Running on Empty

Macroeconomic stability, reserve accumulation, and debt relief in emerging market economies is creating budget problems for the IMF. As The Economist reports, "Its $1 billion budget is traditionally funded by the small profit it makes on lending money to cash-strapped countries. But IMF lending has collapsed in recent years as developing countries have improved their economic management. As a result, the fund looks set to run a deficit of some $400m a year for the foreseeable future."

One might think, "Right then, job well done. Last one out please turn off the lights." After all, the current placid environment reflects in many respects the end of an era that began 35 years ago with the first oil shock. Developing countries developed balance of payments problems in part (though not solely) as a consequence of the negative shocks directly and indirectly generated by the first oil shock. Governments turned to the IMF for assistance and reform. In a very broad sense, one might conclude that although it did take a long time for these problems to work their way through the system, they have finally done so.

This final working out has had two consequences. On the one hand, governments in developing societies have reflected (if that is possible) on the lessons and concluded "never again." Their response has been to recognize the importance of a stable macroeconomic environment and to accumulate foreign exchange reserves as insurance against external shocks. This is especially the case in East Asia, but ever more so in other parts of the world too. Hence, less demand for IMF resources and macroeconomic stabilization. On the other hand, because of these changes, the IMF has a vastly reduced role to play in the global economy.

If ever there were a time at which one could restructure the IMF, this is it. Yet, organizations persist. So, rather than liquidating the fund, or finding ways to fundamentally reduce its scale to bring it in line with current demand for its services, the Fund and the G7 governments are searching for alternative sources of revenue. The most popular source is the sale of some of the IMF's gold holdings (of which it holds 103.4 million ounces, currently valued at around $92 billion). The proceeds would then form a fund that would generate an annual revenue capable of contributing to the budget.

It will be interesting to watch this unfold over the next couple of months. Gold sales require Board approvals, and last time the issue arose (1999) the US Congress was not so keen to see this development. Let's see if they are any more keen this time around.

We're Not So Special

Kenneth Rogoff: "As the United States’ epic financial crisis continues to unfold; one can only wish that US policymakers were half as good at listening to advice from developing countries as they are at giving it. Americans don’t seem to realize that their “sub-prime” mortgage meltdown has all too much in common with many previous post-1945 banking crises throughout the world.

Professor Carmen Reinhart of the University of Maryland and I systematically compared the run-up to the US sub-prime crisis with the run-up to the 19 worst financial crises in the industrialized world over the past 60 years. These include epic crises in the Scandinavian countries, Spain, and Japan, along with lesser events such as the US savings and loan crises of the 1980’s.

Across virtually all the major indicators – including equity and housing price runs-ups, trade balance deficits, surges in government and household indebtedness, and pre-crisis growth trajectories – red lights are blinking for the US. Simply put, surging capital flows into the US artificially held down interest rates and inflated asset prices, leading to laxity in banking and regulatory standards and, ultimately, to a meltdown.

The US economy is in trouble, and the problems it spins off are unlikely to stop at the US border. Experts from emerging markets and elsewhere have much to say about dealing with financial crises. America should start to listen before it is too late."

You can access the academic paper this op-ed draws upon here.

How Unequal Are We?

"The bottom fifth [of Americans} earned just $9,974 [in 2006], but spent nearly twice that — an average of $18,153 a year." How is that possible? " So begins a fascinating Op-Ed in today's New York Times written by two Federal Reserve Bank of Dallas economists. The editorial's broader purpose is to offer an alternative measure of economic inequality in contemporary America.

The punch line is simple: measuring household income yields a 15:1 ratio between the highest and lowest fifths of the income distribution. This gap income lies at the base of most hand-wringing over globalization. Yet, if one measures household consumption expenditures instead of income, the ratio between the richest and poorest fifths falls to 4 to 1. Measured at the individual (rather than the household) level, the ratio falls further to only 2.1 to 1 (wealthier households have more people than poorer households). Thus, the extent of inequality we observe is sensitive to how we measure it.

I don't know if they are right when they assert that consumption expenditures provide a better measure of inequality than income. What I do know, however, is that different measures of the same concept can generate very different conclusions. As we often base policy on what we believe is happening, it might prove useful to examine multiple measures before deciding on a change in policy.

Update: Krugman posts on this article. He thinks it's inaccurate: "So my basic reaction to the piece was, there they go again. There’s some truth in what they say, but no news."