tv [untitled] October 18, 2010 8:00pm-8:30pm EDT
russians demand equal justice as the spotlight falls on cases of influential figures using their connections to evade prosecution a fatal car accident involving the eighteen year old daughter of a local government official prompted widespread public condemnation when she was let off with a suspended sentence. with the u.k. braced for deep public spending cuts economists warn of more financial hardship on the way they say policymakers are applying outdated principles to the complex money problems facing the country financier's claims central banks and governments are leading countries to an even bigger crisis. and heroes of the state russia honors the agents deported from the u.s. in the biggest spy swap since the cold war they were exchanged in vienna this summer before spies held by moscow and of chapman who became the face of the ring is believed to be among the recipients. of those are the hour's headlines up next peter lavelle and his panel of guests ask if the international monetary fund is
still relevant in today's current financial climate raging debate coming your way next on cross talk. fifty. five. in. the low end welcome to cross talk i'm peter lavelle mission not obvious what is the relevance of the i.m.f. today at its recent annual meeting in washington it failed to resolve the crucial issue of global currency imbalances and should we question the logic of an institution that pays its clients for taking its advice. and you can.
discuss the i.m.s. role today and in the future i'm joined by jeffrey frankel in cambridge he's a professor of capital formation and growth at harvard university's kennedy school of government in pittsburgh we go to allan meltzer he is a professor of political economy at the tepper school of business at carnegie mellon university and in washington we cross the invest ques he is the director of the cato institute's center for global liberty and prosperity and another member of our cross talk team you know on the hunger are a gentleman cross talk rules in effect that means you can jump in anytime you want jeffrey if i can go to you in cambridge the i.m.f. is one of the best known institutions in the world but at the same time it's one of the most hated is well during this global turn down this great recession has it been been a net positive act or on the international scene as we just saw in washington they couldn't resolve the currency imbalances that are going on currency wars are people
talking these days i mean what is the relevance of the i.m.f. expression leave during this crisis. i think if the i.m.f. didn't exist we'd have to invent it it's hard to remember that just three years ago there were some otherwise very sensible people who were saying well there's no going to be no market financial crises nothing like we had in the ninety's everything's calm for that reason the i.m.f. is in danger of losing its mission and in fact the i.m.f. reduced its staff quite a bit and all this talk about that they no longer had a purpose but i think during the global financial crisis of the last three years it's once again demonstrated that the world global financial markets mind monetary system does need an institution of the sort they've been busy with some of the countries in central and eastern europe or asia this time around doesn't need their help very much they piled up lotsa reserves that are mostly done done well without them but i think they have definitely fulfilled important function of course they
can't dictate to the large countries and that's what would really be needed pathetically if you were to solve the problem of global current account and balances i don't think that that's the right criterion to judge them by ok we'll go back to that subject a little bit later i mean if i go to you i mean is it useful because some people say it's actually counterproductive and some people go further and say the very existence of the i.m.f. helped bring about this global recession. well i think the it's become increasingly that's right i think it's become increasingly clear that the i.m.f. is irrelevant in the more and more globalized economy that the i.m.f. is an agency in search of a mission and it's been that way for decades frankly its mission actually ended in the one nine hundred seventy s. when the system of fixed exchange rates and did and so did its mission of maintaining the peg exchange rate system and instead it's been taking on new
missions ever since whether it was the oil crisis of the one nine hundred seventy s. the debt crisis of the one nine hundred eighty s. the move from communism to capitalism and then more recently since the ninety's these big bailouts which until recently we thought were discarded by the i.m.f. because they didn't end up working out so well so i'm i'm afraid that the i.m.f. now is a mission is an agency in search of a mission and unfortunately it now has vastly more resources and so it has vastly more opportunity for mischief ok now and he actually answered the question why before i went as i was going to so you see you agree with me and here it is a really an institution looking for a mission because there's a lot of people in i'll even say in this country in russia after the nine hundred ninety s. they definitely would like it to go away because it wasn't welcome to your whatsoever and it left a very sour taste in a lot of people's mouth here and a major sort of chords built up reserves sort of they don't have to go to the
i.m.f. anymore but and latin america is doing somewhat similar to the extent that it can i think the i.m.f. does have two missions to small business and one is that it used to. when. we drew their money from her why why had not done any have not had bad policies but it had a crisis because of what the argentines were doing the i.m.f. then. or why and that was a good thing it wasn't bailing out. mistaken policies what it does now is encourages countries to go to the edge and then it comes to the united states and other countries and says well we have to get money from you we and lend it to countries like the ukraine or hungary or romania which run very very poor policies that just encourages them to do those things at the same time
where do we get the money we have to borrow it from china and japan and others does it make sense for the united states to be borrowing money from china so that it can lend it to countries like greece the ukraine it doesn't make any sense to me and it's not a policy which we want which i would want and so we ought to end that we ought to give the i.m.f. two missions one to help countries that have done nothing wrong have not created big fiscal deficits big inflation's we should help those countries when problems arise in their neighbors second we should use the and the i.m.f. to gather information and provide it so that the market functions better ok jeff i'd like to go to you in cambridge. and brought up an interesting point is that the larger countries they can pretty much go their own way is that as a matter of fact united states has super veto power he can just turn its back and say no we're absolutely not going to do that it's interesting is what this global
crisis they came from the rich countries that specially the united states so i mean what is the revenue how relevant is the i.m.f. if the i.m.f. can say oh look i mean you have all these imbalances but you know exactly what alan was saying is you know accumulating information and giving good advice that way because you know with this crisis that came from the industrialized west way how can the i.m.f. be relevant if the u.s. and other large countries don't have to to listen. well a couple of points i'm glad we're talking about how relevant it is rather than. discussing the ridiculous proposition that it's actually net harmful and we'd be better off without it altogether. the or the dead in a moral hazard the i.m.f. somehow caused the current global financial crisis which i is not something i really heard and it would be a proposition that if you thought if you if anyone is carefully thinking about it would be hard to make let me also point out that nobody is forced to go to the i.m.f. . russia doesn't want to find and as i pointed out and as i mentioned many
countries in asia this time have chosen not to and they didn't need to because they were following good policies and because plus they had lots of reserves to to insulate them but you know i mean i have similar so my motivations we don't want to see you're going to go to the i.m.f. . you know that's a correct but it's certainly the case in russia that certainly in the case in russia they never want to have to go back there again but you know i mean what about the issue of moral houser because that's really important here because when we look at the greeks for example i mean if there is in the definition of moral hazard there i mean of course you have the european union the euro but the i.m.f. also i mean what if i go back to jeff what about the issue of moral houser. you know greece is an excellent example i mean you're always going to have some countries decided they want to help other countries and greece is an excellent example if we didn't have the i.m.f. the only way that countries would help out other countries would be highly politicized based on you know whether you have ethnic immigrants from that country
and all kinds of extra political considerations and it would be very hard to make conditionality stick conditionality is by word of i.m.f. programs we're going to give you this money and it's not huge amounts of money usually it has to be topped up by other countries but we're going to give you this money if and only if you agree to certain conditions which in the case of greece today involves drastic cuts in its budget deficit and so on i think the europeans made a big mistake not letting greece go to the to go to the i.m.f. earlier thank god we have the i.m.f. because the i.m.f. is much more likely and able to enforce conditionality and tell greece you have to shape up if you want us to bail you out much more likely to be able to do it than. in the northern europeans or than the americans or anyone else bilaterally it's ok alan if i'm going to leave the moral hazard that is the i am not doing alan go ahead go ahead the rich europeans have to come to the i.m.f. to ask for help i mean they don't want to put up the money themselves so they say well you know you do united states britain china russia they all have to share in
the costs of building agrees why we have to borrow your audience doesn't make any sense to be the europe you're putting up roles where the money. ok now that you are putting up with the remembering you're going to do on their own is make conditionality stick ok and if i go to you i mean let's talk about let's talk about conditionality because a lot of people say that conditionality is actually very damaging to economies and we can look at our argentina we can look at southeast asia that all of the most advice they were given was really bad advice ok and that's another reason why people don't go back to the i.m.f. . well that's i think there was she was somebody else on the show that it is only fault it's largely been a failure of the i.m.f. conditionality is largely been a failure in this is well recognized by the borrowers and by the i.m.f. the i.m.f. really doesn't have a way to impose its conditions but what everybody does know is that they are you saying it's going to lead here because it has
a tendency of undercutting of undercutting the credibility of the i.m.f. so what you see time and again in the case of argentina in the case of russia in the case of most of africa for decades has been that the i.m.f. lends based on the so-called tough conditions the countries that receive it do not implement the necessary reforms in fact the aid money actually helps to postpone reforms and then they come back for more money this is why the conditionality has not been a success there are countries of course that do end up introducing reforms but that seems to have no relationship with the i.m.f. lending and in the case of greece of course what has happened is that it has allowed greece to not renegotiate its debt as i think it's going to end up having to do and so it's only postpone the day of reckoning there ok gentlemen after a short break we'll continue our days i don't know that me after a short break we'll continue our discussion on the future of the i.m.f.
welcome back to cross talk i'm peter lavelle to remind you that we're talking about the i.m.f. . would be for let's see what russians think about this organization established in one thousand nine hundred forty four at the bretton woods conference and headquartered in washington d.c. the i.m.f. and world bank are very much creatures of their time every since i am a a.g.m. fell into for us as u.s. and chinese delegations accuse each other of currency manipulation the praga has prompted many to question the institutions that lead to t. and purpose. russians believe it was the i.m.f. so aggressive stance that contributed to the current sit default crisis of all those nineteen ninety eight critics also note how the merging group of twenty is
assuming more importance than the i.m.f. reflecting the reality of a new multiple of world back to peter. ok jeffrey right before the break you want to jump in there go right ahead. yeah i want to just sort of clarify something we've heard that the i.m.f. is unpopular in russia that it's unpopular in asia which is true and it's sort of been its job to be unpopular since the very beginning but what i want to make very clear is that the reason it's unpopular in these countries is because it's demanded austerity and people think maybe too much austerity too much cutting of the jets and i want to make very explicit that my fellow panelists are criticizing the i.m.f. for the opposite reason they are saying that the i.m.f. has not succeeded in making our stary stick there when our country promises to cut its budget often it doesn't which is true it's hard to make our stare at the stick when even when it's really essential but the i.m.f. is the best instrument we have for that and in the case of russia in one thousand nine hundred eighty eight it's because it's all unpopular is the on the finally cut
off i.m.f. further lending because russia did fail repeatedly to meet its budget targets so we can't be criticizing them both for imposing too much fiscal conditionality and not enough ok and i did good just because it took a move to get to that point and then only we go first. yes we can we can criticize them because countries cut their budgets when there is a political will in the country to cut the budget and the i.m.f. is irrelevant they get all kinds of conditionality but it doesn't happen people don't like the budget cuts which result and they blame the i.m.f. for that but the budget cuts only occur when the political consensus within the country is willing to do it and that's going to happen in greece whether we have the i.m.f. or we don't have the i.m.f. but the i.m.f. does is the way the adjustment by lending the money you know how it helps greece greece as two big problems it's wages twenty percent above its productivity so they
have to come down the i.m.f. lending the e.u. lending doesn't do a damn thing about that the other thing is the greece has a huge budget deficit they have to reduce it lend it borrowing more doesn't reduce to dad it just extends it in time that's not what they need what the job what the greeks need to do is restructure or default on their debt they won't call it the fault they call it restructure but there is no way in my opinion that greece is going to get out of its current crisis without restructuring its debt and that's something which the i.m.f. is the way and finally what greece has to do is sell off the state assets years ago when the first proper dreyer of the grandfather of the current prime minister was elected i was in greece i asked the people in the central bank what will the socialists now that they're in power what will they nationalize you scratch this
had thought for a long walk home finally said there's nothing left ok even if you got a year in washington got it and in the case let me just make a point about russia in the one nine hundred ninety s. in the case of russia in the ninety's yes the i.m.f. finally did cut russia off but it took nearly all of the one nine hundred ninety s. to get to that point after lending more than twenty billion dollars and when. russia didn't comply with the with the conditions and even over the objections of top russian government officials who were making precisely the point that alan and i are making that this is not going to help reforms and. russia received a massive bailout in one thousand nine hundred eight to prevent the crisis and it totally failed this was one of the reasons why the bailouts of russia there and elsewhere were completely discredited ok if i stay with you get if i could stay with you because we've kind of slightly changed the topic here in an interview you did about a little over a year ago. about the i.m.f. you said the i.m.f.
is basically a political institution not an economic institution can you explain what you mean by that. yes the this is an organization made up of governments that lend money to other governments and i think that that helps explain. the very poor record of promoting reform and promoting growth if you look at the majority of countries that have been receiving aid from the i.m.f. it has not been short term aid as the i.m.f. was designed to london has been the long term aid these are sort of political arrangements between sets of governments that have helped out governments but not so much the economies of the countries that are supposedly trying to help out and that's kind of what you would expect because you have a perverse institute institutional incentive work where you have a bureaucracy that has to lend in order to make itself relevant and recipients know that ok jeffrey if i go to you i mean that's when also one of the criticisms is
that you know you if you if you if you want to aid sometimes you just really need the aid you don't have any other way or any place else to go but then you have to if there are political institutions that are their influence i mean this is a liberal capitalist environment and you must comply by those rules and you know in theory maybe most people would agree that maybe a growing number of people don't anymore but i mean if there's a political package attached as well isn't there it's implicit to least. well i mean life is politics countries interact people interact through politics of course the question is what the politics would be like with without the i.m.f. as compared to with the i.m.f. i mean to take the example of greece again if it weren't for the i.m.f. and it's very relevant because the initial reaction on the part of northern europeans is they wanted to solve it themselves without the i.m.f. and i think the six months of delay or early this year made everything a lot worse you'd still have the money going from northern europe to greece only you wouldn't have the conditionality and it's especially relevant that group greece
partly got into its trouble by fiddling with the statistics you need jacked of neutral body to guarantee to give the good housekeeping seal of approval that yes the greeks are finally getting serious yes these budget numbers are now serious and the europeans northern europeans demonstrated for the last ten years that they weren't capable of doing that they had all kinds of you know the maastricht right terry and it's really a growth pact of the nobel class it all meant nothing because the politics dominated politics is always there but the i.m.f. is a useful institution is plenty useful role in greece and other places today by keeping the politics to a minimum relative to what the alternative is by having serious conditionality enforcing it to the extent possible ok alan if i go to the chinese you could. go ahead jump in i was going to say peter i think one of the things we talk about is what's the future for the i.m.f. just really want to go i was going to change i was going to bring china in we could go ahead ok because they're very concerned about. the current election it's going to be very difficult to get after the current election is over it's going to be
very difficult to get hundreds of billions of dollars from the i.m.f. . which they were asking for out of the u.s. congress the u.s. congress objected strenuously to the bailouts for the i.m.f. and that's how my commission got started in the one nine hundred eighty nine ninety they're not going to be that kind of money for the i.m.f. so the i.m.f. is going to go back to where it was before the obama administration threw money at it as far as china is concerned we have every reason to believe that china is going to do exactly what the chinese see as being in their interest we have been. propositioning the china about all kinds of things that they should do about their exchange rate for administration after administration for at least twenty years and they pay as much attention as last year's snow i mean they don't care what you
say to them they're going to do what they think is in their interest and they see their interest as export led growth. to sop up unemployment in china ok jeffrey if we could stay with the china theme here i mean the chinese the you know they've looked at the i.m.f. and you know if they got a greater role of bigger voice they might bring their money away along with them but i mean it's so disparate that i mean it's a grossly unfair that some countries have so many more voting rights than the way twice then china but if you turned around and said ok china you considered the adult table and they're not going to be pushing some kind of liberal agenda they'll say well you know we want to invest in return on our investment they'll just be very hard core about it and then that kind of some of those conditionalities could possibly go away because like i said there is a political fate on politics and you agreed with me. because politics is the way human beings interact but. china and the other big emerging market countries do
absolutely need to have more representation in the i.m.f. and world bank i think this is but recognize for a long time i mean it's just all sort of elementary democracy of the site and it's also just elementary practicality that we do want the resources from them and i think by the way the fact that we now have the running majors i don't believe banks should be run on the credit basis. no of course not and i've even said democracy we don't want to be like the united nations one country one vote or whatever but china and the other big emerging market countries should at least have representation that's proportionate to their economic weight forget their population their economic weight because we're asking them to contribute and no taxation without representation of course are not going to contribute sums of money without more representation so i'm in favor and it is the u.s. government position that the or the big emerging market countries be given more weight in the i.m.f. and we've taken very small steps in that direction perhaps the g twenty summit in seoul korea next month will take bigger steps i don't know and you get the last
word forty seconds. from here when we go from here. look there's no question that the i.m.f. is a political institution and if china had a bigger say in it it would have political influence over economic decisions but let's not kid ourselves that's already been the case for a long time the reason that the i.m.f. helped bail out mexico was because it was important to the united states the reason that the i.m.f. bailed out russia in the ninety's even though it made no economic sense was because the treasury department considered it important this is primarily a political institution not an economic institution and it's gotten to the point where. it's gotten to the point where the everybody's expecting too much out of the. i'm sorry we've run out of time expecting too much from the i.m.f. many thanks to my guests today in cambridge pittsburgh and washington and thanks to our viewers.
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