lecture 15 imf
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International Political Economy #15
The International Monetary Fund
William Kindred Winecoff
Indiana University Bloomington
October 22, 2013
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Where We Left Off
In short, the developing world and much of the developed world hasorganized their economies in relation to the U.S.
To encourage exports, many of these countries held down the value of
their currencies relative to the USD.
The U.S. let this happen (and/or encouraged it) because:
Higher consumption for U.S. consumers is politically popular,
and the U.S. economy operated at more-or-less full
employment from 1984-2007.
The U.S. wanted to encourage development and trade i.e.
interconnectedness and the incorporation or more and moreof the Gap into the liberal order.
Generally, these governments preferred safe IOUs to risky ones for
political reasons: huge demand for US sov debt.
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Bernanke The Global Savings Glut
We can think about the CA as reflecting trade, or as reflecting finance.These are really the same, but different focii can emphasize different
dynamics. A focus on finance leads us to the GSG:
1 Developed European & Asian countries need to boost savings
for aging populations. Developing countries need to build
war chests of currency reserves to protect against financial
crises like those in the 1990s.
2 Weak currencies can encourage growth via exports.
3 Sharp increase in energy (e.g. oil) costs leads to more $ for
energy exporters.If you, as a developing country government, have a bunch of $ to invest,
where are you going to invest it? Probably in the largest economy with
the deepest, most liquid financial markets. And thats the U.S.
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The Result
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The Result
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The Result
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The Result
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Interdependence
This is exacerbated by the USs structural position, esp with regards to
the dollars role as the global reserve/exchange currency.
Increased demand for dollars globally impliescontinued, and increasing,
indebtedness by the US, as well as asset price bubbles.I.e., we dont have a de jurefixed exchange rate system (as under
Bretton Woods) anymore, but we have a de factofixed exchange rate
system with developing countries keep the value of their currencies low
in order to facilitate job growth.
A new form of the Triffin dilemma?
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The Crash
Bubbles tend to pop, and this one did. But first lets learn about theIMF.
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The IMF
Designed to build flexibility into the Bretton Woods fixed exchange
rates.
Prevent competitive devaluations.
Provide short-term finance to manage balance of payments deficits.
Originally 29 members; now 188.
Over $300 billion in resources, with another $1 trillion pledged.
Votes are given proportionate to contributions; 85% majority needed;
US has more than 15% of the votes.
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Purposes
1 Promote international monetary cooperation.
2 Facilitate the growth of trade.
3 Promote exchange stability.
4 Assist in the establishment of a multilateral system of payments.
5 Make resources available to countries suffering from balance of
payments crises.
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US Power and the IMF
The US has effective veto power.
The IMF gives bigger loans, with fewer conditions, to US allies or to
further US interests.
Pre-Bretton Woods, the IMF dealt primarily with advanced economies.
Balance of payments deficits meant US dollar deficits, so US
has a lot of power.
Post-Bretton Woods, the IMF deals mostly with developing economies.
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The Suez Crisis
1956: Nasser nationalizes Suez Canal. Britain, France, and Israel invade.
US concerned that Egypt would fall into USSRs sphere of influence; US
backs Nasser.
US uses dollar power to back Nasser.
US mobilizes IMF to support British pound in exchange for
acquiescence. Israel also goes on IMF program.
This signals the end of British and France imperial meddling; also
highlights the importance of monetary power and the fact that the IMF
is a political, not technocratic, entity.
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Does the IMF Erode National Sovereignty?
IMF loans come with conditions, because the institution needs to be
repaid.
Usually require significant economic reforms.These can be refused.
These are often used as domestic political cover: blame the IMF, even if
national leaders agree that reform is needed.
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US Power
The US has used the IMF to:
Indirectly bail out American banks (1980s).
End import-substitution industrialization in Latin America
(1980s).Facilitate integration of Eastern Europe into the world
economy (1990s).
Damage currency pegs of exporters (1990s).
IMF loans have fewer conditions for countries that vote with the US in
the UN General Assembly and were on the USs side in the Cold War.
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The IMF Today
The contemporary is essentially a crisis management organization.
There is no pegged exchange rate system to maintain, so it intervenes in
all manner of crises.
Most of its lending is to the developing world, but its gotten involved in
the eurozone crisis as well.
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