We are heading into another recession?

Just when we thought the American economy is on the path of recovery, and hence there is hope for the world economy, we have started to see signs of a second recession - what we normally call a 'double-dip' recession.

Many economists have tried to study the impact of the stimulus spending by the US government on the actual GDP growth. And from what we know, close to $800 billion has already been spent since the second quarter of 2009. Many are now predicting a slow down in the American economy as these stimulus spending has already run out, and this is evident from the predictions shown on the chart above.

The Fed Chairman Ben Bernanke last Friday expressed some hope for the year 2011, however, he also acknowledged that the economy was weaker than hoped and promised additional measures.
However, there is serious doubt as to how much intervention Bernanke is referring to, as the politicians at the Congress are less willing to spend additional money as stimulus, despite policy recommendations by some economists like Krugman and Stigilitz, on continuing the stimulus spending.

Hence, with low investor confidence and a dearth of policy interventions, there is every reason to believe that we are headed into a double-dip recession. What's more disturbing is the fact that many have started to predict that this recession could turn into a prolonged depression, similar to that experienced by Japan recently for a decade. “There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz,

Reminding ourselves about the 'Asaasee's

Total Number of gang-violence within the last three weeks: 5
Number of deaths within last three weeks: 1
Total injured within last three weeks: 8
Source: Haveeru

Last thursday, a 16 year old boy was attacked by knife. Male' streets have become unsafe, and what are the authorities doing about it? We have all hired a President, and paying him Rf100,000 every month. We have hired 77 Parliamentarians, and paying them all Rf4.8 million every month, and all these people have appointed and put in charge Judges, and we are spending more than Rf700,000 every month to all of them. On top of that, we have at our service Police, and a Defense force, and I'm not sure how we are spending in total every month on them. Yet, our streets are unsafe, young children are being killed.

...And we are being told that we have a new Qanoon Asaasee, and with the new Qanoon Asaasee, we have a better governing system; we have a separate Executive, a separate Legislature, and a Separate Judiciary. With new political and governance reforms, things are ought to get better. Maybe, we need to revisit to the basics: Qanoon Asaasee also means the 'basic or primary law'. When I say returning to the basics, I am referring to the main objectives we are trying to achieve. The only reason we want political reforms or governance reforms, or democracy, is for us to achieve some basic objectives. We need to achieve some outcomes, and in order to get there, we have all agreed on to form some basic laws, and then enact other laws and regulations. Then we have all agreed to hire some people according to these laws, and allow these people to serve us; to uphold the laws and regulations, to work for us in order to achieve those objectives that all want to achieve.

So what are those objectives? I'm guessing one of them could be, a safer society with less crimes. A society where people do not have a fear that they could be attacked by another and killed on the street. A society where, even if somebody harms another, that person is properly punished, and such acts are prevented. I'm also guessing that we want to respect the human dignity. I'm also guessing we want to achieve economic prosperity, ensure that people are properly fed, appropriate clothing, and shelter is provided. Appropriate education and health services are provided. We want to have a decent job, and earn a living. So, these are some of the basic objectives we want to achieve, and everything else is just a means to achieving these objectives. So, be that the Qanoon Asaasee, or any other law or regulation. If, the Qanoon Asaasee, the Laws, the Regulations, the President, the Parliamentarians, the Judges, the Police, and whoever I've left out, cannot work together to achieve these objectives, then I'm thinking,...we have serious problems to rethink about.

Sin City

Two days back, one of the suspected drug dealer, Hussein Mohamed Manik was found innocent by the Court. According to the Police, he's one of the six main dealers in the country. Early March this year, another suspected dealer among the six, Adam Naseer was also not convicted. Here, we are talking about "MAJOR" crimes. It's well-known in this country that 'if you are arrested today- you'll be released tomorrow' - no matter the type of crime you've committed. It is also public knowledge that the prisoners, or inmates at Maafushi Jail have their own demands and these demands are very easily met, or they go on strike and even destroy the premises. Bottom line: the Police, Prosecutor General, Parliament, and the Courts are unable to work together to bring about a solution to this. They are unable to restore law and order in this country. They are unable to punish, rehabilitate, or keep wrong-doers away from the rest of the society. Why?

The Courts or the Judges might say, there is not enough evidence to convict according the existing laws. The Police might say, the Courts are not doing their job, and Parliament doesn't provide appropriate laws to do their job. The Executive has been blaming the Judiciary on this matter.

In another case, within this week, two men serving their 15 year sentence were released, saying that they get a 3 year probation, and if they do not commit any crime during this period, their sentence is pardoned. And these two guys are those involved in the Sultan Park bombing. Unlike in the first case, these two guys have been already convicted, and serving their sentence. And just like that, the government decides to pardon them, those who have committed acts of terrorism, and as a result our country suffered immeasurable damage in the international forefront.

So, Maldives has become a haven for anybody with a mind and will to commit crimes, hu? There's less chance you'll be convicted, and even if did get a sentence, the government will pardon you within 2-3 years.

How is the approval rating of the present government's policies?

Please take part in this survey, and express your opinion.

Strengthening the private sector

With our major political transformations or reforms, many things did change in our country's institutions and governance. I've talked about them even earlier in various posts. One of the significant ones is the formation of the Civil Service Commission under the Civil Service Act. Deputy ministers and sate ministers became political posts overnight. Unfortunately (I would say), there were many in such posts who got promoted to those posts over time, and these people are educated, professionals with technical knowledge in their fields. This group also includes some cabinet ministers as well. So, with the change in government, a bunch of seasoned-educated people suddenly got unemployed. All their life, they had worked in the government sector, so it was very much of a shock for them; losing their jobs, and having to stay home. Our system was not prepared for this; as we do not have a vibrant private sector, or research instituties, or civil society organizations.

I am talking about talented people who contributed a lot to our country, and who had sacrificed a lot, and worked dedicately to the development of our society. They are still at the prime of their career, as far as the age is concerned.

Some of them chose to start thier work of coming back to power, and became politically active in political parties. Some chose to get seats in the parliament. Some have left the country with their families, simply having a peaceful time abroad. Some are still staying home, still trying to digest the reality, and wondering what else to do with their life. They were ministers, state ministers, or deputy ministers. So their next job definitely has to be still ministership or state ministership, eh?

Ok, here I come to the main point, at last. Can we only contribute to our country through a job in the government, (or to be precise, a job in the state or public sector)? Well, I guess many have this illusion, that a job is not a job if it's not in the public sector. Our country has got many talented, well-trained, intellingent group of people who are unemployed, and if they can be utilised in the private sector we would be adding up to our productivity, and at the same time saving a lot of foreign currency outflow through expatriate workers.

Looking at the current government, there are some officials in politicals posts, who can be better utilised in the private sector, who used to be in the private sector and earning a decent income. It seems that some political posts have been allocated as 'gifts' or 'recognition' in their political efforts inside the party. Which cannot be avoided in a multi-party democratic system, however much we say it is totally wrong. But, we can still urge the President to at least consider people's technical know-how before allocating them to various posts. Further, get rid of people who cannot perform.

My message to all: jobs in the private sector are also noble jobs, and we can contribute equally, or even better in the private sector.

Do we Maldivians want economic development?

In an earlier post, I talked about the importance of developing the private sector in our country. We need to urgently focus our attention on this for many reasons; one, our fiscal expenditure and deficit is already extremely high, and unsustainable; two, in order to achieve economic growth we need investments in the private sector. We are already very heavily reliant on the tourism sector, and so in order to diversify our economy we need to increase investments in other sectors.

It's disheartening that our focus has shifted more on politics, rather than reforming our economy, and improving productivity in the country. There are many important issues and obstacles for economic growth in our country, and we need to talk about it, address them as soon as we can. Maybe most of the politicians do not understand fully the real consequences, and dangers of economic hardships. When the public comes out, and demonstrates on the road due to economic harships, even the military or police may not be able to stop them. My point is, it's time we all debated about improving our economy, increasing incomes, and achieving economic development. The Parliament must be now debating bills and passing legislation in order to bring about economic reforms and increasing government revenue, reducing government expenditure, and developing the private sector. The government needs to formulate a reform bill and present to the parliament, ways to reduce government expenditure, especially, a detailed plan to reduce government employees and wage bill. Such a plan should have details of compensation packages for those who get unemployed in the short run. It also needs to include plans to developing the private sector, and job creation. The point is, any austerity plan put forward by the government needs to be transparent, and so the parliament and the public endorse it.

The Parliamentarians need to believe that our fiscal deficit was above 20 percent of GDP last year, and the state wage bill is extremely high and unsustainable.

Talking about developing the private sector, there are many talented businessmen as parliamentarians. I'm sure the country would be able to get a better contribution from them, if they were concentrating full time on their private businesses.

The media needs to focus more and divert the public's attention more on the economic issues, instead of wasting resources and time on useless and unproductive battles between DRP and MDP.

Some times I just wonder, do we really want economic development?

What a crisis world...

The recent events in the world financial markets are worth reflecting on, as we have been seeing times of extreme riskiness. On May 6^th, the S&P500 fell from 1165 to 1065 within one day. The following day it was again back at 1135. Since then, the commodity markets, equity markets, and the currency markets are in high volatility, and investors have become very risk averse.

For the last two years (almost), we have been hearing about economic crisis, financial crisis, banking crisis, current-account crisis; it has become a crisis world. Looking at past crises, we saw the ‘Black Monday’ in 1987 when the Dow Jones plummeted almost 508 points and the S&P 500 declined by 20.4 percent within one day. In 1997, there was the East Asian financial crisis, when currencies of Thailand, Malaysia and Indonesia depreciated significantly within weeks. In 1999 we had the Argentine economic crisis. In 2007, we started hearing about the signs of a major financial crisis, the one we are still experiencing today.

When USA was almost on the verge of economic recovery, the debt problem of Greece led to a sudden panic in the markets, and Euro has fallen to 1.21 against the US Dollar.

Whenever there is an economic or a financial crisis, many people lose their jobs and income, banks fail, and companies go bankrupt, and so crises are definitely bad for societies. I wonder why we get so much of these crises, in the first place.

Well, we all know how the financial crisis started in USA; with the banks lending excessively to the Americans at low interest rates for home ownership. Most of these mortgage loans were made to the ‘sub-prime’ market, a group of people who had the lowest possibility and capability of repaying the loan. These banks and financial institutions then sold these debt to other institutions, and in this way, new financial products were innovated. Bright minds working in fund management firms came up with ideas like the ‘Credit Default Swaps’ (CDS), which are still another form of financial product, that acts as an insurance to those banks that hold mortgage debt. Trading in equity markets have become too much sophisticated, and mostly has become just numbers in computer systems.

In order to address some of the problems of this sophisticated system, on 24^th May, Germany has banned naked short-selling of certain sovereign debt instruments and shares of selected German banks. Although some investors are unhappy about this, I guess, the current crisis originated from actions of many investors trying to make gains in the very short run through short-selling of shares and other financial products.

The whole objective of a financial system is intermediation of finance from savers to investments. We buy shares in order to have ownership of a certain company, and when the firm makes a profit, we get a dividend from it. The company gets the benefit of obtaining finance for its needed investments. Whenever we deviate from this basic fundamental objective, and when financial system is dominated by just hypothetical numbers in electronic devices, we will always be prone to crises.

Talking about sovereign debt problems, the one Greece is facing right now, is again a major reason for an economic crisis. Most of the analysts may be talking about the US economic recovery, what they dont talk about is the US debt problem. As at end 2009, the US debt stood at 83 percent of GDP. Hence, in order to prevent yet another crisis, it has to address its debt problem soon in order to avoid America turning into Greece.

The Korean story

Back in university when I did my undergraduate studies, I used to read about the East Asian success stories; that South Korea, Taiwan, Hong Kong, and Singapore as the four Asian tigers. I used to write papers on the success of these nations, how they have managed to achieve high economic growth through advancement in education, and capital accumulation. Since then, I’ve visited Singapore (one of the tigers), several times. Recently, I’ve got the opportunity to visit Korea, and see for myself the development of the country. I’ve to say, most of the things I saw and experienced beat all expectations, and I couldn’t help writing about the success of this developed country. Firstly, let’s look at the facts:

The per capita GDP was about $100 in the early 1960s, and back then it was among the least developed countries in the world. However, today it’s over $20,000. Korea has become the 4^th largest economy in Asia, and is also the world’s 8^th largest exporter. It has a very high human development index, and education index. The gross capital formation in 2008 was about 30 percent (world average 22 percent) of GDP, and exports are 53 percent (world average is 29 percent) of GDP. (World Bank)

I can still remember one article written by the famous economist, Paul Krugman, saying that Asian economies’ success is mainly due to the accumulation of inputs, with less technological growth. (Paul Krugman, 1995). While it can be true for Singapore, it seems that its not exactly the case for Korea. Unlike Singapore and most other Asian countries, Korea has internationally successful brands like Samsung, LG, and Hyundai-Kia. And these firms spend huge amounts annually on R&D, thus achieving further innovation.

So, how did South Korea achieve all this? Definitely it has to do with innovation and technological growth. The country is now ranked as the most innovative country in the world in the Global Innovation Index. South Korea has been able to achieve high export-led growth through their innovation. I spent an year in America, and visited many states in the country, visited many universities and institutions. I was amazed by the level of efficiency and technology usage. Believe me, I could feel the same thing in Korea. In some aspects, it beats even America; that we can see even from the numbers. The gross capital formation in America is about 18 percent of GDP, compared to 30 percent in Korea. I'm not by any means saying that Korea is superior to America in terms of technology, but rather trying to express my amazement.

What I’ve noticed through the few days in Korea is that, unlike Singapore, there aren't many expatriate workers around. Unlike USA or UK, I don’t see many immigrants in Seoul. Ok, Korea already has a population of over 50 million, so we can’t compare it to Singapore. However, in terms of attracting international talent, America and Britain have done a great job. The growth in national total factor productivity (TFP) in those countries surely has been influenced by the influx of talented workers from all over the world. But, it’s not the case in Korea. It is one of most demographically homogenous society, with about 99 percent Korean ethnicity. I could notice this by walking around. They also have a well-developed language, and this I could see from their book stores as most of the books were in their own language. I couldn’t find too many books in English from a huge book store in Seoul.

So, back to the success story; What are the lessons that we can learn from Korea? One: Great economic progress can be achieved through effective and efficient utilization of foreign aid by investing on productive industries that can earn foreign exchange to the country. Even if we incur huge external debt, if those funds are wisely invested on productive income generating activities, the country will be getting the benefits of it.

Lesson number two: for economic progress, we need an efficient governing system, with less political conflicts. One could do a good control experiment, if we consider the neighboring North Korea, almost identical in terms of resources, ethnicity and climate; with the main difference in their governing system. One could see the huge difference between the two countries in terms of economic power.

Lesson three: emphasis should be on developing the private sector, and the private sector should be the engine of economic growth.

These are all important lessons for all other developing countries. As for Maldives, surely we don’t have 50 million people, and enough land. However, most of our economic problems facing today, are due to our low focus on developing the private sector, and the over-reliance on the government. When we come to think of it, many of highly educated youth are employed in the government and engaged in economically unproductive work. In order to achieve economic progress, we need productive investments in the private sector. We citizens need to focus more on economic activities, rather than wasting our time on unproductive political fights. If we need to pressure the government, it has to be on developing the private sectors, so that we can earn an income, rather than asking the government to give us subsidies to pay our bills. Most of all, we need a strategic macroeconomic vision, and a master plan for the future.

Greece would have been better off without euro?

The crisis in Greece has done much damage to the mighty euro, which has reached 1.25 to a US dollar on May 06^th 2010, which had a rate of about 1.40 at the end of January. With the adoption of euro, the Greek economy attracted a lot of foreign financing inflows, and international investors became overly optimistic about the Greek economy. With the global economic down-turn, these inflows almost stopped, and Greece had to face the reality. A reality in which its government spending has escalated, prices and wages have increased dramatically. The government deficit as a percentage of GDP has reached to unsustainable levels.

So, why has Greece become so helpless with its high debt? The answer is simple; it is tied with the euro, and it does not have the luxury of an independent monetary policy. Had Greece had its own currency, its central bank would have had the chance to have an independent monetary policy. It would have been able to have a monetary expansion, or devalue its currency in order to obtain some degree of international competitiveness.

But now, Greece is forced to be dependent on the strong European nations to provide the needed assistance, and if they fail to do so, there is less hope that Greek economy can come out of this crisis. Hence, even now it might be best for Greece and also for the rest of euro-countries, if Greece abandon the euro, and have its own currency once again.

What have we learnt from all this? One;, in order to have a common currency we need synchronized fiscal policies and fiscal discipline. If it cannot be achieved, it will be almost impossible to have a common monetary policy. Afterall, at the end of the day, Its Mostly Fiscal (IMF). Two;, it is extremely difficult to have a common monetary policy and monetary union (with common currency), without political union or common sovereignty. As people in countries like Germany will be less willing to finance the fiscal irresponsibilities of other countries, like Greece. If the whole euro area was one single sovereign state like that of United States, it would have been politically plausible to provide federal funds or assistance to those states with difficulties.

But now, when the crisis has hit Greece, its government is not able to act with an independent monetary policy. And, its too much to expect that all the other european countries will go on providing assistance to Greece. I wonder, if it'll be better for Greece to let go of euro, and have its own currency.

Maldives economy is far from recovery

We’ve been hearing news about the American economy recovering from the economic recession that was hit two years back, and at the same time, there have been some queries as to whether the economy of Maldives is coming out of recession as well.

Maldives economy entered into a state of economic ‘crisis’ in 2008, coinciding with the global economic downturn. However, the ‘sickness’ in our economy is mostly of our own making, as our government spending reached Rf8 billion in 2007, followed by Rf10 billion in 2008. The government deficit stood at 17 percent of GDP in 2008, which is an unsustainable level of deficit even in international standards. In 2009, the deficit reached an alarming 26 percent of GDP. Until August 2009, part of the deficit was financed through printing Rufiyaa, which then led to increased circulation of Rufiyaa in the economy, and hiking inflation in 2008 to 12.3 percent. Although inflation has dropped to about 4 percent in 2010, we are still not recovered from the most dangerous sickness that we’ve inflicted. The unsustainable level of government spending, the resulting fiscal deficit, which was about one third of the GDP in 2009. We’ve still not started to live within our means. The estimated deficit for this year is about Rf4 billion, and it is estimated to be about 19 percent of GDP, which is much higher than that of Greece (12 percent).
It was relieving news that Maldives entered into a stand-by arrangement with the IMF last year, and that there were some macro economic performance criteria set and agreed by the government. However, we still have a long way to go. We still have yet to introduce measures to increase government revenue, through an effective tax system. We still have yet to revive our private sector investments in order to achieve higher economic growth. We still have got the task of reducing government expenditure and deficit. We still got to reduce our foreign currency spending. We still got to start living within our means.

According to the available statistics, the growth in lending to private sector by the commercial banks is on a declining trend, in fact, there was an annual decline by 5 percent as at end of February 2010. Meanwhile, lending to the government by the banks has increased by 13 percent during the same period. This means, unless there is a way to reduce government expenditure, banks may not be lending to the private sector, and we might not see an active private sector in the near future.

Bottom line is, in order to see economic recovery, we need to put our house in order, and start living within our means.

Data Source: Maldives Monetary Authority, Monthly Statistics, April 2010, www.mma.gov.mv

Adverse Selection at its best in Maldives…

I remember one of my professors explaining to me the difference between regulating a restaurant and a bank. He says that even if five restaurants closed down within a week, it doesn’t affect much to the macro economy; however, if even one bank was to fail each week, then it sure will impact the macro economy of the country. It is because of this reason, we need an authority (an effective one), to regulate, supervise, and monitor the activities of commercial banks and other financial institutions.

The under-developed financial sector of Maldives has six commercial banks, a leasing company, and a housing development finance corporation. The commercial banks mainly rely on their lending to the tourism sector for most of their profits. According to the published statistics from the regulating authority, MMA, 59 percent of the total lending of the banks is to the tourism sector, as at end of 2009. There is an outstanding amount of over $700 million (Rf 9 billion) lent to the tourism sector at the end of 2009. According to the website of MMA, the lending rates of the commercial banks in Rufiya ranges between 8 through 13 percent, and for US Dollars it is 5.5 through 13 percent.

The banks normally think that their profits will increase if they lend at higher interest rates; as high as 13 percent. However, what they don’t realize is that at such higher rates, there will come many borrowers who do not have the intention of repaying back. There will come many businessmen, with risky projects, having very high uncertainty of recovering the investments. The banks hence face the problem of adverse selection. This is exactly what has happened to some banks in Maldives. In order to record higher bank profits, the bank managers decided to lend huge amounts to very risky borrowers, when these risky borrowers did not have the intention of repaying back, in the first place. So, we can argue that with the increase in interest rate (lending rate), the probability of repaying back falls, and the profitability of banks fall.

Another very good example of adverse selection was seen in the tourism sector few years back, when the Ministry of Tourism opened several invitations to bid for new islands for resort development. Many parties proposed incredibly high rents, and they were awarded the island. What the government did not realize was; the probability of the investor making regular rent payments; and even the probability of the investor ever being able to develop the island and open the resort, decreases with every percentage increase in the rent proposed. In other words, by selecting the party with highest rent, the government is effectively selecting the party with the lowest probability of making the rent payments, and the party with the lowest probability of ever being able to develop the island. I think the evidence we see now supports this claim. There are still more than fifty islands unable to start their operations. And one of the main reasons they are unable to attract finance is due to the incredibly high rents that they need to pay the government.

Greek and Maldives' economy

According to the data released on Thursday, the Greek budget deficit has reached to 13.6 percent of its GDP. The Greek Prime Minister, George Papandreou announced on Friday that his government was seeking to activate assistance from IMF and the European Union, totaling $60 billion as loan financing.

According to available statistics, Greece needs more than $13 billion to cover part of its debt coming due in May 2010. The total debt comes to about $400 billion, out of which $72 billion is due this year.

Because of the crisis in Greece, fellow eurozone members are worried, as a troubled Greek economy will surely pose problems to the euro economy, and the euro currency. Hence, it is in the best interest to all the member countries to salvage Greece.
We all have heard on the news that Greek authorities implemented a series of austerity measures; including tax increases, and wage cuts for government employees. This has led to demonstrations and unrest across the country. Civil servants conducted large demonstrations and strike in Athens.

All these sound familiar, right? The Maldives budget deficit was 26.1 percent of GDP in 2009, and is expected to fall to only 18.7 percent of GDP even this year. Maldives could be the country with the highest government deficit as a percentage of GDP in the whole world. We also could be the only country with the highest government wage bill as a percentage of GDP. We are spending about Rf 4 billion within a year to pay for salaries of all public employees; including civil servants, politicians, parliamentarians, and those in the independent institutions. Meaning we spend about Rf 400 million every month, only on salaries!

Our present government announced several austerity measures as well, including reduction of salaries, and reducing the number of civil servants. What followed is similar to what is happening in Greece. I say, there might come a time, when the international partners will abandon us, asking us to manage our expenses within our means. We are not Greece; there is no interest for the Europeans to save us. Our economy is insignificant to the region, and the world. Unless we manage our expenses and our economy, we will not be able to come out of this economic recession.

We need to reform IMF...?

Over the past 60 yeas, the world economy has become very inter-dependant. Due to globalization, development and crises have a contagious effect within regions. Further, as highlighted by Buira in his article, improvements in technology and communication , for example greater use of Internet and information technology has led to formation of an “international capital market".

The governing structure of IMF was formed in 1944 under the Bretton Woods Conference. However, a lot have changed since then in terms of size of economies, population of countries, share of world trade, reserves, and countries’ abilities to contribute to financial resources. Hence, it is evident that there is a need for reform of this important multilateral financial institution in order to achieve more effective financial global governance.
Here, I will highlight the main issues on the IMF Reform agenda put forward few years back.

The main reforms:

1. Making surveillance more effective
According to Article I of the Articles of Agreement of the IMF, one of the main purposes of the Fund is to ‘promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems’. In order to achieve this important mission, Article IV of the same Agreement stipulates that all member countries are required to collaborate with the Fund to assure orderly exchange arrangements and to promote a stable system of exchange rates.

However, recently the Fund has very much being criticized on its inability to influence the policies of powerful countries like USA, especially even when economies of such countries have a significant impact on the economies of developing countries.
One such criticism is that, “when the Fund consults with a poor and weak country, the country gets in line. When the Fund consults with a big and strong country, the Fund gets in line”.

As Ariel observed, ‘the world moves away from rules-based multilateral system to a power-based system’, whereby, larger powerful countries ‘go their own way based on their short term interests’ (Ariel 2005).

This was very much evident during the time when the United States Treasury responded to an IMF report, which highlighted the importance of the US current account deficit and the growing indebtedness, by stating that Treasury did not consider that a correction was necessary in its domestic policy (Ariel 2005).

In order to overcome this problem, the Managing Director’s Report 2005 recommended, ‘more incisive analysis of specific weaknesses and distortions that risk crises and contagion or hinder adjustment to gloabalization’. The Managing Director’s Report further describes various specific action plans that can be implemented to achieve the above mentioned recommendation; global surveillance, multilateral dialogue, financial market surveillance, having standards & codes, regional surveillance, country surveillance, and communications strategy.

2. Adapting to new challenges and needs in different member countries
The Managing Director’s Report outlines specific actions to be taken in terms of the Fund’s role towards the advanced, emerging and low-income countries.
With regard to advanced economies it is recommended that global implications are integrated into country specific policies.
Emerging market economies are characterized in the Report as the ones that need crisis prevention and resolution due to their high ‘risk of boom-bust cycles emanating from the volatility of capital flows’ (IMF 2005). Improving financial insurance in these countries is also on the agenda, with particular emphasis on helping member countries to ‘develop local financial markets and instruments’.
Finally, the role in low-income countries is recommended to be more focused, with more flexibility, more emphasis on the Millennium Development Goals, and having fewer procedures.

3. Helping build institutions and capacity
The Fund recognizes the need to further strengthen its ability to provide technical assistance to countries in the area of capacity building and improving institutions. The specific action recommended by the Fund is ‘to give area departments the central role in setting technical assistance priorities in the context of Article IV surveillance and Fund supported programs’. The Fund also acknowledges the need to enhance fiscal transparency and governance as they play an important role in the development of economic institutions.

Although the need for better institutions and capacity building is acknowledged and important, it is questionable how much overlapping and duplication is present in terms of providing technical assistance to member countries, between IMF and the World Bank. Hence, further reform in this area needs to consider this aspect and coordinate better with the Bank on matters relating to capacity building.

4. Prioritization and reorganization of work within a prudent medium-term budget
The Fund highlights the need ‘set priorities for the next few years based on a country-by-country analysis’.
The Fund also needs the reorganization which is necessary to implement the various components of the budget and hence recommends better organization of expert staff, departmental structure, management, executive board, and international monetary and financial committee.

5. Address the issue of fair quotas and voice
In order to achieve the mission of IMF more effectively, it needs to reallocate quotas and voting rights in order to reflect the changes that has taken place in the world economy during the past sixty years. The reallocation should be in such a way to reflect the interests and power of those countries whose share in the world economy has increased, and in general, in a way that the legitimacy of the Fund could be greater.

Concluding Remarks

The G-7 Finance Ministers and Central Bank Governors met in Tokyo on February 09th 2008 and discussed about IMF reforms, reaffirming their support on the IMF surveillance decision on exchange rate, fiscal and monetary policies. In their statement they expressed their support for the “proposal of the Managing Director to refocus the Fund’s operations on core priorities”. This is a positive message that reflects the commitment from the richest nations of the world, and is expected to have a significant impact on the reform agenda of the Fund.

The reforms outlined above are those highlighted in the Managing Director’s Report, 2005 and in addition to these, there are few other areas that need attention.
Some of them include, making the work of the Fund in the member countries more ‘demand-oriented’ taking into account the local circumstances and needs of the countries, rather than being ‘supply-oriented’ by the replicating what is being done in many other countries. In some countries, some of the new projects or policy recommendations are suggested and being ‘forced’ to be developed into loans, even though such loans are not diverted to the most efficient use or sector. In the meantime, there are many other areas that need special attention and assistance, but unable to attract the attention of the Fund or the Bank, as the officials of these institutions do not feel that they are important.

Finally, it has to be emphasized that rich and powerful countries need to be brought on-board in understanding the importance of global financial governance, and the relative effects of global integration, and thus adapting policies that can have positive impacts on the world economy.

In order to achieve ability to force corrective action on its members, the Fund needs reorganization and reallocation of its quotas and voting rights. Reallocation of quotas is also important in order to improve the legitimacy of the institution and hence, achieve the core objectives of the Fund.