Domestic policy failures - rationale in era of globalisation, Microeconomics

Domestic Policy Failures:

i) There is too much emphasis on "ownership" ownership of bad policies can lead to disasters. So, at times, the Fund and the Bank will need to be "paternalistic" and tell a country that the policies are unsustainable, that its debt is unsustainable and that its exchange rate regime is unsustainable. 

Subject to the caveat that some basic ownership is necessary to ensure that an IMF Programme is actually implemented, the IMF should not shy away from being paternalistic when necessary. 

ii) But the Fund and the Bank should be careful about who are the "reformers" and who are the "vested interests". In countries with very unequal wealth and income distributions, the oligarchic elites may pursue their own private and corrupt interests.

iii) Going against vested interest and supporting reformers may mean to choose socially progressive reformers. Those advocating reforms that might address some inequality and poverty at times are not defined as "reformers" event though they are taking on vested interest. Vested interests that secure their interests in other ways often have not gotten the some security from the institutions.

Given these different externalities and market failures. The Bretton woods institutions have many important roles as follows:
• Ensure international monetary and macro stability that is essential for economic growth.

• Ensure global financial stability.

• Provide bilateral and multi-lateral surveillance and tools for crisis prevention.

• Provide lending to countries in financial difficulty or crisis.

• Support macro stability, and thus long run growth, in lower income countries.

Posted Date: 11/9/2012 6:33:43 AM | Location : United States

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