The IMF Part 2:Governance at

The International Monetary Fund

James Raymond Vreeland

Georgetown University

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The Plan

1. Review: Why did we build an IMF? Trilemma

Fixed Exchange Rates

2. IMF to the Rescue?

3. What is the IMF?

4. Conditionality

5. Who is the IMF?

6. Where to IMF resources come from?

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Review…

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The Trilemma

Fixed Exchange Rate

Open Capital Flows

Sovereign Monetary Policy

1944

Degree of global capital mobility

1971-3

Fixed exchange rates

+

Capital controls

Floating exchange rates

+

Open capital flows

1870 Interwar period

Fixed exchange rates

+

Open capital flows

Growing #’s of democraciesFew democracies

• Under “autocracy,” governments could maintain fixed exchange rates with high capital mobility.

• Under democracy, they could not.

5

6

47.5

55

49.5

28 26

18.5

36

71

111.8

0

20

40

60

80

100

120

1870 1900 1914 1930 1938 1960 1980 1995 2006

Financial

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

2015105

0.625

0.5

0.375

0.25

Time (years)

Hazard Rate

Time (years)

Hazard Rate

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People don’t eat

Under authoritarianism:

• Let them eat cake

Under democracy:

• Incumbents lose elections

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http://www.youtube.com/watch?v=3_ex0sTsb_I

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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?

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https://www.youtube.com/watch?v=GVytOtfPZe8

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One solution:

• IMF to the rescue?

• THE WHOLE POINT OF THE IMF: – Soften the blow of adjustment

• A form of insurance…

• Problem?

• Moral hazard?

• Conditionality?

• “Bretton Woods” falls apart…

• The IMF never really worked as intended12

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)13

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

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Why did the West stop using the IMF?

• Bretton Woods fixed XR system constraining– IMF loan: Softens the blow of adjustment– Conditionality: Still enforces adjustment– Impinges on NATIONAL SOVEREIGNTY

• Eventually, the West abandoned fixed exchange rates!

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The trade-off:

Stability of INTERNATIONAL prices

VS

Stability of DOMESTIC prices

For large-economies, DOMESTIC price stability is more important to most voters

Democracyfloating XR 16

Nixon ends Bretton Woodshttp://www.youtube.com/watch?v=iRzr1QU6K1o

http://www.popmodal.com/video/8803/Nixon-Ends-Bretton-Woods-International-Monetary-System

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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

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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

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• Who is the IMF?

• Where do the resources for “loans” come from?

Stepping back a moment…

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Who is the IMF?

• Currently 188 members– https://www.imf.org/external/np/sec/memdir/memdate.htm

• Who’s not a member?– Andorra, Liechtenstein, Nauru, Cuba, and

North Korea– Special case: Taiwan

• Members have “votes” according to the size of their subscription to the IMF…

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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

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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 world24

Great Powers have changed over time

• The IMF– Allocates votes according to economic importance– Great variation over its history…

• 1946-1960:

• 1961-1970:

• 1971 onwards:

• Otherwise the same top 5 for over 30 years

• Change is coming? #3:– Will US ratify the change?

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For the flag-challenged:

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? 26

How are decisions made?Or: Who controls the IMF?

Top 5 members:

16.75%

6.23%

5.81%

4.29%

4.29%

(% of total votes)

Other important members:

3.81%

2.8%

2.39%

1.93% ???

2.67% ??

1.79% ??!!??

2.44% ?

1.41% ? 27

For the flag-challenged:

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%)

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http://www.imf.org/external/np/sec/memdir/members.aspx accessed 2 May 2012

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New vote-shares (for 2012)??Has not happened yet!

1. United States: 16.48

2. Japan: 6.14

3. China: 6.07

4. Germany: 5.31

5. France: 4.02

6. United Kingdom: 4.02

7. Italy: 3.02

8. India: 2.63

9. Russia: 2.59

10. Brazil: 2.22

11. Canada: 2.21

12. Saudi Arabia: 2.01

13. Spain: 1.92

14. Mexico: 1.80

15. Netherlands: 1.76

16. Korea: 1.73

17. Australia: 1.33

18. Belgium: 1.30

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Why the delay?

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What is the IMF? (in one slide)

• 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) 32

Take-aways

• TRILEMMA

• Economic growth re-election

• Power at the IMF: The Executive Board (18824)

• Governance is changing bc the world is changing!

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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

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Thank youWE ARE GLOBAL GEORGETOWN!

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