Toward Glasnost in the IMF
Author(s): JEFFREY SACHS
Reviewed work(s):
Source: Challenge, Vol. 37, No. 3 (MAY-JUNE 1994), pp. 4-11
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JEFFREYSACHS
TowardGlasnostin theIMF
Thesolution
fortheRussianeconomyis nottodroptheIMF's goal oflow
buttodesigna framework
ofassistancetohelpachievethatgoal.
inflation,
The pasttwoyearshave been nothingshortof a deassistanceto Russia.
bacle fromthepointofWestern
In bothyears,theWestpromiseda large-scaleaid
($24 billionin 1992and$28 billionin 1993,
program
In bothyears,onlya
notcounting
debtrescheduling).
oftheaid actuallyarrived.
tinyfraction
As seen in Table 7, theIMF was called upon to
provide$9 billionof assistancein 1992 and,in fact,
delivered$1 billion. Even thatoverstatesthe aid,
since the$1 billionwas grantedon the surrealistic
thatit couldnotbe spent,butratherhad to
condition
held
in
thebankas reserves!In 1993,theIMF was
be
to deliver$13 billion,butactuallydelivered$1.5 billion.Of course,theIMF saysthat"additionalfinance
did notmaterializebecause theRussian authorities
wereunable to implement
appropriatestabilization
and structural
reform
policies."This,I have argued,
is a faultyassessment.The IMF is also responsible
- forfailingto devise a sensible
forthe shortfall
thatwouldhave matchedRussianstabiframework
lizationeffortswithexternalfinancingof Russia's
budgetdeficit.
The WorldBank and theEuropeanBank forRealso failedto meetthe
andDevelopment
construction
setby theG-7. In 1992,thesetwoinstitutions
targets
wereto deliver$1.5 billionin loans, but delivered
weresupposedto
In 1993,theseinstitutions
nothing.
deliver$5 billion,butlentRussia only$0.5 billion.
In thesameyear,theWorldBank lentapproximately
$5 billionto China.
The IMF claims thatbilateralassistancetotaled
that
$20 billionduring1992 and 1993. It is doubtful
thissumwas everreached;it has notbeen precisely
quantifiedin public documentsby the IMF. It is
muchhigherthanthefiguresquotedby manyRussian financialauthorities.
In anyevent,mostofitdoes
Table 1
OfficialFinancial Assistance
to Russia, 1992-93
(billion$)
1992-1993
1993
1992
A
D
D
A1
D2
A
2.5
IMF
1.0 13.0
1.5 14.0
9.0
5.0
0.5
5.0
0.5
WorldBank, 1.5
0.0
EBRD
6.0 21.0 20.0
Bilateral
13.5 14.0 10.0
8.0 40.0 23.0
Total
24.0
15.0 28.0
Memo items:
19.0
3.0
2.0
Aid from
10.5
1.0 18.0
international
agencies
2.0
2.0
0.0
Budgetary
support4
1. Announced.
2. Delivered.
3. Includes $2.5 billionof promisedreliefon interestpaymentsthatwas not
formally
grantedin 1992.
4. Estimate of aid that was directlyin support of budgetaryfinancing,not
countingdebt rescheduling. In 1993, approximately$2.5 billioncould be
used for budgetarysupport: $1 billionof the IMF loan, $0.5 billionof the
WorldBank loan, and approximately$0.5 billionofWesternsupport.
Source: IMF press release, February1, 1994.
on
to theCommittee
This articleis adaptedfromhis testimony
of Economicsat HarvardUniversity.
JEFFREYSACHS is Professor
1994.
of
on
Affairs
the
Senate
and
Urban
5,
February
Banking,Housing,
4
1994
Challenge/May-June
not constitutereal assistance. Almost all of the
creditsat commoneywas in theformof short-term
mercialinterestrateslent to Russian state-trading
The loans
bodies,withRussiansovereign
guarantees.
weredissipatedin subsidiesto selectedregionsand
to corruption.
They providedalmostno budgetary
and
were
notpartof a consistent
assistance
support,
The
IMF
never
tried
to
coordinate
theflow
program.
of fundsor to integrate
thefundsintoan assistance
in
these
funds
are now a significant
fact,
program;
burdenon thebudget,as a largeproportion
of the
loansarealreadyfallingdue!
thanto debauchthecurrency.
The processengages
all thehiddenforcesof economiclaw on theside of
and does it in a mannerwhichnotone
destruction,
manin a millionis able to diagnose."
The debatewiththe IMF is, therefore,
notabout
goals, butaboutmeansto achievethosegoals. I do
not seek to weakenIMF conditionality
vis-à-visinbut
rather
to
raise
the
chance
that
it can be
flation,
successful.I wouldchangethetimingand character
ofaid toRussiatohavea betterchanceof succeeding
in reachinglow inflation.
To understand
mydifferences withtheIMF, it is necessaryto putthedebate
in formaleconomicterms.I apologizeforthetechnicalities
thatfollow,buttheyare necessaryto lay out
inadvertising
Truth
Otherwise,my critiqueof IMF pracmy argument.
"Truthin advertising"would requirethe IMF to
ticeswill continueto be misunderstood
as an attack
the
breakdown
in
of
assistance
the
on
the
of
low
inflation
itself.
specify
following
goal
strucways:(1) grantsversusloans; (2) thematurity
tureof theloansand thetermsof repayment;
(3) the
Basic analyticsofmonetary
stabilization
of
to
the
Russian
proportion financing
budget;and
offinancing
thatwas partofmoni(4) theproportion
toredprogramsof Westernassistance. Then, the The basic cause of highinflation
in Russia is rapid
worldwillsee clearlythattherehavebeenalmostno growthofthemoneysupply.(See theboxon page 6.)
aid-flowsduring1992 and 1993,especiallyin com- To putmatters
in thesimplestanalyticalform(which
with
in
Russia's
and
is
a
with
needs,
parison
comparison
simplifiedversionof the "financialprogramthe levels of assistanceadvertisedby the Western ming" approach used by the IMF), the rate of
Governments
and the IMF. My own estimatesare monthly
is equal to therateof growth
priceinflation
thatRussia receivedapproximately
$3.5 billionof ofthemoneysupply.
overthetwo-year
In fact,extensivestatistical
budgetary
support
period.
analysissuggeststhat
I wouldliketo focusattention
on the Russian monthlyinflationis linkedto the money
Specifically,
issueof theInternational
MonetaryFund,to explain supplygrowthof fourmonthsbefore.I ignorethis
and
whyI havebeenverycriticalat timesof IMF proce- lag in theexpositionforthe sake of simplicity
duresvis-à-visRussia. I continueto believethatthe clarity.For evidenceon thebasic relationship,
see
IMF approachhas been unhelpful
fortheverygoals "ProspectsforRussianStabilizationin theSummer
thattheIMF is trying
topursuein Russia- low infla- of 1993" and "ProspectsforMonetaryStabilization
tionand macroeconomicstability.I would like to in Russia"inForFurther
Reading.
to explainmyposition,and to
takethisopportunity
The rateof growthof themoneysupplyis closely
make suggestionsabout an improvedWesternaplinkedto thebudgetdeficit.Thereare threewaysto
Russiainitseconomicreforms.
financethe budgetdeficit.The governmentcan:
proachtoassisting
with
the
I
believe
that
RussIMF,
(1) borrowfromthecentralbank; (2) borrowfrom
Along
reducing
ian inflation
is themostpressingpolicyissue facing abroad;or (3) borrowfromthemarketforRussian
theRussianGovernment.
In myopinion,highinfla- bondswithinRussia.Whenthegovernment
borrows
tionin Russiacould lead to profound
social and po- fromthecentralbank,themoneysupplyrises.When
litical instability,and could even underminethe the government
borrowsfromabroad,the foreign
in Russia,thereby
structures
borrowsfrom
fragiledemocratic
pos- debtincreases.Whenthegovernment
risksto globalsecurity.
JohnMaynard the domesticmarket,the domesticdebt increases.
ingsignificant
Keynessaid it bestin 1919 in TheEconomicConse- Thus,thereis a basic identity,
showingthatthebudthe
Peace:
"There
is
no
no
surer
deficit
must
be
in
financed one of thethreeways
subtler,
quencesof
get
meansof overturning
the existingbasis of society indicatedabove.
May-June
1994/Challenge 5
tion.Similarly,
thehigherthemonetary
velocity(for
a
as
givenbudgetdeficit),thehigheris theinflation
Basic AnalyticsofRussianInflation
well.If thereis a "flight
fromtheruble,"thenthevebetweeninflaThe simplestanalyticalformfortherelationship
of inflationrises as well,
and
the
rate
rises,
locity
to a vertionand thegrowthof themoneysupplycorresponds
if
as a percentageof GDP
even
the
deficit
budget
sionofthe"financialprogramming"
approachusedbytheIMF.
remainsthesame.
The rateof monthly
A/7P, equals therateof
priceinflation,
ofthemoneysupply,AM/M:
growth
This basic equation(equation4 in thebox) says
else, however,thatis usuallyignoredby
something
AP/P = AM/M
(1)
the IMF, and thathas been almostignoredin the
In turn,therateof growthof themoneysupplyis closely
can be reIMF's
withRussia: Inflation
negotiations
linkedto thebudgetdeficit.Let D be thelevel of thebudget
the
not
duced, onlyby cutting budgetdeficit,butby
deficitand Y be thelevelofGDP, bothexpressedin rubles.Let
d be theratioofthedeficittoGDP. Thus:
theway it is financed.For thesame budget
shifting
a
reductionin moneygrowthmatchedby a
deficit,
D = d(Y)
(2)
fromdomestic
increasein borrowing
compensating
Thereare threewaysto financethebudgetdeficit.The govand foreigncreditmarketswill lowerinflation.In
ernment
can: (1) borrowfromthe centralbank; (2) borrow
otherwords,if thedeficitis financedby foreign
borfromabroad;or (3) borrowfromthemarketforRussianbonds
borrowsfromthecentral
withinRussia.Whenthegovernment
rather
than
or
domestic
bond
rowing by
financing,
by
borrows
bank,themoneysupplyrises.Whenthegovernment
it is possibleto have low infromabroad,theforeigndebtincreases.Whenthegovernment centralbankfinancing,
thedomesticdebtincreases.
fromthedomesticmarket,
borrows
witha sizablebudgetdeficit.
flationtogether
Let AM be the change in therublemoneysupply,F be the
Before
applyingthis equation,I mustadd one
rubles),and B
changein theforeigndebt(expressedin current
be thechangein thedomesticdebt.Also, let/= FIY (foreign
morecomplication.In fact,the moneysupplycan
borrowingas a percentageof GDP), and b = BIY (domestic
centralbankloansto thebudgrownotonlythrough
bondborrowing
as a percentof GDP). Finally,define"mone=
as
YIM.
V
bankloansto enterprises
but
central
also
taryvelocity"
get,
through
Thus, thereis a basic identity,showingthatthe budget
(usuallyvia commercialbanks).Thus,to applythis
deficit
mustbe financedinone ofthreeways:
theratioof thedeficitto
equation,we mustinterpret
D=AM+F+B
(3)
the GDP more broadly,as the budgetdeficitplus
centralbankcreditto banks(all as a percentageof
Combiningthesethreeequations,and the definitionsfor
beenon targetinpressinflation
that
is
at
the
an
for
and
we
have
GDP). The IMF has certainly
V,
really
d,/,
equation
coreofthedebateoverIMF strategy:
the
Bank
Russian
Central
(RCB) to limitcredits
ing
to the enterprisesector.By the end of 1993, RCB
AP/P= (d-f-b)(V)
(4)
creditsto the enterprise
sectorwererunningat beof the
function
It saysthattheinflation
rateis an increasing
tween1 percentand2 percentofGDP.
ofGDP, d. The higher
budgetdeficit,
expressedas a percentage
Now let's applytheequation.At theend of 1993,
thebudgetdeficitas a percentageof GDP, all otherthings
rate.Similarly,the
9 pertheRussianbudgetdeficitwas approximately
beingconstant,thehigheris theinflation
velocity(fora givenbudgetdeficit),the
higherthemonetary
centof GDP, plus another2 percentof GDP in credhigheris the inflationas well. If thereis a "flightfromthe
its to thecommercialbanksthatshouldbe addedto
rises
ruble,"thenthevelocity,V,rises,andtherateof inflation
of GDP reratio.Thereis someamcalculatethedeficit-to-GDP
as well,even if thebudgetdeficitas a percentage
mainsthesame.
size
of the 4th-quarter
about
the
biguity
precise
deficit.The recordeddeficitof 9 percentis based on
cash-flowaccounting.Therewereseveralcategories
of "unfulfilled
Thereis a famousequation(derivedin the box)
obligations"(arrears).FinanceMinisthatis at thecore of standardanalysesof inflation, terBoris Federov maintainedthatthese spending
thatwerenot
itemswereinappropriate
commitments
rateis
includingtheIMF's. It says thattheinflation
an increasingfunctionof the budget deficit,ex- boundby law and thatshouldand couldbe canceled
Othersin thecabinetdisagreed.
of GDP. The higherthebud- by theGovernment.
pressedas a percentage
get deficitas a percentageof GDP, all otherthings The Parliamentwas disbanded at the time. The
ex post deficitwill depend on how many of the
rate.Thisis
thehigheris theinflation
beingconstant,
thecoreanalyticalbasis of theIMF recommendation so-called"arrears"are in factpaid offby the new
to cutthebudgetdeficitas thewayto endhighinfla- cabinet.
6
1994
Challenge/May-June
Table 2
Budget Deficits and
Inflation,Selected Countries, 1992
Budget Deficit
(% of GDP)
Belgium
Italy
Greece
Sweden
Russia,
1993, Q:IV
6.8
9.5
11.1
7.1
9.0
Inflation
(%)
2.4
5.3
15.9
2.3
335.0
Source: For all countriesexcept Russia, OECD Economic Outlook,No. 54,
December 1993, Table A25, "General governmentfinancialbalances," and
Table A15, "ConsumerPrices."
The monetaryvelocitywas approximately1.2.
(Velocityis measuredhereas theratioof monthly
GDP to themonetary
base.) Therewas no foreign
=
and
almostno domesticbond fi(f 0)
borrowing
=
Thus,theequationpredicts
nancing(b 0.3 percent).
a monthly
inflation
rateof:
13 percent= (11 -0.0 -0.3) (1.2)
In essence,thechoices are shownin Table 3, in
two stylizedvariants.The one I call the"IMF variant"is basedon slashingthebudgetdeficitto around
3 percentof GDP. (The IMF has notyetmadea precise recommendation
for 1994, so "IMF approach"
signifiesthe standardprocedureof the IMF, not a
to thispoint.) The "Aid
specificrecommendation
of
the
kind
I
that
have
beenadvocatingdurvariant,"
ing thepast two years,is based heavilyon shifting
thefinancing
of thebudgetdeficitfrommonetary
fito
and
domestic
bond
financing foreignfinancing
nancing. This would allow the budget deficitto
remainat around9 percentof GDP during1994,and
wouldbe consistent
witha fallin theinflation
rateto
around3 percentto 4 percentpermonth.In the"Aid
variant,"the foreignfinancingwould amountto
around4 percentof GDP ($14 billion,assuminga
1994 GDP of $350 billion),and domesticbond financingof around2 percentof GDP (up fromthis
year'srateofaround0.3 percentofGDP).
in simplypressingfor
Whyis theIMF incorrect
in
cuts
the
deficit?
Such
cuts are economigreater
and
A
cally
politicallyunjustified. morenuancedapproach is needed. While it is true that many
subsidiescouldbe cutin 1994(by myown
budgetary
4 percentof GDP), it is also true
around
estimate,
thatmanyareas of social spendingmustbe substantiallyincreased(by around4 percentof GDP). It is
therefore
extremely
unlikelythatRussiacoulddrastiof
callyreducegovernment
spendingas a percentage
GDP thisyear.On the tax side, thereis also little
scope forincreasedrevenues.While a few taxes
(e.g., energyexcise taxes) mightbe raised, other
taxes (such as the VAT) are alreadyat highrates.
it is likely,moreover,
thatprofDuringstabilization,
itstaxeswill decline perhapsby severalpercentof
GDP. Russia will therefore
do well simplyto maintainthetaxrevenuesas a percentage
ofGDP.
The equationis exactlyon themarkforthe 13percentDecember inflationrate (somewhat by
chance,to be sure!). Compoundingthe 13-percent
Decemberinflationratefora 12-month
period,the
annualizedinflationrate was approximately335
percent.
Thereare severalcountries
withbudgetdeficitsof
around9 percentof GDP thathave modestinflation
rates(see Table2). Whydo thesecountries
have low
inflation
whileRussiahas a veryhighinflation
rate?
Simply,theyfinancetheirbudgetdeficitsin nonmonand domesticbond
etaryways,by foreign
borrowing
also
restrict
the
directfinancing
to
financing.
(They
theenterprise
sector,as Russiamustdo as well.)
Thisexperience
in othercountries,
andtheanalytiof equation4, highlight
cal content
thesuperficiality
in thecurrent
debateaboutIMF conditionality.
The
IMF arguesthatRussia shouldsubstantially
reduce
itsbudgetdeficitas a precondition
forIMF aid. But
Table 3
Budget Alternatives
we can immediatelysee an alternative.The IMF
forStabilization
assistance(its
could,instead,mobilizeinternational
(% of GDP)
ownfundstogether
withfundsof theG-7 and interFinanced by:
Budget
nationalinstitutions)
to helpRussia financethebudDeficit
money bonds foreign
from Current
getdeficitin a noninflationary
way,by shifting
9.0
8.7
0.3
0.0
4.0
to
3.0
1.0
finance.
In
0.0
addition,it IMF variant
monetary nonmonetary
Aid
variant
9.0
3.0
2.0
4.0
could help Russia to increasetheproportion
of the
Source: Author'srecommendations.
budgetdeficitthatis coveredbydomesticbonds.
May-June
1994/Challenge
7
IMF focuson budThe incessantand exaggerated
than
deficit
has had three
cuts
(rather
financing)
get
undesirableeffects.It has deflectedtheRussianattentionfromsocial spending,by creatingthe prethatthereis no moneyavailableforsocial
sumption
spending. How can one thinkabout new social
iftheexistingbudgetdeficitis alreadytoo
spending,
6
highby percentofGDP? Second,theIMF focuson
has leftthe West vulnerableto the
budget-cutting
Russian charge of being insensitiveto Russia's
economic realities.Third,the IMF approach has
stymiedrealisticcompromisesinside the Russian
Government.
The IMF arguesthatfinancinga budgetdeficit
whileaccumulating
simplypostponesthedifficulties,
for
the
future.
thereis a case for
debt
Indeed,
public
in
the
form
of
grants(as in the
financing
budgetary
MarshallPlan) ratherthanloans.Even if theforeign
supportwere to come in loans, however,therestill
case fortakingon morelongwouldbe a verystrong
termpublic debt at thispoint.Russia's debt-GDP
20 percent($70 billionof net
ratiois approximately
in
of $350 billion).Thereis aldebt
a
GDP
foreign
Russia's
mostno internalindebtedness.
Therefore,
of GDP is
debtas a percentage
stockof government
Russia's
less thanthatof almostall OECD countries!
debtcurrently
posesa crisisin termsof shortforeign
The debtcannotbe servicedin thenext
runliquidity:
few yearsbecause of the urgentfiscal crisis. It is
likelyto be manageable,however,in the long run.
further
roomtoborrownowin supThereis therefore
ofthereforms.
and
consolidation
of
stabilization
port
of Westernassistancefor
Despitetheimportance
IMF
has failedto acknowlthe
finance,
budgetary
of
that
a
substantial
part theWesternassistance
edge
financshouldbe steeredtowardsbudgetary
program
in
inflation.
the
a
direct
as
fightagainst
weapon
ing,
The IMF assertsthatroughly$20 billionin bilateral
loans flowedto Russia during1992-93. (This number seems unrealistically
highto me. It shouldbe
documentedby theIMF.) It fails to recognizethat
such commercialloans to Russianstateenterprises
to or actuallyinimicalto stabiwereeitherirrelevant
nothelp withbudgetaryfidid
since
lization,
they
nancing.In fact,almostall of theloans thatcame
commercialloans thatsupwere veryshort-term
subsidies,andthattypically
import
portedoff-budget
exacerbatedthebudgetdeficit,thereby
actuallyraisin 1993and 1994.
pressures
inginflationary
8
1994
Challenge/May-June
In a typicaltransaction
during1992,whenmostof
firmreceived
theloansweremade,a Russiantrading
It thensold thefooda creditto importfoodstuffs.
stuffsat a verylow domesticprice.Sometimesthe
were givenaway to politicallypowerful
foodstuffs
wheretheywere resoldfora
local constituencies,
When
loan
comes due (mostlyin 1993the
profit.
it
is
95),
guaranteedby the Russian budget! The
will haveto payofftheloan directly,
Government
or
firmto pay
will have to give subsidiesto thetrading
offthe loan. In thisway,billionsof dollarsof socalled "Westernaid" actuallyhelpedto financeextensive corruption(in the tradingfirms),while
addingto thebudgetburdenduring1993-95. This
about$17 billionof the$23 billionof sorepresents
called "aid flows" reportedby the IMF. The IMF
triedto stoptheuse of suchcredits,thoughit
rightly
assistance"!
nowcountsthemas "foreign
Foreignfinancing
In 1992, therewas zero foreignfinancingof the
Russianbudgetdeficit.The entireforeignfinancing
was eitherto supportoff-budget
importsubsidies
(whichactuallyworsenedthebudgetdeficitin 1993
and 1994), or to supporttechnicalassistanceand
medicine,and a fewothercomgrantsof foodstuffs,
modities(probablyless than$1 billionin total).
In 1993, actual budgetaryfinancingforRussia
was probablyless than1 percentofGDP. (A fullacis notyetcompleted.)In mid-1993,theIMF
counting
of
assumed2.7 percentof GDP in foreignfinancing
theRussianbudget(plus4.2 percentofGDP in commercialloans to financeoff-budget
importsubsiassumed
but
the
dies);
foreign financing was
of interest
basicallyconstituted
by thepostponement
to
the
debt
2.8 peron
(amounting
foreign
payments
ratherthanby
centof GDP in postponedpayments),
actualflowsofmoneyto Russia.
to the
understates
In fact,theIMF systematically
theamountsof WesternassisRussianGovernment
tance thatis potentiallyavailable forbudgetaryfinancing. When the IMF makes its budgetary
to Russia, forexample,it takes
recommendations
intoaccountonlyIMF fundsthatare undercurrent
IMF fundsthatareplannedto
notfuture
negotiation,
followthecurrent
Thus,whentheIMF and
program.
Russia were discussing the $3 billion Systemic
Transformation
Facility(STF) in theSpringof 1993,
theIMF refusedto incorporatein its formalbud- IMF
shortcomings
thefactthatthe$3 billion
getaryrecommendations
STF was supposedto be followedby a $4 billion Thereare two otherdeep shortcomings
in theIMF
loan.
the
IMF
has
made
mistakes
on
standby
approach.First,
major
In an interesting
in a mid-1993 report straightforward
statement
advice.It was one yearlate
monetary
(RequestforPurchaseUndertheSystemicTransfor- in advisingRussia to introducea separatenational
mationFacility),theIMF describesRussia'sbalance currencyand to disband the "ruble zone." This
ofpayments
as follows:"Russia'sexternalfinancing causeda nearlyfatalsetbackto stabilization
in 1992.
requirement
(grantsand loans frombilateraland It also has advisedRussia againstusinga peggedexmultilateral
creditors
and debtrelief,excludingnon- changerateas a "nominalanchor"in financialstabiFSU states)is projectedat about$43 billionin 1993, lization,contraryto the worldwideexperienceof
$3 billionfromtheFund."
recent years. As World Bank Chief Economist
including
The $43 billionmentioned
the
IMF
is
by
clearly MichaelBrunohas concludedin a majorreviewof
to
the
G-7's
announcement
of
a
$43-bilworldwide
stabilization
pegged
prior
experience:
lionaid package($28 billionin loansand grantsand
"Whilemonetary
withan exchange-rate
targeting
The IMF's state- floathas been a plausiblepolicyalternative
$15 billionin debtrescheduling).
in stabimentis veryodd, however,in thattheFund's share lizationfromlow or moderateinflations
(especially
of the$43-billionpackagewas supposedto be $13
whenthe safetycushionof exchangereservesdoes
billion,not$3 billion;yetthisis notacknowledged not exist- as in Bulgaria and Romania), this has
evenintheFund'sowndocument.
hardlyeverbeen the case withsuccessfulstabilizaThe IMF says thatit is notpermitted
to "budget" tionsfromhighor hyperinflations.
Thereare a variitsownfundsthathave notyetbeennegotiated.
The etyof reasonsfortargeting
theexchangeraterather
however,is thattheIMF pushesthe thana monetary
practicaleffect,
aggregateat theinitialstabilization
RussianGovernment
to makelargercutsin thebud- stage- theinstability
of thedemandformoney,the
The Fund frequency
of observationof theexchangerateas a
getdeficitthanarenecessaryor warranted.
also failsto stresstheimportance
of domesticbond proxyforthepriceindex(on a dailybasis), and the
and failsto mobilizetechnicalsupportto morewidelyand intuitively
understood
financing,
signalof the
raisetheproportion
of theRussiandeficitthatcan be
of
a
level
relation
to
(in
stability keyprice
wages,for
financedby domesticbonds. IMF programswith external
considerations,
etc.)."
competitive
Russia have statedthatthe Russian Government
As to thesecondshortcoming,
theIMF has relied
shouldsell domesticbonds to financethe budget almostentirely
on fly-inmissionsratherthanon-thebuttheIMF has putalmostno realeffort
into groundassistancein Moscow. Despite its protestadeficit,
thiscrucialpartofthestabilization
it tionstothecontrary,
theIMF's contactswithRussian
process.Rather,
hasfocusedalmostall ofitsnegotiating
effort
on get- policy officials(especially at the level of division
is superficial
andgenertingRussiato cutthebudgetdeficit.In its 1993 pro- chiefsanddirectors-general)
gramwithRussia,theIMF assumedbondfinancing allytoo briefto be of muchhelp.The IMF had only
atlessthan1 percentofGDP.
tworesidents
in place in itsMoscow officein 1992,
Becauseofthispasthistory
of aid,thewarnings
of and had onlyfourresidents
in 1993.Therehavealso
Western
Governments
thatRussiawill"lose Western beena veryfewadvisersputintotheRussianCentral
assistance"if Russia deviatesfromstabilization
are Bank fora several-months
period- threeadvisers,I
no longercrediblein Moscow.Since therehas been believe,in thepasttwoyears.
almostno realsupportforstabilization,
thereis little
fearnowofa "cutoff'of aid. Of course,theRussians
assistanceprogram
forRussia
remainveryinterested
in large-scaleassistanceofthe Afuture
sortthatwe have offered,
buttheysee littleprospect
thatsuchaid will everarrive.Partof thejob of the It is notyetclear whetherRussia will abandonthe
U.S. Government
now is to raiseourowncredibility questformonetary
stabilization.
Of course,withthe
in
there
of
would
be
the
assistance
in
reformers
fromthegovernthat, fact,
departure
significant
leading
thecontext
ofa rigorousadjustment
ment,theprospectslook ratherbleakin thenextfew
program.
May-June
1994/Challenge 9
Table 4
Basic structureof
recommended Western
aid package
1)
$14 billion
Russian budgetfinancing
$5-8 billionIMF funds
$3 billionWorldBank funds
$3-6 billiondirectG-7 aid
2)
$14 billion
Industrialrestructuring
projects
$10 billionexportcredits
directedat long-term
restructuring
$2 billionEBRD (withcofinancing)
$2 billionWorldBank funds
3)
debt reschedulingin Paris Club
Multiyear
4)
Ruble stabilization Fund ($6 billion,to be held as
reserves,fromGeneral Agreementto Borrow)
Source: Author'srecommendations.
months.On theotherhand,theRussianGovernment
of stabito thepriority
is at leastpayinglip-service
lization. It is possible (thoughunlikely)thatthe
Russian leadership is sufficiently scared of
"Ukrainization"
of theRussianeconomyto be willthepathof monetary
stabilization.
to
continue
on
ing
(Ukrainehas inflationratesof 90-100 percentper
monthwhich,whenannualized,amountto an inflationofmorethan200,000percentperyear.)
In anycase, itis a hugemistaketo leave thesituaIMF missionnow in Moscow.
tionup to thecurrent
The IMF lacksthevisionand conceptualframework
withthe
to workout any satisfactory
arrangement
The solution,once again,is not
RussianGovernment.
The solution
to droptheIMF's goal oflow inflation.
is to design a frameworkof assistance to help
achievethatgoal.
withits G-7 partners,
The U.S. Treasury,
together
shouldtakeovertheactiveguidanceof thenegotiafromthe IMF.
tionswiththe RussianGovernment
Finance
of
the
Deputies theG-7 could
Operationally,
and presumbe chargedwithoperationaloversight,
Summers
Lawrence
ably,TreasuryUndersecretary
its
wouldlead thegroup.The G-7 shouldputforward
to financea significant
partof theRusswillingness
ianbudgetdeficit(through
IMF, WorldBank,and G7 loans) if the Russian Government takes the
additionalstepsthatwouldbe neededto bringabout
realfinancialstabilization.
can
The oddsareverypoorthatsuchan agreement
at thispoint,giventhe
be reachedand implemented
of theRussiancabinet;buton theother
composition
10
1994
Challenge/May-June
of
hand,thestakesare so highthatthepossibilities
such an agreementshould at least be explored.If
suchan agreement
cannotbe reachednow,it should
at leastbe tabledby theG-7, in case theleadingreformers
return
to thecabinetwhentheeconomicsituin future
ationdeteriorates
months.
Direct G-7 leadershipwould accomplishsomecannotdo. By reaching
thingthattheIMF inherently
an aid agreement
betweentheG-7 and Rusdirectly
sia, the Russian leadership(PresidentYeltsinand
Prime Minister Chernomyrdin)will be directly
bound to the agreementmuchmore stronglythan
wouldbe thecase witha typicalIMF loan,whichis
signedat thelevel of theFinanceMinisterand cenof the G-7
tralbank Chairman).This endorsement
the
senior
Russian
leadership would
supportby
forward
with
confidence
to
move
Western
strengthen
large-scaleaid. In this way, Russia and the West
would breakfreeof the trapof "low aid, littlereform,"and would arriveat thegoal of "large-scale
aid,deepreform."
Whatwouldbe thecontentsof a realWesternassistancepackage,if the appropriatecircumstances
arise? It shouldbe modeledwithfourcomponents,
roughlyas shownin Table4. The firstcomponent
- would constitute
$14 billionof budgetary
support
shownin the
the4 percentof GDP budgetfinancing
"aid variant"in Table 3. The other$14 billionforinwould involvethewide range
dustrialrestructuring
ofprojectsalreadyon thedrawingboardformodernof key sectorsof theeconizationand restructuring
omy includingmilitaryconversion,energy,and
wouldcomefrom
Mostof thisfinancing
agriculture.
the WorldBank, the EBRD, and the exportcredit
agencies.In addition,Russia would receivefurther
and a
debtrescheduling
fiscalreliefby a multiyear
fundthatwouldbe designedto be
ruble-stabilization
heldas reservesto back an earlypeggingof theexchangerate.(Thishas playeda keyfeaturein thestabilization programsin Israel, Mexico, Poland,
andEstoniain recentyears.)
Argentina,
Afinalplea: Glasnostin theIMF
will neverbe properly
IMF performance
understood,
untiltheIMF is subjectto the
muchless improved,
as the U.S. Congress,
same kindof publicscrutiny
theFederalReserveBoard,and otherpublicinstitu-
tionsvestedwiththepublictrust.As I preparedthis
article,and perusedIMF documentsin my possessionas a former
adviserto theRussianGovernment,
document
was stamped"Confidenliterallyevery
tial."We cannotindependently
scrutinizetheIMF's
operations,muchless ask informedquestionsthat
mightbe prompted
by thelack of clarityin IMF reofconfidentiality.
ports,undersuchconditions
The IMF respondsto criticisms
of its secrecyby
that
each
member
has access to
saying
government
all thereports.
Thisis notenough.It does notconstituteindependent
Moreover,theIMF
publicscrutiny.
statesthatmembergovernments
wouldnotbe frank
if theyknewthatIMF documentswould thereafter
circulatein thepublicdomain.This too is an inadeto confidentiality.
quatedefenseof theIMF's retreat
fromtheIMF is a privilege,
nota rightof
Borrowing
membergovernments.
The world'staxpayerdollars
(andin thecase of Russia,theworld'sphysicalsecurity)are at stake in each IMF decision.If governmentswant to receive IMF funds,theyshouldbe
to public
preparedto open theIMF loan agreements
scrutiny,
perhapsaftera shortdelay (as in thecase
withthe Federal Open-MarketCommitteeof the
FederalReserveBoard). The U.S. Congress,in its
turn,shouldrequirethatU.S. public fundscan be
are
putat riskin IMF loans onlyif IMF documents
availableforpublicscrutiny.
FROM MALTHUSTO THECLUB OF ROME AND BACK:
Problemsof Limits
to Growth,Population Controland the Migrations
PaulNeurath,
Professor
Emeritus,
QueensCollege
andHonorar
ofVienna
Professor,
University
^tîSPÎA
y^0¡^
Thiscollectionofarticleson populationgrowthspanstwenty
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one-child-per-family-rule
roleofoil andthesoaringpriceofthisbasic inputintoagriculture
as a constraint
on foodproduction
and,as
a result,on populationgrowth.
The book concludeswitha chapteron theGreatMigrationof the 19thand
- including
20thcenturies
Europe,theMiddleEast,andSouthAsia; andwiththeproblemsofrefugees.
Series:ColumbiaUniversity
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A VEBLEN TREASURY
FromLeisureClass to War,Peace, and Capitalism
Edited by Rick Tilman, Universityof Nevada
new book is the
Focusingon theAmericaneconomistThorsteinVeblen(1857-1929),thiscomprehensive
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11