This article assesses the possible future directions and roles of the International Monetary Fund and the World Bank. It first reviews their initially envisaged roles at Bretton Woods, and their evolution, concluding that both institutions played valuable roles earlier on. But for both institutions, the world has changed, and the questions as to their future are important. For the IMF, those questions center on its role in providing finance for poor developing countries in balance of payments difficulties and on its role for middle income countries in managing financial crises. For the World Bank, the question is whether it can and should gradually phase out lending for most middle income countries except in times of drastic policy reforms and focus on low-income countries, or whether it should address the soft issues of development.
Ever since the Mexican, Asian, and Russian crises of the mid-1990’s, efforts have been underway to find means for more effective prevention and resolution of currency-financial crises. Much has been done with respect to crisis prevention: exchange-rate flexibility is much greater than it was; there is increased transparency and improved oversight of the financial system; and greater attention is paid to unsustainable policy stances. Work continues to strengthen economies’ immunity to crises. However, no matter how much is done, there will inevitably be a crisis or crises. Much has already been learned with respect to crisis resolution, and the international financial community is better equipped to cope with crises than was the case earlier. But, as with prevention, more can be done. One item on the agenda, which should contribute both to prevention and to resolution, is dealing with unsustainable debt burdens of sovereign nations. Two of the hallmarks of most of the 1990’s crises were, first, the importance of private capital flows, and their reversals, in triggering the crises and in intensifying their severity; and second, the involvement of the financial systems in them. The countries afflicted by these crises were ones that had succeeded in raising per capita incomes and rates of economic growth. That success hinged in significant part on their having put in place economic policies that are conducive to economic growth, including a predictable legal framework, respect for property rights, openness to the international economy, and much more. The fact that the policy framework was generally appropriate implied, among other things, that there were relatively high real returns to investment in these economies. That is of course the main reason why private investors were interested in them. At the same time, capital inflows permitted more rapid development than would otherwise be possible. These associations of high real returns, growth, and appropriate policy stances continue. For these reasons, there is typically a strong stake for emerging markets to maintain international creditworthiness, and policymakers go to great lengths to maintain their international reputations and market standings. An efficient private international capital market benefits both developing countries, which are thereby able to invest more than domestic savings at high real rates of return, and investors in high-income countries, who can realize higher real returns and greater portfolio diversification than they could achieve without these investment opportunities. Because countries are sovereign, their high stakes in maintaining creditworthiness are crucial for attracting international capital flows. This is because foreign creditors do not have the rights they do in domestic courts and hence must have other protections against default on the part of borrowers. This is especially true for sovereign borrowers; international lenders to private entities in emerging markets normally have the same protection as is afforded to domestic lenders. For sovereign borrowing, however, the chief protection foreign creditors have is the losses that would accrue to the sovereign debtor (both directly, through the future reduction in access to international credit markets, and through the effects on private economic activity of a sovereign default) in the event of † Discussants: Guillermo Calvo, InterAmerican Development Bank and University of Maryland; Morris Goldstein, Institute for International Economics; Michael Mussa, Institute for International Economics; Ann Harrison, University of California–Berkeley.
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Journal Article The Implications of a Backward Bending Labor Supply Curve Get access Anne O. Krueger Anne O. Krueger Minneapolis Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 29, Issue 4, October 1962, Pages 327–328, https://doi.org/10.2307/2296309 Published: 01 October 1962
Journal Article The Impact of Alternative Government Policies under Varying Exchange Systems: Reply Get access Anne O. Krueger Anne O. Krueger University of Minnesota Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 82, Issue 3, August 1968, Pages 511–513, https://doi.org/10.2307/1879523 Published: 01 August 1968
In the wake of the Mexican, Asian, and other crises of recent years, calls for a “new international financial architecture” have been heard from many quarters. While other questions, such as the wisdom of the International Monetary Fund (IMF) practice of long-term support for low-income countries, have also been raised, the central issue is the role that the IMF should play in reducing the likelihood of crises and in handling them once they arise, and it is this issue that is addressed in this paper. Of the other important questions, only one needs to be mentioned here. That is, in recent years, the IMF has begun paying attention to issues such as poverty alleviation, income distribution, and other questions which are not only far away from its traditional competence, but which also detract seriously from its capacity to handle macroeconomic crises, where it has possessed competence. The IMF’s ability to deal satisfactorily with the central concerns discussed here will be significantly impaired if it continues to take on these other issues. Turning then to crisis management, many suggestions have been made for changes in the IMF role. These range from its abolition to large-scale expansion of IMF resources, with many others in between. Prescription should follow diagnosis. I start, therefore, with a diagnosis as to what happened in many of the crisis countries. On that basis, I argue that there are two distinct lines along which changes could be made, and that many of the apparently conflicting demands placed upon the IMF reflect either failure to diagnose the nature of the problem or an unwillingness to come to grips with the central dilemma. Thereafter, some of the proposals currently being aired are evaluated in light of the diagnosis. The key to understanding the issues surrounding crises of the type that occurred in East Asia in 1998 lies in the proposition that most, but not all (Brazil, for example, is an exception) of the “crisis countries” of recent years have really experienced two crises almost simultaneously. They have had a balance-of-payments crisis and a financial crisis. The balance-of-payments crisis has come about as countries have been unable to maintain their obligations to foreign creditors and their commitments to maintain an exchange-rate regime. Balance-of-payments crises are familiar from earlier years, when the IMF routinely supported stabilization programs. Two characteristics of these “traditional” crises should be noted. First, efforts to defend an exchange rate and a commitment to service foreign-currency-denominated debt have almost always been precipitating factors in balance-ofpayments crises, and the solution has almost always entailed adjustment of the nominal exchange rate, if not abandonment of a fixedexchange-rate regime and adoption of a floating exchange rate. Second, key economic policymakers in the crisis country and IMF staff typically had several months in which to work out adjustment programs. In the case of the highly publicized Mexican announcement of inability to maintain debt-servicing in August 1982, for example, an IMF program was not agreed upon until many months later. Financial crises, like balance-of-payments crises, have occurred frequently in the postWorld War II period. A financial crisis comes about when the banking system is threatened with insolvency. It can occur (as in Japan in the 1990’s and in Sweden in 1992) without a balance-of-payments crisis. It is usually centered in the banking system, although the United States savings-and-loan crisis demonstrated that it can arise elsewhere in the financial system. Generally, financial crises are characterized by a large proportion of nonperforming loans (recognized or otherwise) in a country’s banks or the insolvency of other key financial institutions. * Department of Economics, Landau Building, Stanford University, Stanford, CA 94305. I am indebted to Jeffrey Frankel, Nicholas Hope, and Aaron Tornell for helpful comments on an earlier draft of this paper.