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Development Economics 
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Post Development Economics
Development Economics
Harry Marks has provided an insightful response to criticism of the international financial institutions (IFIs) in the thread titled Should Donald Trump be awarded the Nobel Peace Prize? Since this question of the role of the International Monetary Fund and World Bank is such an important global topic, but is not central to the Nobel deliberations, I want to respond, and am therefore quoting Harry’s comments in this new thread.

I have been highly interested in development economics for a long time, and felt Harry’s insights shed a great deal of light on what many people find a confusing topic, as seen in the range of conspiratorial claims that Harry refutes. I read Confessions of an Economic Hit Man by John Perkins, which may be the leading insider account of such conspiracy theories, but while it did expose some abuses it did not seem balanced or convincing overall.
Harry Marks wrote:
KindaSkolarly wrote:
The IMF and World Bank are the financial hammers of the U.N. They claim that they're helping to alleviate poverty and so on, but that's not true.

Countries don't normally approach the IMF unless they have already gotten themselves in debt, usually to private banks.
The central role of private banks in creating debt is largely ignored and misunderstood among critics of the IFIs.
Harry Marks wrote:
The other main case is currency stabilization, against the hot money that Stiglitz discussed. Currency stabilization was the purpose for which the IMF was established, but its expertise in international finance, and its experience negotiating with governments, meant it was the only organization available to be the broker in the debt reductions of the 80s debt crisis.
Whether a strong or weak currency is good or bad is confusing for non-economists, and seems to be disputed among economists as well. So often with such topics people take a small part of this complex puzzle and treat it as the main point. Central banking is such an arcane gnomic pursuit that currency stability is a difficult topic to explain to the broader electorate, except in situations of collapse like Zimbabwe or Venezuela, and even there, the thickness of many people is quite extreme.
Harry Marks wrote:
The World Bank does alleviate poverty. By borrowing at favorable rates from the capital markets, due to its diversified portfolio and managed lending, it makes loans available to developing countries at concessional rates (although right now the rates to a typical emerging market are low enough that the World Bank can't offer them much of a benefit). A one or two percent reduction in the borrowing cost for a port or a power station, over 30 years, can make a substantial difference in the cost of the final service.
One of my favourite papers on this broad topic of poverty reduction is by Dollar and Kraay, Growth is Good for the Poor. They show that economic growth increases the incomes of the poor in a proportional way, and that good economic policy is the best way to alleviate poverty. Unfortunately, that whole rational framework gets disparaged as “trickle down economics” with the result that the false socialist idea gets believed that stealing from the rich can reduce poverty. The World Bank like the IMF combines policy advice with concessional loans. I have often suspected that the advice is more important than the loans in terms of achieving durable results. The other World Bank Group program that I particularly admire is the Doing Business ratings managed by IFC, which has been based on the argument that improved regulation is the most cost-effective development aid.
Harry Marks wrote:
KindaSkolarly wrote:
The countries they "help" are left in debt, with the IMF at the head of the line demanding repayment.
There are no cases I am aware of in which IMF intervention was followed by an increase in indebtedness, and not many for the World Bank. The stories of high indebtedness are not due to lending by those two, but by the banks of the rich world.
It is not so simple to just blame commercial banks, since no one is forced to borrow money, and there is a responsibility of buyer beware in entering into unserviceable loans. Of course there is a lot of swindling by banks like in the US subprime loans, and governments can be corrupted by bribery, but writing off debt is hardly in the interest of banks. The IMF certainly copped a lot of criticism for its policy advice after the 1997 Asian Financial Crisis. Here is an example.


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Post Re: Development Economics
Harry Marks wrote:
For the most part this was because of loans to the private sector, which, until about 1993, were typically guaranteed by the national government of the borrower because of difficulties with things like asset seizure by foreigners in case of default.
It is a great tragedy that taxpayers can become liable for private debt. The danger of loan guarantees seems to often be underestimated. In a situation of weak transparency, authoritarian government is at high risk of corruption, and the responsibility of private banks to factor these governance risks, especially where those banks connive in corrupt deals, seems to be an area where there is inadequate requirement for banks to share the risks of their lending.
Harry Marks wrote:
In the late 70s, huge amounts of money poured into Latin America from "recycled petrodollars" (earnings by OPEC states which had insufficient local projects to invest in, and so placed their money with the international money center banks). This was lent to the firms in the rapidly growing LDCs, but when U.S. and U.K. policy changed in 1978, the world economy slowed and these companies began to go broke. The governments were left with the debt.
Good history lesson. It seems there was a reckless lack of prudence in managing these financial opportunities.
Harry Marks wrote:
KindaSkolarly wrote:
But that's not by "common consent" as you say, it's by consent of the corrupt officials who take out the loans on behalf of their countries.
Subordination of other debt to IMF and World Bank debt requires no consent by the borrowing countries. The private banks accept it because lending to a developing country with access to good advice and basic finance is a better bet. Subordination is win-win, unless the country is on the brink of default, in which case most foreign lenders aren't interested in lending.
But what about the problem of corruption, the ability of officials to steal borrowed money? Subordination is not “win-win” when funds are stolen with a lack of controls and sanctions. Getting a sense of the balance between badly used loans and well used loans would help understand the scale of such problems. I have heard many people say that economic rate of return analysis is frequently subordinated to political demand for project approval, suggesting that the non performing loan ratio is likely to be worse than reported. Overestimation of borrowers governance capacity is a pervasive weakness in development banking.
Harry Marks wrote:
KindaSkolarly wrote:
The IMF gets countries into a position where they can’t repay their loans, then they begin doling out money so that the desperate governments can pay the INTEREST on the loans. Of course that solves nothing, so another loan is arranged, then another...

There were cases, mostly African toward the end of the 90s, of the IMF lending money for debt service. In general that was part of a deal for the country to put its financial house in order and get back to a creditworthy basis.
This reminds me of another chronic problem in lending, that the focus of the bank is on sealing the deal, not managing it or ensuring due diligence about the basis of the loan, so the performance of the loan in terms of delivering outcomes is neglected and the capacity to repay deteriorates.
Harry Marks wrote:
Often it was part of a deal to write down large amounts of debt that had become unpayable (like what Argentina did without IMF brokerage, in 2003) but in the case of some African countries the bulk of the debt was long-term concessional debt from the World Bank and from foreign governments (private banks, for the most part, would not lend to, say, Mozambique or Central African Republic). In those cases the principal payments would have been negligible, and if the country was restructuring, they would need temporary help with meeting interest payments or their cost of borrowing would rise.
For debt to become unpayable is generally a result of incompetence and corruption, as much as of changing economic circumstances. The question of whether lenders should have liability where they ignore the manifest incompetence or crookedness of a borrower seems to have not received enough attention.


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Post Re: Development Economics
Robert Tulip wrote:
Whether a strong or weak currency is good or bad is confusing for non-economists, and seems to be disputed among economists as well. So often with such topics people take a small part of this complex puzzle and treat it as the main point. Central banking is such an arcane gnomic pursuit that currency stability is a difficult topic to explain to the broader electorate, except in situations of collapse like Zimbabwe or Venezuela,
I am mainly replying at this point because I want this new thread to come up in "Show my posts." A lot of complexity to sort through for this weekend, when I am under a little bit of time pressure for a change.

Most economists would not accept the question "is a strong or weak currency good or bad?" With an exception I will mention in a moment, the basic perspective is that a country's currency value represents, as well as one number can, the value of its domestic resources (land and labor, mainly, but patents and other intellectual property to a greater and greater extent in the last 3 decades) relative to those of other countries, on world markets.

If demand for its industries rises, the currency will rise, and this is essentially telling us that its land and labor are worth more. If foreign companies begin to outcompete its exporters, then its currency will depreciate. The good side of that depreciation is that it makes the resources more attractive in price, so maybe producers will move in or invest to snap up a bargain. But in general a country would prefer the first situation, where higher demand for its resources has already happened.

As with nearly any price, then, the message for policy is "don't meddle". Better to have private decisions made on the basis of accurate information as to the market value of things.

You can make a case that this analysis is mistaken when a country is in serious recession. Then the high unemployment of its labor and capital resources is poorly signaled by markets (due to wages and prices being sticky downward) and in fact its low demand for imports will tend to make the currency rise, rather than fall. On the other hand, its low interest rates will signal financial capital to exit, which will push the currency downward, so unless the interest rates get close to zero (the infamous Zero Lower Bound) the equilibration process by financial flows will probably do the necessary signalling.

It still might make sense to devalue when unemployment is high, in order to increase demand for domestic (import competing) goods and decrease demand for foreign goods, but as Krugman pointed out in a recent column, other countries are likely to be in the same position and try the same monkey business, leading to no one getting any advantage. "Competitive devaluations" were part of the early 30s slide into the Great Depression, and led to the establishment of the IMF.

So the main exception to the "hands off" advice on exchange rates is when there is a currency crisis, with all the hot money trying to get out the door first, before the rate falls even further. The result can be drastic exaggeration of the problem.

I would argue that neither the Mexican peso crisis of 1995 nor the Thai baht crisis of 1997 really exaggerated the currency drop, but in both cases stabilization was still a good idea. But I will wait a few days, before trying to explain.



Fri Jun 22, 2018 3:10 pm
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Post Re: Development Economics
Robert Tulip wrote:
It is a great tragedy that taxpayers can become liable for private debt. The danger of loan guarantees seems to often be underestimated.
I have been trying to check on this informal history, passed on to me when I was debt officer at OMB, because I know Brazil intentionally loaded up on sovereign debt. I am not having an easy time checking. Let me back up a bit and say that defaulted private debt was "a significant portion" and that I am unable to ascertain how large a portion.

I guess it sounded quite plausible, even sensible, when I heard about this default wave. What astonished me was the great willingness of the money center banks to extend unguaranteed debt in the 90s. I think this was a combination of overburdened LDC governments, an enormous change in attitude toward foreign investment (so the banks did not have to worry too much about confiscation or politically based repudiation), and the growth of institutions like political risk insurance. With maybe a large dose of having gotten used to choosing higher returns in the junk bond wave.

Robert Tulip wrote:
In a situation of weak transparency, authoritarian government is at high risk of corruption, and the responsibility of private banks to factor these governance risks, especially where those banks connive in corrupt deals, seems to be an area where there is inadequate requirement for banks to share the risks of their lending.
I am not aware of corrupt lending, especially not like the connivance at Enron. There may have been plenty, without me hearing about it. The usual stories of corrupt lending are about government-to-government loans such as to Mobutu's Zaire, and to Somalia in the days of Cold War competition for influence.

Robert Tulip wrote:
But what about the problem of corruption, the ability of officials to steal borrowed money? Subordination is not “win-win” when funds are stolen with a lack of controls and sanctions. Getting a sense of the balance between badly used loans and well used loans would help understand the scale of such problems. I have heard many people say that economic rate of return analysis is frequently subordinated to political demand for project approval, suggesting that the non performing loan ratio is likely to be worse than reported. Overestimation of borrowers governance capacity is a pervasive weakness in development banking.
There was a big problem with corrupt diversion of the loan funds in the Clinton and Bush II eras. The World Bank group was aware of it, but when the smell began to attract borrowers more interested in the corruption than the projects, the Bank got serious about enforcement. Other than increased protocols for verification, I have not heard how that came out (I guess we are now about 15 years on - it probably is not a good sign that the Bank is not trumpeting great successes.)

"Political demand for project approval" is a loose term. Some projects were approved to raise the profile of the right issues, especially schooling for girls, but that doesn't mean there was a lobby somewhere saying "Nigeria needs more school for girls". It just pushed the right buttons for political backing (and for rate of return, if you factor in effects on family planning and thus, down the road, on per capita incomes). I think I am not being very clear, but I just wanted to distinguish it from phenomena like "the Israel lobby" or "the Poland lobby" which used to cause a lot of money to be moved.

Robert Tulip wrote:
This reminds me of another chronic problem in lending, that the focus of the bank is on sealing the deal, not managing it or ensuring due diligence about the basis of the loan, so the performance of the loan in terms of delivering outcomes is neglected and the capacity to repay deteriorates.
This has been an important critique of the World Bank for a long time now, and may account for some of what Kinda Scholarly heard about "getting them into greater debt." The emphasis on moving money was based, in my limited view, on the "banker's culture" and the presumption that they could leave results up to the borrower. But obviously in the rough seas of the 80s and 90s (and then the 10s) this hasn't worked out so well.

In Asia, well enough. But Africa has had a rough time of translating projects into growth. Nobody yet has solved the problem of commodity dependence, although I am hearing good things out of Ethiopia and South Africa about industry getting going (South Africa has a strong industrial base, obviously, but seems to be integrating their manufacturing with factories outside the country in a promising way).
Robert Tulip wrote:
For debt to become unpayable is generally a result of incompetence and corruption, as much as of changing economic circumstances. The question of whether lenders should have liability where they ignore the manifest incompetence or crookedness of a borrower seems to have not received enough attention.
The main response to this problem has been to connect lending to governance targets, going back at least to the Clinton administration. Ghana can hardly find use for all the project money that countries offer it, because of its good governance record.

One of the good things about tying to governance has been encouragement of the internal forces toward good governance. Most countries have some honest potential leaders. Some of the most authoritarian, such as Kagame in Rwanda and Musavene in Uganda, have shunned corruption and improved their transparency. It has reached a point, really, where corruption is an indicator of incompetence, as the stupidity of the Mugabe and Zuma regimes demonstrated. Petrostates are an exception - all the oil exporters in Africa are hotbeds of corruption, but not necessarily of incompetence.

It's still generally true that foreign banks don't want to lend to countries that are close to being failed states. Some borderline cases seem to attract a fair amount of interest, especially when the money goes to infrastructure that is obviously going to lead to growth. Zambia, Tanzania, Malawi and Kenya might make good examples of this.

Well, I have learned a lot about Africa since moving there, but I am still not very well informed. I offer these observations as someone on the fringe of the process but with training enough to tell specious from insightful claims. If you have the chance to talk to academics or officials on the inside, give their views more weight than mine.



Mon Jun 25, 2018 5:04 pm
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