IMF Managing Director Horst Köhler has recommended for Executive Boardapproval a transitional program for Argentina. The IMF said that while

providing no net new financing, the arrangement would provide financial sup-port and an extension of payment expectations to the IMF through August 2003.The Executive Board is expected to review the transitional program in the coming days.

The policy commitments developed by the government under the new agree-ment with the IMF could, if implemented consistently, nurture the macro-economic stability seen during the second half of 2002 and build a bridge to acomprehensive program to be negotiated with a successor government after theApril elections. The new agreement with the IMF would also unlock fundingfrom multilateral development banks for social programs, which are key to pro-tect the vulnerable groups from the adverse effects of the crisis.

In a statement released after the completion of the IMF’s annual assessmentof Argentina’s economy, the IMF said on January 8 that the country shouldfocus on achieving a clear political consensus in favor of reforms, with a view tobuilding a sound fiscal framework, restoring confidence in the banking sector,increasing trade openness, rebuilding legal certainty,

InternationalMonetary FundVOLUME 32NUMBER 1January 20, 2003

In this issue

Financing forArgentina

1AEA in Washington

2Design of SDRMdiscussed

Fischer calls for “fairer”globalization

9De Vries honored

10Latin America stillcrisis prone?

11African leaderstackle challenges

15Demekas onpostconflict aid

and…

3Use of IMF credit

12Recent publications

13New on the web

14IMF arrangements

16IMF rates

1

IMF strikes deal with Argentina

In early January, thousands of economists tradition-ally descend on a U.S. city for the annual American

Economic Association (AEA) conference. This year, thevenue was Washington, D.C., which no doubt promptedthe unusually large number of policy-oriented panelson top of the customary wide array of research-orientedpanels. Maureen Burke, Asimina Caminis, Jeremy Clift,Elisa Diehl, Sheila Meehan, and Patricia Reynoldshighlight several sessions on financialcrises and on the outlook for the U.S.economy. Coverage of additional panelswill appear in the IMF Survey’s nextissue.

What has Argentina taught us? Why hasArgentina been so hard hit? Was this cri-sis avoidable? Could the internationalcommunity have done anything differ-ent? And how important is an IMF pro-

gram to Argentina’s recovery? The depth and length of the crisis—and the need to look to the future—provided the impetus for Guillermo Calvo (Inter-American Development Bank), Michael Dooley(Deutschebank), Kristin Forbes (previously with theU.S. Treasury and now at the Massachusetts Instituteof Technology), Nouriel Roubini (IMF and New YorkUniversity), and Randall Kroszner (U.S. Council of

Economic Advisers) to examine whatwent wrong and what it would take tosustain a recovery.

Calvo, Roubini, and Dooley essen-tially agreed that the severity ofArgentina’s crisis was due to a combina-tion of fiscal woes, a weak banking sys-tem, and political problems. Calvoemphasized that the drying up of finan-cial flows to emerging markets thatresulted from

Annual AEA meetingEconomists probe past, current crises for insights

(Please turn to the following page)

(Please turn to page 4)

www.imf.org/imfsurvey

Guillermo Calvo

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and restructuring debt withprivate external creditors.

Elsewhere in the region, the IMF on January 15approved a two-year, $2.1 billion Stand-By Arrange-ment for Colombia in support of its economic pro-gram through 2004. The approval makes $264 mil-lion available immediately. The authorities haveindicated that they intend to treat the arrangement as precautionary. In announcing the loan, Köhlerpraised Colombia’s “strong reform program.” Henoted that “the Executive Board commends the gov-ernment for its rapid and determined action toaddress the fiscal pressures, which emerged in 2002,and develop a comprehensive strategy for stability,growth, and improved social equity.”

As for Ecuador, an IMF mission is currently in Quitoto hold discussions with the new economic team on apossible Stand-By Arrangement, as well as to completea long delayed overall assessment of the state ofEcuador’s economy. President Lucio Gutierrez tookoffice on January 15, and his government is proposing a comprehensive economic program to deal withEcuador’s immediate fiscal pressures and to restartstructural reforms aimed at sustaining growth in thedollarized economy.

In a statement following the IMF’s annual assess-ment of Peru’s policies, the IMF said on December 23that it was pleased with the country’s overall policyframework, which aims at maintaining macro-economic stability and reinforcing an already solid

financial system. Looking forward, the IMF notedthat it was important that the authorities garner thenecessary political consensus to carry out their policyagenda. Peru has a $340 million loan program withthe IMF, which was approved in February 2002. Thefirst review of the program, which was completed atthe same time as the annual assessment, providesPeru with $154 million in fresh funds. The countryhas not made any drawings under the loan so far.

The IMF completed on December 19 the firstreview of Brazil’s performance under the $30.7 billionloan approved last September. Completion of thereview provides Brazil with $3.1 billion in additionalfunds, in addition to the $3.1 billion provided whenthe program was approved in September. Theremaining amount—about $24 billion—will becomeavailable in 2003. In a statement released shortly afterthe conclusion of the review, Köhler said that Brazil’sperformance under the program had so far been“exemplary,” and he called on the new administrationto continue working to restore confidence in its econ-omy. On January 1, Luiz Inácio Lula da Silva becameBrazil’s new president.

On December 19 and 20, the IMF’s ExecutiveBoard—chaired by First Deputy Managing

Director Anne Krueger—continued discussions ofthe possible features of a new sovereign debt restruc-turing mechanism (SDRM). The discussion was astep toward fulfilling the International Monetary andFinancial Committee’s request for a concrete SDRMproposal that could be considered at its next meetingin April. The Board’s debate revolved around a staffpaper that reflected extensive staff contacts with pri-vate market participants, debt restructuring practi-

tioners and other workout specialists, academics, andmembers of the official community.

In her summary of the Board’s discussions, Kruegernoted that “most Directors reaffirmed their belief thata carefully designed debt restructuring mechanismcan make an important contribution to improving thecomprehensive framework for crisis resolution andthe international financial architecture more generally.The objective of the SDRM is to provide a frameworkthat strengthens incentives for a sovereign and itscreditors to reach a rapid and collaborative agreementon a restructuring of unsustainable debt in a mannerthat preserves the economic value of assets and facili-tates a return to medium-term viability, and therebyreduces the cost of the restructuring process.

“To achieve this objective, the SDRM must notonly address collective action problems among

January 20, 2003

2

Argentina secures breathing space(Continued from front page)

IMF Board debates SDRM design

Photo credits: Denio Zara, Padraic Hughes, PedroMárquez, and Michael Spilotro for the IMF, pages 1,4–10, and 15; Christophe Simon for AFP, page 16.

For further information on these developments, please see the following items on Colombia (Press Release No. 03/04),Argentina (Press Release No. 03/01), Brazil (News BriefNo. 02/128), and Peru (News Brief No. 02/126 and PublicInformation Notice No. 02/139). All are available on the IMF’swebsite (www.imf.org).

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January 20, 2003

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creditors, but also catalyze an early and effectivedialogue and exchange of information between the debtor and its creditors. By creating greaterpredictability in the restructuring process, the SDRMshould also be expected to improve the functioningof international capital markets—an objective thatshould remain a primary concern going forward.”

While Executive Directors found much commonground for moving the discussion forward, a wealthof views were expressed on many aspects of a possibleSDRM. For some important features of the mecha-nism, Directors insisted that all options under consid-eration remain on the table at this stage. Although abrief summary cannot do justice to the breadth of thedebate, issues generating the most discussionincluded the following:

• Scope of claims to be covered. Directors generallyagreed that, in cases where a sovereign’s debt burdenwas unsustainable, a broad range of claims mightneed to be restructured—both to help ensure areturn to debt sustainability and to achieve sufficientintercreditor equity to garner broad support for therestructuring. At the same time, Directors observedthat the debtor could decide to exclude certain typesof claims from a restructuring, in particular to limitthe extent of economic and financial dislocation.

Most Directors therefore thought that the mecha-nism should identify the range of claims that couldpotentially be restructured under the provisions ofthe SDRM while leaving it to the debtor—in negotia-tions with its creditors—to determine which of theseeligible claims would need to be restructured in aparticular case. Much of the discussion then focusedon which types of claims should be excluded fromthe SDRM and how to define more precisely thoseclaims that should be included.

In particular, Directors supported the exclusion ofclaims that were already governed by domestic lawand subject to the exclusive jurisdiction of domesticcourts. However, they stressed that the mechanism’stransparency requirements would need to help ensurethat the restructuring of these claims would be ade-quately coordinated with the restructuring of claimsunder the SDRM.

Directors did not reach a definitive view on how totreat the claims of official bilateral creditors. Whilemany thought that such debts had been efficientlyrestructured in the past (as needed) through the ParisClub, a number of other Directors thought that includ-ing official bilateral creditors under the SDRM wouldbe important for achieving greater inter-creditor equity.

• Activation. Most Directors thought that the debtorshould be allowed to activate the mechanism unilaterally,without third-party confirmation that the activation was

justified. They noted that several proposed features of themechanism would discourage abuse of the SDRM.Furthermore, the IMF would be able to influence amember’s decision to activate the mechanism through itspolicy dialogue and the exercise of its financial powers.

• Consequences of activation. A central issue iswhether the mechanism should provide a stay on cred-itor enforcement. Many Directors favored keepingopen the option of an automatic stay on litigation thatwould remain in place for a brief period until creditorswere sufficiently organized to vote on an extension.

However, many other Directors noted that anautomatic stay would constitute a significant, andpossibly unnecessary, erosion of contractual rights.They viewed the use of a more limited approach—which lawyers refer to as the hotchpot provision—possibly supplemented by injunctive relief as a work-able alternative that would discourage litigation with-out imposing a limitation on enforcement rights.Some Directors urged that this rule be supplementedby a feature that would enable the Sovereign DebtDispute Resolution Forum, upon the request of thedebtor and the approval of a qualified majority ofcreditors, to issue a stay under specific circumstances.

Directors encouraged management and the staff tocontinue work on the design features of the SDRM.The conference on the SDRM—hosted by the IMF onJanuary 22—will be an important opportunity to makefurther progress in clarifying outstanding issues and inbuilding consensus on the mechanism’s design.

Members’ use of IMF credit(million SDRs)

During January– January–December December December

2002 2002 2001

General Resources Account 2,569.35 25,236.95 23,761.62 Stand-By 2,294.11 23,948.13 23,019.62

SRF 1,141.06 9,044.73 13,240.71EFF 275.24 1,261.85 742.00CFF 0.00 0.00 0.00EMER 0.00 26.98 0.00

PRGF 120.98 1,344.49 872.64Total 2,690.33 26,581.44 24,634.26

SRF = Supplemental Reserve FacilityEFF = Extended Fund FacilityCFF = Compensatory Financing FacilityEMER = Emergency assistance programs for countries following

conflicts and natural disastersPRGF = Poverty Reduction and Growth FacilityFigures may not add to totals shown owing to rounding.

Data: IMF Treasurer’s Department

The full text of the Public Information Notice on the Boarddiscussion and the staff paper are available on the IMF’s web-site (www.imf.org).

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January 20, 2003

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East Asia’s crisis of1997–98 caused a sharp depreciation of the equilib-rium real exchange rate. The warranted depreciationwas larger in relatively closed economies likeArgentina that are less able to respond by increasingtheir exports. Argentina was also more vulnerablebecause of the level of its debt denominated in U.S.dollars.

In Roubini’s view, the severity of Argentina’s fiscalproblems distinguished it from other emerging mar-kets. The country was basically insolvent, and this,together with currency, banking, and corporate crises,capital controls, a bank run, a freeze on deposits, and adefault on domestic and external debt, made Argentinamore vulnerable to financial turmoil and political strife.

Dooley blamed the severity of Argentina’s crisis onthe government’s unwillingness to take any correctivesteps. Its choices were to default or devalue, and it didneither, he said, until it was too late. Instead, it raidedthe banks, introduced capital controls, and redistrib-uted wealth arbitrarily, which led to a completebreakdown of financial intermediation and uncer-tainty about how the problems would be resolved.Dooley’s prognosis was that recovery in Argentinawould be delayed as much as 10 years because of thedifficulty of restructuring private sector debt. “Untilall losses are allocated,” he said, “there will be no eco-nomic recovery.”

Was the crisis avoidable? Could the internationalcommunity have done something else? As Forbesnoted, none of the panelists suggested that a largebailout could have prevented the crisis. Roubini agreedin part with Dooley that a government could not beforced to default, but he argued that if official financ-ing had been cut off in November or December 2000,even as late as the summer of 2001, Argentina, lackinganother source of finance, would have experienced arollover crisis. It would then have been forced todefault and accept the consequences.

By mid- or late 2001, Roubini said, Argentina hadreached the point of no return. It was too late for fiscaladjustment, and dollarization, which had been sug-gested, was a bad idea. Early on, he maintained, ifArgentina had resolved its own problems through theprivate sector, debt restructuring would have beenmore orderly. But the country did not go that route,and, as a result, the debt restructuring occurred muchlater and was far more disorderly.

But, Forbes and Kroszner noted, Argentina’s situa-tion has begun to stabilize and a recovery—albeitslow—is under way. According to Forbes, outputgrowth in 2003 should be positive; the peso has more

or less stabilized following a 70 percent depreciationlast year; unemployment has declined by 4 percentsince May 2002; bank deposits have stabilized andare starting to increase; and although inflation ishigh, there is no hyperinflation. Still, Krosznerpointed out, growth needs to be reignited. For that tohappen, there must be political stability and lessuncertainty about future economic policies.

Forbes and Kroszner agreed that if Argentinawanted a vigorous recovery, IMF support for the eco-nomic program would be important. It wouldimprove the chances of a stable environment and sig-nal to foreign direct investors that recovery was start-ing. In Forbes’s view, if the IMF made more moneyavailable to Argentina than the country needed torepay debt, the government would have the incentiveto undertake difficult reforms. But Roubini had reser-vations about Argentina’s receiving net new financing.He noted that the IMF already had a large exposure tothe country, the current Argentine administration hadno credibility for reform, and the huge currentaccount turnaround, of 10 percent of GDP, suggestedthat Argentina needed money only to roll over its cur-rent debt.

How should sovereign debt crises be addressed?Given gaps in the current international financialarchitecture, sovereign states with unsustainabledebt burdens often delay restructuring efforts, withpainful results for debtor and creditors alike. IMFFirst Deputy Managing Director Anne Krueger,whose proposal in November 2001 for a “statutory”solution reenergized the debate on this issue, out-lined the current state of play with regard to thesovereign debt restructuring mechanism (SDRM)proposal (see also page 2). She highlighted, in par-ticular, work that was proceeding on a frameworkthat would strengthen the incentives for both par-ties to reach a rapid and collaborative restructuringof unsustainable debts.

Randall Kroszner then reviewed U.S. administra-tion proposals for a “contractual” approach thatcould expand the use of collective action and otherclauses in individual bond issues and encourage theformation of voluntary dispute resolution forums.

How should the respective merits of these propos-als be evaluated? Barry Eichengreen (University ofCalifornia, Berkeley) acknowledged that the statutoryapproach would be more comprehensive because itcould restructure multiple debt issues simultaneously.In practice, however, its relative usefulness wouldhinge, in part, on whether restructurings involvingmany debt issues were significantly more costly than

Panelists discuss Argentina, sovereign debt crises(Continued from front page)

Michael Dooley

Nouriel Roubini

Kristin Forbes

Randall Kroszner

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those involving fewer issues. His empirical evidence(undertaken jointly with the IMF’s Ashoka Mody)suggested that investors did indeed perceive this to bethe case. In particular, countries with the lowest creditrating (those most likely to restructure) faced higherrisk premiums on new debt issues if many issues werealready outstanding.

Panelists, as well as discussants Guillermo Calvo,Ann Harrison (University of California, Berkeley), andMorris Goldstein and Michael Mussa (both with theInstitute for International Economics and previouslythe IMF), broadly agreed that the key test would behow well a proposed solution could minimize thenumber of financial crises and how quickly it couldreturn crisis countries to a sustainable growth path.Most saw merit in the two-track approach: promotingthe use of collective action clauses and voluntaryforums while working toward agreement on anSDRM. They saw the two tracks—one that could bepursued relatively quickly and the other that wouldtake some time—as complementary.

But several discussants also cautioned against over-selling either option. Goldstein noted that neitherapproach addressed a critical obstacle to restructur-ing—the large overhang of sovereign bonds in thedomestic economy. Mussa observed that, even if anSDRM had been in existence, it would have beenapplicable in only a small number of past crises. Andvery little of the enormous costs associated withfinancial crises has been attributable to litigation(although he conceded that the ultimate resolution ofArgentina’s crisis may teach us a lot about such costs).The SDRM might be useful, but Mussa cautionedagainst proposing it as a solution to emerging marketfinancial crises. That, he said, was like “giving anaspirin to someone who has cancer.”

Learning from history? Earlier eras of global finan-cial integration may hold lessons for today’s emergingmarket economies. Delving into the question of howlenders in the prewar and interwar periods assessedsovereign risk, Maurice Obstfeld (University ofCalifornia, Berkeley) and Alan M. Taylor (Universityof California, Davis) studied the London bond mar-ket from the 1870s to the 1930s. They found thatadherence to the gold standard gave sovereign bor-rowers credibility before World War I, shaving 40 to60 basis points from country borrowing spreads.

In the 1920s, however, as workers and previouslydisenfranchised groups gained political power, andaccess to global markets became more democratic,markets began looking more closely at the “books.”The markets no longer considered a hard peg to bea substitute for good policies, and adherence to thegold standard ceased to be a guarantee of attractive

borrowing terms. Factorslike public debt levels andmembership in the BritishEmpire also began to play arole in determining spreads.

“Plus ça change, plus c’estla même chose” was MichaelBordo’s (Rutgers University)conclusion after he and MarcFlandreau (University ofParis and the Centre forEconomic Policy Research)compared the financial crises of the 1990s with crisesbetween 1880 and 1914. Little has changed over thepast century except that the “core” (advanced) coun-tries in the earlier period chose to peg their currenciesto gold, whereas today, except for the euro area, theyfloat their currencies, and paper has replaced gold andsilver. Then, as now, the “peripheral” (emerging mar-ket) countries were burdened with “original sin”—that is, they could not issue long-term domestic debtor borrow abroad in their own currency. They werealso hindered in their choice of exchange regimebecause of their lack of financial maturity, whichBordo and Flandreau defined as open and deep finan-cial markets, stable money, and fiscal probity.

Examining the past experiences of the UnitedStates, Australia, Canada, and New Zealand, Bordocharacterized the notion of original sin as an explana-tion for emerging market crises as “overblown.” Thesecountries had original sin in that they could not issueabroad bonds denominated in domestic currency, yetthey were financially mature and fiscally sound. Theywere also less exposed to currency and maturity mis-matches than emerging market economies todaybecause their debt was small and mostly long term.Such mismatches are thus a recent phenomenon.What the core countries had that many peripheralcountries lacked was a good track record that madetheir adherence to the gold peg credible, allowingthem to deviate from it temporarily during a war orfinancial crisis and giving them the short-term flexi-bility they needed to implement stabilization pro-grams. Thus, policy played a critical role then, as itdoes today, in preventing, or allowing a swift resolu-tion of, a crisis.

The Corporation of Foreign Bondholders (CFB)—an association of British investors that was effective,much of the time, in coordinating orderly debt work-outs during the “heyday of international bondfinance” (1870–1913)—may have had an easier timethan any comparable body would have today, accord-ing to Paolo Mauro (IMF) and Yishay Yafeh (HebrewUniversity). For one thing, in the past, individuals

Barry Eichengreen (left)with Ashoka Mody

Michael Bordo

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almost never sued sovereign states in the event of adefault. For another, bonds were often collateralizedor implicitly backed by tangible assets or tax rev-enues: creditors were therefore motivated to acttogether to seize the collateral (trading their debt, forexample, for equity in such valuable entities as rail-roads) or even to administer and collect some of thedefaulting government’s tax revenues.

Individual bondholders numbered in the hundredsrather than in the tens of thousands, although mutualfunds were less prominent than they are today.Moreover, the CFB had close ties with the Britishgovernment, and, in a few extreme cases, it persuadedthe British government to resort to diplomatic oreven military intervention when other means of pun-

ishing defaulting debtors failed. For today’s creditors,the appeal of defection is stronger, and the appeal ofcoordination weaker, than in the past. The challengesfaced by a modern version of a creditor associationwould thus be commensurately greater today thanthey were for its predecessors.

Eyes on the U.S. economyFiscal stimulus? The panel “Fiscal Stimulus 2003” wasconvened hurriedly when former U.S. TreasurySecretary Paul O’Neill canceled his scheduled address.In his place, economists Alan Auerbach (University ofCalifornia, Berkeley), Eric Engkin (AmericanEnterprise Institute), Robert Hall (StanfordUniversity), Matthew Shapiro (University of

Toward “better and fairer globalization”

Citigroup Vice Chair and former IMF First DeputyManaging Director Stanley Fischer delivered the 2003Richard T. Ely Lecture, “Globalization and Its Challenges,”during the American Economic Association meetings. In it,he recounted the benefits of globalization—includingimproved growth—but also acknowledged that many of theproblems critics point to are real. He highlighted a number ofpolicies that are necessary to achieve a “better and fairer glob-alization.” In his opening remarks, he also paid tribute to hisfriend and colleague Rudiger Dornbusch, who passed away in July 2002 and was to have delivered the Ely Lecture.For the full text of the lecture, see www.iie.com/fischer.

Almost everyone agrees that the world could be a betterplace and recognizes that much work will be required toimprove it. Why, then, is so much of the globalizationdebate about whether the world is getting better or worse?The reason, Fischer said, is that this debate is ultimatelyabout policies. “The implicit premise is that if the world isgoing to hell, then the policies of the past 50 years are likelyto be wrong and if the world has been getting better, thenthe policies are more likely to be right.” It is a separate ques-tion, he argued, whether all recent developments in globalconditions can be attributed to globalization.

A set of policy recommendations for reform-mindedcountries that has received much attention and a largeshare of negative press is the so-called Washington consen-sus set out by economist John Williamson in 1990. Fischerregarded its 10 elements—which included fiscal discipline,tax reform, financial and trade liberalization, deregulation,and privatization—as a useful shorthand description ofpart of a desirable policy orientation.

What do the data show?Globally, poverty rates have been declining, especially in Asia,Fischer noted. Developments in income distribution aremore mixed, with the evidence showing that inequality has

increased among the average income levels of differentcountries while possibly decreasing among all individuals inthe world. On average, social indicators including literacyand health have improved significantly in the developingcountries. It thus appears that, on average, conditions in thedeveloping world have improved. But, Fischer emphasized,this is not the same as saying that everyone in the developingcountries is doing better.

Trends in global poverty figure prominently in the global-ization debate. But the facts alone do not, Fischer noted,directly address the issue of whether the trends are caused bydeveloping countries’ increasing integration with the globaleconomy. To address this question, we must assess theimpact of openness on growth.

Trade policy is a central aspect of economic policy. Manystudies have shown that greater openness to trade is associ-ated either with higher levels of income or with more rapidgrowth. And countries that have adopted export promotionstrategies have achieved greater economic success than thosethat have sought to keep imports out. The evidence and thestudies, he observed, should persuade many that openness tothe global economy is a necessary, though not sufficient,condition for sustained growth.

Regional challengesClearly, the major challenge facing the world today, Fischersaid, is poverty. And the surest route out of poverty is eco-nomic growth. Growth requires good economic policies setin a policy framework that prominently includes an orien-tation toward integration with the global economy. A waymust be found to make the global system deliver economicgrowth more consistently and more equitably.

Global growth is determined mainly by the performanceof the industrial countries, and attitudes toward globaliza-tion in these countries are key to the future of the globaleconomy. Governments in these countries should stand upand support the right policies; help their own people deal

Fischer: “The pro-market, pro-globalizationapproach is theworst economicpolicy, except forall the others thathave been tried.”

Paolo Mauro

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Michigan), and Janet Yellen (University of California,Berkeley, and former chair of the U.S. Council ofEconomic Advisers, 1997–99) debated whether stim-ulus was warranted at this juncture and what form itshould and would take.

Auerbach and Engkin argued that the recession, ahistorically mild one, was effectively over; Hall,Shapiro, and Yellen were not so confident. Hall andYellen expressed concern about unemployment, andShapiro cited intangibles—the impact of a war withIraq and a possible asset market meltdown. For Hall,fiscal policy also lent a welcome added dimension toa U.S. economic policy framework heavily reliant onmonetary policy. Yellen termed the U.S. economy“abnormally fragile.” She noted that the Fed did not

cause this recession (U.S. recessions typically occurafter the Fed tightens monetary policy), the countryhad price stability, and there was no liquidity trap.But, in her view, the call on whether the U.S. econ-omy had emerged from recession was “too close forcomfort,” and the Fed had few tools left in its arse-nal—most of them virtually untried.

A discussion of what to do quickly turned to whatnot to do. There was universal unease with the coun-try’s fiscal position, which had deteriorated rapidly inrecent years and was looking grim going into thelonger term. Auerbach admitted to being “totally puz-zled” by a stimulus package fashioned around a per-manent cut in dividend taxation (it would, he said,“stimulate private wealth—nothing else”). He pre-

with the adverse consequences of economic change; anddeliver on their promises on trade, aid, and the strengtheningof the international economic system.

Although most of the world’s poor are moving towardsustainable growth (notable exceptions are some countriesin Asia and Latin America), Fischer said that the most pro-found problems of poverty were increasingly concentratedin sub-Saharan Africa. It already has the world’s highestpoverty rate, and the number of poor has been risingrapidly. In addition, HIV/AIDS is taking a tragic toll.

National and global policy challengesAll countries have challenges to surmount if globalizationis to benefit more of the world’s citizens.Implementing the right policies. The outward-oriented poli-cies described in the 1990 Washington consensus, Fischersaid, remain an important component of the right approachto economic policy, but also needed are a greater emphasison social justice, more effective economic governance, crisis-proofing economies, and labor market reforms that allowmore of the workforce to enter the formal labor market.Delivering on trade and aid. The industrial countries needto do their part to facilitate developing countries’ integra-tion with the global economy. That means liberalizing agri-cultural trade and ending the massive subsidies to agricul-ture that impede the exports of so many developing coun-tries. At the same time, the developing countries canachieve major gains by opening up trade to each other.Making the international financial system less crisis prone.The shift to flexible exchange rates 30 years ago and thestrengthening of macroeconomic policy frameworks havehelped prevent foreign exchange crises among the industrialcountries, Fischer noted. But emerging market countries arestill disturbingly prone to crises. Although their shift to moreflexible exchange rates will make their financial systems morestable, crises can erupt for other reasons, particularly marketfears that these countries’ debts are unsustainable.Dealing with migration. Flows of labor, either temporaryor permanent, are a potentially powerful force in the global

economy, Fischer said. But, national economic, social, andcultural preferences are bound to take a front seat in thisarea. Moreover, greater clarity is needed on the economiceffects of alternative policies—an area in which more pub-lic policy attention will eventually be focused.Improving governance. Ordinary people everywhere wantto improve their lives. But corrupt governments do not nec-essarily respond to those desires. That is why, Fischerargued, the trend to democracy is so important.

While countries are primarily responsible for their ownfates, he said, outsiders—from both the public and the pri-vate sector—can influence outcomes by promoting democ-racy, investing in economic activity, and supporting goodprojects in social sectors. Through their actions, they canalso help fight corruption in developing countries. With anod to Winston Churchill’s famous observation aboutdemocracy, Fischer concluded that “the pro-market, pro-globalization approach is the worst economic policy, exceptfor all the others that have been tried.”

Tribute to Rudi Dornbusch“Collaborating with Rudi,” Fischer said of his coauthor onthe textbook Macroeconomics, “has given me as much satis-faction as anything else I have done in my professional life.”In opening remarks at the Richard T. Ely Lecture, Fischerpaid tribute to Dornbusch’s many contributions to the theo-retical and policy fields, from his influential “overshooting”paper to the equally famous 1994 Brookings Institutionpaper that predicted the Mexican peso crisis. Dornbuschwas, Fischer said, “one of the outstanding policy economistsof our time.” Fischer indicated that he often calledDornbusch to discuss difficult situations at the IMF. “Hisadvice was always thoughtful, typically nuanced, and fre-quently provided insights that no one else had seen—and hewas willing to talk as long as it took,” Fischer said. “We willmiss Rudi deeply for his incisive mind, the brilliance of hisinsights, the exuberance of his writing, and his challenges toconventional thinking—but most of all, for his friendshipand the pleasure of his company.”

Robert Hall

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ferred temporary measures, notably steps to encour-age business investment and extend unemploymentbenefits (money likely to be spent quickly).

Engkin favored seizing the opportunity to enactpolicies that would boost long-term growth and movethe country toward fundamental tax reform. Removingthe tax on dividends would, he said, improve competi-tiveness and increase the incentives corporations haveto pay dividends. He opposed raising exemptions forchild care, extending unemployment benefits, or pro-viding a temporary “holiday” on payroll (social secu-rity) tax payments. Hall, too, proclaimed the momentripe for incremental, opportunistic tax reform. He sawthe country moving rapidly toward a consumption taxand welcomed the removal of personal taxation on div-idends as a step in the right direction.

It was just this type of piecemeal tax reform, how-ever, that worried Shapiro, given looming increases inexpenditures to meet pension and security concerns.Much as he did not favor accelerating scheduled 2004tax cuts into 2003, he would do this if the scheduled2006 tax cuts could be scrapped. He also hoped thatpoliticians would not forget that spending was theother half of fiscal policy. He urged relief for states(many of which face severe revenue shortfalls) and aboost in federal spending on security.

In Yellen’s view, stimulus should be temporary,increase demand, and provide maximum “bang forthe buck” and quick results. Like Auerbach, shefavored an extension of unemployment benefits toaddress skyrocketing long-term unemployment rates(such an extension did indeed pass shortly after theAEA conference concluded) and relief for state gov-ernments that were having to make nearly unprece-dented cuts in public investment.

It was interesting, Hall observed, that the panel’s dis-cussion of short-term stimulus turned so quickly tolong-term concerns. The panel expressed much lesscertainty that long-term issues would shape the debatethat was just beginning on Capitol Hill.

Lessons from Enron. Following a string of corporatescandals in the United States, policymakers, regulators,and economists are examining how to improve corpo-rate governance and revive confidence in the equitiesmarkets. At a luncheon speech organized jointly by theAEA and the American Finance Association, ArthurLevitt, chair of the U.S. Securities and ExchangeCommission during 1993–2001, called the scandals acollective failure of all the gatekeepers—the accoun-tants, the lawyers, the boards of directors, the standardsetters, the rating agencies, and the regulators. “Thewhole system was asleep at the switch,” he said.

Levitt, now a senior advisor to the Carlyle Group,a private global investment firm, said that it was up to

boards of directors to rein in excesses in executivecompensation. “There is little doubt that some execu-tives have been paid more than they would if itweren’t for boards of directors stacked with theircronies; if it weren’t for quirks in our tax laws thatfavor certain types of stock options over other typesof pay; and if it weren’t for the fact that options don’thave to be expensed,” he argued. “In the 1990s, topexecutives extracted $3.3 billion from companies thatthey led into bankruptcy. That’s unconscionable. Weneed standards of corporate governance that ensurethat executive compensation does more than just linethe pockets of executives.”

A key change would be to require the expensingof stock options, meaning that companies wouldaccount for the cost of options in their balance sheets.At present, such options are listed in a footnote of thecorporate accounts. “Options have a real value to theexecutive receiving them and a real cost to the share-holders who grant them,” Levitt said. “Like any otherform of compensation, they should be expensed.Investors deserve, and the integrity of our marketsdemands, an accurate and full picture of a company’sfinancial outlook, and expensing stock options willhelp us paint that picture.” He added that “new rulesregarding auditor independence and expensing ofstock options will go a long way to improve the work-ings of our markets.”

In a separate session, Kevin Murphy (University ofSouthern California) also highlighted the expensingof options as a key element in reform. Options nowaccount for 51 percent of the pay of senior executives,he said, and part of the problem is that managers andboards of directors do not understand the true cost ofstock options. “They think they are free,” he said.Wayne Guay (University of Pennsylvania) indicatedthat it was clear that options should be treated likebusiness expenses; otherwise, the balance sheet pre-sented a distorted picture. But one consequence ofexpensing the options, Murphy said, would be thegranting of fewer options.

The bottom line, Levitt explained, was that it wasimportant to retain investor confidence in the markets.“Just as quickly as we have brought millions of newinvestors into our markets, we may have lost that con-fidence in those markets.” He urged companies toappoint independent directors willing to ask awkwardquestions. “All the regulations in the world can’treplace a board willing to ask tough questions,” he said.

Social security reform on the back burner? Unlikefiscal stimulus and corporate governance, reform ofthe U.S. social security system is not prominent inU.S. newspaper headlines. But, with a huge group ofpostwar “baby boomers” nearing retirement and

Arthur Levitt

Janet Yellen

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January 20, 2003

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financial storm clouds on the horizon, the issue is notgoing away.

In a forum on public policy, John Campbell(Harvard University) addressed the risk aspects ofsocial security reform, noting that a major problemis that people often compare the historical average ofreturns available in the U.S. stock market with theimplied returns of the current social security system.This comparison, of course, ignores some seriousissues: past performance does not guarantee futureresults, stock returns are risky, and returns on thecurrent system are low because most contributionsare devoted to paying the benefits of current retirees,and these benefits represent a huge unfunded liability.

The existing pay-as-you-go (PAYG) system of socialsecurity reduces the national saving rate, making afunded component necessary. The current challenge,Campbell said, is to address how the governmentshould use its taxation authority to operate the system’sPAYG component, how big the federally funded compo-nent should be, and how the funds should be invested.

He described two different reform proposals, bothof which have advantages and disadvantages. One isbased on individual retirement accounts (favored byRepublicans) and the other (favored by Democrats)consists of a centralized system with an independentboard to oversee the investment of the social securitytrust fund. He suggested that a compromise systemcould be devised that addressed the disadvantages ofeach. One important consideration, Campbell con-

cluded, is ensuring that investment risk is shared byfuture generations and current savers.

Peter Diamond (Massachusetts Institute ofTechnology) took up three different issues relating tosocial security reform: the indexing of benefits andtaxes for life expectancy, the use of earmarked funds,and the idea of dedicating the estate tax to socialsecurity. Indexing, Diamond noted, is already donefor wages and prices and could work well for lifeexpectancy if handled through a rule, making it auto-matic and thus politically less contentious.

The United States, he explained, finances its socialsecurity system through an “earmarked” payroll tax.Earmarking—dedicating revenue to a particularexpenditure—has limited pressure for higher benefitsand permitted increases in the tax because the rev-enues are for an extremely popular purpose. Thus,earmarking has played an important role in the polit-ical process and has made the public think about thetax much more sensibly. (In general, the public favorsexpenditures and opposes taxes, which does not addup.) In Diamond’s opinion, the estate tax with a largeexemption is an excellent tax. It is currently undersiege, but linking it to social security, he said, mayoffer a good way to defend it.

Diamond concluded with a broader warning aboutthe upcoming debate over social security reform.Beware politicians who promise to fix social securitywithout cutting benefits or raising taxes. It can’t bedone, he said.

Margaret de Vries receives Carolyn Shaw Bell award

On January 3, retired IMF economist and historianMargaret Garritsen de Vries received the 2002 CarolynShaw Bell award from the American EconomicAssociation’s Committee on the Status of Women in theEconomics Profession (CSWEP). The award honors anindividual who has advanced the status of women in eco-nomics through example, achievement, or mentoring.

As a child in Detroit, Michigan, during the GreatDepression, de Vries personally witnessed the devastatingeffects of unemployment, which sparked her interest in eco-nomics. The first member of her family to finish high school,de Vries won a full scholarship to the University of Michigan,where she obtained a B.A. with honors in economics and waselected to Phi Beta Kappa. In 1946, she received a Ph.D. ineconomics from the Massachusetts Institute of Technology,shortly after Nobel prize winner Paul A. Samuelson foundedthe economics department there.

Joining the IMF in July 1946, de Vries was one of theinstitution’s first staff members. Her female colleagues were

few in number, and her early mentors,notably Edward Bernstein and IrvingFriedman, were men. She represented the IMFon negotiating missions to such countries asBurma (now Myanmar), Costa Rica, India,Israel, Mexico, Nicaragua, the Philippines,Thailand, Turkey, and Yugoslavia and helpeddevelop and implement IMF policy on multi-ple exchange rates. De Vries rose to the rankof Division Chief—the first woman to doso—in 1957.

In 1952, she married her colleague Barend A.de Vries, an eminent economist who laterworked at the World Bank. After a brief hiatusfrom the IMF when her children were young,de Vries returned as the institution’s first full-time historian and served in this capacity untilher retirement in 1987.

In presenting the award, Barbara Fraumeni ofCSWEP paid tribute to de Vries’s distinguished career atthe IMF and made special note of her pioneering roleand lifelong commitment to mentoring women.

Honoree MargaretGarritsen de Vrieshad a long,distinguishedcareer at the IMF.

Peter Diamond

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January 20, 2003

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W ith a number of Latin American countries expe-riencing financial difficulties, and others in out-

right economic and political crisis, the Bretton WoodsCommittee hosted a symposium on December 12 toexamine turmoil in the region. The policymakers, busi-ness leaders, and representatives from the internationalfinancial institutions who met at the Inter-AmericanDevelopment Bank exchanged ideas on how economicgrowth could be restored, democracy preserved, andcrises reduced in number and severity.

Enrique Iglesias, President, Inter-AmericanDevelopment Bank, set the stage for the conferencewith a review of the economic, social, and political tur-moil in Latin America over the past year and the less-often-highlighted bright spots in the region. Manycountries had been experiencing weak growth or reces-sion, rising unemployment, increasing poverty, a col-lapse in capital inflows, and high interest rates and lev-els of debt—which left little room to pursue counter-cyclical policies. Nonetheless, others—including Chile,Mexico, and Peru—had been recording moderategrowth and were relatively untouched by the problemsin the region. Foreign direct investment had also heldup relatively well despite financial strains in the region.

Roots of financial crisesWhy have the ghosts of crisis and volatility comeback to haunt the region? And what policies areneeded to put the region back on a more positivecourse? Harvard University’s Ricardo Hausmannstressed that the key to understanding why LatinAmerica is prone to repeated crises relates to suddendrops in capital inflows to the region and the inabilityof these and other emerging market countries to bor-row internationally in their own currency—a condi-tion he has dubbed “original sin.”

With accumulated debt denominated in foreignexchange, foreign-currency-denominated liabilitiesfar outweigh assets, so that countries’ balance sheetssuffer from a serious currency mismatch. Exchangerate depreciations then have seriously negative conse-quences. To alleviate these problems, Hausmann pro-posed creating a synthetic basket currency based on aset of emerging market currencies. The internationalfinancial institutions, he suggested, could issue debtin this synthetic currency and offer loans denomi-nated in the local currencies to each of the emergingmarket countries in the basket. The major industrialnations could also issue debt denominated in the bas-

ket currency and then swap out of it with each coun-try whose currency is included.

Michael Mussa, Senior Fellow at the Institute forInternational Economics, agreed that the inability ofdeveloping countries to issue debt in their own currencywas important, but he emphasized that other factorsalso played crucial roles. First, many Latin Americancountries lacked fiscal discipline and had therefore accu-mulated high levels of public debt that left them vulner-able to domestic and external shocks. Second, in emerg-ing market countries with long histories of financialproblems, easing monetary and fiscal policies tends tobe ineffective in alleviating financial strains. A tighten-ing of policy is needed, but it may have a negativeimpact on economic activity in the short term. Third,international trade for most Latin American countries islimited (particularly relative to Asian countries), andexchange rate depreciation does little to boost the econ-omy via a pickup in exports. Mussa stressed that strongdomestic policies are a prerequisite for Latin America tobe less vulnerable to crisis.

A more resilient Latin America also requires, in theview of the U.S. administration, a greater emphasis onpolicies that promote growth. Randal Quarles,Assistant Secretary for International Affairs at the U.S.Treasury, discussed recent U.S. initiatives to promotehigher growth and foster increased economic andfinancial stability in emerging market countries, par-ticularly in Latin America. He emphasized U.S. effortsto further liberalize trade and strengthen financiallinkages with Latin America.

Future of democratic institutionsDissatisfaction with the results of democracy hasbeen on the rise in Latin America, with political tur-moil erupting in a number of countries. But MarkFalcoff, a Resident Scholar at the American EnterpriseInstitute, remained optimistic about the future of theregion’s democratic institutions. He cited a rise in thenumber of civil society organizations—in particular,nongovernmental organizations actively promotinghuman rights and environmental concerns—as apromising sign and noted the growth of a vibrant freepress and access to electronic media.

Paula De MasiIMF Western Hemisphere Department

Bretton Woods CommitteeWhy is Latin America still prone to crises?

Ricardo Hausmann

The full text of the remarks of the symposium speakers isavailable on the website of the Bretton Woods Committee(www.brettonwoods.org).

Michael Mussa

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January 20, 2003

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More than a year after the creation of the NewPartnership for Africa’s Development (NEPAD),

ministers, governors, and other senior officials fromsome 20 African countries met in Dakar, Senegal, inmid-December to discuss the challenges confronting theinitiative. Participants at the high-level seminar, hostedby the IMF Institute and the Joint Africa Institute,included donor representatives, academics, and staff ofregional and international institutions.

Despite progress by an increasing number of coun-tries, Africa’s overall economic performance has contin-ued to lag behind that of other developing countryregions. Over the past two decades, as noted by SalehNsouli, Deputy Director, and Norbert Funke, SeniorEconomist, IMF Institute, the gap between sub-SaharanAfrica’s per capita income and that of other regions haswidened; its share of world trade has declined; and itsshare of global foreign direct investment has fallen.

Securing a positive turnaround in Africa’s socio-economic indicators calls for the effective implemen-tation of wide-ranging economic and financialreforms at the country and regional levels. This is theoverriding goal of NEPAD, a framework for Africa’srenewal, conceived and developed by African leadersand adopted in 2001 by member states of the AfricanUnion. Its specific objectives are to promote acceler-ated growth and sustainable development, eradicatewidespread and severe poverty, and halt the marginal-ization of Africa in the globalization process.

Turning words into actionAs President Abdoulaye Wade of Senegal stressedwhen he opened the seminar, the time has come tofinance NEPAD and implement its objectives.Successful implementation will require that partici-pating countries establish appropriate institutionalframeworks, generate a strong consensus for reformfrom the wider public, and attract adequate interna-tional support, said Omar Kabbaj, President, AfricanDevelopment Bank. To meet NEPAD’s ambitiousobjectives—including a targeted rate of economicgrowth of about 7 percent over the next decade—African countries will also need to make an unprece-dented effort to consolidate macroeconomic stabilityand pursue broad-based structural reforms, includinga strengthening of institutional capacity, Nsoulinoted. Charles Konan Banny, Governor, Central Bankof West African States, also pointed out that regionalinstitutions would have a key role to play in imple-menting the partnership.

Reducing povertyAt the heart of much of NEPAD’s agenda is the questto reduce poverty. This multifaceted problem has longresisted easy and quick solutions. T.N. Srinivasan, YaleUniversity, emphasized that redistributing assetsand/or income from the rich to the poor—even ifbeneficial in the short and long runs—can be politi-cally difficult. It is often more feasible to identify andimplement policies that have a major influence on thesocioeconomic-political framework in which the poormake their own decisions. Some participants felt thatexisting poverty reduction strategies and nationaldevelopment plans already act as important vehiclesfor identifying these policies and for translating theNEPAD framework into an operational blueprint.

Promoting trade and capital inflowsAfrican economies must position themselves to com-pete in world markets, and trade holds one of the keys.By opening up their economies more rapidly, Africancountries can derive increased economic benefits, saidFelix Ndukwe, Chief Macroeconomist, AfricanDevelopment Bank. Many African countries havealready made substantial progress in trade liberaliza-tion, observed Alexandre Barro Chambrier, ExecutiveDirector, International Institute for Africa; now it istime for the industrial countries to open their marketsfurther to developing country exports. Kwasi Asamoah-Baffour, Special Advisor, Ghana, urged African coun-tries to identify measures to increase intraregionaltrade, and Modise D. Modise, of Botswana’s President’sOffice, indicated that African economic integrationwould require an alignment of countries’ objectives andefforts with those of NEPAD’s.

If Africa is to achieve the UN’s MillenniumDevelopment Goals, however, it will need to fill anannual resource gap of $64 billion—equivalent to

African leaders tackle NEPAD’s stiff challenges

Gathering for thehigh-level seminar in Dakar are (left toright): Abdou AzizSow (Minister for theNEPAD, Senegal);Saleh Nsouli (IMFInstitute); OmarKabbaj (President,African DevelopmentBank); PresidentAbdoulaye Wade of Senegal; IsmailaUsman and DamianOndo Mañe (IMFExecutive Directors);Koffi Yao (IMF);Abdoulaye Diop(Minister of Finance,Senegal); SeyniN'Diaye (NationalDirector, BCEAO,Senegal); andSamba Thiam(Economic Advisor to the President ofMauritania).

©International Monetary Fund. Not for Redistribution

January 20, 2003

12

some 12 percent of Africa’s GDP.Although this will require increaseddomestic savings, a substantial part of theneeded resources will have to come fromabroad. Elizabeth Asiedu, University ofKansas, pointed out that foreign directinvestment can play a potentially pivotalrole, but Africa must substantiallyimprove its investment climate. Although,as Koffi Yao, IMF Resident Representativein Senegal, and Jackson Kinyanjui,Ministry of Finance, Kenya, noted, evencountries with sound economic policiescan be negatively affected by political oreconomic instability in neighboring states.

Building an institutional frameworkTo overcome existing obstacles to growth and sustain-able development, African countries must foster anenabling environment for private initiative, includingmaintaining peace, security, and respect for propertyrights. In his paper, Soumana Sako, Executive

Secretary, African Capacity Building Foundation,praised NEPAD for emphasizing the importance ofgood governance and a sound institutional frameworkfor reducing poverty, enhancing growth, and attract-ing more foreign investment. Saade Chami, IMF, andJean-Claude Brou, Director, Central Bank of WestAfrican States, argued that a well-functioning marketeconomy had to be supported by various types ofinstitutions, such as regulatory and social insurancebodies. Most important, African leaders need toensure the rule of law, which, according to MichaelSarris, Director, World Bank Institute, requires anindependent, impartial judiciary.

Partners doing their shareAfrica’s partners in the international community mustalso hold up their end of the bargain. Abdoulaye Bio-Tchané, Director of the IMF’s African Department,explained that his organization helped countries for-mulate domestic economic policies, foster regionalintegration, and build capacity. The IMF is putting inplace five African Regional Technical Assistance

IMF Working Papers ($15.00)02/199: Automatic Fiscal Stabilizers in France, Gabriel

Di Bella02/200: An Empirical Analysis of China’s Export Behavior,

Valerie Cerra and Sweta C. Saxena 02/201: Testing the Relationship Between Government

Spending and Revenue: Evidence from GCC Countries,Ugo Fasano and Qing Wang

02/202: International Stock Returns and MarketIntegration: A Regional Perspective, Robin J. Brooksand Marco Del Negro

02/203: Oil Revenue Assignments: Country Experiencesand Issues, Ehtisham Ahmad and Eric A. Mottu

02/204: Exchange Rate Pass-Through in Turkey,Daniel Leigh and Marco Daniel

02/205: An Analysis of Money Demand and Inflation inthe Islamic Republic of Iran, Oya Celasun andMangal Goswami

02/206: The Use of Credit Ceilings in the Presence ofIndirect Monetary Instruments: An AnalyticalFramework, Plamen Yossifov

02/207: MODIS: A Market-Oriented Deposit InsuranceScheme, Reza Vaez-Zadeh, Danyang Xie, andEdda Zoli

02/208: The Effectiveness of Fiscal Policy in StimulatingEconomic Activity—A Review of the Literature, RichardHemming, Michael S. Kell, and Selma Mahfouz

02/209: On National or Supranational Objectives: Improvingthe Effectiveness of Targeted Expenditure Programs,Ehtisham Ahmad, Eivind Tandberg, and Ping Zhang

02/210: A Balance Sheet Approach to Financial Crisis,Mark Allen, Christoph B. Rosenberg, Christian Keller,Brad Setser, and Nouriel Roubini

IMF Country Reports ($15.00)02/265: Vanuatu: 2002 Article IV Consultation02/266: Vanuatu: Selected Issues and Statistical Appendix 02/267: Islamic Republic of Iran: Report on the

Observance of Standards and Codes02/268: Islamic Republic of Mauritania: Report on the

Observance of Standards and Codes02/269: Nicaragua: Selected Issues and Statistical Appendix 03/03: Nigeria: 2002 Article IV Consultation

Policy Discussion Papers (free)02/11: Poverty and Social Impact Analysis in PRGF-

Supported Programs, Gabriela Inchauste 02/12: On a Common Currency for the GCC Countries,

Esteban Jadresic

Recent publications

Publications are available from IMF Publication Services, Box X2003, IMF, Washington, DC 20431 U.S.A.Telephone: (202) 623-7430; fax: (202) 623-7201; e-mail: publications@imf.org.

For information on the IMF on the Internet—including the full texts of the English edition of the IMF Survey, the IMF Survey’sannual Supplement on the IMF, Finance & Development, an updated IMF Publications Catalog, and daily SDR exchange rates of45 currencies—please visit the IMF’s website (www.imf.org). The full texts of all Working Papers and Policy Discussion Papers arealso available on the IMF’s website.

President AbdoulayeWade of Senegalopened the high-level seminar.

©International Monetary Fund. Not for Redistribution

Centers (AFRITACs) and is continuing to enhance thetraining activities of the IMF Institute. Broad interna-tional support will also be needed for capacity andinstitution building.

Participants stressed, however, how critical it wasfor Africa’s partners to take action to remove barriersto trade, expand and speed up debt relief, and raiseofficial development assistance to the UN target levelof 0.7 percent of GNP and reform the modalities ofsuch assistance.

Identifying the next stepsIf NEPAD is to succeed, African countries mustensure good governance, too. In this regard, theAfrican Peer Review Mechanism, a voluntary moni-toring instrument of the African Union, could serveas an important vehicle and enhance credibility. Jean-

Eric Aubert, Senior Policy Advisor, World BankInstitute, emphasized that peer learning could sub-stantially improve governance, but participants notedthat it would be vital for these peer reviews to meetconsistently high standards and be free of politicalinterference. Countries must also be willing to takethe corrective measures recommended by the reviews.

One of the preconditions for NEPAD’s success,according to IMF Executive Directors Damian OndoMañe and Ismaila Usman, will be its ability to estab-lish and maintain a sound institutional framework.Together with Seyni N’Diaye, National Director,Central Bank of West African States, they urgedenhancing capacity building in NEPAD’s priority sec-tors and saw the peer review mechanism as the firsttest of Africa’s ability to improve its institutionalframework. As Guy Darlan, Regional Coordinator,

Available on the web (www.imf.org)

News Briefs02/125: IMF Completes First Review of Peru’s Stand-By

Agreement, Approves $154 Million Disbursement,December 13

02/126: CIS-7 Poverty Reduction Strategy Forum Sees New Opportunity to Reduce Poverty, December 16

02/127: IMF Completes First Review Under Cape Verde’sPRGF Arrangement and Approves $1.65 MillionDisbursement, December 16

02/128: IMF Completes First Review of Stand-By Creditwith Brazil, December 19

02/129: IMF Welcomes Senegal’s Poverty Reduction StrategyPaper, December 19

02/130: IMF Statement on Argentina, December 20$15 Million Disbursement, December 23

Press Releases02/55: IMF Announces New Measure of Its Capacity for

New Lending, December 1603/01: Argentina: Press Statement Following Article IV

Consultation, January 803/02: IMF Executive Board Recommends to Governors

Conclusion of Quota Review, January 1003/03: Ukraine Subscribes to the IMF’s Special Data

Dissemination Standard, January 1403/04: IMF Approves a $2.1 Billion Stand-By Credit for

Colombia, January 1503/05: IMF First Deputy Managing Director Anne Krueger

Concludes Visit to Turkey, January 1603/06: IMF Managing Director Issues Statement on

Transitional Credit Support for Argentina, January 17

Public Information Notices02/136: IMF Concludes 2002 Article IV Consultation

with Nicaragua, December 1202/137: IMF Concludes 2002 Article IV Consultation

with Swaziland, December 23

02/138: IMF Concludes 2002 Article IV Consultation with Cameroon, December 24

02/139: IMF Concludes 2002 Article IV Consultation with Peru, December 23

03/01: IMF Concludes 2002 Article IV Consultation with Nigeria, January 2

03/02: IMF Concludes 2002 Article IV Consultation with Kuwait, January 2

03/03: IMF Concludes 2002 Article IV Consultation with the Republic of Tajikistan, January 3

03/04: IMF Concludes 2002 Article IV Consultation with Tanzania, January 6

03/05: IMF Concludes 2002 Article IV Consultation with Singapore, January 6

03/06: IMF Board Discusses Possible Features of ASovereign Debt Restructuring Mechanism, January 7

03/07: IMF Concludes 2002 Article IV Consultation with Madagascar, January 9

03/08: IMF Concludes 2002 Article IV Consultation with Romania, January 17

Speeches“Sovereign Debt Restructuring: Messy or Messier?”

Anne Krueger, IMF First Deputy Managing Director,Annual Meeting of the American Economic Association,Washington, D.C., January 4

“Hopes and Fears: The Global Outlook, Asia, and the IMF,”Thomas C. Dawson, Director, IMF External RelationsDepartment, Hong Kong Foreign Correspondents Cluband Singapore International Chamber of Commerce,January 8

Statements at Donor MeetingsIMF Staff Statement at Interim Donor Meeting on

East Timor, December 9

TranscriptsPress Briefing, Thomas C. Dawson, Director, IMF External

Relations Department, January 16 January 20, 2003

13

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January 20, 2003

14

World Bank Institute, noted, the crucial question iswhether the review mechanism itself will become awell-functioning and credible institution.

In the area of regional integration, Sherifa KamalRahmy, Central Bank of Egypt, emphasized that thehighest priority should be given to improving infra-structure to catalyze further integration. Isaac Aluko-Olokun, a member of the NEPAD SteeringCommittee, also underscored how important itwould be to better communicate NEPAD’s goals and

implementation plan to garner much wider andstronger support from the general public.

Now is the time, Evangelos Calamitsis, formerDirector of the IMF’s African Department, concluded,for African countries and institutions to redouble theirefforts, notably in the critically important areas ofestablishing an enduring foundation for peace, security,democracy, good governance, and the rule of law.

Norbert FunkeSenior Economist, IMF Institute

Stand-By, EFF, and PRGF arrangements as of December 31, 2002

Members drawing

on the IMF “purchase”

other members’

currencies or SDRs

with an equivalent

amount of their

own currency.

Date of Expiration Amount UndrawnMember arrangement date approved balance

(million SDRs)Stand-By Argentina1 March 10, 2000 March 9, 2003 16,936.80 7,180.49Bosnia & Herzegovina August 2, 2002 November 1, 2003 67.60 36.00Brazil1 September 6, 2002 December 31, 2003 22,821.12 18,256.90Bulgaria February 27, 2002 February 26, 2004 240.00 156.00Dominica August 28, 2002 August 27, 2003 3.28 1.23

Guatemala April 1, 2002 March 31, 2003 84.00 84.00Jordan July 3, 2002 July 2, 2004 85.28 74.62Lithuania August 30, 2001 March 29, 2003 86.52 86.52Peru February 1, 2002 February 29, 2004 255.00 255.00Romania October 31, 2001 April 29, 2003 300.00 165.33

Turkey February 4, 2002 December 31, 2004 12,821.20 2,892.00Uruguay1 April 1, 2002 March 31, 2004 2,128.30 1,016.60Total 55,829.10 30,204.69

EFF Indonesia February 4, 2000 December 31, 2003 3,638.00 1,376.24Serbia/Montenegro May 14, 2002 May 13, 2005 650.00 550.00Total 4,288.00 1,926.24

PRGF Albania June 21, 2002 June 20, 2005 28.00 24.00Armenia May 23, 2001 May 22, 2004 69.00 39.00Azerbaijan July 6, 2001 July 5, 2004 80.45 64.35Benin July 17, 2000 March 31, 2004 27.00 8.08Cambodia October 22, 1999 February 28, 2003 58.50 8.36

Cameroon December 21, 2000 December 20, 2003 111.42 47.74Cape Verde April 10, 2002 April 9, 2005 8.64 6.18Chad January 7, 2000 December 6, 2003 47.60 10.40Congo, Dem. Rep. of June 12, 2002 June 11, 2005 580.00 160.00Côte d’Ivoire March 29, 2002 March 28, 2005 292.68 234.14

Djibouti October 18, 1999 January 17, 2003 19.08 5.45Ethiopia March 22, 2001 March 21, 2004 100.28 31.29Gambia, The July 18, 2002 July 17, 2005 20.22 17.33Georgia January 12, 2001 January 11, 2004 108.00 58.50Guinea May 2, 2001 May 1, 2004 64.26 38.56

Guinea-Bissau December 15, 2000 December 14, 2003 14.20 9.12Guyana September 20, 2002 September 19, 2005 54.55 49.00Kenya August 4, 2000 August 3, 2003 190.00 156.40Kyrgyz Rep. December 6, 2001 December 5, 2004 73.40 49.96Lao People’s Dem. Rep. April 25, 2001 April 24, 2004 31.70 18.11

Lesotho March 9, 2001 March 8, 2004 24.50 10.50Madagascar March 1, 2001 November 30, 2004 79.43 45.39Malawi December 21, 2000 December 20, 2003 45.11 38.67Mali August 6, 1999 August 5, 2003 51.32 12.90Moldova December 21, 2000 December 20, 2003 110.88 83.16

Mongolia September 28, 2001 September 27, 2004 28.49 24.42Mozambique June 28, 1999 June 27, 2003 87.20 16.80Nicaragua December 13, 2002 December 12, 2005 97.50 90.54Niger December 22, 2000 December 21, 2003 59.20 25.36Pakistan December 6, 2001 December 5, 2004 1,033.70 689.12

Rwanda August 12, 2002 August 11, 2005 4.00 3.43São Tomé and Príncipe April 28, 2000 April 27, 2003 6.66 4.76Sierra Leone September 26, 2001 September 25, 2004 130.84 56.00Tajikistan December 11, 2002 December 10, 2005 65.00 57.00Tanzania April 4, 2000 June 30, 2003 135.00 15.00

Uganda September 13, 2002 September 12, 2005 13.50 12.00Vietnam April 13, 2001 April 12, 2004 290.00 165.80Zambia March 25, 1999 March 28, 2003 278.90 41.38Total 4,520.21 2,428.18

1Includes amounts under Supplemental Reserve Facility.

EFF = Extended Fund FacilityPRGF = Poverty Reduction and Growth FacilityFigures may not add to totals owing to rounding.

Data: IMF Treasurer’s Department

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January 20, 2003

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Over the past decade, countries recovering fromwar and civil unrest have received substantial

amounts of postconflict aid designed to address theirhumanitarian emergencies, rebuild destroyed infra-structure, and restore public services. In a new IMFWorking Paper, Dimitri Demekas (Advisor, European IDepartment); Jimmy McHugh (Resident Representativein Armenia); and Theodora Kosma (Athens Universityof Economics and Business) examine the impact ofpostconflict aid on an economy. Demekas talked withthe IMF Survey about the new study.

IMF SURVEY: What prompted you to develop a newframework for analyzing the impact of postconflict aid?DEMEKAS: The original idea for the study came fromJimmy McHugh, who was then our desk officer forBosnia. At the time, I was leading missions to Kosovo,and we had just finished a major joint IMF–WorldBank paper on Southeastern Europe after the Kosovoconflict. Our work on that paper, as well as on Bosniaand Kosovo, turned our attention to the amount ofaid that went into these countries after the wars.Jimmy originally proposed a paper on the economicimpact of an influx of refugees and of refugee-relatedaid flows. This aid helps host countries deal with thecost of assisting refugees and facilitates the postcon-flict return of refugees to their countries of origin.The idea quickly led us to the broader issue of post-conflict aid. We discussed our outline with seniorstaff in the European I Department and, in mid-2002,wrote the paper with the indispensable input of oursummer intern, Theodora.

IMF SURVEY: Is postconflict aid really all that differentfrom conventional development assistance?DEMEKAS: Three characteristics of postconflict aid dis-tinguish it from traditional aid. The first and mostnoticeable is, of course, its size. Look at some of theexamples we cite in the paper: Rwanda’s aid reached95 percent of GDP during the first year after the con-flict; Bosnia’s, 75 percent of GDP; and Kosovo’s,65 percent of GDP. These are huge amounts ofmoney, which drop off very quickly four or five yearslater, typically down to a range of 10–25 percent.Traditional development aid is a trickle comparedwith that: on average, the amount of aid that middle-and lower-income countries receive is something like2.5 to 3 percent of GDP. But then it lasts for 20, 30, oreven 40 years in the case of Africa. We felt that thesetwo kinds of aid were essentially different phenomena

and decided to develop a new ana-lytical approach because we sus-pected that the tools developed toanalyze the impact of developmentaid were not really appropriate forpostconflict aid.

Another reason the traditional aidliterature does not provide appropri-ate tools for examining postconflictaid is that it basically models aid as atransfer of tradable goods or, in moresophisticated models, a transfer offoreign currency. But this is not thetypical case in postconflict countries.In these countries, you instead see alot of resources allocated towardrebuilding infrastructure—roads,telephone networks, water supply systems, andhouses—that has been destroyed. And you also seearmies of foreign consultants rebuilding institutions—aministry of finance, a modern tax system, a centralbank—that, of course, are at least as important as phys-ical infrastructure.

In postconflict situations, there is also a very cleardifference between humanitarian aid and reconstruc-tion aid. Humanitarian aid provides a huge burst ofmoney in the first year or two after the conflict. Then,in most cases, it tapers off very quickly, while recon-struction aid continues for several years. That is notthe pattern of development aid, where the distinctionbetween these two kinds of flows is much less sharp.

IMF SURVEY: How does your model help in assessingthe impact of postconflict aid?DEMEKAS: I think the main achievement of our modelis that it distinguishes the impact of humanitarian aidfrom that of reconstruction aid. We distinguishbetween the two types of aid to reflect their funda-mentally different objectives: reconstruction aid aimsto improve productive capacity, while humanitarianaid is intended to support basic consumption. Wealso include reconstruction aid in the productionfunction to account for the fact that, by rehabilitatinginfrastructure and public institutions, postconflictreconstruction directly boosts productivity.

IMF SURVEY: And what did you conclude?DEMEKAS: Our main finding is that humanitarian aidand reconstruction aid do have different effects.Humanitarian aid has pretty much the same impact as

Interview with Dimitri DemekasRethinking what postconflict aid can accomplish

Demekas: “Ouradvice would be togive larger amountsof humanitarian aidover a shorter periodof time, instead ofdisbursing relativelysmall amounts over along period of time.”

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January 20, 2003

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traditional development aid:it is a transfer of income thattends to be consumed ratherthan saved. It gives a boost toconsumption in the shortterm but reduces savings,capital accumulation, and,in the long run, growth.

Reconstruction aid, how-ever, has a completely differ-ent impact. In particular, itseffect on capital accumula-tion, which is the key togrowth, is ambiguous in ourmodel but, within reason-able constraints, we believeit can be positive. In addi-tion, our model also pro-vides a bit of comfortbecause it shows that recon-struction aid, when properlydesigned, does not necessar-ily lead to “Dutch disease.”

IMF SURVEY: What is “Dutch disease,” and why is it ofconcern? DEMEKAS: If a country receives a transfer of tradablegoods (or foreign exchange that makes it possible forthe country to buy tradable goods), the relative price ofnontradable goods rises. As a result, resources (capitaland labor) shift toward the nontradable goods sectorand the tradable sector shrinks. This phenomenon iscalled “Dutch disease” because Holland experienced acontraction in its tradable goods sector after the dis-covery of large natural gas deposits and the foreignexchange inflow associated with it.

The same thing can happen when a countryreceives foreign aid: aid boosts consumption but candepress the tradable goods sector and jeopardize the

long-term potential of thecountry. Our paper showsthat in postconflict econ-omies, in particular, thedesign of the aid package hasa crucial impact on whetheror not postconflict aid willcause the tradable goods sec-tor to shrink.

IMF SURVEY: How shouldpostconflict aid be designed?DEMEKAS: There are perfectlylegitimate reasons for givinghumanitarian aid. But from an economic perspective, in the long run, it is “growth-destroying” because people losetheir incentive to save andinvest. Our advice would be togive larger amounts of human-itarian aid over a shorter

period of time, instead of disbursing relatively smallamounts over a long period of time. Also, in designingreconstruction aid, which is the component typicallydisbursed over a longer period of time, channel ittoward the tradable goods sector. Spend the money onactivities or infrastructure or institutions that help thatpart of the economy. If you must choose, for example,between rebuilding churches and sports facilities andrebuilding roads and sewer networks, you are betteroff—from an economic point of view—doing the latter.

IMF SURVEY: What are the broader lessons you wouldlike to see policymakers draw from your study? DEMEKAS: In the traditional aid literature, there is littleagreement on whether aid is beneficial and, if indeed itis, under which circumstances. It is remarkable howdisappointing the results of almost 50 years of eco-nomic research in this area are. This has been one ofthe major motivations behind our effort to give a freshlook at how we model aid. Our hope is to stimulate anew trend in thinking about it. The main benefit forpolicymakers would be the creation of new analyticaltools to help them make better choices about allocat-ing the limited aid resources between different uses—for instance, humanitarian and reconstruction aid—and design aid packages more effectively.

Selected IMF rates

Week SDR interest Rate of Rate ofbeginning rate remuneration charge

January 6 1.91 1.91 2.44January 13 1.90 1.90 2.43

The SDR interest rate and the rate of remuneration are equal to aweighted average of interest rates on specified short-term domesticobligations in the money markets of the five countries whose cur-rencies constitute the SDR valuation basket. The rate of remunera-tion is the rate of return on members’ remunerated reserve tranchepositions. The rate of charge, a proportion of the SDR interest rate,is the cost of using the IMF’s financial resources. All three rates arecomputed each Friday for the following week. The basic rates ofremuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171 orcheck the IMF website under IMF Finances.Data: IMF Treasurer’s Department

Laura WallaceEditor-in-Chief

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A Kosovo family receives humanitarian aid.

Copies of IMF Working Paper No. 02/198, The Economics ofPostconflict Aid, by Dimitri Demekas, James McHugh, andTheodora Kosma, are available for $15.00 each from IMFPublication Services. See page 12 for ordering information. Thefull text is also available on the IMF’s website (www.imf.org).

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