1. 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

2. 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).

3. 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).

4. 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.

5. Fig. 1 Theoretical impact of the adjustment set of IMF policies 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). 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).

6. 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.

7. Decrease in Domestic Credit. The decrease of domestic credit tends to lower the inflation rate but worsens the negative changes in real GDP.

8. Devaluation. The theoretical impact of a ruble devaluation is a decrease in output while the inflation rate decreases.

9. Reducing the Fiscal Deficit. As a result, the inflation rate decreases and the decrease in real GDP become less important.

10. 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.

11. 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.

12. 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, n 0 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, n 0 1, March, pp. 183-186. Reinhart, C. (1990), “A Model of Adjustment and Growth: An Empirical Analysis”, IMF Staff Papers, Washington, DC, Vol.37, n 0 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.