IMF Intervention and Relevance

Abstract
In todays modernised global financial markets technological advancements have transformed the way investors, financial institutions, governments and central banks operate. This has brought about a crisis of confidence in the ability of any one body to provide high quality surveillance, supervision and crisis management. Countries are unwilling to borrow from the IMF due to the intrusive economic reform policy conditionalities. Cocktail mixes of tax increases, spending cuts and privatisation of public sector assets have proven difficult for local governments to serve. The funds inability to keep pace with an expanding global economy suggest redefining itself with a more modest role that is fitting for such an international monetary system may be the best approach, As opposed to expanding the funds activities.

Table of contents

1. Introduction page 1

2. Objectives page 1

3. Rationale page 1

4. Literature review page 2

4.1 The Mandate page 2
4.2 Consequences of IMF Programme Implementation page 2
4.3 IMF Relevance page 6

5. Conclusion page 9

6. Reference

1. Introduction
This literature review will examine the effectiveness of intervention by the International Monetary Fund (IMF). It will challenge the results of IMF programs and attempt to derive whether the Fund still serves a meaningful role in today's global economy.
The International Monetary Fund was formed during a United Nations conference at Bretton Woods, New Hampshire in July 1944. At its inception the Funds founding fathers signed off on an expansive mandate with its key role being the oversight of the world’s international payment system post World War II. The modern day IMF as we know it has used this broad mandate as a mechanism to adapt in order to expand its activities. In 2005 former managing director Rodrigo de Rato acknowledged this transformation but was adamant the Fund was staying true to the mandate laid out by its founding fathers "to foster international economic cooperation, to promote rising prosperity and high employment, and to safeguard global financial stability" (Rato, 2005). Having recently celebrated its 70th anniversary it is unclear whether the Funds tenure has been one which can be reviewed with aplomb and whether it still serves a purpose.

2. Objectives * To investigate the research resulting from IMF intervention. * To review academic papers relating to the success and failures of IMF programs. * To assess the relevance of the IMF.

3. Rationale
The intent of this literature review is to examine the effectiveness of the IMF as a warden for financial stability and surveillance. The idea stemmed from how pertinent the Fund has become once again in recent times with its programs being the target of much scrutiny. The objectives of the review will be reached through comprehensive reference to past research and background information. Drawing on comparisons from research produced within and outside problem states.

4. Literature Review

4.1 The Mandate
The IMF has evolved so significantly during its 70 year existence it would surely bear little resemblance to its founding fathers John Maynard Keynes and Harry Dexter White. The financial world has changed considerably since the Fund was commissioned in 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire. The Fund was tasked with three fundamental purposes. The responsibility of transitioning its original 29 members from a predominantly unilateral economic approach to a multilateral one. Secondly, to aid in the identification and implementation of macroeconomic policies that would enable them to preserve high employment and gross national product. Finally the Fund would make available short term financial assistance where possible. With the major changes to the global economy it may come as a surprise Article I of the original 1944 International Monetary Fund Articles of Agreement remains void of any amendments. "The IMF's mandate has been sufficiently flexible to enable it to adapt to these changes and to the evolving needs of its expanded membership." (Rato, 2005).

4.2 Consequences of IMF Programme Implementation
Equipped with an adaptable mandate the Fund is free to tailor its programmes as it sees fit. Unsurprisingly it is in times of economic difficulty the IMF steps out from the shadows and into the light. Naturally this means the Fund will act as a lender of last resort when other avenues of financing have been exhausted.
During 1988-2002 the nation of Pakistan suffered a period of political instability, financial naivety and sky rocketing fiscal debt. Isran M., Isran S. and Phulpoto (2013) examined the IMF's Structural Adjustment Program undertaken during this period in order to gauge its effectiveness. Pakistan joined the IMF with the ambition of curtailing poverty and stabilizing the national economy. The policies of the program were to implement austerity measures through decreasing expenditure on the less productive segments of the economy and to offload public sector organizations to the private sector in order to raise capital, a common theme for the fund.

“One of the major factors in the failure of IMF programs was the lack of commitment on part of different civilian governments as they were unwilling to implement IMF conditionalities.” (Isran, et.al, 2013). The authors are in consensus that on a theoretical level these measures could be beneficial in the long run, but these reforms can be extremely problematic on a practical level during implementation. The results observed were less than desirable with the period being coined by many economists as a lost decade for the economy of Pakistan. The brunt of the burden fell on the middle and poorer classes. Using a critical and qualitative method the authors concluded that the Fund "contributed towards worsening of the economic situation, with dire consequences for vulnerable sections of society." (Isran, et.al, 2013). The authors are accurate in their analyses of the programs failings and suggest that for Pakistan to minimize its poverty it would have required an overhaul of its governance in order to implement the suggested reforms. Many critics of the funds programs lay little culpability with political forces and their willingness to comply with the structural reforms yet Isran, et.al, (2013) suggest a strong governmental cooperation is required.
Having undergone almost two decades of unparalleled economic growth Ireland was the poster child for the European Union. Contrary to this the nation was brought to its knees in 2007-08 when a property bubble, which inflated over a 6 year period, burst. The Irish government and people were at the mercy of the EU/IMF. Details of a program were negotiated with the Troika, a group of bodies including the European commission, the European Central Bank and the IMF. An agreement was made in 2010 that in return for providing funds to aid with the nation’s goliath budgetary deficit Ireland would need to implement harsh structural reforms in order to reduce the annual deficit to below 3% by 2015. Comparably to the approach taken in Pakistan, Ireland was to meet this target through spending cuts, increased taxation and privatisation of national assets. Although in contrast to the pervious example, Ireland complied with the tough requirements of the program. In accordance with this, researchers at the European think-tank Bruegel investigated the Funds bailout of the Irish economy in 2008 and under the criteria of fiscal consolidation; growth and financial stability suggest that the Funds intervention was in fact a success “The Irish programme can be considered a success. Ireland is expected to correct its excessive deficit by 2015." (Sapir, et.al, 2014). Both the Chairman of the IMF Christine Lagarde and German Chancellor Angela Merkel has labelled the intervention a triumph. Chairman Lagarde pointing directly to the Irish Public and State for championing the crisis "The true heroes, the ones who have really taken the brunt and will take the benefit are the people of Ireland and their representatives”.
At the tail end of 2009, fears began to cultivate about the ability of Greece to repay its debt after it came to light that data on the level of Greek debt had been misreported by its own government. This brought about a crisis of confidence within the Eurozone. In a very controversial move the IMF bailed out Greece, against the judgement of an almost majority vote by the fund directors. The fear was that Greece posed a systemic threat to the greater Eurozone and that they could be the deciding factor in its survival or demise. As a result, on the 2nd of May 2010 alongside the European Commission and the European Central Bank the IMF launched its largest ever bailout of €110 billion in order to save Greece from default. The bailout came with a rule set which followed the expected theme of strict alterations in government expenditure, increased taxes and privatisations. The Greek crisis is on-going.
Kosmidou, Kousenidis and Negakis (2015) preformed a study on the bailout of the Greek economy testing its effectiveness. Using a combination of qualitative and quantitative analysis the authors concluded that “Overall, our findings suggest that the policy actions of the troika and of the Greek Government failed to prevent the financial crisis from turning into a real crisis. Our results likely suggest that ending the crisis requires strong liquidity support not only for the banking sector but also for the real economy” Kosmidou, K., Kousenidis, D., Negakis, C. (2015). The authors centre on the point that all the bailout provided was a shift in the systemic threat posed by the banking sector onto other sectors of the economy. A contrarian view could be made that although this shift in systemic threat can be viewed as inequitable the effects of a failing banking sector poses the greatest threat to any economy. Restoring the credibility and market sentiment of international and domestic investors is vital to restabilising the greater economy. “The actions of the Greek Government only significantly increased the systematic risk for value banking stocks, most likely because established banking firms in Greece hold large amounts of Greek sovereign debt” Kosmidou, K., Kousenidis, D., Negakis, C. (2015). The authors also address the fact that once again an unstable local government can have negative effects on IMF intervention. Repeatedly across multiple programs we can see that nations operating within a democratic environment encounter a power struggle as opposition parties’ piggyback off the IMF proposed rule sets being forced upon the incumbent governments. In the example of the successful Irish bailout program the incumbent government accepted the rule set, as did the future government.
Furthering the statement that government cooperation plays a considerable role in the effectiveness of IMF programs, author K., Pfeifer (1999) analyzed results from four different countries: Tunisia, Morocco, Jordan and Egypt. Once again the theme remains the same where the participants were expected to reduce expenditure, increase taxes and sell off public assets. The author made clear that all four cases could be regarded a success stating “Budget deficits were reduced and inflation was curbed. Production for export was stimulated and external account deficits and debt services were reduced, at least relative to the crisis years.” K., Pfeifer (1999). What is particularly notable is that in all four cases governments followed the reforms religiously “Egypt is praised for privatizing more than one third of the public sector portfolio in 1996 and 1997, which will help raise productivity growth and domestic savings. Jordan is praised for passing an exemplary investment law that treats all investors alike, regardless of nationality Tunisia and Morocco received kudos for restructuring their tax codes, and Tunisia is especially commended for its pioneering liberalization of not only profit repatriation but also capital liquidation for foreign investors.” K., Pfeifer (1999).
In the 1990’s Post Soviet Union Russia was left in economic turmoil requiring aid and guidance “The Fund set out immediately to provide three types of assistance to Russia: financial support, policy advice, and technical assistance” Boughton (2012). The technical expertise of the IMF would prove invaluable to Russia as for years under the Soviet Union even basic economics books had been unavailable. In order for Russia to become a fully-fledged participant of the global economy it meant major reforms were in order. During this period of co-operation Russia saw the formation of a new central bank which gradually gained experience and control over monetary policy with the assistance of IMF staff.
In 1998 Russia faced a financial crisis due to weakening productivity, a fixed exchange rate, and a persistent fiscal deficit. The central bank was haemorrhaging money and tax collections were lower than expected. A bailout package of $22.6 billion was approved by the IMF and World Bank on 13 July 1998. The intention of this package was to preserve the value of the currency and for the incumbent government to enact the reforms necessary in order to create long-term stability. Once again governmental issues meant these structural reforms were unlikely. “mismanagement, inertia, and outright corruption, such vital changes as trimming the budget, overhauling the tax code and tax collection, land reform, and otherwise providing conditions to stem capital flight and attract foreign investment have not been implemented” Boughton (2012). Responsibility has to also fall on the shoulders of the IMF as a continuous line of bailouts were provided without any assurances reforms would be put in place. Russia ended up repaying its debt to the IMF early, thanks to an increase in global oil prices, in order to cut the nations tie to the fund. “A decade of close relationships, turbulence, and drama thus ended weakly. For the IMF and for the reformers within the Russian government, the satisfaction of seeing the country still on the road to integration with the world economy was mixed with disappointment that progress on that road was still slow and that success was far from assured” Boughton (2012). To some extent the IMF can take credit for the transformation of the Russian economy and it could be argued the decision to continue providing bailouts with no guarantee of reform could be justified due to the Russian nation’s strategic importance. Once again local government stood in the way of meaningful structural reform. Conditional lending had failed.

4.3 IMF Relevance
Since the 1980’s the IMF has adopted the role of lender of last resort to nations in financial crises. Due to the nature of its activities the fund is subject to much criticism. The methods employed by the fund are regarded as counterproductive and out-dated by some as there have been major changes in the way the global economy operates.
According to Masson (2007) the expansive movement of capital across borders has diluted the significance of the IMF. The author argues that due to the increasingly open nature of the global economy the IMFs role in "managing a more flexible, eclectic monetary system with vague rules of the game will necessarily be a limited one" (Masson, 2007). The author rationalizes this explaining how exchange rate flexibility, insufficient liquidity and the inability for one institution to manage the international monetary system will limit the funds ability to stay relevant. Capital mobility is something that won’t be going away any time soon with more technological and financial advances an inevitability. These increases in the movement of capital would not threaten the future of the IMF had the resources available to the fund kept pace with the changing global economy. “Cross-border banking claims have increased thirty-two-fold since 1977, as measured by international asset positions of (BIS-reporting) commercial banks. This translates into a 13.1% annual rate of growth, far in excess of world trade’s 8.4% growth over the same period” Masson (2007). The increased capital flows have led to two substantial dilutions of power for the fund. Firstly, it has brought about a transition away from the pegging of exchange rates, by the larger industrial nations along with the majority of emerging market economies. Secondly, it has significantly reduced the proportion of the funds balance of payments support in relation to the level of possible capital outflows of national economies. It leaves little surprise as to why the IMF’s relevance has come under question.
“The IMF has assumed three major new tasks since the 1980s debt crisis: 1) helping transform centrally planned regimes; 2) large-scale crisis lending to emerging market economies; and 3) promoting transparency, data dissemination, codes of conduct for monetary and fiscal policy, and financial regulation” Masson (2007). These new responsibilities meant a greater role for the IMF in the global economy. It is important to state that the IMF is not the sole agent of change; it is difficult to deny that both the lending and technical assistance provided by the fund helped in easing the transition and soften the destructive effects of crises. It is clear to see that the IMF will not be in a position again to direct a system of pegged exchange rates. The role the fund plays in the modern, increasingly flexible monetary system looks to be a limited one. “No international organization can serve as international lender of last resort because the amount of liquidity required would be dwarfed by private capital flows—unless that institution can, like a domestic central bank, create its own liquidity” Masson (2007). Masson argues that the increased capital flows means it would be impossible for the IMF to aid nations in crises as the private flows would dwarf those of the fund. During the financial crisis of 2007-08 we saw the IMF combine with the European Central Bank and the European Commission in order to provide aid to Greece and Ireland.
As the international monetary system has transformed drastically since the immediate post war period the extent to which it can be directed has lessened considerably. Masson suggests that no reforms of the fund will alter its fundamental position in the world economy but does makes suggestions as to how reforms could aid in improving its functionality within its reduced role. “IMF lending should be more short-term and accompanied by fewer conditions. More equitable representation of countries can help to increase its legitimacy and improve decision-making. Greater diffusion of information and more candid country assessments can enhance the IMF’s contribution to international public goods” Masson (2007). The author suggests accepting this modest role and embracing it in order to promote effectiveness and accountability through a well-defined mandate combined with unequivocal expertise. Contrary to Masson's research former First Deputy Managing Director of the International Monetary John Lipsky stated in 2008 in response to the financial crisis "The IMF, with its global membership, multilateral perspective and technical expertise, can help in developing and promoting solutions" Lipsky (2008). The former director showed confidence in the ability of the IMF to aid in the fallout of the 2007/08 crisis. The fund aimed to use its technical expertise in order to assess the contingent risks that could endanger global stability. Lipsky also observes the ever changing economic world in his article stating “But in today's world of contingent risks, macroeconomic policies may not be sufficient to cushion the blow if extreme events occur. We must keep all options on the table, including the potential use of public funds to safeguard the financial system” Lipsky (2008). The former director makes a point of stating that the fund is aware of the changes in the amount of private capital flows across modern day borderless markets. The IMF cannot be the first line of defence in times of economic turmoil this duty lies with central banks. Lipsky maintains that the IMF regards central banks, financial supervisors and regulators as close partners. These partnerships were made evident during the bailouts in Europe of Ireland, Greece and Portugal. Masson’s research appears to have been correct in the sense that he suggested the IMF would not have the ability to aid countries during crises alone but through the creation of the Troika these issues were circumvented. Both authors draw on empirical evidence to justify their contrasting views. Although the authors fundamentally disagree there are elements on reform that show a consensus. Both understand that changes in technology and the movement of capital mean a change in the effectiveness of certain policies for the fund. Interestingly both are optimistic about the future of the IMF if the correct reforms are put in place.

5. Conclusion

Over the past decades the IMF has been widely involved in limiting the damage of several financial crises. Drawing on historical data the established approach for IMF interventions is one of imposing crisis afflicted nations with severe macroeconomic reform programs in exchange for a bailout package financed by the international community. As shown in 4.3, the interventions have a wide array of probable outcomes. A better understanding of the political, economic and ripple effects is needed if the fund is to more consistently gain the desired results. Through the analysis of multiple IMF programs a common theme has emerged of spending cuts, increased taxes and privatisation of public assets. These severe structural reforms can be difficult to implement on a local government level and can be regarded as political suicide for some. It can be concluded on the basis of the examples in this research that programs are more likely to be successful where both the incumbent governments and their opposition show solidarity on the economic reforms front.
From the research in this literature review it is reasonable to conclude that the role of the IMF as an individual lender of last resort is a diminishing one. Technical advancements and increased private capital flows have been the key factors bringing about this deterioration of power. The IMF has shown its ability to adapt in the face of difficulty, working together with central banks and financial institutions in using its expertise in the most recent crisis to the benefit of the Eurozone. It is unequivocally clear that the IMF remains relevant to this day as the principal institution for global economic governance. Many sceptics simply analyse the funds lending activities ignoring the fact that only 20% of the IMF’s undertakings are in fact lending. The IMF provides a public good in the form of observation of global economic and financial events and weaknesses. This is not to suggest the fund is not in need of reforms. Adjustments will be required in order to restore confidence in the IMF’s ability to monitor the most expansive and open market the world has ever known. The funds capacity to offer financing to members dependent on their reforms policies looks to be coming to an end. The future of the IMF most likely will be in an advisory role using its expertise to provide a public good.
“Developments simply make adapting to the new challenges all the more important” Jacques de Larosière, former managing director, International Monetary Fund.

6. References
Rato, R. (2005) ‘Is the IMF's Mandate Still Relevant’. Global Agenda,
Available at: https://www.imf.org/external/np/vc/2005/010105.htm [Accessed: 21/09/2015]

Felix, S. (2014) ‘The IMF revisits sovereign bankruptcy’. Capital Markets Law Journal, 9.1: 10-17.

Masson R. (2007) ‘The IMF: Victim of Its Own Success or Institutional Failure?’. International Journal, 62.1: 889-914.

Isran, M., Isran, S., Phulpoto N. (2013) ‘Failures of IMF Programs: Causes and Consequences’. Journal of Business Strategies, 7.1: 77-86.

Sterne, G. (2014). ‘The IMF crisis and how to solve it’. Economic Outlook, 38.3: 25-39

Pfeifer, K. (1999). ‘How Tunisia, Morocco, Jordan and even Egypt became IMF "Success Stories" in the 1990's’. Middle East Research and Information Project, 210: 23-27

Arezki, R. & Quintyn, M. (2012). ‘Structural Reforms, IMF Programs and Capacity Building: An Empirical Investigation’. International Monetary Fund.

Articles of Agreement of the International Monetary Fund (2011). Available at : https://www.imf.org/external/pubs/ft/aa/pdf/aa.pdf [Accessed: 22/09/2015]

Darvas, Z. & HÜTTL, P. (2014). ‘The long haul: debt sustainability analysis’. Working Paper, Bruegel Think-tank.

Sapir, A., Wolff, G. & Terzi, A. (2014). ‘The Troika and financial assistance in the euro area: successes and failures’. Study on the request of the Economic and Monetary Affairs Committee, European Parliament.

Lipsky, J. (2008). ‘Dealing with the Financial Turmoil: Contingent Risks, Policy Challenges and the Role of the IMF’. International Finance, 11.2: 185-192

Gillespie, P. (2012). ‘At the receiving end-Irish perspectives and response to the banking and sovereign debt crises’. Asia Europe Journal, 9.2-4:125-139

Kosmidou, K., Kousenidis, D., Negakis, C. (2015). ‘The impact of the EU/ECB/IMF bailout programs on the financial and real sectors of the ASE during the Greek sovereign crises’. Journal of Banking & Finance, 50:400-454

Calomiris, C., Meltzer, A., Lachman, D. (2007). ‘Is the IMF Obsolete?’ The magazine of International economic policy, 9-21.

Boughton, J. (2012). ‘Tearing Down Walls’ the International Monetary Fund.