Tuesday, September 05, 2006

Foreign Aid 6: IMF is Engineerable and Abolishable

A news report last August 29 at the IHT has this story,

U.S. urges the IMF to reflect new order
By Steven R. Weisman The New York Times
Published: August 28, 2006

Washington. The United States is seeking to increase the power of China and other countries within the International Monetary Fund to reflect their growing weight on the world economic stage, an effort that is
being resisted by some European countries whose voices could be weakened within the organization.

The Bush administration, arguing that the IMF has been "asleep" as the world economy changed, is seeking a first step that would grant more voting power immediately to four countries - China, South Korea, Turkey and Mexico - on the grounds that their economic growth entitles them to more influence.

But because the administration's proposal would mean less representation by some countries in Europe, it has run into objections and questions, especially among European countries that could lose power.

Resistance has come from Belgium, the Netherlands and Scandinavian countries, which might lose voting share to Spain, Ireland and other rapidly growing countries in Europe. In general, Europe would lose voting share to Asia and the United States. Poor countries in Africa also fear a loss of power...

Voting at the IMF is determined in part by a quota system that defines how much a country must contribute to the fund and how much it can borrow in emergencies. The United States has 30 percent of the world economy but only 17 percent share of the quotas; Europe's share of 23 percent is roughly equal to its share of the world economy.

The IMF, along with the World Bank, was created in 1944 at BrettonWoods, New Hampshire, as part of a postwar financial structure designed to avoid a repetition of the economic crises of the 1930s that preceded World War II. The fund has $28 billion in loansoutstanding to 74 of its 184 member countries, given out over the years to avert defaults, bankruptcies and other crises. In the early1990s, the fund was involved in bailing out Mexico.

Later in the decade it helped rescue Thailand, South Korea and several other Asian countries from insolvency. But since then the fund has had no major crises to deal with, and many recipients of its previous efforts have paid off their loans. Some economists joke that with little to do, board members have theluxury of squabbling among themselves for power over an organizationwith an ill- defined mission....

I think the IMF is an abolishable institute that has become more of an expensive and intrusive bureaucracy to taxpayers around the world, than any help in terms of macroeconomic stabilization function that it used to do. But since IMF abolition is next to impossible in the minds of national politicians, Finance/Treasury, and Central Bank bureaucrats around the world, "re-engineering" its quota composition is the next best alternative.

Nonetheless, even the bureaucrats in the US Treasury Department still peddle a number of misconceptions about China and other industrializing developing economies. For instance, China's "overvalued" currency (the yuan) as the bane for the US' high trade deficit ($200B from China alone out of its $800+ B total trade deficitin 2005) and growing unemployment.

Come on guys, many US consumers buy China-made products (often by US multinational companies locating there) not so much because the yuan is "cheap", but mainly because of rigid US labor laws, ala-Europe's "expensive to hire, difficult to fire" policies, and paranoid immigration policies. Many potential migrants are willing to offer their cheap labor for US companies in the US mainland, so that said US companies can produce cheap and competitive goods and services, reducing the need to import a lot from China, Korea, Mexico, and soon.

Majority if not all bureaucrats at the IMF, as well as the US TreasuryDepartment and EU Finance Ministries, look like broken records in blaming China's (and India's and Turkey's and Korea's and Mexico's and many other countries') over-valued currencies and other global inflationary pressures (like the spiralling world oil prices) for theUS' and Europe's anemic growth and high unemployment rates. Why can't they look inwards and ask their own consumers, their very own citizens, why these people prefer bargains from abroad at the expense of local jobs and slow domestic growth? Should they blame their owncountrymen and consumers why they prefer to buy cheaper clothes and shoes, cheaper food and drinks, cheaper toys and vehicles, available from industrializing poor countries, or they blame the politicians andFinance/Central Bank bureaucrats of the latter?

As many people hunt for bargains everywhere, from bargain hotels and restaurants to bargain computers and shoes, the high-taxes countries of Europe and north America should expect slower economic growth and high unemployment rate. Because demand for their hotels and restaurants is not big, and demand for computers and shoes made in their countries is not big. High and multiple taxes -- to finance expensive welfare and bureaucracies, including internationalbureaucracies like the IMF, UN and the WB -- are inflationary. They make the prices of many goods and services produced in high taxes economies very expensive, and hence, far from bargains.

A re-engineering of the quota system at the IMF maybe a 2nd best alternative. And even such alternative meets fierce opposition by Finance bureaucrats of a number of European countries. They've gotten use to over-taxing their citizens and over-extending their power in the lives of citizens of poorer economies who borrow from the IMF.

There are not much relevance for the IMF even among fiscally irresponsible governments, like the Philippine government. Every year, the Phil. government makes about $7B foreign loans and another $7-8B domestic loans (in Peso value). About 60-70% ofthose foreign loans are from private bondholders abroad, the rest are mostly from the ADB and JBIC (Japan government's ODA lender), a few others from the WB and other government's foreign aid bodies. The Philippine government's Department of Finance (DOF) and central bank(BSP), even the Office of the President (OP) are more afraid of ratings downgrade by Standard & Poors, or by Fitch, or by another ratings firm, than from any visiting IMF bureaucrats makingmacroeconomic and external account reviews.

Last June 21, 2006, I wrote this,

Why the IMF Should be Abolished

The IMF should ultimately be disbanded and abolished. I only have 2 main reasons for saying so: taxes and growing IMF irrelevance.

1) High cost to taxpayers of many international bureaucracies.
There are already so many government clubs now -- IMF, WB, UN, WTO, OECD, ADB, AfDB, APEC, G-77, EU, ASEAN, MERCUSOR, various other regional and bilateral clubs of governments. Such international and regional clubs cost money to taxpayers, and national and international bureaucrats just spend such tax money, from fat salaries and per diems to endless travels and conferences. Yes, they have various "development" projects, but for many taxpayers, the benefits of those projects are often less visible compared to their reduced welfare through high and multiple taxes removed from their pockets.

2) Growing irrelevance of the IMF.
Private bondholders, the main lenders to many fiscally-irresponsible governments, both rich and poor countries alike, do not look much to the IMF for macroeconomic scanning of governments wanting to float new bonds (ie, borrow from them), but to ratings agencies and big investment banks.

Such fiscally irresponsible governments spend more than what they can collect from taxes and privatization, so they borrow left and right and get more indebted. And irresponsible poor governments cannot borrow much from governments of rich countries either because many of them, the G7 countries's governments in particular, are themselves highly indebted.

General government gross debt as % of GDP, G7, 2005:

1) Japan 175.5%
2) Italy 106.3%
3) Canada 85.0%
4) Germany 67.5%
5) France 67.3%
6) US 62.9%
7) UK 43.3%
(source: IMF, World Economic Outlook, April 2006 database)

So, those spend-and-borrow governments, especially poor-country governments, turn to private bondholders, from individuals to corporations and banks. Bondholders would rather wait for Moody's or S&P or Fitch, whether they would downgrade or upgrade the credit ratings of a borrowing government, than look up to the IMF.

Not much relevance for IMF and many other government clubs. The money of taxpayers siphoned off by governments to sustain those international bureaucracies are better diverted as tax cuts, so taxpayers can better take care of themselves and their families, rather than be dependent on various subsidies from indebted and fiscally-irresponsible governments.

See also:
Foreign Aid 4: Easterly vs. Sachs, May 01, 2006
Foreign Aid 5: Failure in East Timor, May 31, 2006

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