Ukraine: A stress test of IMF credibility
Susan Schadler 09 October 2014
The IMF went to extraordinary lengths to come to the assistance of Ukraine, financing above-quota limits and breaking its rule to withhold lending during acute conflict. The fighting continues and the government has yet to make concrete its commitments to the programme. Now that the 2014 economic projections are coming to resemble the ‘adverse scenario’, the IMF faces the task not only of remedying the situation in Ukraine, but of salvaging its own credibility.
The IMF will shortly go back to the drawing board with Ukraine. As it prepares to revise the economic programme on which the third tranche of its funding will be based, the IMF faces three interconnected problems:
Europe's nations and regions International finance
Taking a bite out of Apple? Fixing international corporate taxation
Ruud de Mooij, Michael Keen, Victoria Perry 14 September 2014
Multinational companies’ ability to pay little corporate income tax has grabbed headlines recently. This column argues that the details of international tax rules matter for macroeconomic performance – especially in low-income countries. This emphasises the importance of the G20–OECD Action Plan on Base Erosion and Profit Shifting. However, dealing properly with tax spillovers will require a deeper global debate about the international tax architecture itself.
It’s hard to pick up a newspaper these days (or, more likely for those reading this, do the digital equivalent) without reading about Apple, Amazon, Google, or a host of others managing, by some magic, to pay little corporate income tax – and the consequent outrage of duly shocked and horrified politicians. Entertaining though all this is, understanding the rules that make such tax avoidance possible is a dull task that many of us are happy to leave to the tax nerds – detail really matters (just ask an international tax lawyer).
tax, taxation, IMF, corporate taxation, corporate income tax, spillovers, tax treaties, tax avoidance, multinationals, tax competition, tax harmonisation
Restoring financial stability with economic growth
James Boughton 15 September 2014
The international financial system is not working fine and reforms of regional and global institutions are much needed. This column discusses some of the transformations that the IMF could implement in order to keep pace with the changes in the world economy. One problem for the credibility of the IMF is the G20 in its current design and organisation. Institutional reforms, however, should be combined with advances in economic policy in order to promote economic growth and financial stability.
No one would argue seriously any longer that the international financial system is working just fine. When the politicians and central bankers who govern the International Monetary Fund and the World Bank gather in Washington this October, much of the talk will be about the refusal of the US Congress to pass legislation that would reform the IMF.
Global governance International finance
economic growth, financial stability, institutions, IMF, G20
Rapid growth in emerging markets and developing economies: Now and forever?
Giang Ho, Paolo Mauro 12 September 2014
Forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth. Is this optimism warranted by past international growth experience? This column explores this question by looking at economic growth forecasts at longer-term horizons.
Projecting a country’s economic growth into the medium term and beyond is notoriously difficult. At the same time, getting the growth projections wrong has major adverse consequences. For fiscal policymakers, overestimating future economic growth implies underestimating the government debt-to-GDP ratio that will be reached at the end of the projection period (in the absence of corrective policy measures).
Development Macroeconomic policy
optimism bias, forecasting, growth, IMF, World Bank
To exit the Great Recession, central banks must adapt their policies and models
Marcus Miller, Lei Zhang 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.
For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:
Global crisis Macroeconomic policy Monetary policy
Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy
Conflict between US-led and China-led economic architecture
Pradumna B. Rana 05 August 2014
China’s frustration with the slow progress of IMF governance reform has contributed to the evolution of a China-led architecture that locks out the West – the latest examples being the New Development Bank and the Credit Reserve Arrangement established by the BRICS. This column argues that these institutions are not a threat to the IMF and the World Bank, but they complicate global economic governance. It is unlikely that Europe’s ‘troika’ model – where the IMF works jointly with regional financing facilities – will be possible in Asia. We perhaps need a New Bretton Woods.
The Bretton Woods agreement – which is 70 years old this month – established three institutions to promote law and order in international economic relations:
- The IMF to promote macroeconomic stability,
- The GATT (and its successor, the WTO) to ensure an open trading environment, and
- The World Bank to provide development finance for poverty reduction.
The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-WWII period.
US, China, IMF, global governance, World Bank, multilateralisation, troika
Capital controls in the 21st century
Barry Eichengreen, Andrew K Rose 05 June 2014
Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention.
IMF, capital flows, global financial crisis, capital controls, capital, Macroprudential policy
The IMF’s preferred creditor status: Questions after the Eurozone crisis
Susan Schadler 28 April 2014
The IMF has had a preferred creditor status throughout the history of its lending. This implies that borrowing countries are expected to give priority to meeting their obligations to the IMF over other creditors. This column reviews the onset of this preferred status, its purpose, and the way it changed after the recent Eurozone crisis. By lending €30 billion to Greece in 2010, the IMF introduced the option to permanently waive the requirement that a borrowing country is on the path to stability. This option increases the chance of moral hazard and undermines the strong framework for the preferred creditor status.
Throughout the history of IMF lending, the institution has had preferred creditor status – that is, distressed countries borrowing from the IMF are expected to give priority to meeting their obligations to the IMF over those to other creditors. This status is a defining characteristic of the IMF’s role in financial crises – it provides a high degree of confidence that IMF resources are safe when other creditors face substantial uncertainty about full repayment.
Global crisis Global governance International finance
IMF, Eurozone crisis, preferred creditor status
The Ukraine-Russia deal
Charles Wyplosz 24 December 2013
The Ukraine-Russia deal involves politics as much as economics. This column argues that the economics of the deal will eventually lead to problems for one or both.
As the price to deter a westward move of Ukraine, Russia has made an offer that the Ukrainian president has found impossible to turn down, if he ever contemplated seriously tying his country to the EU. This is generally hailed as a master coup by President Putin and a great relief for President Yanukovych. In fact, this coup is likely to end in tears for both countries.
Smart governance: solutions for today’s global economy
Nemat Shafik 14 December 2013
Crises expose weaknesses in rules and institutions, and provide impetus for reform. Macroeconomic policy coordination was strong early in the financial crisis, but momentum slowed. There has been significant progress on financial regulation, yet major challenges remain. International safety nets have been reinforced – including a trebling of IMF resources. This column argues that ensuring the future effectiveness and legitimacy of the IMF, its member countries will need to agree on greater voice and representation for emerging market countries in the interest of a better managed global economy.
Making the case for smart governance
Global economic crises tend to reignite discussions of global governance and international cooperation. This is because crises lay bare the shortcomings of existing international rules and institutions. The recent crisis has been no different.
IMF, financial crisis, global crisis, global governance