8 noviembre, 2016

GENEVA – In the movie Dangerous Minds, the actress Michelle Pfeiffer plays a former US Marine who becomes a teacher in an inner-city high school. In a difficult environment, where academic achievement is far from the top of the rebellious teens' list of priorities, Pfeiffer's character comes up with an unorthodox – and effective – new approach: each student will start the year with an "A" grade, which is theirs to lose. At a time when many emerging-market economies are as discouraged as Pfeiffer's students, perhaps the International Monetary Fund should take a page out of her playbook.

Emerging economies inhabit a risky world characterized by volatile capital flows. But, rather than rely on the IMF to fulfill its mandate of protecting them from liquidity crises, they self-insure by accumulating large stockpiles of international reserves. Emerging and developing economies now lend nearly $7.5 trillion to the US Treasury – resources that could be used to fund badly needed infrastructure projects.

What is curious about this approach is that the IMF's record in handling financial crises, though far from perfect, is generally quite good. So why the reluctance to count on the Fund?

Perhaps the most obvious reason is timing. For historical reasons, most Fund facilities are better suited to managing crises than they are to preventing them. By the time countries turn to the IMF for support, they have already lost access to international capital markets. Yet they have to engage in protracted negotiations that allow the situation to deteriorate before it improves. Tapping a country's own reserves may not be an ideal option, but at least it is fast.

But the IMF does offer a fast option. The Flexible Credit Line (FCL) facility grants immediate access to Fund resources, no questions asked. It amounts to a pre-approved loan that eligible countries can obtain whenever they want, on the basis of the strength of their fundamentals and policy record. It is thus the perfect tool for preventing self-fulfilling liquidity crises.

Yet IMF members do not seem to be interested in the FCL. Seven years after the facility was developed, only three countries (Colombia, Mexico, and Poland) have access to it. While not all of the Fund's 189 members could qualify for it, the number that do is a lot higher than three. The FCL-like Precautionary and Liquidity Line, which has an even lower bar for eligibility, has only two takers.

The problem is stigma. Countries fear that by applying for pre-approval – a process that they are not confident will remain confidential, as promised – they will signal potential economic problems. Worse, they could be rejected, either the first time they apply or when their approval comes up for review (every 1-2 years); that would surely undermine confidence in their economies, if word of it were to get out.

This is where Pfeiffer's strategy comes in. Instead of forcing countries to work for approval, the IMF could create a new FCL-like facility for which all of its members are pre-approved, with the exception of countries that do not meet certain criteria in terms of policies and fundamentals. Exceptions could be identified as part of the IMF's so-called Article IV consultations with members – an approach that would strengthen IMF country surveillance. As for the rest, pre-approval would substantially diminish the temptation to self-insure by accumulating reserves.

As with any attempt to change the status quo, this approach would raise challenges. For starters, IMF staff could face political pressure from countries that did not qualify, particularly if those countries were among the IMF's more influential members. But, as Tito Cordella and Eduardo Levy Yeyati suggested in 2006, this risk could be mitigated by specific, measurable, and transparent criteria. The disadvantage of this approach is that it would preclude more nuanced country-specific analyses involving qualitative assessments.

Moreover, if evaluations were made public, negative assessments could precipitate crises. Ensuring that the eligibility criteria are clear and specific could help to prevent such an outcome. A more direct approach to preventing crises in weaker economies would be to create a continuous eligibility scale, akin to the sovereign rating scale (which does not have a large effect on country risk), with countries at different points on the scale having access to different types of precautionary facilities.

The final risk is that, if many countries fulfill the criteria, the Fund might not have enough resources to meet its commitments in a crisis. This problem could be solved by boosting the Fund's capacity to borrow, while reducing the amount of resources that the Fund needs to set aside for FCL-like facilities. After all, a successful precautionary credit line is one that is never (or very rarely) used.

Financial globalization demands a stronger global financial safety net. Economists and policymakers have been tinkering with the international financial architecture since the mid-1990s, without much success. While the idea of redefining the status quo may sound crazy, it may be, to paraphrase the physicist Niels Bohr, just crazy enough to be right.


Ugo Panizza is Pictet Chair and Professor of Economics at the Graduate Institute, Geneva.

© Project Syndicate 1995–2016

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