Joyce Praise for The IMF and Global Financial Crises “Joseph Joyce has written a masterful book tracing the history of the IMF from inception to its current place in the international financial system. But The IMF and Global Financial Crises is much more than a history. In an engaging yet clear fashion, Joyce explains the gen- eses of financial crises, and why the functioning of the global economy requires an institu- THE IMF tion like the IMF. This book is sure to become the definitive work on this critically important issue.” THE IMF – Menzie Chinn, University of Wisconsin–Madison “Santayana reminds us that ‘Those who cannot remember the past are condemned to repeat AND GLOBAL it.’ Joseph Joyce’s book provides a ready mnemonic. The International Monetary Fund is the focal point of this work, and Joyce shows us both the strengths and the weaknesses of this institution as an agent of stability in the volatile world financial markets. This will be an FINANCIAL CRISES important addition to your financial-crisis bookshelf.” – Patrick Conway, University of North Carolina F AND GLOBAL “In this book, Joseph Joyce surveys the role of the International Monetary Fund in overseeing Phoenix Rising? international finance since the 1940s. Joyce’s clear, compelling analysis goes beyond this to provide an informative, incisive history of modern international finance more generally. The IMF and Global Financial Crises is an accessible, comprehensive, and fair-minded review of the history, structure, and functioning of the contemporary international financial order.” – Jeffry Frieden, Harvard University Joseph P. Joyce “Joseph Joyce’s book is a tour de force. Unlike other works on the IMF this analysis weaves together theory and practice from economics and political science with larger concerns over I the ways in which international organizations can influence domestic policies of member NANC states. Professor Joyce has produced a volume that will be an important reference for academ- ics and policy makers alike.” – David Leblang, University of Virginia I “Joe Joyce has written a concise yet lucid history of the IMF that focuses on its evolving role AL in a world of increasing financial fragility. This volume fills a real pedagogical gap, and any- one who teaches about the international monetary system, or wishes to learn about it, will be C in the author’s debt.” R – Maurice Obstfeld, University of California, Berkeley I SES “Joe Joyce has produced a concise review of the IMF’s sixty-five-year evolution. The book is comprehensive, informative, and provocative.” – Edwin (Ted) M. Truman, Senior Fellow, Peterson Institute for International Economics Joseph P. Joyce is a Professor of Economics at Wellesley College. Cover image: © Toria / Shutterstock.com Cover design by David Levy THE IMF AND GLOBAL FINANCIAL CRISES Th e International Monetary Fund's response to the global crisis of 2008–9 marked a signifi cant change from its past policies. Th e IMF provided relatively large amounts of credit quickly with limited conditions and accepted the use of capital controls. Th is book traces the evolution of the IMF’s actions to promote international fi nancial stability from the Bretton Woods era through the most recent crisis. Th e analysis includes an examination of the IMF’s crisis manage- ment activities during the debt crisis of the 1980s, the upheavals in emerging markets in the 1990s and early 2000s, and the ongoing European crisis. Th e dominant infl uence of the United States and other advanced economies in the governance of the IMF is also described, as well as the replacement of the G7 nations by the members of the more inclusive G20, which have promised to give the IMF a role in their mutual assessment of policies while undertaking reforms of the IMF’s governance. Joseph P. Joyce is a professor of economics at Wellesley College and serves as the faculty director of the Madeleine Korbel Institute for Global Aff airs. Professor Joyce’s research deals with issues in fi nancial globalization. He has published articles in many journals, including the Journal of International Money and Finance , Open Economies Review , Review of International Economics , Journal of Development Economics , and Economics & Politics, and he is a member of the Editorial Board of the Review of International Organizations. He received his Ph.D. in economics from Boston University. Th e IMF and Global Financial Crises Phoenix Rising? J O S E P H P. J O Y C E Wellesley College Department of Economics cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, S ã o Paulo, Delhi, Mexico City Cambridge University Press 32 Avenue of the Americas, New York , NY 10013-2473, USA www.cambridge.org Information on this title: www.cambridge.org/9780521874175 © Joseph P. Joyce 2013 Th is publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printed in the United States of America A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication data Joyce, Joseph P. Th e IMF and global fi nancial crises : Phoenix rising? / by Joseph P. Joyce. p. cm. Includes bibliographical references and index. ISBN 978-0-521-87417-5 (hardback) 1. International Monetary Fund. 2. Financial crises. 3. International fi nance. 4. Global Financial Crisis, 2008–2009. 5. International Monetary Fund – Developing countries. I. Title. HG3881.5.I58J69 2013 332.1′52–dc23 2012023656 ISBN 978-0-521-87417-5 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate. Th e phoenix hope can wing her fl ight Th ro’ the vast deserts of the skies, And still defying fortune’s spite, Revive, and from her ashes rise. Miguel De Cervantes, Don Quixote (Motteux, trans.) Contents List of Figures, Tables, and Boxes page x P r e f a c e xiii A c k n o w l e d g m e n t s xvii List of Abbreviations xix 1 . I n t r o d u c t i o n 1 1.1 IPGs and Financial Stability 4 1.2 IGOs and the IMF 8 1.3 Principals and Agents 10 1.4 Overview 13 2. Bretton Woods 19 2.1 New Order 20 2.2 Administrative Arrangements 24 2.3 Adjustment versus Finance 26 2.4 Collapse of Bretton Woods 31 2.5 IMF and Bretton Woods: Appraisal 32 3 . T r a n s i t i o n s 3 5 3.1 New Responsibilities 36 3.2 Euromarkets 40 3.3 Recycling 42 3.4 New Organizations 47 3.5 IMF and the Nonsystem: Appraisal 49 4 . Th e Debt Crisis 52 4.1 Crisis Emergence 53 4.2 Crisis Manager 55 4.3 Program Breakdowns 58 vii viii Contents 4.4 Crisis Resolution 62 4.5 Basel I 67 4.6 IMF and the Debt Crisis: Appraisal 69 5. Global Finance Redux 72 5.1 Resurgence of Capital Flows 73 5.2 IMF Programs and Capital Decontrol 76 5.3 Catalysis 81 5.4 New Amendment 83 5.5 IMF and Financial Liberalization: Appraisal 86 6. Currency Crises 88 6.1 ERM 89 6.2 IMF and the ERM Crisis: Appraisal 92 6.3 Mexico: Crisis 96 6.4 Mexico: Aft ermath 100 6.5 IMF and Mexico: Appraisal 102 7 . Th e Widening Gyre 105 7.1 East Asia 106 7.2 IMF and East Asia: Appraisal 115 8. Fiscal Follies 120 8.1 Russia 121 8.2 IMF and Russia: Appraisal 124 8.3 Brazil 125 8.4 Argentina 127 8.5 IMF and Argentina: Appraisal 132 9. Lessons Learned 134 9.1 Reforms 135 9.2 International Lender of Last Resort 139 9.3 FSF and Basel II 143 9.4 Reserves and Regional Arrangements 148 10. Th e Great Recession 153 10.1 Global Imbalances 154 10.2 Premonitions 161 10.3 Impasse 164 10.4 Implosion 167 10.5 IMF and the Great Recession: Appraisal 177 Contents ix 11. Th e World Turned Upside Down 181 11.1 Debt Again 182 11.2 Integration or Autonomy? 188 11.3 What Is to Be Done? 191 Appendix: IMF Data 197 R e f e r e n c e s 201 I n d e x 227 List of Figures, Tables, and Boxes Figures 4.1. Debtors and Lenders: Chicken Game page 56 4.2. Debt of Heavily Indebted Countries: 1982–1990 63 4.3. Capital Flows to Developing Economies and Emerging Markets: 1980s 64 5.1. Capital Flows to Developing Economies and Emerging Markets: 1990s 75 9.1. Foreign Reserves of Emerging Markets: 1997–2009 149 10.1. Real GDP Growth: 2000s 155 10.2. Infl ation: 2000s 156 10.3. Capital Flows to Developing Economies and Emerging Markets: 2000s 157 10.4. Current Accounts of Advanced Economies: 2000–2009 158 10.5. Current Accounts of Developing Economies and Emerging Markets: 2000–2009 159 10.6. Real GDP Growth Rates of Advanced Economies: 2008–2011 175 10.7. Real GDP Growth Rates of Developing Economies and Emerging Markets: 2008–2011 176 11.1. Government Gross Debt of Selected Advanced Economies: 2007–2015 184 11.2. Government Gross Debt of Advanced Economies and Emerging Markets: 2007–2015 187 A.1. Size of IMF Membership and U.S. Voting Share: 1950–2010 197 A.2.