IMF‐Supported Programmes: Stimulating Capital to Non‐defaulting Countries

International Monetary Fund (IMF)‐supported programmes catalyse private capital to non‐defaulting countries. We find the IMF to be effective in stimulating private capital flows to middle‐income countries that participate in a Fund programme, but do not restructure their debt. IMF‐supported programmes help non‐defaulting countries to signal their willingness to reform and repay debts, thereby catalysing private capital. This signalling role appears to be more important for Fund catalysis, than the size of IMF lending.     

The International Monetary Fund (IMF) and the Catalytic Effect: Do IMF Agreements Improve Access of Emerging Economies to International Financial Markets?

We investigate whether countries have access to loans with better conditions after an International Monetary Fund (IMF) agreement. We conduct an empirical analysis which takes into account both the maturity and the interest rate of public and publicly guaranteed private debt. A two‐stage least squares estimation method is used to avoid selection bias problems. Panel data covering 116 countries between 1984 and 2007 and two other subsets of this panel data are used. The results indicate an improvement in access to international financial markets when an IMF programme is announced. The improvement increases as the sample consists of better‐performing countries. We conclude that, the catalytic effect may lower the level of commitment, political will and ‘ownership’ of the programme of the borrower country. On the other hand, borrower countries should consider the catalytic effect in determining the amount of financial assistance from the IMF.     

Reforming the IMF's Weighted Voting System

This paper surveys various proposals to reform the IMF's quota determination process and voting regime. We first provide some necessary context by describing IMF decision rules, including the methods by which the Fund determines quotas according to countries’ relative positions in the world economy. This section also addresses the arbitrariness of the IMF quota determination process and how IMF decision rules hamper developing country influence within the Fund. Following this, we review several proposals designed to provide developing countries greater voice in IMF decision‐making. We conclude that the problems of developing country representation are not likely to be fixed by either reallocating quotas on the margins of the existing IMF system or by tinkering with the quota‐determination formulas. Rather, more fundamental institutional adjustments will be required.     

The lending policy of the International Monetary Fund

In the worldwide economic and debt crisis of the eighties the International Monetary Fund increasingly became the “lender of last resort” for a great many Third World countries. With world trade weak and interest rates high, a considerable number of developing countries got into serious balance-of-payments difficulties. The demand for stand-by and extended arrangements with the Fund rose dramatically. The conditions or adjustment programmes linked to this lending not infrequently led to serious social and political tensions in the countries concerned. The term “IMF riots” was coined, and the conditionality of credit again became the subject of political and academic debate.     

Global Volatility and Forex Returns in East Asia*

During 2001–2010, increases in mature market volatility were associated with declines in forex returns for East Asian economies, consistent with an overall ‘flight to safety’ effect. Estimates from GARCH models suggest that a 10 percentage point increase in mature market equity volatility generated an exchange rate depreciation of up to 3/4 percent. This sensitivity rose during a more tranquil subsample for some countries, reflecting their greater integration with global financial markets. Long‐run forex volatility increased in Asian economies after 2008, reflecting the global reach of the financial crisis in mature markets. Unconditional standard deviations estimated from these models provide operational measures of ‘long‐term’ and ‘excess’ volatility in forex markets.     

Dealing with financial crises in emerging markets

Financial crises in emerging markets are a reality of doing business in these countries in the early twenty‐first century. Managers can gain some perspective on this problem from experiences of firms in crises that occurred in Mexico, Thailand, and Russia during the 1990s. We show how firms have taken steps to protect themselves against financial crises and to deal with the crises once underway in these three countries. Such strategies are divided into frameworks of: short‐term, immediate responses to a crisis; intermediate steps during the period of economic downturn; and long‐term continuing responses for operating in emerging markets. © 2002 Wiley Periodicals, Inc.     

The Question of Sustainability for Microfinance Institutions*

Microentrepreneurs have considerable difficulty accessing capital from mainstream financial institutions. One key reason is that the costs of information about the characteristics and risk levels of borrowers are high. Relationship‐based financing has been promoted as a potential solution to information asymmetry problems in the distribution of credit to small businesses. In this paper, we seek to better understand the implications for providers of “microfinance” in pursuing such a strategy. We discuss relationship‐based financing as practiced by microfinance institutions (MFIs) in the United States, analyze their lending process, and present a model for determining the break‐even price of a microcredit product. Comparing the model’s results with actual prices offered by existing institutions reveals that credit is generally being offered at a range of subsidized rates to microentrepreneurs. This means that MFIs have to raise additional resources from grants or other funds each year to sustain their operations as few are able to survive on the income generated from their lending and related operations. Such subsidization of credit has implications for the long‐term sustainability of institutions serving this market and can help explain why mainstream financial institutions have not directly funded microenterprises. We conclude with a discussion of the role of nonprofit organizations in small business credit markets, the impact of pricing on their potential sustainability and self‐sufficiency, and the implications for strategies to better structure the credit market for microbusinesses.     

Myth,Sin and Redemption in Capital Account Liberalisation

The Fund's argument that capital account liberalisation in developing countries might appeal for justification to the recognised gains from free trade in goods and services was seriously undermined by the Asian financial crisis. Perhaps the most remarkable critique in view of his pre‐eminence in the development of international trade theory and policy was a short paper by Jagdish Bhagwati in which the Fund's parallel was described as a ‘myth’. Taking up the argument he advanced, this article explores further the underlying weakness of the Fund's case. Jagdish emphasised the discrepancy between the nebulous long‐term benefits from capital flow liberalisation and the painful consequences of the crises that they had recently occasioned. The relevance of the ‘original sin’ hypothesis in determining the magnitude of these costs is therefore discussed here with attention drawn to country inability to borrow readily in their own currencies as a reason for their acute exposure to exchange rate speculation. ‘Redemption’ for borrowers is then sought through an identification of sources of genuine comparative advantage in financial trade. Net flows of finance are not required for the realisation of these gains and a final section argues that there should be no presumption that net transfers improve welfare – just as Jagdish claimed.     

IMF Conditionality and the Intertemporal Allocation of Resources

This article analyzes the impact of IMF (International Monetary Fund) conditionality on the intertemporal allocation of resources in an emerging market economy. The study identifies a principal‐agent problem between the government of the emerging market and its citizens and shows that conditionality has the potential to mitigate the resulting misallocation of resources. Nevertheless, the analysis indicates that if IMF lending were influenced by geopolitical motives then the suboptimal allocation of resources would remain notwithstanding IMF conditionality.     

Capital Controls Re‐examined: The Case for ‘Smart’ Controls

The global financial crisis which began in east Asia in 1997 is not over, neither is the inquest into its implications for adjustment policy. In the wake of this crisis, we focus here on the role of capital controls, which formed a much publicised part of the crisis‐coping strategy in one country (Malaysia) and, less openly, were also deployed by other crisis‐afflicted countries. Evaluation so far has examined different target variables with different estimation methods, generally concentrating on efficiency and stability indicators and ignoring equity measures; it has also typically treated ‘control’ as a one‐zero dummy variable, ignoring the ‘quality’ of intervention and in particular the extent to which efficiency gains are obtained in exchange for controls. Partly because of these limitations, the literature has reached no consensus on the impact of controls; however, it is moving over towards acknowledging that the quality and type of controls is important, as well as their intensity. We propose an approach in which the government plays off short‐term political security against long‐term economic gain; the more insecure its political footing, the greater the weight it gives to political survival, which is likely to increase the probability of controls being imposed. The modelling of this approach generates a governmental ‘policy reaction function’ and an impact function for controls, which are estimated by simultaneous panel‐data methods across a sample of thirty developing and transitional countries between 1980–2003, using, for the period since 1996, the ‘new’ IMF dataset which differentiates between controls by type. We find that controls appear to cause increases in income equality, and are significantly associated with political insecurity and relatively low levels of openness to trade. They do not, in our analysis, materially influence the level of whole‐economy productivity or GDP across the sample of countries examined, although they do influence productivity in particular sectors. But the dispersion around this central finding is wide: the tendency for controls to depress productivity by encouraging rent‐seeking sometimes is, and sometimes is not, counteracted by purposive government policy actions to maintain competitiveness. Whether or not this happens is vital, on both efficiency and equity grounds. We make the case for ‘smart’ capital controls – controls which are time‐limited and contain an inbuilt incentive to increased productivity.     

Political Economy Influences Within the Life‐Cycle of IMF Programmes

Increasing attention is being paid to political economy dimensions of the IMF's operations. However, up until now, the literature has lacked a systematic overview of how politics and economics interact in this context. This paper sets out to fill the gap. Its conceptual basis is that of the ‘life cycle’ of an IMF programme. What determines the decision to turn to the Fund for financial assistance, what determines the outcome of negotiations, what determines whether a country will come back to the Fund? Answers to these questions cannot be satisfactorily given by examining economics alone. The paper draws on existing evidence to provide an empirically based discussion of the issues involved. It also points the direction in which future research needs to go. Some of the policy implications of the analysis are also examined.     

Financial Globalisation and Emerging Markets Volatility

The volatility of capital flows to emerging market (EM) countries and frequency of financial crises have imposed high welfare costs on the countries involved. The empirical literature provides, at best, a mixed picture on the relationship between long‐run EM country growth and financial integration. Meanwhile, the prevailing policy discourse regarding reform of the international financial system remains incomplete: the focus has largely been on either institutional and policy measures required of EM countries or international crisis‐resolution procedures. The role played by private financial markets and institutions in the developed world has not received adequate attention. This paper describes some of the structural features inherent in today's financial markets that directly contribute to the instability in EM capital flows.     

An Asian Currency Unit: Simulations for Its Effects on East Asia

An Asian currency unit (ACU) is necessary to deepen Asian financial markets and to convert national currencies into a single monetary policy. However, the experiences of the European Currency Unit and the European Exchange Rate Mechanism crisis in 1992–93 have indicated the danger of the so‐called gradual approach. This study evaluates the effects of welfare should the ACU indicator become a long‐term constraint of the People's Republic of China and Japan, the big two in East Asia. Our results indicate that the constraints of countries’ own baskets (e.g. real effective exchange rates) are still better before the launch of a true single currency. That is, pegging to an ACU indicator could hardly be sustained in the long‐run if East Asian countries have not reached a consensus about a regional monetary union.     

Financial Integration in East Asia: An Empirical Investigation

The central objective of this paper is to empirically evaluate the degree of linkages among East Asian equity and bond markets. Using data from the IMF’s Coordinated Portfolio Investment Survey (CPIS), we find that intra‐East Asian financial asset holdings of four East Asian countries – Japan, Korea, Hong Kong and Singapore – are larger than the levels predicted by the financial gravity model. However, our analysis suggests that this result is likely to be driven by intra‐regional trade linkages and reflect those linkages. Therefore, the salient implication for regional policymakers is that they should continue to promote intra‐regional financial integration. This paper also aims to analyse the impact of three different types of country‐specific risks – political, economic and financial risks – on investment from the four countries. This analysis yields a clear positive relationship between destination‐country risk, in particular political risk, and capital inflows.     

The Episodic and Unpredictable Nature of IMF Lending: An Empirical Analysis

Having had excess lending capacity at the beginning of 2008, by the end of the year International Monetary Fund (IMF) lending had increased and, in anticipation of a further increase in the demand for Fund assistance, arguments were being put forward for a substantial increase in IMF resources. Analysis of IMF lending over a protracted period of time reveals considerable volatility. Using both bivariate and multiple regression estimation, this paper investigates the determinants of IMF lending and examines the extent to which it is predictable. Although some significant relationships are discovered, many of them are unstable and time variant. This makes it difficult to predict IMF lending with any degree of confidence. The paper goes on to examine briefly the policy implications of unpredictability. It is critical of the ways in which the problem has been handled in the past and it offers what it argues is a preferable solution.     

The feasibility of currency union in Gulf Cooperation Council countries: A business cycle synchronisation view

This paper study the feasibility of a monetary union among Gulf Cooperation Council (GCC) countries, by measuring the evolution of economic integration among them. Considering the critical role of crisis and shocks in the integration process within the region, we determine whether GCC countries are characterised by a common business cycle. We suggest a different empirical approach that, unlike previous studies, allows one to endogenously detect structural changes in the comovement process between outputs. We apply a new measure for this region that is based on the time‐varying coherence function. Such a measure not only detects comovement dynamics but also distinguishes these dynamics in terms of short‐ and long‐term cycles. Additionally, we can test whether certain countries tend to be more synchronised. The main finding of this study is that not all GCC countries share a common short‐term business cycle. However, in the long term, all country‐pairs indicate a medium‐level synchronisation in the most recent subperiods. The new role of the United Arab Emirates’ regional trade platform allows it to strengthen long‐term business cycle comovement, thus differentiating it from other GCC country‐pairs that have shown a decline in the last two subperiods.     

Policy dialogue between multilateral institutions and developing countries

The lending criteria applied by the IMF and the World Bank have been converging for some time. Considering also that since the floating of exchange rates in the early seventies the IMF seems to have lost in importance as a monetary institution, debate is growing on the question of whether the Fund needs to correct its policy course, to be assigned new tasks by its member countries or even to be amalgamated with the World Bank into one efficient development aid institution.     

Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection

When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller.     

金融体系效率对FDI溢出效应的影响——基于金融功能视角的经验研究

多数研究表明FDI溢出效应的发挥受到东道国金融市场的影响。文章从国内金融体系吸收存款和提供贷款的基本功能出发,采用我国1984～2009年的时间序列数据,检验了金融体系效率对FDI溢出效应的影响,结果显示动员储蓄效率在短期内对FDI溢出效应的影响不明显,而长期内具有抑制作用,储蓄投资转化效率以及资本配置效率对FDI溢出效应无论短期还是长期都具有显著的抑制作用。     

Disentangling the Differences between Abusive and Predatory Lending: Professionals’ Perspectives

This study describes how mortgage professionals differentiate abusive from predatory lending. Data were analyzed qualitatively. The results indicate that some users of this term do not always adhere to a strict definition of predatory lending but rather use it as a term for any general mortgage abuse and mortgage fraud. Existing laws at the federal‐ and state‐level curtail abusive lending and promote fairness in the market place and they are highly enforced among depository financial institutions. However, unregulated nonfinancial institutions, mortgage brokers, and originators are still a primary source of predatory lending.