The IMF Institute Courier, Summer 2006, Volume 11 by intlmoneyfund


									Providing economics training to officials of IMF member countries and IMF staff

the imf institute
Summer 2006 • vol 11

The response rate of 58 percent was the highest since such surveys were begun in 1995 (up from 53 percent in 2003 and 33 percent in 1998). Harris reports that such a significant response rate—high for a survey of this type—is likely indicative of the large involvement of member organizations in the IMF and their appreciation
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Training Survey Shows Rising Demand and Satisfaction
Franklin Havlicek and Caryl McNeilly
The IMF Institute continually evaluates the effectiveness of its training programs through internal and external evaluations. An independent research firm recently conducted a survey to assess training programs organized by the IMF Institute over the last three years and the future training needs of IMF member countries. The response rate was significant and the results are very positive. The survey showed a high degree of satisfaction with current training, and a continued increase in demand for training in more specialized topics as well as in core macroeconomic and statistical areas.


he survey was conducted by Harris Interactive between January and March 2006. Questionnaires were sent to the 516 central banks, ministries of finance, statistical and other government agencies in 179 countries that had sent participants to IMF Institute training during 2003, 2004, and 2005.

Warsaw Conference Considers Impact of EU Enlargement
Clinton Shiells
The enlargement in May 2004 brought a number of countries with relatively low-income levels into the European Union, and equalizing incomes will almost certainly involve labor flows from east to west and capital flows from west to east. Anticipating the costs and benefits of factor flows will be important so as to be able to allay concerns when they are exaggerated and smooth the process. To encourage better understanding of these trends and appropriate policy responses, the Joint Vienna Institute (JVI), the IMF Institute, the IMF European Department, and the National Bank of Poland gathered academicians and policymakers to discuss EU enlargement issues at the National Bank, in Warsaw, on January 30–31, 2006.
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IMF First Deputy Managing Director Anne Krueger addressed the Warsaw conference.

Contents Training Survey Shows Rising Demand and Satisfaction Franklin Havlicek and Caryl McNeilly Warsaw Conference Considers Impact of EU Enlargement Clinton Shiells Is the Investment Climate Fostering Sustainable Growth in Africa? Jean-Francois Ruhashyankiko The IMF Helps Members Prepare for a Possible Avian Flu Pandemic David S. Hoelscher STI Hosts First Meeting with Asia and Pacific Training Managers Joshua Greene and Ling Hui Tan Joint IMF-Arab Monetary Fund Regional Training Program Extended Ralph Chami and Abdelhadi Yousef Reflections on the Joint Vienna Institute— a Center in Transition Pamela Bradley The Macroeconomic Consequences of Remittances Ralph Chami and Michael Gapen The Net Worth Approach to Fiscal Solvency and Sustainability Mercedes Da Costa and V. Hugo Juan-Ramón

from the director
1 1 The IMF Institute’s main mission is to provide training on the formulation and implementation of macroeconomic and financial policies to officials of member countries. To ensure that it continues to meet the needs of member countries, the Institute continually evaluates its effectiveness through internal and external evaluations. An independent research firm recently conducted a survey to assess both training programs organized by the Institute over the last three years and IMF member countries’ future training needs. Franklin Havlicek and Caryl McNeilly report on the survey’s high response rate and positive results. High-level seminars have proven to be an effective way to bring together academicians and policymakers to discuss issues of current importance. Two recent high-level seminars focused on significant regional issues: With the enlargement of the European Union (EU), labor flows from east to west and capital flows from west to east in Europe seem inevitable and will play a role in raising incomes in the new member countries. The effects of such factor flows have, however, given rise to debate and controversy. In January 2006, a high-level seminar was held in Warsaw, Poland, to explore the factor flow implications of EU enlargement and the appropriate policy responses. Clinton Shiells summarizes the conference highlights. In Africa, many countries have made substantial progress toward macroeconomic stabilization; and growth, overall, has picked up. But Africa has not managed to attract the large inflows of private fixed investment that would ensure sustained high-quality growth and poverty alleviation. In February 2006, the IMF Institute held a high-level seminar in Tunis, Tunisia, to discuss what government policies could do—and, also, what they should refrain from doing—to foster conditions for increased private investment. Jean-Francois Ruhashyankiko reports on views that emerged. The IMF seeks to help member countries anticipate issues of global importance. As concern about the possibility of an avian flu pandemic in the human population increased, the IMF established an interdepartmental task force to identify and implement a strategy for helping members to minimize the output costs of a potential disruption of financial systems. David Hoelscher provides details on this strategy, which has been the subject of a series of regional seminars organized with the help of the IMF Institute. There have been a number of interesting new initiatives in our regional training centers: • The IMF-Singapore Regional Training Institute (STI) hosted its first meeting with training managers from the Asia and Pacific region, as part of the Institute’s efforts to maintain the quality and relevance of training for the IMF member countries that the STI serves. Joshua Greene and Ling Hui Tan report on the outcome of this meeting. • The Joint IMF-Arab Monetary Fund agreement on the Regional Training Program (RTP) in Abu Dhabi, United Arab Emirates, has been renewed for a further four years. Ralph Chami and Abdelhadi Yousef describe the new facilities and initiatives at the RTP. • As her term as Director of the Joint Vienna Institute (JVI) in Vienna, Austria, comes to an end, Pamela Bradley reflects on the JVI’s transformation from a temporary training center to a permanent institute. The IMF Institute continues to place importance on research to support curriculum development and inform our teaching. In this issue, Ralph Chami and Michael Gapen discuss the macroeconomic consequences of remittances, and highlight the policy trade-offs faced by remittance-dependent countries. Also in this issue, Mercedes Da Costa and Hugo Juan-Ramón address the question of the appropriate indicators to assess the sustainability of fiscal policy, and the corresponding criteria to determine public sector solvency.








ORDERIng InfORmaTIOn The Imf Institute Courier is published twice a year by the International monetary fund. It is distributed to former participants, participant sponsors, and member government agencies and institutions at no charge. available in hard copy and on institute. Write to the Editor at to be added to the mailing list. address all correspondence to: Editor Imf Institute, Room mSC HQ2-4-001 International monetary fund Washington, D.C. 20431, U.S.a. or call 202-623-6660 CREDITS Editor: martha Bonilla Design: Luisa menjivar Art Editor: Lai Oy Louie Production: Bob Lunsford, Imf multimedia Services Division Photography: Imf Photography Unit; Tomasz Borkowski (pp. 1, 4); ali Daibe (p. 6); Louis Lim (p. 8).

Leslie Lipschitz Director, IMF Institute

Training Survey Shows Rising Demand and Satisfaction
(continued from page 1)

for the opportunities and benefits provided Satisfaction with IMF Institute Training Programs by the IMF Institute. This is supported by the 97% notable level of satisfaction (97 percent) with 2006 72% Institute training, also the highest ever, with 72 percent of respondents expressing “strong” 91% satisfaction. These positive results seem to con2003 61% firm the effectiveness of the Institute’s efforts in recent years to adapt the curriculum to the 92% changing training needs of officials in IMF 1998 56% member countries. Training Demand Growing. The IMF 0 20 40 60 80 100 Institute training program has been expanded worldwide both in the number and variety Total satisfied (strongly or somewhat) of offerings since the last survey in 2003. Strongly satisfied Nonetheless more than two out of three agenResponse to survey question, ‘Overall, our organization is satisfied with our IMF Institute experience’ (”Total Agree [Strongly/somewhat] and Strongly Agree”) cies surveyed expect their need for Institute training courses to increase further over the next five core courses on financial proyears (2006–10). Nearly gramming and policies, short seven out of ten respondents seminars for high-level offi(69 percent) expect their cials on current issues, and “The survey demand for training at IMF technical courses in macroHeadquarters in Washington economic statistics. showed a to increase, while additional Training Benefits high degree of demand at IMF Institute Identified. The survey regional training centers included several quessatisfaction with ranged from 63 to 82 percent.1 tions about how IMF traincurrent training, (See also article on “STI Hosts ing contributes to building First Meeting with Asia and capacity in member countries. and a continued Pacific Training Managers” in Respondents overwhelmthis volume.) ingly agreed that the trainincrease in Training Needs Clarified. ing: Helped participants do demand for Future demand for specific their jobs better (95 percent); topics was also assessed by Enhanced their understanding training in more the survey. Among a list of of the IMF and its work specialized topics nine major course categories, (94 percent); and Improved increased demand was reportthe way their staff formulates as well as in core ed in all categories by about and implements policy 50 to 75 percent of respon(91 percent). In addition, macroeconomic dents. The sharpest increase, 70 percent of organizations and statistical according to respondents, will responding to the survey said be for the newer specialized that officials had been given areas.” courses in macroeconomic added responsibilities or topics (such as inflation tarpromotions as a result of geting, macroeconomic diagtheir Institute training. nostics, and macroeconomic * * * forecasting) and macroeconomic management, as well as specialized monetary and finanFranklin Havlicek is Deputy Chief of the IMF cial courses and public finance courses. But Institute’s Administrative Division, and Caryl demand also remains strong for the traditional McNeilly is Assistant to the Director.


survey covered training at IMF Headquarters as well as the Institute’s regional centers in Austria, Brazil, Singapore, Tunisia, and United Arab Emirates. It did not cover the China Training Program, which serves officials of that country only.


Warsaw Conference Condiders Impact of EU Enlargement
(continued from page 1)

rates on investment-location decisions. Two presentations, by Claudia Buch (University of Tübingen) and Dalia Marin (University of Munich), documented the extensive use of outsourcing and offshoring by German and Austrian firms. These were followed by a survey by Elhanan Helpman (Harvard University) of new theories of trade and factor flows and an empirical study by Poonam Gupta and Ashoka Mody (IMF European Department) of possible complementarities between these flows. The final panel session summarized the main views expressed by conference participants: • Labor flows since enlargement have been much smaller than projected. Flows to the United Kingdom and Ireland have been larger than to other destinations because of fewer restrictions, better labor market conditions, and more flexible institutions that allow better use of labor inflows. Possibly because of restrictions, labor flows to the other EU-15 countries have so far been small, even relative to standard estimates suggesting that migration may reach about 3 percent of new members’ (and about 1 percent of old members’) populations. Removing restrictions on labor inflows to other EU-15 members would probably therefore elicit relatively small flows— especially compared with those originating outside the EU. • An important basis for popular antagonism to labor inflows is the perception that migrants could overwhelm domestic welfare systems. In this connection, limitations on access to welfare systems—along the lines of policies in the United Kingdom—make sense. • The analysis of factor flows requires a global, rather than a purely European, perspective. Given the huge amount of global trade, foreign direct investment, and insourcing and outsourcing of intermediates, there are increasingly new opportunities for wage arbitrage for different skill categories between individual national labor markets. Thus, wage relativities are being influenced significantly in global markets. Attempts by one country or cluster of countries to set high reservation wages, reduce wage dispersion, or introduce social policies aimed at achieving more egalitarian income distribution would thus likely be detrimental to growth, employment, competitiveness, and investment in human capital. • There is compelling evidence that German and Austrian firms have improved their

At the Warsaw conference, right to left: Dalia Grybauskaité (European Commission), Dalia Marin (University of Munich), Karl Pichelmann (European Commission), and Michael Devereux (University of Warwick).


he conference was opened by Leszek Balcerowicz, President of the National Bank of Poland, and Susan Schadler, Deputy Director of the IMF European Department. A final panel session, summing up the conference, was chaired by IMF Institute Director Leslie Lipschitz and included Marek Belka (former prime minister and finance minister of Poland), Lajos Bokros (former finance minister of Hungary), André Sapir (principal author of An Agenda for a Growing Europe, the “Sapir Report”), and Erik Berglöf (Chief Economist of the European Bank for Reconstruction and Development—EBRD). IMF First Deputy Managing Director Anne Krueger gave a dinner speech on the history of EU integration and the need to nurture trade creation and avoid trade diversion.

Conference Highlights
The conference began with a review by Tim Hatton (University of Essex and Australian National University) and George Borjas (Harvard University) of historical episodes of large migration and their effects on labor markets. It continued with a presentation by Tito Boeri (Bocconi University) of estimates of potential labor flows resulting from EU enlargement and a discussion of the public’s concerns by Christian Dustmann (University College London). Philip Lane (Trinity College, Dublin) and Gian Maria Milesi-Ferretti (IMF Research Department) then described the large foreign direct investment flows from old to new members, and Michael Devereaux (University of Warwick) talked about the influence of tax


competitiveness—particularly in the face of skill shortages—by using labor inputs from the new EU members. In this emerging “war for talent,” firms in the capital-rich old members are employing migrants domestically but also, to an even greater extent, outsourcing and offshoring intermediate inputs. • With respect to capital mobility, converging institutions and substantial differences in capital-labor ratios are bound to elicit huge flows into the new member countries. A degree of vulnerability associated with substantial capital flows is intrinsic to the capital-flow-driven convergence process. Some conference participants, however,

thought that capital account volatility would be mitigated insofar as flows were being driven mainly by long-term investment decisions. • Tax policies can influence the amount and location of investment. Conference participants, however, showed little enthusiasm for
strict tax harmonization.

(The conference program and papers are available on the JVI website, * * * Clinton Shiells is Deputy Director of the Joint Vienna Institute.

Is the Investment Climate fostering Sustainable growth in africa?
Jean-Francois Ruhashyankiko
Many African countries have made substantial progress toward macroeconomic stabilization but still fail to experience private investment flows that are strong enough to sustain high-quality growth and achieve large reductions in poverty. These countries are now left to wonder: What are the sufficient conditions for sustaining economic growth? How can Africa realize its potential for large and ongoing flows of profitable investment? Senior African officials and outside experts discussed these issues at a high-level seminar.


he seminar was organized by the IMF Institute under the auspices of the Joint Africa Institute in Tunis, Tunisia, on February 28–March 1, 2006. It included presentations by experts from international financial organizations, academia, and the African investment community. About 50 African officials from 30 countries—selected mainly from the ranks of ministers, heads of investment promotion agencies, and senior officials from revenue authorities—participated actively in the discussions. This article reports on the views that emerged. A consensus surfaced that African countries have the potential to realize profitable investment and sustain high-quality growth. The continent’s abundant natural resources and supply

of labor offer the prospect of very high returns on capital, and, indeed, evidence from stock market returns suggests that several African countries have among the highest rates of return in the world. Adjusted for risks and the various costs of doing business, however, returns on investments in many areas are currently too low to stimulate widespread entrepreneurship. These risks and costs are often linked to the pervasive negative effects of weak governance. The other major obstacles to investment in Africa, identified by the seminar participants, included poor infrastructure, burdensome tax systems, and inadequate access to finance. Participants agreed that countries need to figure out the key binding constraints on their economies and focus on lifting them. Based on

Senior officials and experts meet to discuss how to realize Africa’s potential for profitable investment.

the World Bank’s survey data, this would imply tion, the partnership arrangements need to that policymakers in Africa should improve ensure that private returns are commensurate infrastructure, streamline regulatory requirewith the financial risks borne by the private ments, simplify tax systems, partners. There should be and diversify access to genuine risk transfers from finance. Better infrastructhe public to the private secture and efficient regulations tor, with limited government would contribute importantly guarantees. “African countries to reducing the costs of The seminar unearthed inputs used in the producsome interesting success have the potential tion of goods and services stories in promoting venture to realize profitable and would raise the returns capital, microfinance, and on private investments. The public-private partnerships investment and simplification of tax systo improve infrastructure. sustain hightems would alleviate a major There was, however, a feeling obstacle to entrepreneurship that more needed to be done quality growth. The and the establishment of forin these areas, that the simmal businesses. And greater plification of tax systems was continent’s abundant access to finance is essential also particularly important, natural resources if African countries are to and that success in genermake substantial progress ating sustainable growth and supply of labor in establishing a genuine depended critically on good offer the prospect of culture of venture capitalism governance, strong pro-busiand entrepreneurship. ness leadership, and political very high returns In addressing approaches commitment. on capital.” for strengthening infrastructure, seminar participants (The seminar program and focused on an increasingly presentations are available at popular set of funding tures that involve private finance initiatives or public-private partner*** ships. Under such arrangements, the government needs to ascertain in the planning stage Jean-Francois Ruhashyankiko was an Economist that social returns on investments exceed the in the IMF Institute’s African Division at the time returns that accrue to private partners. In addiof this writing.


The Imf Helps members Prepare for a Possible avian flu Pandemic
David S. Hoelscher
Concern about the possibility of an avian flu pandemic in the human population has increased as infections in bird populations have spread from Asia to much of Europe and to Africa. While human infections remain rare, as the H5N1 avian virus strain is not transmitted easily from birds to humans, about half of all human infections have been fatal. Health experts therefore remain concerned that if the virus becomes transmittable to humans, it could have a significant impact on a substantial portion of the world’s population. The IMF is helping member countries prepare their financial sectors for a possible pandemic.
he IMF’s efforts in this arena complement those of other organizations such as the World Health Organization (WHO) and the U.S. Centers for Disease Control and Prevention (CDC). These efforts focus primarily on helping members strengthen business continuity planning, including planning for possible sharp rises in absenteeism attributable to a pandemic. The IMF is well positioned to collect information on emerging practices from members that are most advanced in continuity planning and to share this with officials of countries at an earlier stage of preparedness. The IMF has established an interdepartmental task force to identify and implement a strategy for helping member countries.1 The strategy has four elements: • Publication of a paper on the global economic and financial effects of a possible avian flu pandemic. The paper, which consists of a distillation of the elements of business continuity plans for an avian flu pandemic, is posted on the IMF’s external website.2 • Asking IMF missions to discuss preparations in member country’s financial sectors, using a standardized format for questions, in the course of their normal mission work. • Holding a series of regional seminars in which participants share knowledge and experience in preparing financial systems for a possible pandemic. Of the five regional seminars presented to date, three were hosted at the IMF Institute’s training facilities in Singapore, Tunis, and Vienna; one was hosted by the Reserve Bank of South Africa; and the fifth was held at IMF Headquarters. The seminars


brought together representatives from health organizations, business continuity managers from global private financial institutions, and representatives from both central banks and supervisory authorities. Participants exchanged views about how business continuity planning should be modified in light of the potential for an influenza pandemic. • Standing ready to respond to requests for targeted technical assistance on financial sector business continuity planning. There is, of course, a high level of uncertainty about both the possible evolution of a pandemic and its potential economic and financial effects. The WHO has stressed that it cannot predict if or when the current avian virus may become easily transmittable among humans. However, the WHO does consider that, once a virus mutates into a form that allows for efficient human-to-human transmission, a pandemic will emerge quickly because of the high global mobility and interconnection of the human population. The economic impact of an avian flu pandemic is equally difficult to quantify—given the many uncertainties about its possible timing and severity and the public’s response. To limit contagion from a rapidly spreading lethal flu strain, countries may impose travel and trade restrictions. Economic activity may fall sharply as people avoid public spaces and social contact. Markets may also overreact, resulting in asset price volatility and worsening the economic impact. The severity of the economic impact will depend on the pandemic’s infection and fatality rate, its duration, and the capacity of the health care system. The most likely economic


task force is composed of representatives from the IMF’s European, External Relations, Finance, Fiscal Affairs, Human Resources, International Capital Markets, Monetary and Financial Systems, Policy Development and Review, and Research Departments. 2

outcome would be a sharp but short-lived drop in output, followed by a quick recovery. Business disruptions could come from possible labor shortages resulting in disruptions to energy supply, payment systems, and telecommunication networks. The IMF is not trying to become an expert in either avian flu or continuity planning. Its contribution thus far involves helping member countries anticipate and minimize possible dis-

ruptions that may occur should the avian flu pandemic strike. In part this entails setting up mechanisms for critical financial operations to be run without requiring participants and facilitators to cluster in population centers. * * * David S. Hoelscher is Division Chief of the Systemic Issues Division in the IMF’s Monetary and Financial Systems Department.

STI Hosts first meeting with asia and Pacific Training managers
Joshua Greene and Ling Hui Tan
The IMF-Singapore Regional Training Institute (STI) convened its first meeting with training managers from the Asia and Pacific region in April to discuss the STI’s activities and selection procedures.


he STI’s first meeting on training was initiated as part of the Institute’s efforts to maintain the quality of STI training and its relevance to the 43 economies in Asia and the Pacific the STI serves. On April 27 and 28, 2006, some 36 officials from 24 countries met with Institute and STI staff and officials from Singapore’s Ministry of Foreign Affairs (MFA). While the Institute and STI staff regularly update the STI’s course offerings and procedures, there was broad agreement that a general meeting with training officials could serve many purposes: The Institute and STI staff wanted to review nomination procedures and admissions criteria with country officials and to receive their comments on STI’s curriculum, including courses held outside Singapore. A general meeting would also enable training officials to meet the STI’s Singaporean partners and learn about the MFA’s Singapore Cooperation Programme. In the meeting’s first session, STI Director Mr. Sunil Sharma reviewed the STI’s mission and activities in the context of the Institute’s global training role. Mr. Sharma explained the Institute’s organizational structure and discussed trends in the number of STI participants and the distribution of training events across subject areas. He also reviewed recent Institute training surveys (see article on “Training Survey Shows Rising Demand and Satisfacion,” in this volume), noting high satisfaction with and expected continued heavy demand for Institute and STI training, particularly in financial sector

Training directors listen closely to a description of the STI curriculum.

issues and more advanced macroeconomic management. During the second session, Ms. Ling Hui Tan, Deputy Chief (In Charge) of the Institute’s Asian Division, reviewed the STI’s curriculum. She described the wide range of macroeconomics and finance courses, including courses on financial programming and policies (FPP), macroeconomic management, fiscal policy, inflation targeting and exchange rate policy, macroeconomic forecasting, financial market analysis, new financial instruments, and banking crises. She also mentioned courses offered by other IMF departments, and new training events, including the high-level seminar on crisis prevention in emerging markets in July 2006 and a two-week course on macroeconomic diagnostics planned for late 2007.


In the third session, Mr. Joshua Greene, STI’s Deputy Director, reviewed admission procedures for STI’s training events. He explained how participants are selected for STI events—either by application or by nomination—and for national and regional courses outside Singapore. Mr. Greene emphasized the importance of job relevance, academic qualifications, and, for courses conducted at the STI, English fluency. He highlighted the specific computer skills needed for courses on FPP, financial market analysis, and macroeconomic forecasting. He also reviewed the rules about eligibility for those who have attended previous STI and other Institute training events, including the prohibition against taking the same course twice. Country training officials welcomed the chance to discuss the STI’s activities and exchange information on their own selection procedures. While pleased with the STI’s activities, they also raised specific concerns. • Training directors recommended making the course descriptions and course eligibility requirements in the STI’s brochure more precise. • To provide additional exposure of their officials to financial programming, several directors requested “training of trainers” programs, which would allow pre-course training of those going to the STI and in-country training for non-English speakers. • Directors requested additional training on a variety of specific topics, including risk and debt management and fixed income markets. • Several directors suggested introducing a distance learning FPP course and short (1–2 day) policy seminars for senior officials, although STI staff explained this would be difficult owing to the high cost involved. • Training directors desired advance notice of courses by nomination and more information about participant selection decisions. Besides noting course requests and plans to diversify the subjects of national and regional courses, the Institute and STI intend to: • Work with country officials to maintain a current list of training officials at key agencies in their countries, to be posted on an accessible website. • Secure broad dissemination of training information among designated national agencies and enable training directors to request email notification of application deadlines and information about new training events, including events by nomination. • Clarify the descriptions and qualifications needed for training events and include ques-

tions about computer skills on course application forms. • Inform sponsors and training directors automatically about application outcomes. • Improve the design and content of the STI website, to include course descriptions and the most recent program and reading list for each course. • Provide occasional “training of trainers,” to facilitate in-country activities that offer additional exposure to financial programming for those attending STI courses and training for those unable to attend because of language barriers. This first meeting between IMF staff and training directors from the region helped to improve their working relationship, clarify specific concerns from both sides, and plan for improvements in the STI’s activities and selection procedures. There was widespread support for holding a meeting on training issues once every two to three years. * * * Joshua Greene is Deputy Director of the IMFSingapore Regional Training Institute, and Ling Hui Tan is Deputy Division Chief (In Charge) of the IMF Institute’s Asian Division.

IMF Institute High-Level Seminar
The IMF Institute and the Singapore government will be organizing a high-level seminar on Crisis Prevention in Emerging Markets at the IMF-Singapore Regional Training Institute (STI) during July 10–11, 2006. It will bring together an extraordinary group of economists and policymakers from around the world to examine the issues and modalities related to crisis prevention in emerging markets. The seminar will:
• distill the lessons learned from recent

• discuss the problems created by open

capital accounts for macroeconomic and financial policymaking; • analyze the issues raised by sovereign self-insurance, regional reserve pooling arrangements, and preemptive financing for countries; and • explore the challenges ahead for crisis prevention and the role of the IMF.

Joint Imf-arab monetary fund Regional Training Program Extended
Ralph Chami and Abdelhadi Yousef
The joint IMF-Arab Monetary Fund (AMF) Regional Training Program (RTP) opened its doors in May 1999 in Abu Dhabi, United Arab Emirates. The RTP, which was initially to operate for a period of three years, was subsequently renewed: in 2001 for a period of four years, and again in 2005 for a further four years.


he primary focus of the Regional Training exchange of letters between the IMF Managing Program has been on expanding economic Director and the AMF Director General and training for officials of member countries Chairman of the Board. The renewed agreement of the IMF and the AMF in incorporates a number of the Middle East and North modifications to the Joint Africa. It offers courses that Memorandum on Selection cover a wide range of topics and Course-Related including macroeconomic Procedures for Participants, management and policies, in order to further stream“I am pleased . . . that financial programming, line the selection process the Regional Training macroeconomic statistics, as well as to improve the financial sector issues, fisquality of participation in Program between cal policy issues, as well as these courses. In addition, our two institutions seminars on topical issues the AMF is upgrading the for high-level officials. training facilities to support has been a success, Courses are given in Arabic more specialized courses and I welcome its and English (with simulat its Economic Policy taneous interpretation into Institute (EPI). Phase I of continuation for the Arabic). The IMF Institute the upgrade, which took benefit of our member collaborates with other place during 2005, involved IMF technical assistance renovating the three breakcountries and their departments (Statistics, out rooms so that each Fiscal Affairs, and Monetary room could accommodate training needs.” and Financial Systems) in 12 participants, as well as offering these courses and equipping each room with Dr. Jassim Al-Mannai seminars. three computers. During Director General and During 1999 through Phase II, to be concluded by Chairman of the Board 2005, the RTP offered a the end of June 2006, the Arab Monetary Fund total of 61 activities, providAMF will install 12 computing training for about 2,000 ers in each of the breakout officials from Arab counrooms, and all computers tries. The number of activiwill be linked and have ties increased from about Internet access. After com10 during 2002–03 to an average of 12 during pletion of Phase II, the IMF Institute will be able 2004–05, and the number of officials trained to offer some of its quantitative and computer during 2004–05 increased by about 30 percent. intensive courses at the RTP. Also, four seminars for high-level officials were *** offered under the RTP. Ralph Chami is Division Chief and Abdelhadi The Memorandum of Understanding (MOU), Yousef is Deputy Division Chief of the IMF extending the program a further four years Institute’s Middle Eastern Division. until April 30, 2010, was signed through an


Reflections on the Joint Vienna Institute— a Center in Transition
Pamela Bradley
The Joint Vienna Institute (JVI) is an international training institute located in Vienna, Austria. It was launched in 1992 by five international organizations and the Austrian authorities to respond rapidly to the large demand from economies in transition to train officials in market economics and the free enterprise system. Pamela Bradley, who has been Director of the JVI since 2001, will be leaving this June. Below are reflections on her tenure.
Managing Director Horst Koehler, Austrian Finance Minister Karl Heinz Grasser, and OeNB Governor Klaus Liebscher. With such important impetus, negotiations led quickly to final agreement on an MOU that was signed in a ceremony at the Ministry of Finance on March 13, 2002. The new MOU ensured the future financing of the JVI, provided for a new JVI facility, and outlined a governing structure that fully reflected the new financial arrangements. The next task was to build the JVI’s new facility—to be financed by the Austrian authorities. The location was chosen, and I worked closely with the Austrian architectural and building company to ensure that the new facility would meet current and future needs of the JVI. Our objective was to build a facility that would enhance the current training environment and be flexible enough to meet future needs. During the design and building process, the staff of the JVI provided invaluable input. These staff members had worked at the JVI since it was established in 1992, and they knew what worked and what did not. Our information technology (IT) staff, our course administrators, and our interpreters all contributed their expertise to ensure that the new JVI facility would be “state of the art.” Watching the new JVI building take shape was one of the most satisfying experiences of my career, and one that I will long treasure. The opening of the new JVI in May 2003 prompted the need for an official ceremony to show off the new space and to thank the Austrian authorities for their financial commitment. Accordingly, in November 2003, the JVI hosted a Gala Opening for more than 250 official guests. Complete with a red carpet entrance, a wind quartet to welcome guests, live video cameras projecting the events onto flat screens positioned throughout the building, a steady parade of hors d’oeuvres from around the world, and a “Sky Bar” on the top floor, it was an event worthy

Pamela Bradley, Director of the Joint Vienna Institute.


f the sign of a successful training institute is its ability to change to meet the needs of its clients, then the Joint Vienna Institute (JVI) certainly qualifies as a success. It has been my pleasure and honor to be a part of the JVI for the past eight years—first as an Advisor (1998–2001) and then as Director (2001–06)—as it made the transition from a temporary training center, sharing space with the Austrian Customs Training School, to a permanent institute with its own teaching and participant housing facilities in the heart of Vienna. As Director, my first responsibility in 2001 was to work with my counterparts in the Austrian National Bank (OeNB) and the Ministry of Finance to negotiate a Memorandum of Understanding (MOU) that would remove the JVI’s “sunset clause” and make it permanent. We were fortunate in that the directive to reach agreement came from the top—IMF


of marking the JVI’s new, permanent status. After opening remarks, Messrs. Koehler, Grasser, and Liebscher joined in cutting the ribbon to officially open the JVI, followed by a presentation of the “Key to the JVI” to the Director. With the new JVI facility up and running, attention turned to a review of the JVI’s curriculum. Under the leadership of Leslie Lipschitz, Director of the IMF Institute, the JVI hosted a brainstorming seminar in Vienna with representatives of the OeNB, the Ministry of Finance, local research institutes, the National Bank of Hungary, and the European Commission. The brainstorming session focused on the changing training needs of member countries—and how best the JVI can meet them—after more than a decade of transition. As a result, the JVI revised and shortened its ten-week Applied Economic Policy course for young officials to make it more relevant to current transition issues, and a number of new courses were designed by the IMF Institute for training at the JVI. The session also led the JVI Board to approve some non-teaching initiatives designed to further enhance the profile of the JVI in

Vienna and in its target countries. These included cosponsorship of a high-level seminar on “Labor and Capital Flows in Europe Following Enlargement,” in January 2006 (see article on “Warsaw Conference Considers Impact of EU Enlargement” in this volume); introduction of a monthly lunchtime series of Research Seminars on Macroeconomic and Structural Issues; and a small research conference in conjunction with a European partner in June 2006. As I prepare to leave the JVI at the end of June, I am confident that it is a solid institution with a tremendously competent staff, prepared to host seminars on specialized topics for participants from a broad spectrum of countries. I will carry with me warm memories of Vienna, JVI staff, JVI participants, and the beautiful transition countries that I was fortunate enough to visit during my tenure. (The JVI can be accessed at http:/ / * * * Pamela Bradley is Director of the Joint Vienna Institute.

The macroeconomic Consequences of Remittances
Ralph Chami and Michael Gapen
Recent studies estimate that remittance flows to developing countries may be as high as $250 billion. In many developing countries remittances have now surpassed other official and private capital flows combined. While many studies have looked at the microeconomic and behavioral characteristics of remittances, little attention has been given to their macroeconomic consequences. Remittances can play an important role in poverty reduction, but we find that, even though they may cushion demand during cyclical downturns, they can magnify business cycle volatility; this has important implications for government policy choices.


ecent studies estimate that officially recorded remittance flows to developing countries were $167 billion in 2005,1 a figure that rises to $250 billion if estimates of unrecorded remittances are included. Indeed, the magnitude of remittances in many developing countries has overtaken official development assistance (ODA), private equity flows, and foreign direct investment, and their rate of growth is outpacing that of official and private capital

flows. In a recent IMF Working Paper, coauthored with Thomas Cosimano (University of Notre Dame),2 we examine how the behavior of economic variables differs in remittance-dependent economies, and highlight the policy tradeoffs faced by these countries. Our study uses a stochastic dynamic general equilibrium model with money and distortionary government policy to investigate the effects of remittances on the conduct of fiscal and

Bank, 2006, Global Economic Prospects: Economic Implications of Remittances and Migration (Washington). Ralph, Thomas F. Cosimano, and Michael T. Gapen, 2006, “Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances,” IMF Working Paper 06/61 (Washington: International Monetary Fund).

monetary policy. To remain consistent with the findings from recent microeconomic studies of remittance behavior, remittances in our model are altruistically motivated. That is, remitters care about the well-being of family members in the home country and increase remittances during economic downturns in the recipient economy. This implies that remittances are countercyclical income transfers to households.

Remittances Can Heighten macroeconomic Volatility
In our macroeconomic setting, we confirm many of the positive aspects of remittances frequently cited in the microeconomic literature. Not only do remittances raise household consumption of both goods and leisure, the countercyclical nature of remittances provides insurance against business cycle shocks to household income. Our study therefore confirms the widespread belief that remittances can play an important role in poverty reduction and in improving living standards. We also show, however, that remittances generate an externality that has to date gone unnoticed. Remittances may indeed cushion demand-side shocks, but they tend to exacerbate supply-side disturbances. The presence of remittances raises the correlation between labor supply and domestic output, thereby increasing output volatility and amplifying the business cycle. This finding overturns claims made by other researchers that remittances should reduce business cycle volatility, not increase it. If the economy receives a positive productivity shock, for example, domestic income increases through the effects of higher productivity in the production function. The increase in domestic income results in lower remittance transfers since they are countercyclical. The household, which is interested in smoothing consumption, responds to the reduction in remittance income by increasing labor supply. Consequently, household labor supply becomes more procyclical when remittances are introduced, meaning that remittances have the undesirable effect of raising business cycle volatility. The increase in business cycle volatility also translates into higher risk in the labor market through higher wage and labor supply volatility.

important ways from nonrecipient countries. First, governments may have a more difficult time financing expenditures if remittances lead households to allocate significantly more time to leisure (e.g., to the extent that remittances are a disincentive to supplying additional labor). If the tax base is output related, any reduction in labor supply that leads to reduced domestic output means fewer resources for the government to finance the same level of spending. Policymakers may find themselves in a position in which some combination of higher taxes, debt, or money creation is necessary to clear the government’s budget constraint. We also show that remittances change the type and mix of government policy tools necessary for the optimal conduct of fiscal and monetary policy. The use of labor taxes tends to magnify the procyclicality of labor and output under remittances. Consequently, the government will find it optimal to reduce reliance on labor taxes and, instead, rely more heavily on consumption-based taxation. Otherwise, additional money creation may be necessary. We therefore conclude that governments that operate in remittance-dependent economies should have a sufficiently rich set of independent fiscal and monetary instruments to meet all of their objectives simultaneously. To sum up, we find that the benefits to the household from remittances outweigh the negative effects of increased volatility at the macroeconomic level. But we suggest that remittances introduce a more complex set of issues into recipient economies than previously imagined. Like private capital flows, remittances have both positive and negative effects. Therefore, not only do policymakers need to understand the impact of remittances on household decision making, they must also consider how the changing underlying economic patters influence, and are influenced by, government policy choices. We believe that the IMF Working Paper is a useful step in this direction. And in a forthcoming Occasional Paper (2007), we collaborate with Adolfo Barajas (IMF), Thomas Cosimano, Connel Fullenkamp (Duke University), and Peter Montiel (Williams College) to explore the full macroeconomic implications of remittances. * * * Ralph Chami is Chief of the IMF Institute’s Middle Eastern Division, and Michael Gapen is an Economist in the Asian Division.

Policy Implications for RemittanceDependent Economies
We show that optimal government policy in remittance-dependent economies will differ in


The net Worth approach to fiscal Solvency and Sustainability
Mercedes Da Costa and V. Hugo Juan-Ramón
The topic discussed in this article is part of an ongoing research agenda on fiscal policy sustainability, currently undertaken by the authors and colleagues in the IMF Institute’s Western Hemisphere Division. This agenda includes addressing questions such as what is the appropriate indicator to assess the sustainability of fiscal policy and the corresponding criteria to determine public sector solvency; how to assess the dynamics and long-run effects of some fiscal rules; how to design fiscal policy in a country rich in natural resources; what would be a “comfortable” level of public debt in emerging market economies and how to achieve convergence to that comfortable level when the interest rate exceeds the growth rate.


he assessment of the financial soundness of the public sector based on the debt-toGDP ratio ignores an important part of the government’s balance sheet: financial and nonfinancial public assets. A government that sells assets to reduce debt may exhibit an improvement to its financial position that is illusory, since nothing has changed but the composition of the government’s net worth. An assessment based on all government assets and liabilities allows for a more comprehensive analysis, although it presents conceptual and analytical challenges.

The net Worth approach to fiscal analysis
One important challenge is to define and measure the government’s net worth. In the private sector, the market value of a firm’s net worth—stockholder’s equity—directly reflects both the firm’s prospective earnings and the value of its recorded assets and liabilities. However, in the case of the government, there are no marketable shares, so net worth has to be measured indirectly using the recorded value of assets and liabilities and an estimate of prospective net revenues (revenues minus expenses). Contingent liabilities derived from guarantees on nongovernment debt also have to be included. Any government potential rights to assets or contingent assets should also be included. Together, they allow for a better assessment of the government’s capacity to pay its creditors. The IMF’s 2001 Government Finance Statistics Manual (2001 GFSM) provides a power-

ful tool to measure the government’s net worth and its changes during a given period. At any point in time, recorded net worth is the sum of nonfinancial and financial assets minus liabilities, measured at market value whenever possible. Changes in net worth are the result of transactions (revenues minus expenses) plus other economic flows, valuation adjustments, and asset losses or depletions. The 2001 GFSM properly differentiates revenue (e.g., taxes) from sales of assets (e.g., oil), and expenses (e.g., salaries) from acquisition of assets (e.g., investment in infrastructure). Based on the 2001 GFSM, it is possible to develop an analytical framework—the net worth approach—to capture the impact on government net worth of fiscal policy measures, interest payments on debt, GDP growth, depreciation rates of nonfinancial assets, rates of return on assets, and price changes. This approach can also be used to evaluate the impact of fiscal rules. One example is the “golden rule”: borrowing must be offset by investments to keep government’s net worth constant. Another example is an “investment fund” designed to capture proceeds from the sale of state-owned resources (such as oil) in financial assets.1 Because of the rigorous accounting conventions of the 2001 GFSM, prospective and contingent assets and liabilities are excluded, resulting in a partial measure of net worth. In view of this limitation, a more comprehensive indicator is proposed: the expanded net worth, defined as recorded net worth plus prospective assets minus prospective liabilities. Formally, the

authors have examined the characteristics of this rule and other such fiscal rules. For a comparison among rules under the 2001 GFSM framework, see Da Costa, Mercedes and Hugo Juan-Ramón, 2006, “The Net Worth Approach to Fiscal Analysis: Dynamics and Rules,” IMF Working Paper 06/17 (Washington: International Monetary Fund).



prospective asset can be defined as the present value of future tax and nontax revenues plus the present value of the net return on investments; likewise, the prospective liability is the present value of future non-interest expenses, as the government has an obligation to provide public goods and services.2 Of course, any valuation of contingent assets and liabilities depends critically on the probability of the contingencies occurring; it is probably beyond the scope of most such exercises to determine probability weights.

prospective assets; in this case, the expanded net worth should be equal to the recorded assets.3

Convergence to Solvency
At any point in time, the value of the expanded net worth may suggest that the government is insolvent as a result of unanticipated adverse shocks. However, in the long run, the government’s net worth should return to the value required for solvency. Convergence will take place either through changes in the market value of debt, changes in fiscal policy, or forced adjustment (e.g., default). The speed of convergence depends on the flexibility of fiscal policy and on the marketability of the debt. For example, if the government had difficulties in changing fiscal policy and the debt were nonmarketable, convergence from a negative to a zero or positive expanded net worth would take time. In this case, insolvency might persist and even be exacerbated in the medium term, but eventually there will be a forced adjustment, such as default. * * * Mercedes Da Costa is a Senior Economist and V. Hugo Juan-Ramón is Deputy Division Chief, both in the IMF Institute’s Western Hemisphere Division.

Sustainability Under the Expanded net Worth
Current fiscal policy is said to be sustainable if the government can satisfy its creditors without policy changes, that is, the government is solvent under current policies. In the context of the net worth approach, fiscal sustainability could be gauged by imposing the solvency condition that the expanded net worth be equal to or larger than zero. If the government’s creditors consider that all recorded assets are good collateral, recorded debt and prospective liabilities could be exactly backed by both recorded and prospective assets, yielding an expanded net worth equal to zero. If no recorded asset is committable as collateral, the recorded debt and prospective liabilities must be backed solely by

Da Costa, Mercedes, V. Hugo Juan-Ramón, and Evan Tanner, 2006, “The Expanded Net Worth” (forthcoming). that have no value as collateral still have economic value (e.g., highways, bridges, national parks), which is why they are counted in the recorded and expanded net worth.

New Global Course Catalog

2007 IMF Institute Global Course Catalog
for the first time, the Imf Institute will publish a single, comprehensive catalog of its global course offerings at Imf Headquarters in Washington, DC, and the Regional Training Centers in austria, Brazil, China, Singapore, Tunisia, and United arab Emirates.

2007 Course Schedule and Applications Available July 2006 at


imf headquarters participants
Financial Programming and Policies
This “flagship” course is designed for officials who analyze economic conditions, who provide advice on macroeconomic and financial policies, or who are involved in policy implementation.

In Spanish (January  – february 24)

In English (march 6 – april 21)

In french (may 1 – June 16)


imf headquarters participants
Financial Programming and Policies – Residential Segment
The Distance Learning fPP course addresses the needs of officials who are unable to attend long courses away from their jobs. Participants who successfully complete the ten-week distance segment attend the two-week residential segment at Imf headquarters.

In french (april 3–4)

In English (april 24 – may )


imf headquarters participants
Government Finance Statistics
This course assists government officials in the compilation of statistics in accordance with the Imf’s Government Finance Statistics Manual 2001. The methodology is harmonized with the 13 System of National Accounts.

In Spanish (february 21 – march 31)

Supervisory Challenges and Financial Stability
This course, designed for senior supervisory and regulatory officials in banking or insurance, provides a framework for discussing emerging challenges to financial supervisors associated with the changing financial landscape.

In English (may 1–12)


imf headquarters participants
Macroeconomic Management and Financial Sector Issues
This course is designed for mid- to senior-level officials involved in the formulation and implementation of policies for the financial sector or in the interaction of these policies with macroeconomic management.

In arabic (may 8–8)

Balance of Payments Statistics
This course provides training on the methodology for collecting and compiling balance of payments and international investment position statistics. The methodology is based on the fifth edition of the Imf’s Balance of Payments Manual.

In English (may 1 – June 23)


The macroeconomic management of foreign aid: Opportunities and Pitfalls
Edited by Peter Isard, Leslie Lipschitz, Alexandros Mourmouras, and Boriana Yontcheva


large increase in disbursements of official aid is envisaged over the next decade to help poor developing countries in Africa and elsewhere achieve the United Nations’ Millennium Development Goals (MDGs). The scaling up of aid follows commitments by the G–8 heads of state at Gleneagles in June 2005 and the subsequent cancellation, by the IMF and the World Bank, of 100 percent of the debt owed to them by a number of poor, highly indebted countries. This new IMF volume emphasizes that such a substantial increase in foreign aid will be necessary but not sufficient to meet the MDGs. Sound macroeconomic management of aid will also be crucial. The book is based on a seminar that brought together senior African policymakers, experts from universities and development think tanks, and representatives of the IMF, World Bank, and aiddonor community. It provides nine papers on key issues by experts on foreign aid and development, as well as an overview chapter that conveys many relevant insights that surfaced from lengthy discussions among the broader group of seminar participants. The following perspectives emerged: • Economic growth is the surest and fastest way to reduce poverty, but there is no simple relationship between foreign aid and growth. It is generally agreed that while rapid growth over periods of several years may be achievable without strong institutions, sustained growth over decades requires effective institutions to protect property rights and provide incentives for saving, investment, and entrepreneurship. Aid provided to countries with weak institutions and policies may help serve urgent humanitarian needs, but is unlikely to propel countries on to a sustainable path of high growth and lift them out of entrenched poverty. • Empirical studies presented at the seminar indicated substantial benefits from a front-loaded expansion in infrastructure spending together with constantly growing social spending. Spending on the former can bring relatively rapid growth benefits, but the benefits from social spending on education and health, for example, can have a relatively long gestation period. • Although aid has generated some remarkable successes—contributing to the reconstruction efforts of countries devastated by conflicts, averting humanitarian catastrophes in countries hit by natural disasters like drought or tsunamis, and eradicating diseases such as river blindness—large increases in aid, if not carefully managed, can also have adverse effects on international competitiveness and choke off the one proven channel of development, namely, growth through export expansion. • Adverse competitiveness effects arise when the allocation of aid strains productive capacity in certain sectors of the economy, putting upward pressures on prices and wages in the strained sectors that subsequently lead to higher costs in export sectors. • Given the implications of hitting capacity constraints, countries should not allow aid donors to crowd too much activity into “flavor-of-the day” sectors—not even into sensible priority sectors such as health or education. • Countries need to watch diligently for signs that aid may be having detrimental effects—e.g., for price and wage jumps in sectors producing nontraded goods and services and for declines in profitability and sales in export sectors. • African countries have considerable scope to expand production capacity and increase export competitiveness by improving infrastructure, reducing red tape and corruption, and increasing the efficiency of services for business. • The volatility and unpredictability of aid flows are big problems, often exacerbating cyclical swings in the economy. Donors should address those aspects of their behavior that contribute to these problems. They should also allow recipient governments to exercise a great deal of latitude in the timing of aid-financed expenditures, and to build reserves and fiscal cushions. • In sum, to maximize the benefits of aid, policymakers and aid donors need to be aware of the important complementarities between aid, policies, and institutions, and to be cognizant of potential macroeconomic hazards to avoid. The seminar was hosted by the Government of Mozambique in March 2005. It was organized by the IMF Institute and the IMF’s African Department with support from both the United Kingdom’s Department for International Development (DFID) and Germany’s Internationale Weiterbildung und Entwicklung gGmbH (InWEnt). Copies may be ordered from IMF Publication Services, E-mail: or Internet: http:/ /

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