sister organization, the World Bank, with its microeco- nomic and social focus and commensurately much larger staff, is appropriately charged with the lead role. But poor countries in the developing world still face important macroeconomic challenges. For exam- ple, if enhanced aid flows ever materialize, policy- makers in emerging markets will still need to find ways to ensure that domestic production grows and thrives. Perhaps poor nations won't need the IMF's specific macroeconomic expertise-but they will need something awfully similar. [II
Want to Know More?
For a look inside the International Monetary Fund (IMF) during the Asian financial crisis of the late 1990s, see Paul Blustein's The Chastening: Inside the Crisis That Rocked the Global Financial Sys- tem and Humbled the IMF (New York: PublicAffairs, 2001). For a passionate and comprehensive list of critiques about the IMF from the left, right, center, and outer space, see Joseph E. Stiglitz's Globalization and Its Discontents (New York: W.W. Norton & Company, 2002). Kenneth Rogoff evaluates alternative grand plans to redesign the international financial architecture in "International Institutions for Reducing Global Financial Instability" (Journal of Economic Perspectives, Vol. 13, No. 4, Fall 1999). Devesh Kapur assesses the strengths and limitations of the fund's crisis manage- ment in "The IMF: A Cure or a Curse?" (FOREIGN POLICY, Summer 1998).
Jeremy Bulow and Rogoff identified the problem of moral hazard and IMF lending in "Multi- lateral Negotiations for Rescheduling Developing Country Debt: A Bargaining-Theoretic Framework" (International Monetary Fund Staff Papers, Vol. 35, No. 4, December 1988). The issue was enshrined in the policy debate in the Meltzer Commission Report to the U.S. Congress in 1999, avail- able on the Web site of the Joint Economic Committee of the U.S. House of Representatives. For a recent discussion of the empirical importance of moral hazard in IMF lending, see Olivier Jeanne and Jeromin Zettelmeyer's "International Bailouts, Moral Hazard, and Conditionality" (Eco- nomic Policy, Vol. 33, October 2001) and Rogoff's "Moral Hazard in IMF Loans: How Big a Con- cern?" (Finance & Development, Vol. 39, No. 3, September 2002).
FOREIGN POLICY's recent coverage of the international financial system and the IMF includes "The Coming Fight Over Capital Flows" (Winter 1998-99) by Robert Wade; "Think Again: The International Financial System" (Fall 1999) by Zanny Minton Beddoes; "Trading in Illusions" (March/April 2001) by Dani Rodrik; and "The Cartel of Good Intentions" (July/August 2002) by William Easterly. See also "Michel Camdessus Talks With FP" (September/October 2000).
) For links to relevant Web sites, access to the FP Archive, and a comprehensive index of relat- ed FOREIGN POLICY articles, go to www.foreignpolicy.com.
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- Article Contents
- p. 39
- p. 38
- p. 40
- p. 41
- p. 42
- p. 43
- p. 44
- p. 45
- p. 46
- Issue Table of Contents
- Foreign Policy, No. 134 (Jan. - Feb., 2003), pp. 1-48+1-32+49-104
- Front Matter [pp. 2-103]
- Sympathy for the Devil [p. 1]
- Letters
- Europe's Green-Eyed Monster [pp. 4+6+8]
- Can't Buy Me Democracy [pp. 8+10]
- Selling America [pp. 10+12]
- Caution: Pollution Ahead [p. 12]
- NATO's Dirty Little Secret [pp. 12+14]
- Correction: Mahathir's Paradox [p. 14]
- Correction: Dependency Theory [p. 14]
- In Box
- Profits of Doom [p. 16]
- Pop Anti-Americanism [pp. 16-17]
- Shopkeepers R U.S. [p. 16]
- Techno's Edge [p. 17]
- Think Again
- Power [pp. 18-22+24]
- Cover Story
- The Five Wars of Globalization [pp. 28-37]
- Essays
- The IMF Strikes Back [pp. 38-46]
- An Unnecessary War [pp. 50-59]
- Globalization at Work
- Measuring Globalization: Who's Up, Who's Down? [pp. 60-72]
- Between the Lines: Crouching Tariffs, Hidden Protectionism [pp. 74-75]
- Arguments
- Development's False Divide [pp. 76-77]
- Future Perfect Union [pp. 78-79]
- In Other Words: Reviews of the World's Most Noteworthy Books
- Review: Le Modest Proposal [pp. 80-81]
- Review: Czechs on the Media [pp. 82-84]
- Review: A Message from Tora Bora [pp. 86-87]
- Global Newsstand: Essays, Arguments, and Opinions from around the World
- Do Human Rights Treaties Make Things Worse? [pp. 88-89]
- Africa's Rainbow Nation [pp. 90+92]
- A Rustproof Iron Lady [pp. 92+94]
- China Goes Hollywood [pp. 94+96+98]
- Intelligence Test [pp. 98+100]
- Net Effect: Web Sites That Shape the World
- Spinning History [p. 102]
- Cap, Gown, Mouse [pp. 102+104]
- Expert Sitings [p. 104]
- Back Matter
6 UN & other multilateral approaches/UN core.pdf
6 UN & other multilateral approaches/UN system.pdf