May 17, 2009

Central Bank Profligacy and Massive Malinvestment

I stumbled upon a newly interesting paragraph in an article about IMF fiscal advice from 1990 by Alan Tait:
Central banks are not expected to make losses. In industrialized economies, central bank profligacy is rare. In the last few years, however, significant central bank deficits have become not uncommon in developing countries (central bank losses in Costa Rica were 5.6 percent of GDP in 1982; in the Philippines, 5.2 percent in 1984; in Uruguay, 7.6 percent in 1983; and, in Argentina, 2.5 percent in 1984). This largely occurs when a central bank undertakes quasi-fiscal activities (e.g., net lending or guaranteeing foreign exchange losses) that show up, initially, as a change in the composition of central bank's assets.
The US Federal Reserve has been working overtime to achieve an exception to the first sentence. Sure puts them in an interesting new group of peers.

A later paragraph states:
Frequently, the public sector has undertaken massive investment programs, often with an eye on the symbolic need to "think big." But some of this investment may prove unproductive if the initial capital commitment is not followed up by maintenance. Donors will give capital but are reluctant to fund maintenance costs. Fund and Bank advice may well be to forego some large new projects for the sake of maintaining and operating efficiently the existing capital stock.
Massive investment programs? Yes, sir! Unproductive? You bet.

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