Brazil and the IMF
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Keynote Luncheon Address|
Ms. Anne O. Krueger
First Deputy Managing Director
International Monetary Fund
Supply, Demand & Deadlines: A Workshop on Economics for Journalists
University of Minnesota, June 16, 2003
I'm delighted to be here today, not least because it seems to me that journalists and economists have many things in common. Most important, perhaps, is that both professions tend to be the subject of considerable public suspicion—and, as a result, we tend also to be the butt of many jokes. Long before the troubles of Arthur Andersen, it used to be said that economists made accountants look interesting. And Ronald Reagan once argued that an economist was somebody who saw something that worked in practice — and then wondered if it would work in theory.
So we economists have quite a bit of fellow-feeling for you journalists!
Don't be disheartened by the occasional insult—it was ever thus. Generations of distinguished thinkers have indulged in press-baiting. You must see that as a challenge, one worth rising to.
And reporting economics is challenging, and often disheartening. It requires a capacity for hard work, a clear mind and persistence in the face of scepticism. But it can also be rewarding, both for you—and, perhaps more importantly, for your readers, listeners and viewers.
So I congratulate you for taking up that challenge. But I'd better qualify what I've just said. Reporting economics well is what brings those challenges and those rewards.
Almost anybody can write about economic issues in a slapdash, ill-informed way, paying little attention to the main facts, let alone the underlying arguments. Long ago, Adlai Stevenson said that accuracy to a newspaper was like virtue to a lady—but that a newspaper could always print a retraction!
I'm sure you understand the importance of accuracy—and balance, I should add—because you're here. You've chosen to come to this workshop because you want to raise your game.
While I'm dishing out congratulations, some should go to the Minneapolis Fed: both for recognising the importance of this issue. The programme is impressive—as is the range of speakers lined up. And this afternoon, you will be working with a practitioner of the highest calibre. John Berry's journalism is well-known and well-regarded. You can learn a great deal from listening to him—and, of course, from reading him.
So what do I mean by reporting economics well? You might already be suspicious. After all, I'm a policymaker with a message to get across. What are my motives? How do I judge what makes good reporting? Do I give higher marks to those journalists who say what I want them to say, who report my message uncritically?
Rest assured the answer is an emphatic no! Of course, I wouldn't be human—nor would you believe me—if I didn't admit to a certain satisfaction when someone sees an issue in the same way as I do, or when someone credits the International Monetary Fund for getting something right. I like to think we often get things right—but getting the credit for it is, let me tell you, a very rare experience!
I'll come back to some specific issues concerning the IMF in a minute or two. But my main focus today is much broader than that. I'm concerned with the coverage of fundamental issues—issues that are central to everybody's everyday life. We are constantly making economic decisions in our personal life, in our life as citizens and voters, and often in our professional life: and far-reaching decisions at that.
Understanding economics is key to understanding so many other important issues—poverty, at the local, national and global level; healthcare; education; conservation of the environment. Less obviously, but no less true, it also helps us understand much about the nature of relationships between countries—between governments, but also between companies and individuals.
Every time you use your credit card, take out a loan, decide whether to rent or buy a home, think about refinancing your mortgage, you are making an economic decision; and one which will affect your future financial health.
Every time you cast your vote, whether it be in a federal, state or local election you are taking an economic decision—even if you don't always recognise it as such. Which candidate will raise your taxes; and what will you get in return for those taxes? As an individual the only control you can exert over decisions which will have a significant impact on your life—on your health, and wealth—is your vote.
Moving home, from one district to another, or from one state to another, even one country to another—you might think of it as a lifestyle choice. But it is fundamentally an economic decision. It will affect you income and your wealth, now and in the future.
There is almost nothing that we do that doesn't have economic consequences. An understanding of economic issues is fundamental to every aspect of our life.
But some of you will already know only too well how difficult it can be to persuade news editors that economic issues are important. Their eyes glaze over. They will tell you that, yes, of course what you are talking about is important. But then they might go onto ask what the personal angle is. Who's arguing with whom, what rivalry might be driving the policy debate.
Yet getting the facts of a story right—and marshalling all those facts—providing a complete picture—can illuminate debates that might, on the face of it, be about local politics. Let me give you an example that will also illustrate what a minefield policy issues can be.
The debate in Florida over a sugar tax is exactly the sort of state level issue that many of you will suddenly be called upon to write knowledgeably about—and in a hurry!
Let me summarize briefly. The pressure for a sugar tax came mainly from environmentalists concerned about the damage that sugar farming was inflicting on the Florida everglades. It was simple in concept: a small tax on sugar output, the proceeds of which would be used to fund conservation and repair work in the everglades.
The sugar industry was up in arms, complaining that a tax would threaten the livelihood of sugar farmers. Farmers, or their lobbyists, also argued that the environmentalists were ignoring other threats to the Everglades, and were instead using them as an easy target. The debate was polarised between big business and the environment.
Yet it was difficult to get a clear picture of what the argument was about, partly because both sides were anxious to present their case in a favourable light.
From an economist's point of view, the issues are unusually clearcut. The overwhelming balance of economic evidence would argue against any sort of producer tax. It distorts economic behaviour. A tax on one group of producers means they have to raise their prices (or accept lower profits). In this case sugar farmers would be worse off than, say, orange growers in Florida or sugar farmers overseas.
The environmentalists did have a point when they accused sugar farmers of damaging the Everglades. But to the extent that the farmers were doing harm, the sensible and efficient way of dealing with would be to make them pay directly, not impose a tax. That way, those farmers who had invested effort in trying to minimise incidental damage would not be penalised equally with those who had paid no attention to environmental effects.
Producer taxes are misguided because they interfere with the market. But producer subsidies are also wrong. A bit of investigative work would have revealed that Florida's sugar farmers were receiving massive subsidies, even as they were resisting taxation. Their prices were higher than the world market price, and they could get away with that because they were protected from import competition. In fact, you would have to work hard to find a more distorted market.
Of course, if the farmers had seen their subsidies withdrawn and been made to face competition from foreign imports, then many of them would have ceased farming; in turn, much less damage would be done to the Everglades.
The natural instinct of the environmentalist lobby was to argue for more intervention—the tax—rather than less, by withdrawing subsidies and producer protection. But interference with the market rarely makes economic sense.
I think the lessons of this example are pretty clear. Never take what you are told at face value. Even in a straight two-sided argument, both parties might have their own reasons for not wanting to draw attention to the full picture.
One of your most important tasks is to fill in the gaps in the story, so that ordinary citizens, who will be voting on these issues, can make an informed judgment. They might in the end decide that they wanted to keep subsidies for farmers and have a sugar tax. That is their democratic right. It is my job as an economist to try to persuade them of what makes economic sense. It is your job to make sure they see the whole picture.
The first challenge
Getting the facts right and understanding the issues is the crucial first challenge. Doing that in a confident but accessible manner will help you break down some of the barriers that you so often encounter when you mention the word economics.
The polite boredom you can so often encounter is often disguised fear. Numbers make many people nervous—and there's no doubt that economics does rely heavily on numbers. People are often baffled by statistics. They're afraid because they do not understand. And nobody wants to admit their ignorance: that's human nature.
You know how important economics is to all of us. But you are also journalists. You want to get your copy in the paper—and sometimes on the front page—or on air.
So your job is to bridge the divide between the technician and the technophobe. If you want to show why economic issues are important and you want your story to be given prominence, it is worth the effort to strip away the jargon and sift through the numbers to find the ones that matter most.
Easier said than done, of course, but certainly not impossible. Do not be afraid to ask the dumb question. Economists can be notoriously unhelpful when it comes to simplifying facts and arguments. Too many of them only want to talk to other economists. Do not be put off, though. If somebody cannot explain their case clearly, it can often mean that they are not wholly sure of their facts.
Remember that it is easy to hide behind jargon—it can be a camouflage for ignorance. If your exposition isn't clear, though, the story will lose its impact, and its interest.
The second challenge
But beware. The search for clarity is praiseworthy; but it is not without dangers of its own. It can be all too easy to be drawn to those who present the clearest but not necessarily the most accurate or balanced case. It is easy to marshal facts selectively without people realising it. It is not just a matter of getting the facts right, but of choosing which facts to present—as the sugar tax debate shows only too clearly.
I promised I would say something about the International Monetary Fund. I am not sure how many of you are familiar with the IMF and what we do.
Oscar Wilde said that there is only one thing in the world worse than being talked about—and that is not being talked about. When the IMF does attract attention it is sometimes unfavourable—and, then, often unfair. But our biggest challenge is to combat ignorance about what we do—and why we exist in the first place.
I believe what we do is both vital and in America's national, and the world's interest. Our primary aim is nothing less than the preservation of international financial stability. We are concerned in a very real sense with the maintenance and growth of global prosperity.
It is important to remember that financial stability is not just an abstract concept. We are talking about the standards of living of ordinary people—people whose living standards are already, in all too many cases, very low. Helping to preserve the value of their jobs, their incomes, their savings, is a vital task. Helping their governments to afford to provide education, health and welfare programmes affects peoples' lives in a fundamental way. The better educated and healthier that people are the more prosperous they and their country can become, and the better able they are to take care of those less fortunate than themselves.
Global prosperity is good for America as well. Prosperity and financial stability bring political and social stability—both at the national and the international level. Whatever contribution the IMF can make to that is surely worthwhile.
Apart from anything else, of course, the IMF, with its 180 plus members, is a wonderfully inclusive organisation. Of course, there are disagreements among our members from time to time but there is a remarkable degree of consensus about the issues with which we are concerned.
I mentioned that our aim is to preserve international financial stability. That is what we were set up to achieve in 1945. It is our job, then, to prevent international financial crises. A secondary objective is to deal with crises when they erupt. Our role in crisis resolution is what attracts attention—for obvious reasons. Apart from anything else, if we succeed in our primary objective, there is, in effect, no news. We are most effective when nothing happens. And if you think about the scale of the shocks to the international economy in the past three years - the bursting of the stock market bubble in the U.S., the disaster of September ll, and uncertainty over the geopolitical situation in the Middle East, among others - it is perhaps remarkable how few crises there have been.
That partly, I think, reflects the work we've undertaken in recent years to make our crisis prevention work more effective. That work was inspired by the big changes that took place in the international economy in the 1990s and by the series of major crises that erupted in the wake of those changes. Asia, Russia and, more recently Argentina, have all experienced painful upheavals as governments have struggled to come to terms with the impact of changes in the international financial system.
Handling those problems was for everybody involved—governments across the world as well as the international institutions—a crash course in the power of modern financial markets. It was a steep learning curve for us all.
But it also led us to focus more attention on how we might try to prevent or forestall such large-scale crises in the future.
The new tool-kit
It became clear during the 1990s that the nature of financial crises had fundamentally changed. Emerging market economies were able to borrow from private lenders: and increasingly, they were able to do so not by borrowing from banks but by issuing bonds. Bonds offer lenders a fixed rate of interest, and they can be bought and sold—just like domestic government bonds here.
But this greater reliance on bond finance coincided with the opening up of international capital markets. Large sums of money now circulate freely around the world, usually in search of the best rate of return. Creditors make a judgment about the risk they're prepared to take. The riskier the loan, the higher the rate of interest they want. And on fixed rate bonds, the price of the bond fluctuates accordingly. If bonds issued by one country suddenly seem risky, the price will drop—and many holders will sell, sometimes desperately anxious to offload their bonds.
Governments learned to their cost that lenders can disappear, along with their cash, as fast as they appeared. At the first whiff of trouble, they'll be anxious to sell. Trouble can mean suspicion that a government owes more than it can comfortably afford to repay—at which point there'll be a mad scramble to offload that government's debt. Or it can mean concern about misguided economic policies. Whatever the cause, once creditors want out, a government will find it hard to raise new loans—loans it might need, for instance, to pay off existing loans coming due for repayment.
As part of our work in preventing crises, therefore, the IMF now pays very close attention to the sustainability of a government's economic policies. By that we no longer just mean policies aimed at delivering growth and low inflation—important though those still are. But we also pay attention to a country's debt burden. Can it manage the repayments it will be obliged to make?
One factor that tended to make many crises more painful in the 1990s, was the tendency for governments to rely on fixed exchange rates. When fixed exchange rates come under pressure, as they did in several Asian countries and Argentina, lenders get nervous and governments can quickly find themselves in trouble. Flexible exchange rates are now much more common.
The IMF now puts more emphasis on structural reforms, aimed at helping countries make the sort of changes that reduce the risk of trouble. Stronger financial sectors and proper bankruptcy laws are needed to cope with the much freer flow of capital around the world. We can also provide technical assistance to governments who need help in pushing through such reforms.
Everybody—governments and the IMF—has come to recognise the importance of something that, too often, used to be overlooked: transparency. How best can a government convince its creditors, and the international community more generally, that it is pursuing sound, sustainable economic policies? A good start is to provide more information about what it is doing and why. As governments grow more accustomed to being upfront about what their aims are, the financial markets will come to trust them more. Journalists might be less cynical about a government's motives if more information is available—and by that I do not mean information that is manipulated to serve short-term political ends.
We ourselves have also worked hard to become more open about what we do. We wondered if we were partly to blame when we felt we hadn't had a fair hearing in the press. Was it our fault if not enough people knew who we were and what we did; and if few journalists bothered to write about us?
We concluded that perhaps we could do more. So we now publish as much as possible about what we do and what we say to member governments. When they agree, we publish what used to be confidential reviews of each member government's economic policy—and I don't mean just those countries that need to borrow from us, but every member.
Finding the best way to prevent crises is always going to be hard, partly because we are always learning the lesson of the past. Crises often come on us from unexpected directions.
But in the short-term, one way for the IMF to help is by judicious lending to governments in temporary difficulties. The best, most recent example of this, is the loan package agreed with Brazil last year.
Some of you might recall that as the presidential election started to get exciting last year, the financial markets started to get nervous. Markets hate uncertainty. They also hate the unknown, the untested. As the summer drew on, it looked as if Lula—as everybody in Brazil calls him—might be in with a chance. This was a man who had once seemed opposed to many of the economic policies of the outgoing government. A man who wanted to help the poor—by which he appeared to mean spending large sums of money the government didn't really have.
The "hot money" started to flow out of the country. Interest rates rose sharply as the government and the central bank tried to keep a grip on the situation. The Brazilian real started to drop against the dollar. Economists started to worry about the size of Brazil's foreign debts. What had looked manageable at one level of interest and exchange rates suddenly started to look unsustainable. There was talk of a debt rescheduling—in other words Brazil would have to tell the people who'd lent it money that it couldn't repay on time.
The IMF decided that it could help Brazil deal with what we were convinced was a temporary problem of uncertainty caused by the election. We put together a large loan package—$30 billion, the largest single loan ever advanced by the Fund. But we didn't write a blank check.
The loan is in installments, each one to be paid when the conditions laid down have been met. Most of the money was due for release after the election—and only after the new president had agreed to abide by the conditions set out in the loan package. It was one of my more enjoyable tasks, when I visited Brazil last month, to be able to congratulate President da Silva on the progress he and his government have made in such a short time.
However hard we work to prevent crises, how well we respond to those crises that do occur will always be how some people judge the effectiveness of what we do. I just want to make a couple of observations about our role in crisis management.
One common charge from the IMF's critics is that we make unreasonable demands on countries that come to us for help. Let's be clear. We do not impose demands on governments. We consult with them about the appropriate policies to accompany the lending programme. The resulting agreement, expressed in a "letter of intent" sets out the conditions for the loan that the government has agreed to abide by.
Those conditions are intended to ensure that a country will adopt sound economic policies, with the aim of preventing future crises. Since most of what we lend is intended to enable countries to overcome short-term financial problems, we need to make sure that they have policies in place that will help them resolve their difficulties and repay us on time. And if loans to us aren't repaid, we have less money to lend to other countries.
But there's another reason why loans are conditional on sticking to a pre-arranged set of policy steps. It's what economists like to call moral hazard. If we lend money to anybody who asks and don't insist on our conditions being met; if we essentially turn a blind eye to economic mismanagement in one country, other countries will be encouraged to think we'll do the same for them.
None of this stops our critics from accusing us of being unduly harsh on countries in trouble. But it is worth remembering that when a country comes to the IMF for help in a crisis, it does so because it is in trouble. The policies it has in place are, for whatever reason, seen as unsustainable by the financial markets in general, and by its creditors in particular. At that point, of course, tougher measures are almost certain likely to be needed; and that the IMF can sometimes get the blame for their introduction.
A world without the IMF
But it is worth looking at this from a different angle. How would international financial crises play out if the Fund didn't exist? Would they be easier to resolve without our resources and expertise? Would governments be able to restore confidence in their economic policies more easily without us? I can't think of a recent case when a government has tried to.
I started out by saying that economics is important—and that so is reporting economics well. I hope what I have said has helped convince you, if you had any lingering doubts, that your task is a difficult but worthwhile challenge.
But if economics is important in a domestic context, how much more so is it in global terms. We've seen in recent years that poverty and a sense of exclusion from the world economy has helped create "failed states"—countries that have been breeding ground for dissent and terrorism. The IMF's role—acting alongside the World Bank, the UN, and national governments—is to help all countries participate in the world economy: by encouraging them to pursue sensible economic policies and, where needed, to provide the financial support to help them do so.
The more people understand what we do, the easier our task will be, and the more every body can benefit from a prosperous international economy.
IMF EXTERNAL RELATIONS DEPARTMENT