Russian Roulette: The Prague Stock Exchange
By: Sam Vaknin, Ph.D.
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Written: September, 1998
The Prague Stock Exchange is, lately, highly correlated with the notorious Moscow Stock Exchange. The latter is even more responsive to IMF pressures. But the almost bankrupt organization is perceived by the citizens of the former "Evil Empire" not as a saviour but as a tool of American economic imperialism. Should a backlash against the IMF develop in Russia (and many politicians are working diligently at it) the repercussions could reverberate through what is left of the Prague financial community.
The more involved the IMF gets in the Russian economy – the more controversy surrounds it. True, economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are loudly complaining. Some economists regard this as a sign of the proper functioning of the IMF – others spot some justice in some of the complaints. The IMF is supposed to promote international monetary cooperation, establish a multilateral system of payments, assist countries with Balance of Payments (BOP) difficulties under adequate safeguards, lessen the duration and the degree of disequilibrium in the international BOPS of member countries and promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.
It tries to juggle all these goals in the thinning air of the global capital markets. There is little dispute that the IMF is indispensable. Without it, the world monetary system would have contracted more readily and many countries would be worse off. It imposes monetary and fiscal discipline, forces governments to plan, and introduces painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters endure. Lately, it began to lend credibility to countries and to manage crisis situations.
But, this scapegoat role allows politicians in Russia to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a reformed market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to have prolonged the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if not – the IMF is always to blame. Negative feelings, which would have normally brought about a real, transparent, corruption-free, efficient market economy are vented and deflected.
The IMF money in Russia encourages corrupt and inefficient spending because it cannot really be controlled and monitored. The rule is: the more resources the Federal and regional governments have – the more will be lost to corruption and inefficiency. The IMF cannot rationalize spending in Russia because its control mechanisms are flawed: they rely too heavily on local, official input and they are remote (from Washington). They are also underfunded.
Despite these shortcomings, the IMF assumed and not only in the case of Russia – two roles which were not historically allocated to it. It became a country credit risk rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. Russia experienced it last month. No banks or donor countries extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) shifted – so did responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments ("why worry, the IMF will bail me out in case of default"). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline. There is no better example than the bloated and wrongly priced Russian market for short-term government obligations, the GKOs.
The IMF is too restricted in both its ability to operate and in its ability to conceptualize and to innovate. It, therefore, resorts to prescribing the same medicine of austerity to all the sovereign patients which are suffering from a myriad of economic diseases. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalization is dubious (the daily turnover in the foreign exchange markets alone is 6 times the total resources of the IMF). The result is fiascos like South Korea and Indonesia where 40- 60 billion USD aid packages was consumed by sick economies in days to no avail. More and more, the IMF looks anachronistic and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico, which shares a border with the USA and not Bulgaria, which doesn't?), politicization (South Korean and Indonesian officials complained that the IMF officials tried to surreptitiously introduce trade concessions to the USA into an otherwise financial package of measures) and too much red tape.
The problem is that the IMF forces governments to restrict flows of capital and goods, and to reduce budget and balance of payments deficits. Consequently, governments find themselves caught between non-compliance with the IMF performance criteria and addiction to its assistance. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". This looks a trifle overblown. But the process that he describes is, to some extent, true and fully applicable to Russia.
The inevitable devaluation of the Rouble (supposed to encourage exports and stabilize the currency) will lead to increased inflation. The higher prices will burden businesses and increase their default rates. The banks will increase their interest rates to compensate for higher risks and for inflation. Wages in Russia are never fully indexed or paid timely so the purchasing power of households will be further eroded. Despite recent posturing, tax revenues will fall as a result of a decrease in wages and the collapse of many businesses. Thus, the budget will be either cruelly cut or the budget deficit will increase. The options of raising taxes or improving the collection methods are fantastic in the chaotic environment euphemistically known as the Russian Economy. The Rising costs of manufacturing (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) will lead to the pricing out of the local markets of many local firms. A flood of cheaper imports will ensue. The comparative advantages of Russia will disappear as it slides into ever growing trade deficits. Finally, The Russians believe, Western creditors will take over the national economic policy. Communism will be replaced by IMF-ism. No country is independent if the strings of its purse are held by others. Russians, too nationalistic to acquiesce, will rebel. The price will be partly paid by the likes of the Prague Stock Exchange.
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