Docstoc

IMF_Tanz

Document Sample
IMF_Tanz Powered By Docstoc
					    Tanzania and the IMF during
            the 1980s


           James Raymond Vreeland
Political Science Department, Yale University
        International Institute, UCLA
           Plan of the lecture:
   What is the IMF?
   Conventional story of why governments enter into
    IMF programs.
   Tanzania and the IMF in the 1970s.
   What happened in 1983? (No agreement – a
    strange case!)
   Why did Tanzania enter in 1986?
          What is the
International Monetary Fund?
   1944: 44 countries signed the Bretton
    Woods agreement
    – International Monetary Fund (stability)

    – World Bank (development)

   The “Bretton Woods” Institutions.
     The IMF was given 2 tasks:
1.   Monitor exchange rates.

2.   Act as “lender of last resort.”
    Monitor exchange rates
 Goldstandard – each currency’s value
 was ultimately backed up by gold.
 Required   high maintenance monitoring.
 Surveillance
             is still an important part of
 what the IMF does…
   But when the world shifted away from the
    gold standard in the 1970s, the old exchange
    system collapsed.
   The new system did not require intense
    monitoring.
   The IMF faced A CRISIS OF PURPOSE.
   Shifted its attention to the 2nd function.
          Lender of last resort
   Mitigate balance of payments crises by
    providing “loans.”
   This is intended to discourage
    competitive/destructive policies the are
    believed to have led to the Great
    Depression.
    – Trade barriers, competitive devaluations.
   Who is the IMF?


   Where do the resources for “loans” come from?
   Who is the IMF?
    – Currently 184 members.
    – Members have “votes” according to the size of their
      subscription to the IMF…
 Where do the resources for “loans” come from?
   Members provide a contribution (“capital
    subscription”) called the member’s quota
    denoted in SDRs
   The size of the quota is a function of the
    country’s economy:
           GDP
           current account transactions
           official reserves
Largest: USA (SDR 37,149.3 million). Smallest: Palau (SDR 3.1 million).
                 Quotas
 Determine    “vote share.”
  – US: 17%
  – G-7: 45%
(Canada, France, Germany, Italy, Japan, UK,
  + US)
So…as a lender of last resort,
   If a country gets into a balance of payments crisis
    (or for whatever reason) has a shortfall in its
    foreign reserves,
   The IMF can provide a loan (lest this country
    enter into destructive policies).
   Problem: This “bailing out” option lowers the
    incentive to pursue sound policy.
   “Moral Hazard.”
                       Solution?
   If the IMF determines that the need for an IMF loan is due
    to bad policy,
   The Fund imposes policy conditions in return for the loan.
   This arrangement of conditions for loans is known as
    “Conditionality.”
   How does the IMF determine if need is due to bad policy?
    If the required loan is >25% of the member’s quota.
   Note that the loan is not provided upfront, but disbursed in
    “tranches,” subject to reviews of compliance with
    conditions.
    Policy conditions usually entail:
   Fiscal austerity
    – cutting government services and increasing
      taxes
   Tight monetary policy
    – raising interest rates and reducing credit
      creation
 Since 1982: Structural reforms
 (Currency devaluation)
        Conventional wisdom
   We often hear that governments turn to the
    IMF only when they have no choice.

   Governments enter into IMF programs if
    and only if they need a loan, and must
    accept IMF conditionality in return.
               Tanzania’s early experience
                fits the conventional story
                                       Figure 8: Tanzania 1970-1988
                               Foreign reserves (in terms of monthly imports)

                   4.5
                    4
                   3.5
Foreign reserves




                    3
                   2.5
                    2
                   1.5
                    1
                   0.5
                    0
                         70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
                                                       Year
     The “conventional story” aptly
    describes the early experience of
        Tanzania with the IMF:
   Foreign reserves dropped in 1974.
   President Nyerere needed foreign exchange but
    avoided IMF conditions as long as possible.
    – Government draws down 25% of quota (10.5 million SDR ).
    – Obtains 2 Oil Fund Facility Arrangements (6.3 & 3.15 mill SDR ).

   Finally, the government succumbs in 1975, but
    negotiates for weak conditions:
    – IMF required only that domestic credit usage by the public sector
      be constrained.
      Nyerere did not want IMF
             conditions
   When reserves plummeted again in the late
    1970s:

   “People who think Tanzania will change her
    cherished policies of socialism because of the
    current economic difficulties are wasting their
    time” –President Nyerere
   1980 Agreement
    – Nyerere negotiates for soft conditions
        Nyerere uses prominence as a world figure

        takes advantage new Managing Director’s (de La

         Rosière) reach out to Africa
    – Only 2 conditions
        a joint Tanzanian-IMF study of the exchange rate

        ceiling on government borrowing



   Even these conditions were too much. The
    agreement fell apart.
    Important points from 1970s
   Why did Nyerere turn to the IMF?
   Why was he able to negotiate for soft conditions?
   What was Nyerere’s negotiation posture?
    – Arusha Declaration
    – Non-aligned movement

   What was the IMF’s negotiation posture?
    – Crisis of purpose
    – Budget constraint weak
                         Tanzania’s experience:
                         What happened in 1983?
                                       Figure 8: Tanzania 1970-1988
                               Foreign reserves (in terms of monthly imports)

                   4.5
                    4
                   3.5
Foreign reserves




                    3
                   2.5
                    2
                   1.5
                    1
                   0.5
                    0
                         70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
                                                       Year
      Tanzania is not typical…
       The typical experience:
   Once a country enters into an IMF program,
    consecutive agreements are signed until the
    economic situation improves (and
    sometimes even after the situation
    improves).
         Extreme examples from around the world:
 South Korea spent 13 years under consecutive agreements
  from 1965 to 1977.
   Zaire 14 years straight (1976-1989).
   Liberia 15 years (1963-1977).
   Peru participated in consecutive agreements from 1954 to
    1971 (18 years).
   Panama from 1968 to 1987 (20 years of consecutive
    agreements)
   After a stint of seven years (1961 to 1967), Haiti entered into
    agreements again from 1970 to 1989, for a total of 27 out of 29
    years.
   By the way: Tanzania from ’86-2000? Under 14 out of 15 years.
         But Nyerere said NO!
   In the aftermath of the Latin American Debt
    Crisis, IMF conditions became tougher.
   Also, the IMF faced a tighter budget constraint,
    with more countries participating than ever.
   Nyerere’s negotiation posture was weakened and
    he could not get soft conditions.
   So no agreement!
      A note on case selection:
               Lagged Foreign reserves, BoP and current account
           for countries that did not turn to the IMF for at least 3 years

                              ForRes/mly                                      Current
  Country         Year          impts                BoP/GDP                 Acct/GDP
Guinea-Bisau      1987           -0.10                -25.03                   -56.70
   Liberia        1986            0.00                -18.58                    -3.20
Tanzania         1983              0.00                 -4.15                 -9.80
   Benin          1989              0.10                 -6.05                -12.30
      Tanzania is a stark case:
   It helps to sharply illustrate the importance
    of domestic political preferences.
   When governments turn to the IMF, they
    may actually want the IMF to impose
    conditions.
   Nyerere did not, so he said no.
                         What happened in 1986?
                                       Figure 8: Tanzania 1970-1988
                               Foreign reserves (in terms of monthly imports)

                   4.5
                    4
                   3.5
Foreign reserves




                    3
                   2.5
                    2
                   1.5
                    1
                   0.5
                    0
                         70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
                                                       Year
     What happened in 1986?
   Did the economic crisis worsen?

   Did the IMF’s position soften?

   Did Tanzania suddenly gain international
    prominence?
    Domestic politics changed…
 1985 Ali Hassan Mwinyi elected president
 Nyerere remains president of CCM

Struggle for      leadership
IMF finds domestic allies who in turn find supporters within
  the state

Mwinyi brings in the IMF to help push
 through economic reforms.
       How does bringing in the IMF help
        push through economic reform?
        Key Features (non-ratification / enforcement):
   Agreements are entered into by executives and the IMF.
   The approval of other actors (veto players) may be
    required for policy change…
   But their approval is not required for an IMF agreement
    to be put in place.
   Once an IMF agreement has been signed, failure to
    change policy becomes more costly (“rejection costs”).
           “Rejection costs”
1.   Restriction of access to IMF loan.

2.   Preclude debt rescheduling.

3.   Decreased investment.
                              Figure 9: Tanzania 1980-1986
                            Investment (percentage of GDP)
                                 Penn World Tables 5.6
             15
Investment




             10




             5
                  80   81          82        83        84    85   86
                                            Year
            Figure 1: The logic of bringing in the IMF
                                               Payoff to veto player
                                      Accept   -1 (change policy)
                             Veto
                             player
            Without                   Reject
            the IMF                             0 (maintain the status quo)


Executive




     With the IMF                     Accept   -1 (change policy)
                             Veto
                             player
                                      Reject
                                                -r (reject the IMF)
         Why study Tanzania?
1.    It is an intrinsically fascinating case.

2.    As an economic outlier, we gain leverage
      over the question of domestic politics:
      It is the most extreme case of a country NOT
        turning to the IMF during an economic crisis.
      When the government does turn it is because
        of political preferences, not a change in the
        economic situation.
           Cocktail Party Phrases:
   Substance:
    – Tanzania 1983 is the most extreme case of a country not turning
      to the IMF despite a need for foreign exchange.
    – Mwinyi signed in 1986 to pressure anti-reformists in the CCM.

   Methodology:
    – The case of Tanzania illustrates the importance of doing both
      large-n and small-n research.

   Political Science:
    – The case of Tanzania is at the crossroads of International
      Relations and Comparative Politics.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:3
posted:5/18/2012
language:English
pages:36
fanzhongqing fanzhongqing http://
About