Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, August 22, 2003

Slanted and Sensationalist I

Here's the first in a new series of 'slanted and sensationalist posts from Edward Hugh, the blogger you can't rely on'. I just gave a post which veered mildy (sorry, I mean extremely) towards a defence of the IMF so now - in the interests of prejudice - let's have an extremist (sorry again, I mean moderate) criticism of the thing.

When Michel Camdessus, head of the International Monetary Fund, went to Moscow in 1993, Viktor Chernomyrdin, the Russian prime minister, took him on a wild bear hunting trip to the Zavidovo region. That set the tone for what many see as a personalised and politicised approach to economic policymaking that helped create the conditions for the country's August 1998 financial crisis. Five years after the simultaneous collapse of the rouble and debt default, IMF officials argue that an over-valued, fixed exchange rate at a time of irresponsible fiscal policy was at least partly to blame. But debate is still raging about their own role in triggering the collapse.

While a rise in oil prices also played a large role, few question that devaluation substantially aided Russia's fast economic recovery after the crisis. It boosted domestic producers and suggested the previous exchange rate had been too high. To its critics, the IMF was obsessed with a fixed exchange rate without considering the realities of the Russian economy - notably large budget deficits, as spending was not matched by tax collection, and a high volume of barter trade. "I visited the IMF in Washington and it reminded me of the central committee of the Communist party, with the same subsidised canteen and isolation," recalls one Russian economist. "They were very smart in finance but naive in other ways."

John Odling-Smee, the senior IMF executive responsible for Russia who recalls a frenetic period of travel to and from Moscow during 1998, says: "It's true that following the Asian crises there was a general shift in opinion away from the consensus among economists for fixed exchange rates and we had been part of that [view]." Another factor was the lack of reliable information. One IMF official says the data available in the period leading up to the crisis suggested the financial system was solid and the rouble competitive, with productivity by local industries that competed with imports appearing to improve, alongwith import penetration. "We didn't put our foot down enough, but we were flying blind," he says. "We did not really know the foreign exposure of the Russian banks . . . because the central bank itself did not have a systematic view."

But a third issue was the political reality and the IMF's own ability or willingness to implement the policies it was advocating in theory. The official says it was the Russian government that insisted on a fixed rate, while the IMF was by late 1997 starting to advocate a gradual shift towards a floating rouble. Then the government announced a three-year stable currency policy designed to offer certainty to investors until after the 2000 presidential elections. "Rouble stability was seen by Russians as one of the main accomplishments of the Yeltsin era," he says. "If we had opposed it, there would have been a run on the rouble. In retrospect, we should have insisted on a more flexible approach."

Mr Odling-Smee agrees. "What I regret is that we didn't find a way of persuading them to be tough on the fiscal side. But there was not any more leverage we could have brought to bear." However, Augusto Lopez-Claros, former IMF resident representative in Moscow, argues that the fund had enormous influence and could have stopped disbursing loans. Instead, it continued to give support, ignoring Russia's failure to raise more revenues and reduce controversial tax breaks. It also ignored abuses, including controversial loans-for-shares schemes in 1995-97 by which state assets were sold to insiders in cut- price deals. For many critics, that reflected pressures for continued lending including direct lobbying by Mr Chernomyrdin to Mr Camdessus, against a backdrop of the "Bill and Boris show" of support by then President Bill Clinton for his counterpart Boris Yeltsin.

"The IMF was always hoping that fiscal adjustment was just around the corner," says Mr Lopez-Claros. "But this strategy did not work, and over time the government accumulated $22bn of debts to the fund, which would be a heavy burden on the Russian population and impose constraints on other, sometimes vital, areas of spending." If the IMF's focus on exchange rate policy has since diminished and its experience broadened, its recent loan to Turkey with heavy US endorsement suggests the political context in which it operates has not. The August 1998 crisis was a lesson for Russia's political class which has since implemented on paper the fiscal responsibility demanded by the IMF. But President Vladimir Putin's insistence on rapidly paying down Russia's foreign debts also means IMF leverage in steering future economic policy in the country has diminished still further.
Source: Financial Times

Of course Russia is rather a special case, the 'transition countries' need to be treated in a category of their own. But the muddle about whether to support or not support fixed rates rings true, as does the poor information quality and the lack of political resolve to tackle a government head on. The most serious of the problems has to be real information quality. Most of the societies with which the IMF gets involved are not especially 'information friendly', normally the corruption is enormous, and maybe the IMF execs and resident representatives just don't have the worldy wisdom and 'street knowledge' to see through the spin.

No comments: