The New York Times writes today about the latest round of complaints from poor countries about the loans they get from the IMF and the World Bank, which were created shortly after World War II and haven't changed much since then. This time the pretext for reform is that loans are getting more complicated and climate change is costing poor countries a lot of money even though they aren't the ones responsible. The answer?
Those like Mr. Guzman and Ms. Mottley pushing for change argue that indebted countries need significantly more grants and low-interest loans with long repayment timelines, along with a slate of other reforms.
So countries that are serial offenders thanks to perpetual mismanagement should just be given the money instead of having to take out loans? And if they do take out loans, payments should be spread out over decades?
That doesn't really seem like very sound advice, does it? And yet, it might well be. Instead of playing the same old game for another century, maybe we should just give money to poor countries for deserving causes and ditch the loans altogether. It seems like they do little but create moral hazard among countries who know they can be endlessly bailed out even if their problems are entirely of their own devising.
So sure. You have an idea for a project that seems doable and is economically stimulating? Apply for a grant from the International Capital Building Fund. Global warming is producing huge floods? Apply for amelioration grants from the Climate Change Fund.
But you're bankrupt because you subsidize gasoline and the government is corrupt and the rich don't pay taxes? Then you're on your own. The World Charity Fund will try to take care of the humanitarian suffering, but bailout money will have to come from private markets if you can convince anyone that you're a good risk.
Beyond that, perhaps we should have an International Bankruptcy Court. Even if you've been reckless, if you're bankrupt you're bankrupt—and big lenders knew the risks going in. The court can oversee payments to creditors, if any, and then wipe the slate clean. It works in the US, even if it's galling that even feckless idiots are allowed to wipe out their debts.
So there you have it. Kill the IMF and the World Bank and replace them with the International Capital Building Fund, the Climate Change Fund, the World Charity Fund, and the International Bankruptcy Court, all funded by rich countries that can afford to help out and will work in a spirit of brotherhood and harmony. Piece of cake.
I just assumed most of the "loans" made by the IMF and the World Bank were basically grants, because you know, we have to play the game to make it look like we're not just giving it away. Because we all know that moral hazard is how rich people fool poor people into thinking that "work" is a good and necessary part of life -- that you should have to work to earn money, even as they, the gentry and their kin, live off the estate of their forefathers.
Yeah, I assumed this also. They've always basically been grants that are just called loans.
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Assumptions that are entirely false and reflect simply ignorance and misunderstanding.
World Bank and IMF loans (as with other Multilateral develoment banks and funds, e.g. Asian Development Bank, African Development Bank) are not grants and have always been subject to repayment - except Capital Increases, that is cash contributed by the Member States (which is essentially all nations except the pariahs, e.g. North Korea) - and it is repaid funds that fund in fact (excepting new capital) other new rescue programs, new lending.
Capital does not come out of thin air.
There are separate grant funding lines in context of the Development Banks, typically funded out of recycled 'profits' (that is net gain).
World Bank and IMF rates are generally concessional - concessional meaning "below what going to the pure private market would cost."
The vast majority of IMF and World Bank loans are paid back, and even the few that don't produce a lot of interest and fees payments. When you see a country default, it's almost always the private loans that get hit.
Quite right - IMF is in the jargon Super Senior, WB essentially the same - although they do often roll-over (i.e. refinance) in conditions and situations that no private lender to a Sovereign would ever roll-over. Rescedule and extend but get paid.
Their "concessionality" - rates and conditions (as like guarantees) lower than what private market or even bilateral Sovereign to Sovereigns typically would lend at (see PRC lending e.g.) - is intrinsically tied to this.
Contrary to private capital lenders (as like mostly Bondholders) who for developing markets regularly have to take haircuts or see defaults - and of course price accordingly.
There is a vast amount of Magical Thinking particularly but not uniquely from the Hard Left in respect to developing countries defaults - where sans WB and IMF support, pain is clearly more likely for these instances where the Sovereign is insolvent, spending above levels it can fund out of taxes (typically tax collection is rubbish) and they don't have a god-given right to other people's capital. So the choice is IMF or being Zim or Venezuela, clearly worse options (hyper-inflalation and crony-kleptocracy wearing the thin masque of "socialism")
i don't know why but when i read the words, feckless idiots and bankruptcy, the name donald j. trump immediately came to mind.
Yeah, that's really strange...
Are these programs really to help the developing world, or to help the multi-nationals that want to exploit resources?
Bingo. And these loans almost always come with conditions about changes to government policy which are somehow always a right wing wishlist.
Ah right wing wish lists that include having a robust and fair tax collection system, attacking business tax evasion as well as wealthy families fiscal evasions... (as IMF rightly consistently identifies massive fiscal leakages as well as poor fiscal mobilisation underneath headline rates - they do often suggest lowering headline rates combined with tax enforcement for more realism - of course such advice well is not "right wing wishlist" in the least)
Funny the Fun House Mirror lens political partisans put on.
You can profitably look the paradises of Venezuela, North Korea and Zimbabwe for your response.
As if a stable currency and proper tax collections are somehow things that benefit Multinationals rather than ordinary non-elite companies in a country.
But simplistic Tiers Mondiste sloganeering with an odour of the 1970s is so much easier to engage in.
Won't read the article until my print copy arrives tomorrow. Lack of knowledge never stopped me. Even if the World Bank and IMF haven't changed much (although every new head seems to come in vowing big changes), the international monetary system has. If I understand, Harry Dexter White and Maynard Keynes came up with them to enable the gold standard to work in the 20th century. But Nixon took us off gold.
After the Asian Crisis of 1998, Indonesia got a $4.8 billion loan package from the IMF. The IMF demanded Indonesia cut state subsidies and privatize its public utilities. That led to weeks of street riots in 2003. The Indonesia government relented, told the IMF to go fuck itself and repaid their loans about 4 years early. Since then, Indonesia has turned to China for funding.
Malaysia flat out refused IMF assistance and advice. Instead, Malaysia imposed strict capital controls to eliminate speculative trading in its currency. The IMF mocked Malaysia's approach but it was one of the first countries to emerge from the economic crisis.
IMF is a dirty word in much of Asia.
Kevin's solution sounds good until you realize that governments change. Case in point: Sri Lanka where I grew up, driven to default in 2022 by PM Rajapaksa's and his corrupt family's mismanagement and heavy borrowing. Good thing there was an IMF to spearhead renegotiations of its debt after Rajapaksa's ousting.
So yes, there's something to say for Kevin's idea, but there's also something to say for an IMF that helps stop a downward spiral when those who caused it have been forced out of power. (Not to idealize everything the IMF does.)
As for the World Bank, I'm all for abolishing it for something better.
people starving or freezing is preferably to subsidizing gas?
"...even if their problems are entirely of their own devising."
This seems like a pretty wrong-headed and simplistic notion for countries still working their way out of decades or centuries of colonial misrule.
"If I understand, Harry Dexter White and Maynard Keynes came up with them to enable the gold standard to work in the 20th century."
Your understanding is incorrect.
Plenty of countries that were previously under colonial rule have fixed the problems their colonizers left them with and have moved forward into a better future. (South Korea has done so well it's become easy to forget that they spent the first half of the 20th century under the brutal boot heel of Imperial Japan.) Others have not, and often it's by choice - their elites simply replicate the exploitative behavior of their former colonial overlords under their own management. This choice rests with the local elites, not the former colonizers.
Your "local elites" can only do that if they have an export market for said goods.
As South Asia and South East Asia have amply demonstrated, the development of markets for goods is not something lacking in potential.
50 years on from decolonisation, it is time to open your eyes to the agency that also resides at local levels, and not all resolves to Bad White People (or similar reductionist flips of the old White Man's Burden the Left has flipped around).
Kleptocratic systems however do not encourage domestic investment in productive assets (notably industrial).
Countries that have escaped post-colonial thinking have developed decent infrastructure and at least a plausible go at stable if not ideal domestic property rights and policies (interestingly some of those were even Communist, e.g. Vietnam does okay if not brilliantly).
That's a huge chunk of the problem. The local elites have no faith in the country they are running. Property rights are uncertain. There's no infrastructure. There's no internal market. Government policies are mercurial. A quick glance in the mirror confirms the worst. There's no way they will invest their own assets locally. They know themselves too well.
International Bankruptcy Court: the trouble with naive "why don't we just do X" questions is they implicitly assume the technocratic mandarins are stupid or blind or corrupt…. Whereas there are
There are mechanisms and attempts but when it comes down to it, ENFORCEABILITY is the key issue. No-one short of sending the gunboats and expeditionary forces à la mode de 19e century can force another sovereign to accept a judgment, whether that sovereign is creditor or debtor.
As the recent unenlightened and ongoing Sovereign defaults of Zambia and Sri Lanka illustrate, as it turns out even the Peoples Republic of China for its Sovereign lending rather takes a view that repayment is not a suggestion, and has resisted tooth and nail acceptance of haircuts even on nominally "non sovereign" loans from PRC state tied parties.
Excepting enforcement mechanisms, international sovereign default is doomed to be complex and of course walk away while possible means slamming the door to new debt, which Ministries of Finance, normally staffed by actually numerate people, try to avoid knowing the oain of either hyperinflation from printing to cover current expenditure or the tax rises to fund the same are more painful than IMF.
Grant versus Debt Investment
Leftists always circle to pure Grant, without ever explaining how this would get funded, except of course the magical thinking that the taxpayers of wealthy nations, contrary to all available evidence, will fight up to hundreds of Billions in non recycled funding (which is what grants are) on ongoing and permanent basis.
That is bad fantasy (and one can point to the applied behaviour of the PRC, actual socialist to communiste government).
And of course ignores the fundamental fact that IMF and World Bank are not the only or even in many instances even the major players, vs private and Sovereign to Sovereign as like PRC Belt & Road.
That is not to say that lending reform could not help, although focusing on the Bretton Woods institutions is mistaking the tip of the iceberg as the iceberg
Avoiding providing open debt funding to current operations, I.e. non infrastructure is desirable as taking debt to pay for current social programs and subsidies as most perversely the extensive subsidy to hydrocarbons (direct ones, not implied that US lefties bang on about in re USA).
More grant funding for that perhaps, those defensible segments like public education and law income transfers.
Grant funding in my experience builds in indiscipline generating inefficient white elephants that are poorly scoped on free money that as a socialist oriented colleague named it "build to fail" - good infrastructure pays.
However what there is not roughly of is subsidy to the costs of borrowing or more specifically the Risk Premia that these markets have to pay on projects.
Low cost or free guarantee on projects to lower financing cost would be significant (the Biden administration ot being idiots in large have recently announced such although more is needed)
Actually you need this for your own Renewabl Energy investment in USA giving borrowing costs driving cancellation