Tanzania and the IMF during Tanzania and the IMF during the 1980sthe 1980s

James Raymond Vreeland

Political Science Department, Yale University

International Institute, UCLA

Plan of the lecture:Plan of the lecture: What is the IMF?

Conventional story of why governments enter into IMF programs.

Tanzania and the IMF in the 1970s.

What happened in 1983? (No agreement – a strange case!)

Why did Tanzania enter in 1986?

What is theWhat is theInternational Monetary Fund?International Monetary Fund?

1944: 44 countries signed the Bretton Woods agreement

– International Monetary Fund (stability)

– World Bank (development)

The “Bretton Woods” Institutions.

The IMF was given 2 tasks:The IMF was given 2 tasks:

1. Monitor exchange rates.

2. Act as “lender of last resort.”

Monitor exchange ratesMonitor exchange ratesGold standard – each currency’s value

was ultimately backed up by gold.

Required high maintenance monitoring.

Surveillance is still an important part of what the IMF does…

But when the world shifted away from the gold standard in the 1970s, the old exchange system collapsed.

The new system did not require intense monitoring.

The IMF faced A CRISIS OF PURPOSE.

Shifted its attention to the 2nd function.

Lender of last resortLender of last resortMitigate balance of payments crises by

providing “loans.”

This is intended to discourage competitive/destructive policies the are believed to have led to the Great Depression.

– Trade barriers, competitive devaluations.

Who is the IMF?

Where do the resources for “loans” come from?

Who is the IMF?– Currently 184 members. – Members have “votes” according to the size of their

subscription to the IMF…

Where do the resources for “loans” come from?Where do the resources for “loans” come from?

Members provide a contribution (“capital subscription”) called the member’s quota denoted in SDRs

The size of the quota is a function of the country’s economy:

GDP current account transactions official reserves

Largest: USA (SDR 37,149.3 million). Smallest: Palau (SDR 3.1 million).

QuotasQuotasDetermine “vote share.”

– US: 17%– G-7: 45%

(Canada, France, Germany, Italy, Japan, UK, + US)

So…as a lender of last resort,So…as a lender of last resort, If a country gets into a balance of payments crisis

(or for whatever reason) has a shortfall in its foreign reserves,

The IMF can provide a loan (lest this country enter into destructive policies).

Problem: This “bailing out” option lowers the incentive to pursue sound policy.

“Moral Hazard.”

Solution?Solution? If the IMF determines that the need for an IMF loan is due

to bad policy,

The Fund imposes policy conditions in return for the loan.

This arrangement of conditions for loans is known as “Conditionality.”

How does the IMF determine if need is due to bad policy? If the required loan is >25% of the member’s quota.

Note that the loan is not provided upfront, but disbursed in “tranches,” subject to reviews of compliance with conditions.

Policy conditions usually entail:Policy conditions usually entail:Fiscal austerity

– cutting government services and increasing taxes

Tight monetary policy– raising interest rates and reducing credit

creationSince 1982: Structural reforms(Currency devaluation)

Conventional wisdomConventional wisdom

We often hear that governments turn to the IMF only when they have no choice.

Governments enter into IMF programs if and only if they need a loan, and must accept IMF conditionality in return.

Tanzania’s early experienceTanzania’s early experiencefits the conventional storyfits the conventional story

Figure 8: Tanzania 1970-1988Foreign reserves (in terms of monthly imports)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Year

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ves

The “conventional story” aptly The “conventional story” aptly describes the early experience of describes the early experience of

Tanzania with the IMF:Tanzania with the IMF: Foreign reserves dropped in 1974.

President Nyerere needed foreign exchange but avoided IMF conditions as long as possible.– Government draws down 25% of quota (10.5 million SDR ).– Obtains 2 Oil Fund Facility Arrangements (6.3 & 3.15 mill SDR ).

Finally, the government succumbs in 1975, but negotiates for weak conditions:– IMF required only that domestic credit usage by the public sector

be constrained.

Nyerere did not want IMF Nyerere did not want IMF conditionsconditions

When reserves plummeted again in the late 1970s:

“People who think Tanzania will change her cherished policies of socialism because of the current economic difficulties are wasting their time” –President Nyerere

1980 Agreement– Nyerere negotiates for soft conditions

Nyerere uses prominence as a world figure takes advantage new Managing Director’s (de La

Rosière) reach out to Africa

– Only 2 conditions a joint Tanzanian-IMF study of the exchange rate ceiling on government borrowing

Even these conditions were too much. The agreement fell apart.

Important points from 1970sImportant points from 1970s Why did Nyerere turn to the IMF?

Why was he able to negotiate for soft conditions?

What was Nyerere’s negotiation posture?– Arusha Declaration

– Non-aligned movement

What was the IMF’s negotiation posture?– Crisis of purpose

– Budget constraint weak

Tanzania’s experience:Tanzania’s experience:What happened in 1983?What happened in 1983?

Figure 8: Tanzania 1970-1988Foreign reserves (in terms of monthly imports)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Year

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ves

Tanzania is not typical…Tanzania is not typical…The typical experience:The typical experience:

Once a country enters into an IMF program, consecutive agreements are signed until the economic situation improves (and sometimes even after the situation improves).

Extreme examples from around the world:Extreme examples from around the world: South Korea spent 13 years under consecutive agreements

from 1965 to 1977.

Zaire 14 years straight (1976-1989).

Liberia 15 years (1963-1977).

Peru participated in consecutive agreements from 1954 to 1971 (18 years).

Panama from 1968 to 1987 (20 years of consecutive agreements)

After a stint of seven years (1961 to 1967), Haiti entered into agreements again from 1970 to 1989, for a total of 27 out of 29 years.

By the way: Tanzania from ’86-2000? Under 14 out of 15 years.

But Nyerere said But Nyerere said NO!NO! In the aftermath of the Latin American Debt

Crisis, IMF conditions became tougher.

Also, the IMF faced a tighter budget constraint, with more countries participating than ever.

Nyerere’s negotiation posture was weakened and he could not get soft conditions.

So no agreement!

A note on case selection:A note on case selection:

Country YearForRes/mly

impts BoP/GDPCurrent

Acct/GDPGuinea-Bisau 1987 -0.10 -25.03 -56.70

Liberia 1986 0.00 -18.58 -3.20

Tanzania 1983 0.00 -4.15 -9.80Benin 1989 0.10 -6.05 -12.30

Lagged Foreign reserves, BoP and current account for countries that did not turn to the IMF for at least 3 years

Tanzania is a stark case:Tanzania is a stark case:It helps to sharply illustrate the importance

of domestic political preferences.

When governments turn to the IMF, they may actually want the IMF to impose conditions.

Nyerere did not, so he said no.

What happened in 1986?What happened in 1986?Figure 8: Tanzania 1970-1988

Foreign reserves (in terms of monthly imports)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Year

Fo

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ves

What happened in 1986?What happened in 1986?

Did the economic crisis worsen?

Did the IMF’s position soften?

Did Tanzania suddenly gain international prominence?

Domestic politics changed…Domestic politics changed…1985 Ali Hassan Mwinyi elected presidentNyerere remains president of CCM

Struggle for leadership

IMF finds domestic allies who in turn find supporters within the state

Mwinyi brings in the IMF to help push through economic reforms.

How does bringing in the IMF help How does bringing in the IMF help push through economic reform?push through economic reform?

Key Features (non-ratification / enforcement):

Agreements are entered into by executives and the IMF.

The approval of other actors (veto players) may be required for policy change…

But their approval is not required for an IMF agreement to be put in place.

Once an IMF agreement has been signed, failure to change policy becomes more costly (“rejection costs”).

““Rejection costs”Rejection costs”

1. Restriction of access to IMF loan.

2. Preclude debt rescheduling.

3. Decreased investment.

Figure 9: Tanzania 1980-1986Investment (percentage of GDP)

Penn World Tables 5.6

5

10

15

80 81 82 83 84 85 86

Year

Inve

stm

ent

Executive

Without the IMF

With the IMF

Veto player

Accept

Reject

Payoff to veto player

-1 (change policy)

0 (maintain the status quo)

-r (reject the IMF)

Figure 1: The logic of bringing in the IMF

Veto player

Accept

Reject

-1 (change policy)

Why study Tanzania?Why study Tanzania?1. It is an intrinsically fascinating case.

2. As an economic outlier, we gain leverage over the question of domestic politics:

It is the most extreme case of a country NOT turning to the IMF during an economic crisis.

When the government does turn it is because of political preferences, not a change in the economic situation.

Cocktail Party Phrases:Cocktail Party Phrases: Substance:

– Tanzania 1983 is the most extreme case of a country not turning to the IMF despite a need for foreign exchange.

– Mwinyi signed in 1986 to pressure anti-reformists in the CCM.

Methodology:– The case of Tanzania illustrates the importance of doing both

large-n and small-n research.

Political Science:– The case of Tanzania is at the crossroads of International

Relations and Comparative Politics.