The role of the IMF from the Mexican perspective / Luis Miguel Galindo. - [Electronic ed.]. - Bonn, 2000. - 6 S. = 27 Kb, Text . - (Studies on international financial architecture ; 2000,7 : IMF special)
Electronic ed.: Bonn : FES Library, 2000.
The Actual Perspective
Proposals For The Reform of IMF and World Bank
The Mexican experience with IMF policies began in 1976 with the signing of an agreement after the collapse of the Mexican peso. The collapse was the result of a very active public policy which lacked any regard for macroeconomic balances. Public expenditure in real terms had increased on average 15.9% per year from 1972 to 1982 while the external debt increased on average 30% between 1973 and 1981.
The 1976 agreement with the IMF was partly secret - especially where fiscal and current account targets were concerned. This proceeding was not taken well by the public opinion which considered the situation as a threat to national independence and as a kind of plot against national interests. Public opinion was divided into two groups: The first one in favour of the international organisations supported the ideas of policy adjustment, a strong privatisation process and the importance of opening the economy, including the financial sector. The second group favoured of the ideas of public expenditure as an economic engine, the promotion of an active participation of the public sector in the productive sector, the protection of the national industry by using import taxes and the slowing down of the financial liberalisation process. Since then the visions have converged and now both sides accept the ideas of macroeconomic balances and solid foundations of the economy. Yet, differences still exist concerning the intensity of these measures and their secondary effects.
Since 1976 the Mexican economy has gone through different phases of growth and recovery. The economic performance has, in general, been very poor without attaining an improvement in the per capita income for almost three decades. Simultaneously, the economic policies were directed at the creation of solid economic foundations, such as a balanced budget, small external deficit, a more realistic exchange rate and a more open economy in order to allow free international trade and a financial liberalisation process. The coincidence of these polices with a very poor economic performance has lead to a general rejection of the IMF recommendations that are consequently characterised as being neo-liberal. In the political arena the adjective of neo-liberal is in general being used without any specific connotation. The term implies a set of policies that are related to privatisation, free markets without any control, a strict wage policy and a fast process of opening the economy, which has caused a reduction in the populations living standard.
The actual government praises the advantages of its macroeconomic policies and structural adjustment under two main lines of reasoning: However difficult the process may have been, without it the situation would be much worse. Thanks to these adjustment policies the Mexican economy is now on a road to economic recovery and has some sort of shield against international financial crises. In this context, the Mexican government is always keen to praise its achievements in international forums and it has earned the support of the IMF and the World Bank. Horst Koehler, for example, declared during his recent visit to Mexico, that the Mexican economic policies are correct and that he does not expect a financial crisis in the near future. [ Newspaper Reforma , 20 May 2000, Business Section. ] On the other hand, the Mexican government, does not accept that its economic policy should be stereotyped as neo-liberal.
The Actual Perspective
The economic crisis of 1995 with a fall of the GDP of nearly 7% and the recovery and persistent economic growth after that year are the main features of the recent Mexican economy. From the governments point of view, the adjustment policy, supported by the IMF and the United States (specified by a loan of 50,000 million dollars), paid off by generating the conditions for the recovery of the economy. The structural and institutional changes, the process of privatisation, the free market operation, the reduction of the public deficit and the financial liberalisation process as well as the governments strong support of the private banks are considered to be key factors for the economic success. And, in addition, the private sector supports this line of reasoning, some small and medium enterprises excepted.
The groups with an opposite view on the role of the IMF and World Bank in Mexico are essentially the left parties (PRD, PT, the Zapatista groups in Chiapas, popular movements such as those of students or land seekers, small peasants, trade unions that are not associated to the traditional workers organisations or even important intellectuals such a Jorge Castañeda and Carlos Fuentes). These organisations argue, with different vigour, against an economic policy which generates slow rates of growth without distributing the benefits. They point out that the number of poor people in Mexico has increased and that there are indications that the financial rescue as operated by the government was, to say the least, not free of some indications of large frauds. Following this line of reasoning, the adjustment policies are essentially methods that suit the objectives of international financial capital and governments of developed countries, but not its population.
It is worth mentioning that the agreements with the IMF in 1994-1995 did not cause the same response as in 1976. Whereas the response in 1976 was one of surprise and nationalistic reaction, in 1994/95 the IMF-agreement met with open rejection. However, the rejection aimed not so much at the agreement in itself but the kind of agreement and its social consequences. Part of this change of behaviour is due to a greater acceptance of the existence of a global economy for which there is an obvious need for international agreements and for organisations to face global challenges. Also it could be argued that it is the poor economic performance of the Mexican economy since 1976 with its negative economic consequences that gave the population a very pragmatic view of things which can be summarised by the sentence as long as it works it is fine".
In second place, the Mexican economy has not suffered from a major financial crisis these past five years. The Asian and recent Latin American crises had a minor effect on Mexico apart from some instability on the stock market and small movements in the exchange and interest rates in order to prevent capital flight. Consequently, the Mexican authorities argue that the economy is shielded against massive capital flights and the contagious effect of international financial crises because they followed the prescriptions of the IMF policies.
In the third place, there is a general agreement amongst actors from different political backgrounds that in a global economy with free capital markets it is indispensable to have a consistent macroeconomic policy. This calls for a small fiscal and current account deficit, a reduced inflation rate and the operation of markets. For example, in the recent election campaign all presidential candidates agreed on these points despite interesting differences as to the intensity and the implementation of the measures. For example, all parties accept the relevance of a healthy fiscal balance with the PRD (left party) still promoting some Keynesian polices based on a larger public expenditure. In this sense, PRI and PAN (the ruling and the right party) both accept the actual status of the NAFTA meanwhile the PRD does not reject it but does want to make some adjustments; however those are, far from clear. Similarly, all parties accept the independence of the Central Bank in order to fight inflation but again the PRD would prefer more social accountability. It is worth mentioning that the two largest parties (PRI and PAN) are in general keener to continue with the internal reforms in order to build a competitive and strong financial system". [ See Heath, J., „Los candidatos y la disciplina fiscal", 9 and 16 May 2000, Reforma Newspaper. ] The PRD on the other hand, is eager to instrument changes which reduce the pace of the financial liberalisation process and to confront the actual IMFs proposals more strongly.
In this sense, it should be mentioned that despite the general rejection of the so call neo-liberalism all parties have accepted the main principles of controlled public finances and a minor current account deficit, free markets, liberalisation of financial markets and free trade agreements. In this situation two seemingly incompatible discourses coincide: On one level all parties reject the neo-liberalism policies and simultaneously, on the other level, all of them accept principles associated with IMF and World Bank policies.
Proposals For The Reform of IMF and World Bank
The Mexican proposals to reform the international financial system are not fully elaborated due to the particular economic and political situation. In effect, the Mexican economy has been growing since 1996 and has not met with the full force of the negative effects of the most recent financial crises. Moreover, the presidential elections led to a concentration of the main debates on internal affairs; the international financial reform is only a secondary topic.
The main proposals concerning an international financial reform, considering the recent experiences in Mexico, are the following:
1. It can be said that in general Mexico has a rather negative perception of the programmes of the IMF and this is due to two main factors. In the first place, since 1976 the government preached to follow the IMF programmes. Nonetheless the Mexican economy has only had an average rate of growth of two per cent during this period. The social consequences of this situation are enormous. In the second place, the IMF is considered to be primarily concerned with the stability of the financial system. This basically implies the implementation of policies to maintain international capital flows and in the extreme to preserve the profitability of the financial sector. In Mexico the situation of the whole national financial system was precarious in 1994, but the IMF was essentially concerned by the macroeconomic balances after the crisis. This view can be considered to be rather narrow and it did not solve the problem of the weakness of the financial system; this is still a problem in Mexico.
2. In this sense the IMF should have a more integral approach. This implies a close collaboration with the World Bank. In particular the overlapping of functions of the two institutions must be eliminated. A long term approach, with the central purpose of development and fulfilling the functions that markets cannot fullfil, seems suitable. That is to say that it is plausible, as the Meltzer Commission points out, to stop IMF loans for development and poverty alleviation.
It could be debated whether the IMF should concentrate on short term liquidity problems while the Word Bank would give loans to countries with no access to private credit markets (and abandons areas that seem profitable for private banking). Yet, these proposals might contribute to accentuate the narrow vision of the IMF by showing that it is solely concerned with the short term stability of the flow of funds. Moreover, it is questionable if the profitability of the investment should be the only condition to grant a credit to a developing country. There are good reasons to consider in addition the existence of the credit ratio problems, the institutional problems of the guarantees, the high probability of credit default and the presence of price distortions that reduce the efficiency of the national private credit markets. In this scenario the World Bank funds can be particularly useful.
A close collaboration between the IMF and the World Bank should concentrate on forecasting, avoiding and managing financial crises - with a IMF taking on a long term view while World Bank focusing on credit functions. These might include countries and areas where private resources are not available or those cases which might be profitable for the private sector and still generate important social effects. The World Bank credits in Mexico have played an important role in certain areas despite some inefficiencies that still need to be eliminated. By explicitly including the social dimension in its objectives the IMF must avoid a situation where its main role is to achieve macroeconomic balances in order to solve cash flow problems. It must also address the institutional dimension, the possible presence of market failures that would reduce the efficiency of its adjustment policies and the implications of its policies to achieve economic growth.
3. In the Mexican perspective, the functioning of international financial institutions in a global economy is considered to be of outstanding importance. However, in order to face national social demands, the IMF should strengthen its precautionary role, paying close attention to institutional financial vulnerability, exchange rate regimes and the long term possibility for growth. The adjustment policies are ineffective if they do not generate the conditions for a sustainable economic development. This, of course, does not mean that the IMF should no longer look for adequate macroeconomic balances. The present IMF structure seems insufficient when facing major financial crises due to a simultaneous collapse in several countries or a massive outflow of capital. It is, therefore, a matter of urgent necessity to create an institution which can cope with the new challenges of the global economy. The magnitude of the flow of funds suggests that the only possible option is to co-ordinate all international agencies with the private sector. However, the private sector normally does not want to support financial rescue packages directly, as they have high risks and no profits. It is, therefore, not enough to modify the international institutions if the private sector does not contribute in some ways to the stability of the system. Hence it is necessary to organise the international financial sector by using private incentives. International institutions should encourage the application of international standards of management and control on the national level and support better national financial practices as well as the disclosure of the relevant information. The faculties of the IMF and its resources should also be increased in order to equip it to cope with major financial crises. A close co-ordination with national institutions, such as the United States, the European Union or the Japanese government, is recommendable.
The operations of all international institutions should show more respect for social accountability and the position of developing countries should be considered with more detail, even though their monetary contribution is not that significant. The operations of the IMF should have a more ethical approach towards, for example, debt relieve and show more concern for global environmental problems.
The existence of a global economy with highly volatile capital movements and the instability of major financial variables makes international institutions, engaged to prevent and control financial crisis, indispensable. The recent financial crises and their contagion effects must be controlled and reduced, not only by considering modification of international institutions, but also through the strength of the national financial systems. This includes the identification of normal and systemic risks and the vulnerability of the national financial systems. The macroeconomic adjustment process must be consistent with the institutional requirements and the management of potential risks. These requirements must be addressed by the IMF. The solution to financial crises does not only include the cash flow problem. A long term strategy is indispensable in order to incorporate structural and institutional changes and the social dimension. In the Mexican case, the adjustment policies were instrumented for too long without achieving a sustainable economic growth. A consequence of this is, in addition to the high social costs, the IMFs lack of credibility in the public opinion. Furthermore, there is still scepticism concerning the actual economic recovery.
A general strategy to face international financial instability must include modifications to the IMF and World Bank institutions avoiding a duplication of duties. It must also include the development of policies which guarantee a sustainable economic growth with social dimensions. This implies a strategy which consolidates the national financial systems and also finances economic development. It is, therefore, necessary that the World Bank, responsible for the credits for development, is also involved in the design of the adjustment process policies.
The international financial organisations operations should be more open to the public in order to avoid the criticism of secrecy. This should be complemented by more disclosure of information from the side of the national governments. The decision process within international organisations should regard more strongly the concerns of all countries. This will help the private sector to improve its decision process.
The modifications of the IMF and the World Bank should allow for a more efficient contribution to the stability of the international financial system as well as support long term economic growth and better social conditions. This is only possible by improving the co-ordination between these institutions, the national governments and the private sector. The new allocation of roles does not imply a reduction of the IMFs tasks on the management of cash flow problems. On the contrary it should also address problems such as the social dimension of the adjustment policies, the conditions of a sustainable economic growth and the institutional aspects.
Luis Miguel Galindo, Professor at the faculty of Economics at the University UNAM, numerous publications on questions of the financial sector and the economic development of Mexico.
The Studies on International Financial Architecture published by the Friedrich-Ebert-Stiftung are a contribution to the national and international discussion on the building up of a sustainable international financial order. They represent the debate in selected threshold and developing countries.
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