University of New South Wales Faculty of Law Research Series
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University of New South Wales Faculty of Law Research Series |
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Re-envisioning Economic Sovereignty: Developing Countries
and the
International Monetary Fund
Ross P. Buckley[*]
This paper is a chapter from "The End of Westphalia? Re-Envisioning Sovereignty", Ramesh Thakur, Charles Sampford and Trudy Jacobsen, (eds)(forthcoming).
Abstract
Developing countries in financial difficulties routinely enter into arrangements with the International Monetary Fund (IMF). Such arrangements reduce the economic sovereignty of the developing country markedly. This paper analyses this reduction in sovereignty and seeks to assess whether it is warranted given the IMF’s performance in the past 15 years and the proven capacity of some developing countries in policy development and implementation. It concludes by considering ways forward for the IMF.
The sovereignty of a nation-state encompasses political autonomy, freedom to regulate movement of goods and people, control over foreign policy and the right to govern free from the interference of other states.[1] Sovereignty is commonly seen as a fundamental tenet of international law that cannot be discarded except at the risk of undermining the international legal system. One of its key features is the ability to make decisions concerning economic policy, namely ‘economy sovereignty’.
The process of increasing globalisation is commonly perceived to erode national sovereignty. However Barry Hindess argues most persuasively to the contrary in this volume that sovereignty in its contemporary form is in fact a product, and instrument, of the process of globalisation.[2]
This chapter commences by examining the ways the practices of the IMF diminish the sovereignty of states that have agreed to an IMF Programme.
The IMF plays a pivotal role in shaping the interaction between developing countries and global capital. The Fund is a supra-national organization with 184 member states. Surveillance, financial assistance and technical assistance are cited as the Fund’s three main functions.[3]
The IMF advises countries upon when and how to liberalise their financial systems and open up to global capital. In addition, for countries with an IMF program in place, the Fund has direct input into the fiscal and monetary policy settings of the country. This was not part of the IMF’s original role. The IMF was founded to assist countries in managing their fixed exchange rates by providing funds and technical advice.[4] However, as developed nations moved away from fixed exchange rates in the 1970s, much of the IMF’s original mission disappeared. Since the inception of the Debt Crisis in 1982 the Fund’s role has evolved so that today its role is managing crises in emerging markets countries and conducting the surveillance, financial assistance and technical assistance that aims to avert these crises.[5]
More than ninety IMF member states have sought loans or technical assistance from the IMF.[6] In the Debt Crisis that commenced in 1982, most African and Latin American countries sought IMF assistance.[7] In recent years the IMF arranged bailout packages in the wake of the Asian crisis of 1997 and offered assistance following crises in Russia, Brazil, Turkey and Argentina.[8] Countries that approach the IMF for assistance are often already in considerable financial difficulty and suffering from macroeconomic mismanagement.[9] The IMF provides loans to states to seek to correct balance of payments problems and promote economic growth by implementing adjustment policies and reforms. The IMF also offers technical assistance, aiding states in formulating and managing economic policy, and advising upon domestic banking systems, fiscal policy and management of public finances. Technical assistance is usually implemented by placing IMF staff in the relevant government departments of the recipient country and by training nationals of the recipient country in Washington D.C. or via the internet. Additionally, the IMF has established regional training centres in Africa, the Caribbean and the Pacific. Countries that adhere to IMF policy recommendations are eligible for assistance from the Fund’s Poverty Reduction and Growth Facility. [10]
The IMF’s financial support is contingent upon entering an ‘arrangement’ with the Fund.[11] The arrangement requires that policies designed to restore financial balance be implemented. The country seeking assistance must provide the IMF with a ‘Letter of Intent’ that outlines the policies it intends to implement.[12] The IMF website states that the policies are formulated by the country seeking financial assistance “in consultation with the IMF.”[13] However the policies and procedures are often effectively imposed upon member states, leaving domestic governments with little scope for input. A government must demonstrate its commitment to the implementation of these economic policies.[14] The recommended policies are intended to reduce public debt and bring about economic stability. The prescriptions are well-intended; however they take decision-making out of the domestic realm. Domestic policymaking is replaced by policies imposed by IMF economists.[15]
The UK government has criticized this form of policy conditionality, and has moved to make its aid dependent on outcome-based conditionality.[16]
Stiglitz suggests the IMF has overstepped its mandate by viewing all matters of domestic policy as factors that potentially contribute to economic instability, and thereby claiming input into a very wide range of domestic structural issues.[17] These policies invariably impose the ‘harsh fiscal austerity’[18] of the ‘Washington Consensus’. The ‘Washington Consensus’ describes the policies advocated by the IMF, the World Bank and the United States Treasury, which include reduction of public expenditure, privatisation of public enterprises, deregulation of financial systems and removal of barriers to trade.[19] These policies reflect the free market ideology popular in the 1980s.[20]
Stiglitz suggests these policies do not address the root causes of financial strife, which vary among countries.[21] IMF policies regularly fail to address human rights issues such healthcare and food shortages. Nonetheless, less-developed countries accept IMF prescriptions due to their weak bargaining power and acute financial need. IMF policies attract vigorous and increasing criticism regarding their formulation, implementation, lack of transparency and lack of accountability.[22]
Furthermore, if a country rejects IMF policies it will forfeit its right to assistance from the World Bank. The World Bank does not offer credit to countries that don’t comply with IMF policy prescriptions.[23]
Nonetheless, over the years several developing countries have chosen not to follow IMF prescriptions. China has enjoyed strong economic growth for two decades by charting its own, unique, economic course. China has a high degree of autonomy in setting its own policies due to the capital controls that isolate its financial system from the vagaries of global capital, the domestic ownership of its financial system, and the strong desire of foreign corporations to do business in China irrespective of the policy environment.[24] Malaysia, Hong Kong, Chile and Colombia have also effectively implemented locally determined policies.[25]
These countries have all implemented policies the IMF would have opposed, such as capital controls, restrictions on speculative trading, and the retention and development of state-owned assets.
In international law, nations have authority to determine their own economic policies. If the IMF is going to require nations to cede most of this authority to the Fund as the price of receiving assistance, the Fund must at least be able to demonstrate that it is better placed than the nations themselves to exercise that authority wisely.
This chapter analyses four developments in the past fifteen years to assess whether the Fund or the developing countries themselves are better placed to exercise this economic sovereignty. These are: (i) the Brady Plan implemented in the early 1990s to address the Latin American debt crisis, (ii) Chile’s response to increasing capital inflows in the early 1990s, and (iii) Malaysia’s response to the Asian Economic Crisis that commenced in 1997; and (i) Argentina’s ongoing economic crisis.
The debt crisis that commenced in 1982 was initially seen as a liquidity crisis that sufficient fresh capital would remedy. However, by early 1989 the banks had wearied of advancing new funds and countries had wearied of their ever-rising debt levels. IMF austerity programmes were endangering democratic governments in Latin America.[26] A new innovative approach was needed, and in March 1989 it was announced by U.S. Treasury Secretary Nicholas Brady.[27]
The first Brady-style restructuring was of Mexico’s medium and long-term debt to commercial banks.[28]
The banks were offered a choice between converting their loans into two types of 30-year bonds or of advancing new money equal to 25% of their exposure to Mexico. The bonds had sufficient collateral to cover the repayment of principal upon maturity and provide a rolling guarantee of 18 months of interest payments. One type of bond paid a market floating interest rate on principal reduced 35%. The other paid a reduced, fixed interest rate on the full principal amount of the loans. The restructuring was said to be ‘voluntary’ but the banks were not given the choice of doing nothing.[29]
The options allowed banks to accommodate their views on interest rates and debtor prospects and their individual tax, regulatory and accounting situations. Nonetheless, banks were reportedly “disgusted” with the Plan and many had to be forced to comply by their respective central banks.[30] Yet, in hindsight the banks benefited enormously from the Plan, as it gave them liquid bonds, rather than relatively illiquid loans, triggered a turn-around in secondary market prices of these assets, and signaled the end of the debt crisis from the perspective of the banks. [31]
In the following years the commercial banks negotiated Brady restructurings with the Philippines, Costa Rica, Venezuela, Morocco, the Philippines, Venezuela, Uruguay, Argentina, Brazil, Bulgaria, the Dominican Republic, Ecuador, Jordan, and Poland.
The architect of the Brady Plan is generally considered to be David Mulford, then Assistant Secretary of the U.S. Treasury. The view that the Plan was conceived in Washington D.C. is buttressed by it being named after the U.S. Treasury Secretary. Yet the genesis of the Brady Plan was in Latin America not Washington: in the Aztec bonds, developed at Mexico’s request and with the input of JP Morgan, in 1988, and in even earlier proposals by Brazil to convert its foreign debt into 35-year bearer bonds with the same face value as the loans and below market fixed interest rates.[32]
David Mulford played a role – he was willing to listen. His was the ear in Washington that was receptive to Mexico’s and Brazil’s ideas, and when Nicholas Brady became Treasury Secretary, Mulford had a superior who was also willing to listen.
But the critical policy lesson is that the creative conceptual thinking behind the Brady Plan was done in Sao Paulo and Mexico City, not Washington. As Professor Luiz Carlos Bresser Pereira has noted, these ideas had been developed and refined in Brazil and Mexico for some years before they were shared with David Mulford.[33] The critical conceptual work was done by the debtor nations, and for the purposes of our present enquiry stands as testament to the capacity of at least some middle-income developing countries to develop sophisticated and innovative policy responses to unprecedented problems.
By the end of the 1980s foreign capital was starting to flow again into Chile in increasing amounts. The damage caused to Chile in 1982 was still fresh in the mind when Chile’s capital account surplus reached 10 percent of GDP in 1990, with short-term flows representing one-third of this amount. Fearing a repeat of 1982, Chile introduced capital inflow controls in 1991.
The capital controls had a number of elements, the most important being an unremunerated reserve requirement: a set proportion (initially 20%) of portfolio inflows had to be put on deposit with the Central Bank for one year, without attracting interest, irrespective of the duration of the inflow.[34] The proportion was increased to 30 per cent in May 1992, and then reduced to 10 per cent in June 1996. .
Chile’s controls effectively lengthened the average maturity of the capital it received.[35] There is strong evidence that the ratio of short-term debt to foreign currency reserves is a powerful predictor of financial crises, and that higher short-term debt levels are associated with more severe crises.[36] Short-term financing is simply not suitable, in the main, for the needs of developing countries. There is accordingly a strong argument for capital controls along Chilean lines that fall most heavily on short-term inflows.
Views are more divided over whether Chile’s controls also served to reduce the volume of capital inflows, although there was a strong initial effect: the capital account surplus fell from 10 percent of GDP in 1990 to 2.4 percent in 1991.[37] When capital inflows surged again in 1992, the proportion of the non-renumerated reserve requirement was increased successfully. Eventually the controls were lifted in 1998 when, in the aftermath of the Asian crisis, global capital flows to emerging markets nations declined precipitately and there was no longer a need to regulate inflows.[38]
The controls altered the mix of incoming foreign capital in favour of long-term debt and away from instability-inducing short-term debt, and they served to reduce rapidly increasing levels of inflows in 1991 and again 1992.[39] As against these factors, they also increased the cost of credit within Chile considerably.
In conclusion, for a developing nation with a thin financial market, unsophisticated private sector risk management techniques and an unsophisticated and under-resourced capital market regulator, there are very strong arguments for capital controls, from time to time, on in-flows.[40] This is particularly so in Asia, where high local savings rates diminish significantly the need for completely open capital markets. As an economy’s own capital markets deepen, and its regulatory systems mature, then it can safely liberalise its capital account. Many developing nations are decades away from that position.
As the above case study suggests, inflow controls can play a real role in stabilizing an economy during periods of high and increasing inflows of global capital, and, as we shall see next, outflow controls can play a similar role in periods of great instability in which capital flight is a major problem. Yet capital controls are a policy option that is unlikely to ever be advocated by the IMF because the U.S. is the world’s largest importer of capital and the strategic interests of the U.S. and of its banking sector require free capital mobility. The strategic direction and policies of the IMF are set in the twice-yearly meetings of their Board of Governors over which the U.S. has enormous influence. Controls are a policy option that developing nations need to have, but they are an option that is unlikely to be available if economic sovereignty has been ceded to the IMF.
Malaysia was the only severely affected crisis country not to adopt an IMF program during the Asian crisis that began in 1997. Malaysia’s policies saw it recover from the crisis at least as fast as those countries that implemented IMF policies.
Malaysia’s initial response to the crisis was an IMF package without the IMF. In consultation with the IMF, Finance Minister Anwar Ibrahim made sharp spending cuts. This policy was subsequently altered on an ad hoc basis, until Prime Minister Mahathir announced a complete change of policy with the introduction of the National Economic Recovery Program in July 1998.[41] This decisive departure from IMF orthodoxy involved an increase in government spending to stimulate the economy, and capital controls to allow the government more control over Malaysia’s economy and to prevent the outflow of foreign capital that would have ensued. Malaysia’s two unique responses to the crisis were the introduction of capital outflow controls and the pegging of the ringgit to the U.S. dollar. The government could then ease monetary policy unhampered by concerns about the impact on the exchange rate of capital outflows.[42]
The outflow controls blocked all avenues for the transfer of the ringgit outside Malaysia and stopped non-residents removing portfolio capital from Malaysia for a period of 12 months.[43] After 6 months, the 12-month restriction was replaced with a variable exit levy on principal or profit from investments in Malaysian securities. The ringgit was pegged to the U.S. dollar in an attempt to prevent speculation in the ringgit. [44]
It has since been widely acknowledged, even by the IMF, that the introduction of the exchange controls and the currency peg was sound policy.[45] The Malaysian response also involved significant financial sector reform, which the IMF notes ‘led to substantial improvement in the sector’s performance’[46].
Malaysia’s expansionary fiscal policy stimulated the economy, which improved confidence and domestic demand.[47] However, to be able to adopt these policies, Malaysia had to impose capital controls. Otherwise the policies would have provoked an exodus of foreign capital that would have more than counteracted any stimulative effect the expansionary policies could have delivered.[48]
Paul Krugman has stressed that capital controls (i) should only be temporary because they distort the economy, (ii) should never be used to defend an over-valued currency and (iii) must ‘serve as an aid to reform, not an alternative’.[49] Malaysia’s use of controls met all of these principles. After three years the controls were all but gone.[50] Malaysia exercised monetary discipline and did not use the controls to inflate the currency or the economy or bail out companies. It used the breathing space afforded by the controls to implement financial and corporate reforms.[51] The IMF notes that the ‘successful experience of the 1998 controls so far is largely due to the appropriate macroeconomic policy mix that prevailed at that time’[52] and that the controls were effective because they ‘were wide ranging, effectively implemented, and generally supported by the business community’.[53]
Whilst capital controls of the type implemented in Malaysia can be circumvented in various ways (principally through under or over invoicing) there was limited circumvention in Malaysia because of its design and enforcement of the controls. The controls were designed to affect all channels for the movement of the ringgit offshore, whilst allowing current account transactions and foreign direct investment.[54]
The decisive and unorthodox crisis policy of pegging the ringgit to the US dollar gave the government more control over its economic policy and prevented speculation in the ringgit. The danger of a pegged exchange rate is that it may become overvalued as was to happen in Argentina. Malaysia avoided this danger by pegging the ringgit at an undervalue, which boosted exports. This undervaluing also served as ‘an incentive for retaining funds in the country’. The peg reportedly ‘reduced uncertainty and made it easier for business to plan’.[55] There has been widespread acknowledgment of the efficacy of Malaysia’s currency peg.[56]
In Kaplan and Rodrik’s words, ‘compared to IMF programs, we find that the Malaysian policies provided faster economic recovery... smaller declines in employment and real wages, and more rapid turn around in the stock market.’[57]
There are a number of possible reasons for the success of Malaysia’s policy response to the crisis. These include:
Each will be considered.
Malaysia had experience in imposing temporary capital controls in 1994 in response to speculative short-term capital inflows[58] and economic recovery is best achieved with policies that suit the condition of the economy in question.[59]
Pre-crisis economic policy in Malaysia involved extensive affirmative action to improve the position of the native Malays (Bumiputras).[60] The Malaysian government was experienced in using economic policy to support social policy. The Malaysian government’s policies did not affect the poor as harshly as IMF policies did in other crisis countries.[61]
One cause of the Asian crisis was a self-fulfilling panic by investors.[62] In Alan Greenspan’s words, the reaction of the markets to Asia’s problems was based on a ‘visceral engulfing fear’.[63] Jeffrey Sachs went so far as to say that there was no reason for the financial panic except panic itself.[64] This panic took the form of ‘a self-fulfilling withdrawal of short-term loans’.[65] In the face of such rapid capital outflows, unconventional tactics may be the only thing that can protect an economy.[66]
Because Malaysia implemented its own reform program, the program was implemented more rigorously than were the reforms in IMF program countries.[67] In other countries political will was absent in implementing reforms. For instance, within days of signing the US$40 billion accord with the IMF, ‘economic reforms seemed to disappear from the [Indonesian] government’s agenda’.[68]
Malaysia’s economic policies during the Asian crisis delivered slightly better economic results than those in countries under IMF programs. Furthermore, Malaysia’s policies were better suited to its specific circumstances than those in IMF-program countries were suited to their circumstances.
Malaysia’s policies had a more benevolent impact on the poor. IMF mandated austerity almost inevitably takes money from programs that benefit the poor. Malaysia’s approach did not punish the poor to repay capital that had principally benefited the rich when it had flowed into the country.
Malaysia’s refusal to adopt IMF policies allowed it to control its own economic destiny. Malaysia could act solely in its own best interests and decision-making power in Malaysia remained with the elected representatives of its citizens.
A further bonus of Malaysia’s approach was the avoidance of the substantial moral hazard occasioned by the IMF-organised bail-outs of Indonesia, Korea and Thailand. A central tenet of IMF policies is that markets allocate resources best. However, the IMF is inconsistent - it often does not allow markets to allocate losses in bad times. This engenders moral hazard, which arises whenever a financial actor does not bear the full risks of its actions.[69]
Indonesia, Korea and Thailand were required to use the bail-out loans arranged by the IMF to repay the credits that were then due, i.e. the debts owed to short-term creditors. This encouraged the extension of short-term debt, the very type of debt that renders an economy more vulnerable to volatility. In the following year, 1998, short-term creditors pumped massive amounts of credit into Russia to claim returns as high as 50% or 60% per annum on short-term Russian government bonds while relying for the repayment of principal on an IMF arranged bail-out.[70] Russia’s geo-political significance meant investors were confident it would not be allowed to default on its financial obligations.[71]
Ironically, given the IMF’s responsibility for the stability of the international financial system, Malaysia’s policies destabilized the system far less than did those of the IMF.
For a decade following the debt crisis of 1982, Latin American countries were net capital exporters. They repaid more than they were able to borrow, living standards plummeted, and infrastructure crumbled.[72]
In contrast, between 1991 and 1998 Argentina prospered as the partial resolution of the debt crisis through the Brady Plan encouraged the resumption of net capital flows into the country. Argentina’s economy performed strongly with GDP per capita increasing an exceptional 44% between 1991 and 1998. Argentina enjoyed its highest rates of growth since the 1920s and inflation was completely under control.[73] Argentina has a strong base for an economy: a high literacy rate, a strong educational system and rich natural resources. Between 1991 and 1998, Argentina significantly improved its banking system, more than doubled its exports, increased infrastructure investment through privatisations, enjoyed significant growth in oil and mineral production and achieved record levels of agricultural and industrial output.[74]
Nonetheless at the end of 1998 Argentina entered a severe recession, due in part to the 1997 Asian economic crisis and the August 1998 Russian crisis. Together these crises severely limited capital flows to emerging markets economies. Argentina accordingly had very limited access to new capital to finance budget deficits and service its debt. However, while the external factors dictated the precise timing of the crisis they were not its cause. [75]
The recession deepened into a severe crisis in late 2001 when the IMF refused to extend further credit to the nation, believing its economic programs to be unsustainable. Argentina was denied access to capital by commercial lenders and defaulted on its external debt of some US$ 132 billion.
The government was forced to float the peso, which more than halved in value overnight. In April 2002 the government was forced to order the indefinite closure of all banks in Argentina.[76] Widespread poverty followed the crisis and UNICEF is concerned that stunted growth and reduced mental capacities in millions of children will be the long-term consequence of this economic crisis.[77]
The principal causes of this crisis were the one to one peg of the peso to the US dollar, the massive inflows of foreign capital[78] and Argentina’s endemic corruption. The first two causes were promoted or supported by the IMF.
The peg was an effective means of stabilising inflation, which was critical in promoting local economic activity and in rendering Argentina an attractive destination for foreign capital. However by making one peso equal to one US dollar, Argentina gave up the principal means by which a nation’s balance of payments remains in balance and its exports remain competitive: adjustments in its exchange rate. When, in the wake of the East Asian and Russian crises in 1997 and 1998 capital flows to Mexico declined sharply, its currency decreased in value, thereby improving the competitiveness of its exports.[79] Similarly when these and other factors affected Brazil, its government was able to devalue the real 40% in January 1999, and thus neatly sidestep an incipient crisis.[80] No such exchange rate flexibility was available to Argentina.
The Brazilian devaluation was particularly problematic for Argentina. Brazil is Argentina’s major trading partner and overnight Argentine products became much more expensive in Brazil.[81]
The unavoidable consequence of the peg, over time, was that, unless either productivity growth in Argentina exceeded the relative appreciation of the US dollar, or private and public sector wages decreased in Argentina, the peso would inevitably become overvalued.[82]
The Argentine tragedy is that, once hyperinflation was defeated in 1994, if the peso had been allowed to gradually depreciate, the growth in the nation’s exports and economy might have been strong and sustainable.[83]
The second cause of the crisis was the Argentinean government’s reliance on international capital to finance budget and current account deficits throughout the 1990s.[84] During the boom from 1991 to 1997, Argentina was thriving on borrowed money.[85] Borrowing to finance budget deficits is particularly problematic because this use of the funds will not generate the foreign exchange to service and repay the debt.
In the early-to-mid 1990s the IMF encouraged the contemporaneous development of a nation’s prudential regulation and the liberalisation of its capital account. Its removal of capital controls permitted strong flows of foreign capital into Argentina in these years. For the IMF to promote the simultaneous, rather than sequential, adoption of these measures proved to be a recipe for disaster first in Indonesia, Korea, and Thailand and then in Argentina. A recent audit by the Independent Evaluation Office of the IMF into the Fund’s role in Argentina in the 1990s found that Argentina borrowed too much, and the IMF acquiesced in this error.[86]
The clearest lesson of the Asian economic crisis that commenced in 1997 is that stringent prudential regulation must precede the liberalisation of a nation’s capital account.[87] Unfortunately the IMF did not learn this lesson in time to avert a calamity in Argentina.
Throughout the 1990s the Argentine government was a model IMF pupil. In liberalising its capital account by relaxing capital controls Argentina was implementing IMF policy, and the pegging of the peso to the US dollar was supported by the Fund.[88]
Argentine compliance continued even through changes of government during the severe recession. Upon becoming president in late 1999, Fernando de la Rua raised taxes and made massive cuts in government expenditure, including deep cuts in state workers’ wages and pensions.[89] These policies were so unpopular Mr de la Rua was forced out of office half-way through his term after violent street protests in late 2001.[90]
Fiscal contraction is bad policy in any recession yet it was the IMF’s first policy prescription for the East Asian crisis in 1997, and an error repeated in Argentina in 1999.
Many economists believe Argentina’s troubles stem directly from its implementation of IMF policies.[91] Certainly, IMF policies provide no insurance against ruinous crises. The IMF lauded Argentina’s policy settings throughout the 1990s, and yet its economy still imploded. Argentina stands as testament to the fact that the IMF can get policy settings very wrong indeed.
The four case studies considered here suggest that the IMF fails to meet the threshold test for claiming economic sovereignty over developing countries: that it can do the job better than the countries themselves. There are a number of reasons for this, including:
If economic mismanagement is one reason a nation needs IMF assistance, it is understandable the Fund wishes to reshape the economic policies of that nation.
However the IMF is very heavy-handed in how it wrests control from the Finance Ministry and Treasury Department of its client nations. The focus of this paper has been on whether the IMF is justified in assuming the economic sovereignty of its client nations, and the answer, from these case studies, has been no. If the IMF wishes to be entrusted with this power it should earn it.
It is therefore worth noting some potential ways forward for the Fund. There are a number of changes the IMF could implement which would, in time, improve significantly the quality of its policies, and their appropriateness for specific developing countries.
These changes include:
For instance, it is arguable that privatisation of state-owned assets offers considerable efficiencies in the use of those assets, and may serve to enhance the economy of the nation that owns the assets. However, this can only be true if the institutional framework of that nation includes a strong rule of law, a free and active media, and a sophisticated financial and professional infrastructure able to price such assets accurately. In most developing nations, the range of potential purchasers is not wide and if these factors are missing it is virtually impossible to realise appropriate prices for the privatisation of major assets. In the absence of these important economic institutions, a policy that may be welfare enhancing in the U.S., Britain or Australia will only lead to knock-down prices for well-connected purchasers, as was seen in Russia in the early to mid-1990s. Thus, a potentially good policy in one institutional environment will always be the wrong policy in the environment prevailing in most developing countries.
[*] Professor, Faculty of Law, University of New South Wales, Program Leader “Enhancing Australia’s Security and Prosperity in the 21st Century”, a Research Network of Australia 21 (http://www.australia21.org.au). An earlier version was presented to The End of Westphalia? Re-envisioning Sovereignty, in Canberra, April 8-10, 2005. My sincere thanks go to Anna Lyons for invaluable research assistance, and to Tina Hunter-Schulz for assistance with the footnotes. The usual claim of responsibility applies.
[1] Sampford, Charles. “Sovereignty as a Traditional and Emergent Concept”, and Charlesworth, Hilary “Current Trends Towards Sovereignty in International Law”, chapters __ and ___ respectively in this volume.
[2] Hindess, Barry. “Sovereignty as Indirect Rule”, chap __ in this volume.
[3] International Monetary Fund, (2004) About the IMF, available from http://www.imf.org/external/about.htm.
[4] Joseph Stiglitz, (2002) Globalisation and its Discontents, New York: Norton Press, 15.
[5] The full text of the Purposes of the IMF can be found in Article I, Articles of Agreement of the International Monetary Fund, available from http://www.imf.org/external/pubs/ft/aa/aa01.htm.
[6] See International Monetary Fund, (2004a) Country's Policy Intentions Documents, available from http://www.imf.org/external/np/loi/mempub.asp?view=loi&sort=ctyAfghanistan; and International Monetary Fund, (2004b) How the IMF helps to resolve economic crises, available at http://www.imf.org/external/np/exr/facts.crises.htm
[7] Quiggan, John (2003) Global Crisis and Australia’s Options: paper presented at the Now We The People conference (University of Technology, Sydney, 24 August 2003), available from http://www.nowwethepeople.org/conference/2003/conference%20papers/john_quiggin.html.
[8] Head, John W. (1998) ‘Lessons from the Asian Financial Crisis The role of the IMF and the United States’ 7 Kansas Journal of Law & Public Policy 70, 70; Joyce, Joseph P (2002) Through a glass darkly: New questions (and answers) about IMF programs: Wesley College Working Paper 2002-04, available from http://www.stern.nyu.edu/globalmacro/, 2.
[9] Rogoff, Kenneth (2003) The IMF Strikes Back, available from http://www.imf.org/external/np/vc/2003/021003.htm; and Joyce, (2002) op cit n 8, 2-3.
[10] International Monetary Fund, (2004c) IMF Lending, available from http://www.imf.org/external/np/exr/facts/howlend.htm; International Monetary Fund, (2001) Policy Statement on IMF Technical Assistance, available from http://www.imf.org/external/pubs/ft/psta/index.htm; and Joyce, op cit n 8 at 4.
[11] International Monetary Fund, (2004c), op cit n 10.
[12] Joyce, (2002) op cit n 8, 2.
[13] International Monetary Fund, (2004c), op cit n 19.
[14] International Monetary Fund, (2004d) IMF Conditionality: A Factsheet, available from http://www.imf.org/external/np/exr/facts/conditio.htm.
[15]Santiso, Carlos (2002) ‘Good Governance and Aid Effectiveness: The World Bank and Conditionality’ 7 Georgetown Public Policy Review 1.
[16]Department for International Development, (2005) ‘Partnerships for Poverty Reduction: Rethinking Conditionality, available from http://www.dfid.gov.uk/pubs/files/conditionality.pdf.
[17] Stiglitz, (2002), op cit n 8, 14.
[18] Rogoff, (2003), op.cit n 9.
[19] Quiggan, (2003), op cit n 7.
[20] Stiglitz, (2002), op cit n 8, 16.
[21]Stiglitz, (2002), op cit n 8, 16.
[22] Stuart, James Gibb (1998) Defending National Economic Sovereignty, available from http://www.prosperityuk.com/prosperity/articles/jgs1.html; George, Susan (1999) A short history of neo-liberalism: Twenty years of elite economics and emerging opportunities for structural change: Paper presented at the Conference on Economic Sovereignty in a Globalising World (Bangkok, 24-26 March 1999), available at <http://www.zmag.org/CrisesCurEvts/Globalism/george.htm; Joyce, (2002), op cit n 8, 2; and Raffer, Kunibert (2004) “International Financial Institutions and Financial Accountability”, 18 Ethics and International Affairs, 61.
[23] World Bank Group, (2004a) About Us, available from http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html.
[24]Weisbrot, Mark (1999) ‘Think Globally, Act Nationally: the Case for National Economic Sovereignty’ The Nation, 21 June 1999, available from http://lists.essential.org/stop-imf/msg00138.html.
[25] See Buckley, R., & Fitzgerald, S. M, (2004) ‘An Assessment of Malaysia’s Response to the IMF during the Asian Economic Crisis, Singapore Journal of Legal Studies 96.
[26] Statement of Professor Luiz Carlos Bresser Pereira, (1989) Solving the Debt Crisis: Debt Relief and Adjustment (Statement delivered before the House Committee on Banking, Finance and Urban Affairs hearings on the “Lesser Developed Countries’ Debt Crisis”), 101st Congress First Session, 5 January 1989, 330, 332.
[27] Brady, Nicholas (1989a) ‘Remarks to a Third World Debt Conference’ Department of State Bulletin, May 1989, 53-56.
[28] Santos, ‘A. Gonzalo (1991) Beyond Baker and Brady: Deeper Debt Reduction for Latin American Sovereign Debtors’ 66 NYULR 66, 79.
[29] ‘The Debt Agreement’ (1989), Mexico Service (Mexico), 27 July 1989; and Santiso, op cit n 15.
[30] (1989) ‘Hurricane heading for Brady Plan’, 794 IFR, 23 September 1989, 12; and ‘1989) ‘Commercial bankers say Brady Plan is a non-starter’ 795 IFR, 30 September 1989, 8.
[31] For a detailed consideration of the benefits to the banks of the Brady Plan, see Buckley, R. (2004) ‘Turning Loans into Bonds: Lessons for East Asia from the Latin American Brady Plan’ 1 Journal of Restructuring Finance 185.
[32] ‘LDC Debt - The deep discount bushfire’ (1987), 690 IFR, 12 September 1987, 2947.
[33] Pereira, (1989) op cit n 26.
[34]Rajan, R.S (1998) ‘Restraints on Capital Flows: What Are They?’ The Institute of Policy Studies Working Paper No. 3 (Singapore) 3, Table 3.
[35] Habermeier, J, Ariyoshi, A et al, (2000) Country Experiences with the Use and Liberalization of Capital Controls’ available from http://www.imf.org/external/pubs/ft/capcon/index.htm; Edwards, Sebastian (1999) How Effective Are Capital Controls? NBER Working Paper No. W7413, 11, available from http://www.nber.org/papers/w7413; Eichengreen, Barry and Mussa, Michael (1998) ‘Capital Account Liberalization: Theoretical and Practical Aspects’ IMF Occasional Paper No 172, 49-52 (and the sources there cited); Feldstein, Martin (1999) ‘A Self-Help Guide for Emerging Markets’ Foreign Affairs 93; Rajan, 1998, op cit n 34, Table 3.
[36] Rodrik, Dani and Velasco, Andres (1999) Short-term Capital Flows, NBER Working Paper No. W7364.
[37] Eichengreen and Mussa, (1998), op cit n 35, 49-52; Reinhart, Carmen M and Smith, R Todd (1997) ‘Temporary Capital Controls’ National Bureau of Economic Research Draft Paper, 8; Rajan, 1998, op cit n 34, Table 3.
[38] Gallego, Francisco, Herdanez, Leonardo and Scmindt-Hebbel, Klaus (2000) Capital Controls in Chile: Effective? Efficient? (Paper presented at the Latin American and Caribbean Economic Association 2000 Annual Meeting, Rio de Janeiro, 12 October 2000), available from <http://www.lacea.org/meeting2000/FranciscoGallego.PDF, 4.
[39] The conclusion of Ariyoshi, Habermeier, et al, (2000), op cit n 35, is that inflow controls were partly effective in reducing the level and increasing the maturity of inflows in Malaysia and Thailand, and in affecting the composition of the inflows in Colombia and Chile but were largely ineffective in Brazil.
[40]Bustelo, P, Garcia, C and Olivie, I (1999) ‘Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)’ Instituto Complutense De Estudios Internacionales Working Paper No. 16, 78. This was a recommendation of the Council on Foreign Relations in the U.S.: see ‘The Future of the International Financial Architecture; A Council on Foreign Relations Task Force’ (1999) Foreign Affairs, 169.
[41]Athukorala, Prema Chandra, (2001) Crisis and Recovery in Malaysia: The Role of Capital Controls (2001), 66.
[42] Athukorala, (2001) op cit n 41, at 17; and International Monetary Fund, (1999) Malaysia: Recent Economic Developments,16.
[43] International Monetary Fund, (1999), op cit n 42, at 23; and Buckley, Ross (1999) ‘The Role of Capital Controls in International Financial Crises’ 11 Bond Law Review 231.
[44] International Monetary Fund, (1999), op cit n 42, 23.
[45] Ariyoshi, Habermeier, et al, (2000), op cit n 35. Navaratnam, Ramon V. (2002) Malaysia's Economic Sustainability: Confronting New Challenges Amidst Global Realities, Subang Jaya: Pelanduke Publications
[46] International Monetary Fund, (2001), op cit n 10, 71.
[47] Ariff, Mohammed and Kadir, Azidin Wan Abdul (2000) 'The Near-Term Outlook for the Malaysian Economy' (Paper presented at the ISEAS Regional Conference, Singapore, 6 January, 2.
[48] International Monetary Fund, 2001, op cit n 10, 13; Corsetti, Giancarlo; Pesenti, Paolo and Roubini, Nouriel (1998) What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate National Bureau of Economic Research Working Paper 6834, available from http://netec.mcc.ac.uk/WoPEc/data/Papers/nbrnberwo6834.html; Eichengreen, Barry (1999) Toward a New Financial Architecture: A Practical Post-Asia Agenda, 56.
[49] Krugman, Paul (2003) An Open Letter to Prime Minister Mahathir, available from http://web.mit.edu/krugman/www/mahathir.html.
[50]Nathan, K.S. (2001) ‘Economic Slowdown and Domestic Politics: Malaysia Boleh?’ 12 Trends in Southeast Asia, 4.
[51] International Monetary Fund, (2001), op cit n 10, 54.
[52] International Monetary Fund, (2001), op cit n 10, 6.
[53] International Monetary Fund, (1999), op cit n 42, 18.
[54] International Monetary Fund, (2001), op cit n 10, 54.
[55] International Monetary Fund, (2001), op cit n 10, 50, 13, 10.
[56] Navaratnam, (2002) op cit n 45, 35.
[57] Kaplan, Ethan and Rodrik, Dani Did the Malaysian Capital Controls Work? (2003) National Bureau of Economic Research Working Papers, available from http://papers.nber.org/papers/W8142.
[58] Reinhart and Smith, 1997, op cit n 37, 10; Athukorala, Prema-Chandra (2001) ‘Capital Mobility, Crisis and Adjustment: Evidence and Insights from Malaysia’ in Dasgupta, Dipak; Uzan Marc and Wilson Dominic (eds), Capital Flows Without Crisis? Reconciling Capital Mobility and Economic Stability, Edward Elgar Publishing, Cheltenham, England 255, 257.
[59] Abidin, (1991,) op cit n 48, 1, 6.
[60] Mohamad, Mahatir bin (1998) The Way Forward, Malaysia, 85.
[61] Nyland, Chris et al, (2003) 'Economic and Social Adjustment in Malaysia in the 'New' Business Era' in Chris Nyland et al (eds), Malaysian Business in the New Era, , Cheltenham, UK, Edward Elgar 2.
[62]Buckley, Ross (2000) ‘An Oft-Ignored Perspective on the Asian Economic Crisis: The Role of Creditors and Investors’ 15 Banking and Finance Law Review 431, 431-454.
[63] Quoted in Kelly, Paul (1998) ‘IMF tightens the screws on Suharto’, The Australian, 11 March, 13.
[64] Quoted in Tirole, Jean (2002) Financial Crises, Liquidity, and the International Monetary System, Princeton, New Jersey: Princeton University Press, 44.
[65] Tirole, (2002), op cit n 64, 44.
[66] Eichengreen, (1999), op cit n 48, 56.
[67] International Monetary Fund, (2001), op cit n 10, 15.
[68] Sanger, David E. (1998) 'IMF Reports Plan Backfired, Worsening Indonesia Woes', The New York Times, 14 January.
[69] For a consideration of the moral hazard engendered by the IMF-organised bail-outs of Indonesia, Korea and Thailand in 1997 and the ways in which it contributed to Russia’s economic meltdown in 1998, see Buckley, (2000), op cit n 62, 431.
[70] IMF Economic Forum, (1999) Financial Markets: Coping with Turbulence available from http:www.imf.org/external/np/tr/1998/TR981201.HTM.
[71] “Many [investors] refused to believe the United States and the International Monetary Fund would allow Russia to collapse until it actually happened.”: Fuerbringer, Jonathon (1999) ‘After Russian Lesson, Bond Prices Remain Stable in Latest Crisis’, The New York Times, 14 January.
[72] See Statement of Pinstrup-Andersen, Per (1989) ‘Food Security and Structural Adjustment’ (Statement delivered before the House Committee on Banking, Finance and Urban Affairs hearings on the ‘International Economic Issues and Their Impact on the U.S. Financial System’, 101st Congress First Session, 4 January 1989) 165, 181; Testimony of Jolly, Dr Richard before the same House Committee hearings, at 14; and Dohnal, Jerry (1994) ‘Structural Adjustment Programs: A Violation of Rights’ [1994] AUJlHRights 5; 1 AJHR 57.
[73] Kiguel, Miguel (2002) ‘Structural Reforms in Argentina: Success or Failure?’ XLIV(2) Comparative Economic Studies 83, 84; percentage calculated from Figure 1. There was a brief hiatus in growth during 1995 because of the contagion from Mexico’s crisis in late 1994: id at 94-95.
[74] Kiguel, (2002), op cit n 73, 100-101.
[75] Kiguel, (2002), op cit n 73, 84; and Buckley, Ross (1999) Emerging Markets Debt, The Hague: Kluwer Law International, 21.
[76] Gaudin, Andres, (2002) ‘Thirteen days that shook Argentina – and now what?’ 35 NACLA Report on the Americas, 6; Teather, David (2002) ‘Argentina orders banks to close’, The Guardian, 20 April; and Tran, Mark (2002) ‘Argentina scrambles to avoid financial collapse’, Guardian Unlimited (United Kingdom), 22 April.
[77] Sophie Arie, “Rich Argentina tastes hunger”, The Observer, May 19, 2002
[78] Feldstein, Martin (2002) ‘Argentina’s Fall’ 81 Foreign Affairs 8; and Interview with Taylor, Lance (2001) ‘Argentina: A Poster Child for the Failure of Liberalized Policies? Challenge November-December, 28.
[79]Rojas-Suarez, Liliana ‘Toward a Sustainable FTAA: Does Latin America Meet the Necessary Financial Preconditions?’, unpublished paper.
[80]Gruben, William and Kiser, Sherry (1999) Why Brazil Devalued the Real in Federal Reserve Bank of Dallas available from http://www.dallasfed.org/eyi/global/9907real.html; and Amann, Edmund and Baer, Werner (2002) Anchors Away: The Costs and Benefits of Brazil’s Devaluation University of Illinois at Urbana-Champaign College of Business Working Papers, available from http://www.business.uiuc.edu/Working_Papers/papers/02-0122.pdf.
[81]Rojas-Suarez, op cit n 79.
[82]Kiguel, 2002, op cit n 73, 85; Anne Krueger puts it this way: “under a firmly fixed exchange rate, you need other sources of adjustment to maintain competitiveness”. See Krueger, ‘Crisis Prevention and Resolution: Lessons from Argentina’ (Paper at the NBER Conference on ‘The Argentina Crisis’, Cambridge, 17 July 2002) available from www.imf.org/external/np.speeches/2002/071702.htm.
[83] Sachs, Jeffrey (2002) ‘A Crash Foretold: Argentina must revamp its society and economy for a high-tech world’ 159 Time International14 January, 17.
[84] Kiguel, ‘2002, op cit n 73, 101.
[85] Rojas-Suarez, op cit n 79. .
[86] See Independent Evaluation Office (IEO) of the International Monetary Fund, (2004) Report on the Evaluation of the Role of the IMF in Argentina: 1991-2001, available from http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm.
[87] Buckley, 2000, op cit n 62, 439-440.
[88] Feldstein, Martin (2002), op cit n 35, 8; Denny, Charlotte (2002) ‘Firefighters turn on tap again’, The Guardian12 August.
[89]Jeffery, Simon (2002) ‘Crisis in Argentina’, Guardian Unlimited, 4 January.
[90]Goni, Uki (2001) ‘Argentina collapses into chaos’, The Guardian, 21 December; and Healey, Mark and Seman, Ernesto (2002) ‘Down, Argentine Way’ 13 The American Prospect 12. And the protests have not stopped since: see (2002) ‘Argentine Crisis Fuels Protests’, Assoc Press Online (New York), 26 August; and (2002) ‘Argentines protest against government economic policies’, Xinhua News Agency, 30 August.
[91] Rohter, Larry (2002) ‘Giving Argentina the Cinderella Treatment’, The New York Times, 11 August, 14.
[92] SDR’s are allocated as a result of a member’s Quota, which is broadly determined by its economic position relative to other members. Various factors are considered in determining the quota, including GDP, current account balances, and official reserves. See International Monetary Fund, (2004) IMF Quotas: A Fact Sheet 2004, available from http://www.imf.org/external/np/exr/facts/quotas.htm.
[93] This anecdotal evidence has been supported by recent research into the extent to which IMF and World Bank lending patterns support the interests of the major OECD countries. See Faini, Riccardo and Grilli, Enzo (2004) “Who runs the IFIs?”, CEPR Discussion Paper No. 4666, available from http://ssrn.com/abstract=631010.
[94] North, Douglass C. (1990) ‘Institutions, Institutional Change and Economic Performance, Cambridge; Cambridge University Press.
[95] See text accompanying n 19.
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