D

r
a
f
t
International Political Economy #15
The International Monetary Fund
William Kindred Wineco
Indiana University Bloomington
October 22, 2013
W. K. Wineco | IPE #15: The IMF 1/16
D
r
a
f
t
Where We Left O
In short, the developing world and much of the developed world has
organized 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 more
of the Gap into the liberal order.
Generally, these governments preferred safe IOUs to risky ones for
political reasons: huge demand for US sov debt.
W. K. Wineco | IPE #15: The IMF 2/16
D
r
a
f
t
Bernanke The Global Savings Glut
We can think about the CA as reecting trade, or as reecting nance.
These are really the same, but dierent focii can emphasize dierent
dynamics. A focus on nance 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 nancial
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 nancial markets. And thats the U.S.
W. K. Wineco | IPE #15: The IMF 3/16
D
r
a
f
t
The Result
W. K. Wineco | IPE #15: The IMF 4/16
D
r
a
f
t
The Result
W. K. Wineco | IPE #15: The IMF 5/16
D
r
a
f
t
The Result
W. K. Wineco | IPE #15: The IMF 6/16
D
r
a
f
t
The Result
W. K. Wineco | IPE #15: The IMF 7/16
D
r
a
f
t
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 implies continued, and increasing,
indebtedness by the US, as well as asset price bubbles.
I.e., we dont have a de jure xed exchange rate system (as under
Bretton Woods) anymore, but we have a de facto xed exchange rate
system with developing countries keep the value of their currencies low
in order to facilitate job growth.
A new form of the Trin dilemma?
W. K. Wineco | IPE #15: The IMF 8/16
D
r
a
f
t
The Crash
Bubbles tend to pop, and this one did. But rst lets learn about the
IMF.
W. K. Wineco | IPE #15: The IMF 9/16
D
r
a
f
t
The IMF
Designed to build exibility into the Bretton Woods xed exchange
rates.
Prevent competitive devaluations.
Provide short-term nance to manage balance of payments decits.
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.
W. K. Wineco | IPE #15: The IMF 10/16
D
r
a
f
t
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 suering from balance of
payments crises.
W. K. Wineco | IPE #15: The IMF 11/16
D
r
a
f
t
US Power and the IMF
The US has eective 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 decits meant US dollar decits, so US
has a lot of power.
Post-Bretton Woods, the IMF deals mostly with developing economies.
W. K. Wineco | IPE #15: The IMF 12/16
D
r
a
f
t
The Suez Crisis
1956: Nasser nationalizes Suez Canal. Britain, France, and Israel invade.
US concerned that Egypt would fall into USSRs sphere of inuence; 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.
W. K. Wineco | IPE #15: The IMF 13/16
D
r
a
f
t
Does the IMF Erode National Sovereignty?
IMF loans come with conditions, because the institution needs to be
repaid.
Usually require signicant 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.
W. K. Wineco | IPE #15: The IMF 14/16
D
r
a
f
t
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.
W. K. Wineco | IPE #15: The IMF 15/16
D
r
a
f
t
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.
W. K. Wineco | IPE #15: The IMF 16/16