Transcript World Bank Integrated Model

Neither Adjustment nor Growth for Russia in the 90’s.
A critical evaluation based on
the IMF - World Bank Integrated Model
Claude Berthomieu & Anna Tykhonenko
University of Nice – Sophia Antipolis, CEMAFI
IMF - World Bank Integrated Model
The model marries :
1)
the Monetary Approach of the Balance of Payments (MABP)
used by the Fund for designing its adjustment programs ;
2)
the Growth Model (Revised Standard Minimum Model) used at
the Bank for its macroeconomic projections ;
In our analysis, we consider that the macroeconomic policies
prescribed to (and adopted in) Russia were more or less directly
derived from these approaches.
3)
Four sectors: private, public, foreign and monetary (the basic
structure of the merged model is given by thirteen equations).
• The target variables : real economic growth, the variation of the global
domestic price level, variation of the Central Bank foreign reserves ;
• Given the estimated values for the structural parameters, it is possible
to “simulate” the integrated model by giving some convenient values to
the variables defined as “policy instruments”: monetary (D), budget (T
or/and G) and exchange (E).
• Following Khan, Montiel and Haque (1990): “solving the model
leads to two relationships between Δy and ΔPd which can be
regarded as the Bank component and the Fund component”.
- The Bank component (BB curve) :
- The IMF component (FF curve) :
• The macroeconomic equilibrium position is determined by the
intersection of two straight lines respectively labeled BB and FF in
(Pd, y) space. They depict respectively the real and monetary
equilibriums and their intercept defines the unique macroeconomic
equilibrium position for the economy.
Three policies are proposed by the
IMF as central to any adjustment
program: a decrease in domestic
credit, a decrease (increase) in
government spending (taxes) and
a devaluation.
•
• The theoretical impact of the
adjustment set of IMF policies is
the reducing inflation and the
increasing of real income growth
(see Fig. 1).
Fig. 1 Theoretical impact of the adjustment set of IMF
policies
• The equilibrium’s position needs
to be situated in order to test the
theoretical impact of these policies
on target variables of the model
(inflation rate and growth).
• More detailed work suggests that the
parameters v, s and θ are sensitive to change
in the inflation rate, growth and other
variables.
• The
theoretical
macroeconomic
equilibrium for Russia according to the
integrated model is characterized by a
negative growth rate and high inflation.
• Note that for the period of January 1994 to
July 1998, the Russian economy was
effectively characterized by a considerable
contraction for the real sector and a sharp
increase in the domestic price level.
Decrease in Domestic Credit.
The decrease of domestic credit tends to lower the inflation rate but worsens the
negative changes in real GDP.
Devaluation.
The theoretical impact of a ruble devaluation is a decrease in
output while the inflation rate decreases.
Reducing the Fiscal Deficit.
As a result, the inflation rate decreases and the decrease in real GDP
become less important.
Conclusions.
• Our purpose is not to criticize the integrated model per se: firstly, it is a
valuable model because it marries the Bank and Fund points of view on
the adjustment and growth crisis ; second, its rather simple and precise
analytical framework offers large possibilities of use;
• However, in order to define an efficient set of economic policies, one
must be very careful with its use. A precise diagnosis has to be made,
especially in regard to the initial situation and the structure for each
country. In the case of Russia, it had certainly not been done and the
economic policies recommended by IMF led to disappointing issues :
(i) the bank credit shortage would entail a deeper production crisis
even if some slight slowdown could be anticipated ;
(ii) the ruble devaluation would have the same negative impact on
the real level of activity.
Conclusion.
• Our analysis also shows that a tight fiscal policy would have been the
sole policy capable of reducing inflation and a slowdown (through a
government expenditure decrease or/and rise in tax proceeds).
Unfortunately, this policy could not been implemented successfully in
Russia due to the inability to levy taxes end to the negative impact on
global demand of the public sharp reduction in expenditures ;
• It is clear that the integrated IMF-World Bank model framework, which
is at the basis of the IMF’s recommendation, was misused for Russia, a
country where the recession has been extremely deep and where the
priority of policies should have been to promote economic growth at the
beginning of transition.
• Nevertheless, the integrated IMF – World Bank model is an efficient
conceptual framework for the evaluation of the adjustment and growth
policies.
References
Addison, D. (1989), “The World Bank Revised Standard Minimum Model. Concepts and
Issues”, Country Economic Department, World Bank, May.
IMF, World Economic Outlook, Washington, various years.
Khan, M., Montiel, P. (1989), “ Growth Oriented Adjustment Programs : A Conceptual
Framework”, IMF Staff Papers, Washington, DC, Vol.36, n0 2, June, pp. 279-306.
Khan, M., Montiel, P., Haque, N. U. (1990), « Adjustment with Growth Relating the
Analytical Approaches of the IMF and the World Bank”, Journal of Development
Economics, 32, pp. 155-179.
Polak, J. (1957), “Monetary Analysis of Income Formation and Payments Problems”, IMF
Staff Papers, Vol. 6, Washington, DC, pp. 1-50.
Polak, J. (1990), “A Marriage Between Fund and Bank Models? Comment on Khan and
Montiel”, IMF Staff Papers, Washington, DC, Vol.37, n0 1, March, pp. 183-186.
Reinhart, C. (1990), “A Model of Adjustment and Growth: An Empirical Analysis”, IMF
Staff Papers, Washington, DC, Vol.37, n0 1, March, pp. 168-182.
Williamson, J. (1997), “The Washington consensus revisited”, in Emmerij, L. (ed.)
Economic and Social Development into the XXIth Century, John Hopkins University
Press, pp. 48-61.