nader testimony on imf

[Robert Weissman <rob@essential.org>]

Testimony of Ralph Nader
On the International Monetary Fund
Before the General Oversight and Investigations Subcommittee,
House of Representatives Committee on Banking and Financial Services
April 21, 1998

Mr. Chairman and members of the House Banking Oversight Subcommittee,
thank you for the opportunity to testify about the International Monetary
Fund (IMF).

The International Monetary Fund is an institution out of control. It is
completely unresponsive to the U.S. Congress, which appropriates 18
percent of its monies. In combination with its allies in the Clinton
administration, the IMF has misleadingly sought to take advantage of the
Asian financial crisis -- for which it is partly to blame -- to extract
billions of dollars more from the United States. In contrast with its
vaunted austerity measures for people in poor countries, the IMF provides
free insurance to big bankers, bailing them out when their foreign loans
go bad. The IMF rides roughshod over borrower countries in the Third
World, making a mockery of attempts to democratically determine
macroeconomic policy in those nations. And now the IMF is seeking to
expand its mission through a stealth amendment to its charter that would
requires IMF member countries to eliminate restraints on the international
flow of capital.

Mr. Chairman, it is increasingly apparent that corporate globalization has
scarcely fulfilled its promises. There are innumerable indications of
this: the Asian financial crisis; the large and growing U.S. trade
deficit; the stagnation in real U.S. wage rates over the last 25 years;
the flat or declining growth rates throughout much of Africa in the past
decade and a half; the staggering global concentration of wealth, which,
according to a 1996 United Nations Development Program report, has created
a condition whereby 358 people collectively control as much wealth as 45
percent of the world's population. Most disturbing, perhaps, is the
shriveling of the world's modest attempts at domestic democratic
governance in the face of the increasing power of international financial
institutions like the IMF, multinational corporations and international
currency markets.

Many of the Congressional supporters of extending new financing to the IMF
understand its problems, and agree that they must be addressed. But they
are supporting a new IMF appropriation for two reasons: a mistaken belief
that the IMF needs a monetary infusion to deal with the Asian financial
crisis and to address potential subsequent international financial crises;
and a misplaced confidence that the specific "voice and vote" language in
the IMF supplemental appropriations bill will prompt reform at the Fund.

In this testimony, I address these rationales for supporting the
administration's request for funds for the IMF quota increase and the New
Arrangements to Borrow, and then briefly discuss the IMF's
unresponsiveness to developing country borrowers and its attempted power
grab through a charter amendment that would provide it with a mandate to
promote capital account liberalization.

A. More Money to the IMF Worsens, Not Helps, the Global Financial Crisis

The IMF has plenty of money. It does not need more, and Congress should
not allocate it more.

Members of the administration and officials of the IMF have intimated to
Congress and the U.S. media that the Fund needs more money to address the
Asian financial crisis. This is patently untrue. 

The delay in Congressional approval of the administration's request for
new IMF funding has provided an unusual opportunity to test the
Administration and Fund's claims about the near-term consequences of
failure to approve the requested appropriation. Those warnings have been
show to be groundless.

Whether we like it or not, with existing assets, the IMF has already
intervened to address the Asian financial crisis. Without any infusion of
additional funds, the IMF has committed existing resources -- more than
$35 billion to Thailand, Indonesia and South Korea, administering its
standard austerity medicine to troubled economies. Without any infusion of
additional funds, the IMF has compelled Thailand, South Korea and, to a
lesser extent, Indonesia to adopt devaluation, budget cutback and foreign
investment liberalization measures that are forcing citizen standards of
living to plummet and opening these economies to foreign domination.
Without any infusion of additional funds, the IMF has administered bailout
packages that ensured the big foreign banks that had outstanding loans to
Korea, Thailand and Indonesia (Federal Reserve data show BankAmerica,
Citibank, Chase Manhattan, J.P. Morgan, Bankers Trust and the Bank of New
York and other U.S. banks had approximately $20 billion in loan exposure
in South Korea) escaped with only the slightest sacrifice. 

Somehow, notwithstanding alarmist warnings from the Fund and the
administration to the contrary, the international currency markets have
not panicked over the fact that Congress has yet to approve new money for
the IMF. Indeed, the U.S. stock market, at least, has resumed its
skyrocketing ascent with little apparent concern for warnings about
overvaluation. And international capital flows are zipping around the
globe with no appreciable shortfall of investor confidence.

With the passage of time making it ever more clear that the Asian crisis
does not require an infusion of new money into the IMF, IMF backers have
begun relying on a back-up contention that the Fund needs new money to
address future currency crises such as those which recently beset Asia and
the Mexico peso meltdown of 1994-1995. 

This claim is as fallacious as the first. Even after its Thailand,
Indonesia and South Korean bailout loans, the IMF has $45 billion in
liquid capital available, plus $25 billion available through the General
Arrangements to Borrow, plus the ability to borrow unlimited sums from
private capital markets.

In addition to ignoring the ample resources the IMF currently has at its
disposal, the argument that the Fund needs a massive infusion of money to
address future crises is disturbing for what it suggests about
globalizers' expectations. With the Asian crisis still stabilizing and the
peso meltdown only three years past, there is an emerging sense that
financial crises might become a regular part of the global economy. "No
matter how much prevention is improved, we cannot expect to avert every
crisis," IMF Managing Director Michel Camdessus said in a March 9, 1998
address. "Moreover, the nature of future crises may be such that they
require larger amounts of financing than the Fund has traditionally
provided." Indeed, one way to interpret the IMF's proposed quota increase
and funding for the New Arrangements to Borrow is that it hopes to
routinize international financial crises -- to develop a standard
operating procedure whereby it quickly intervenes to calm financial
markets, bail out lenders and inflict harsh terms on borrowers. 

This is a deeply troubling prospect. First, the routinization of the
process, while intended to localize problems so that global financial
market confidence is not shaken by country or regional problems, is
equally designed to remove the IMF bailout procedure from democratic
debate -- especially in the United States and other rich countries that
can potentially influence Fund policy. If the IMF simply applies a
standard operating procedure based upon prior practices to the next
currency crisis, and to the one after that, and to the one after that, it
hopes that political scrutiny of its policies will diminish. Infusing the
IMF with new resources beyond what it might need to address another major
crisis helps the Fund accomplish its goal of insulating itself still
further from democratic influence and accountability

Second, the Fund's standard operating procedure is, in times of crisis, to
bail out Wall Street and other lenders and dole out punishment to borrower
countries. In 1995, the Fund contributed almost $18 billion to a Clinton
administration bailout of the Wall Street interests who stood to lose
billions with the peso devaluation. Now, in Asia, the Fund has
orchestrated a massive bailout of the big banks that made bad loans to
Asian countries. About the only pain felt by the banks was the need to
reschedule short-term loans -- and much of that was done on terms
favorable to the banks.

Because the IMF and Treasury Secretary Rubin conditioned bailout financing
on the Asian countries on further opening up their economies to foreign
investors, the banks doubly benefited from the bailout. The IMF/Rubin
demands relate to foreign direct investment in factories, agriculture and
service operations ranging from tourism to banks, not just portfolio
investment in stocks, bonds and currency. Rubin specifically and
successfully pressured South Korea to open up its financial sector. Thus
one of the perverse outcomes of the Asian bailout is the very U.S. banks
which contributed to the crisis now stand to buy up lucrative sectors of
the now-suffering Asian economies -- a takeover with further political
resentments that could disrupt relations.

Third, the IMF standard operating procedure actually perpetuates the very
problem it is designed to remedy. When the IMF bails out lenders, it
encourages risky lending in the future, worsening the financial volatility
the IMF is supposed to calm. In this sense, the Clinton Administration/IMF
bailout of Wall Street in the 1995 Mexican economic collapse paved the way
for the current crisis. This is the economists' "moral hazard" problem
about which other witnesses will testify in more detail and which led
George Schultz, William Simon and Walter Wriston to urge the denial of
further funds to the IMF in a February 3, 1998 Wall Street Journal
article. The article is attached to my testimony.

B. The Silent American

Some Members of Congress supporting new IMF financing recognize some or
all of these and other flaws in IMF performance. But, they think, the cure
for the problems is embedded in H.R. 3580, which directs the U.S.
Executive Director to the Fund to use "voice and vote" to promote an array
of policies, including exchange rate stability, antitrust enforcement,
social safety nets for displaced workers, financial sector transparency,
requiring lenders to bear the burden of adjustment along with borrower
countries, respect for core labor standards, incorporation of
environmental concerns in macroeconomic policymaking, greater IMF
transparency, microenterprise lending and other programs designed to reach
the poor. H.R. 3580 would also establish an advisory committee to advise
the Secretary of the Treasury on the extent to which the IMF programs meet
the policy goals set forth in the Act and require the Secretary of the
Treasury to issue semiannual reports on the attainment of the policy goals
set forth in the Act in the context of IMF financial stabilization
programs.

Many of the policy entreaties in H.R. 3580 are admirable, but they contain
nothing more than hortatory language.. They will have no effect whatsoever
on Fund policy.

Although the United States' 18 percent voting share gives it a theoretical
veto over Fund policy decisions, the IMF does not hold votes. It operates
by consensus. Thus the requirement that the U.S. Executive Director use
her "vote" to advance specified aims is meaningless. Hypothetically, in a
consensus system, the U.S. "voice" should be heard loudly, both because
consensus should require agreement by all parties and because the U.S.
voice should be louder than others since it has the largest quota at the
Fund. In reality, however, the Fund has remained completely impervious to
past Congressional direction to enact environmental, worker rights and
other positive reforms -- whether this is due to less than vigorous
lobbying by the U.S. Executive Director or Fund obstinateness, or both,
cannot be said because of the secrecy surrounding IMF operations.

In 1989, Congress urged the Fund, through its instructions to the U.S.
Executive Director, to take into account the effects of its policies on
natural resources. There was no change in Fund policy.

In 1992, Congress urged the Fund, through its instructions to the U.S.
Executive Director, to pull back its veil of secrecy, incorporate
environmental considerations in all of its programs and focus more
attention on poverty alleviation. There was no change in Fund policy.

In 1994, Congress urged the Fund, through voice and vote instructions to
the U.S. Executive Director in the Sanders-Frank Amendment, to promote
compliance with key International Labor Organization conventions. There
was no change in Fund policy.

The amended Bretton Woods Agreements Act and the amended International
Financial Institutions Act are replete with instructions to the U.S.
Executive Director which closely parallel the language in H.R. 3850. 

Sec. 286y of the Bretton Woods Agreements Act instructs the Executive
Director to "promote conditions contributing to the stability of exchange
rates ..." Compare this to H.R. 3850's instructions to "promote policies
and actions that will contribute to exchange rate stability."

Sec. 286dd of the Bretton Woods Agreements Act instructs the Executive
Director to "vote against any Fund drawing by a member country where, in
his judgment, the Fund resources would be drawn principally for the
purpose of repaying loans which have been imprudently made by banking
institutions to the member country." Compare this to H.R. 3850's
instructions to "promote policies that aim at appropriate burden sharing
by the private sector so that investors and creditors bear more fully the
consequences of their decisions."

Sec. 286kk of the Bretton Woods Agreements Act instructs the Executive
Director to promote procedures "which ensure the inclusion, in future
economic reform programs approved by the Fund, of policy options which
eliminate or reduce the potential adverse impact on the well-being of the
poor or the environment resulting from such programs." Sec. 286ll
instructs the Executive Director to encourage the Fund to "incorporate
environmental considerations into all Fund programs." Compare this to H.R.
3580's prodding of the IMF to recognize that "macroeconomic developments
and policies can affect and be affected by environmental conditions and
policies."

Sec. 262o-1 of the International Financial Institutions Act instructs the
Executive Director to urge the Fund to promote the goal of "mak[ing]
substantial reductions in excessive military spending and forces." Compare
this to H.R. 3580's instructions to promote policies so that "governments
that draw on the International Monetary Fund channel public funds away
from unproductive purposes, including large "show case" projects and
excessive military spending ..."

What reason is there to believe that this round of voice and vote language
-- so similar to that of prior years -- will in any way affect Fund
policy? There is little evidence that the IMF takes seriously the concerns
of the U.S. Congress or that the U.S. Executive Director vigorously
pursues the voice-and-vote policies articulated by the Congress. If there
were, the Congress would not again be debating instructing the U.S.
Executive Director to advocate for policies that she is already required
to promote. Members should not be misled about the importance of the
hortatory language in H.R. 3850: it will have no discernible impact on
Fund policy.

Neither the advisory committee nor the reporting requirements of H.R. 3580
will change this unfortunate reality. Indeed, the Treasury Department has
shown disdain for the reporting requirements of the Sanders-Frank
Amendment, waiting three years to deliver a report required after one
year, and using the report to discuss labor market reforms instead of
labor rights. Once Congress has approved the IMF's latest funding request,
it will be back to business as usual.

There is but one way for Congress to influence Fund policy: deny it funds.
The 1994 withholding of $25 million from the Enhanced Structural
Adjustment Facility (ESAF) marked the only time in recent memory that
Congressional action sparked even modest reform at the Fund. As a result
of that action, the Fund has, ever so slightly, begun to lift the curtain
of secrecy which shrouds its operations. It also agreed to conduct
independent reviews of its ESAF operations, though they have proceeded far
behind schedule.

IMF Managing Director calls the IMF "the most magnificent bureaucracy of
the world." The only way to influence such a bureaucracy is to withhold
funding as an incentive to reform.

C. Unaccountable to the Poor

Perhaps the Fund's utter unresponsiveness to its largest source of capital
could be partially excused if instead the IMF focused on accountability to
the poor countries to which it extends credit. Unfortunately, the IMF is
even more oblivious to concerns of debtor nations than of its quota
providers.

In its dealings with borrower countries, the IMF imposes a single set of
structural adjustment policy mandates, with little variation from country
to country. The central feature of this cookie-cutter approach is that
economies should be structured to promote exports. In addition to trade
liberalization, other key features include privatization, deregulation and
government downsizing.

The IMF demands acceptance of its package of proposals as a standard
condition of extending loans. Since countries are turning to the IMF in
distress, and since other sources of financing generally will not extend
money without an IMF stamp of approval, poor countries have little choice
but to accept the IMF conditions.

The process of negotiating Policy Framework Papers was intended in part to
complement IMF mandates with dialogue, but the IMF first external
evaluation of the Enhanced Structural Adjustment Facility reports instead
that "the predominant view -- and many ministers and senior officials
echoed this view with some disappointment -- is that although initially
the PFP had held great promise as an instrument of a genuine three-way
dialogue between the government, the Fund, and the [World] Bank, it has
become a rather routine process whereby the Fund brings uniform drafts
(with spaces to be filled) from Washington, in which even matters of
language and form are cast in colorless stone."

The reviewers found that "almost without exception, technical personnel in
ministries and political leaders in the various countries who deal
regularly with the Fund complained about what they saw as the Fund's
inflexible attitude in its dealings with the government. They complained
that the Fund often came to negotiations with fixed positions so that
agreement was usually only possible through compromises in which the
country negotiating teams moved to the Fund's position."

Not surprisingly, the External Review concluded that countries did not
take "ownership" of Fund plans. 

This is an efficiency problem as well as one relating to respect for
democratic decision making. As common sense suggests, and the external
reviewers emphasize, "all the available evidence suggests that
conditionality-intensive programs seldom succeed in achieving their
objectives."

All countries are not alike. To be effective, policies must be tailored to
local conditions; different approaches may make sense in different
circumstances; and diverse initiatives may yield positive outcomes not
foreseen by the well-paid technocrats working in Washington, D.C. who
prescribe policy for much of the world's population.

One result of the IMF's inflexibility is that it stubbornly imposes its
standard structural adjustment policies even when they are clearly
failing. In war-torn Mozambique, one of the poorest countries on the
planet (with a per capital GDP of not much more than $100), the IMF has
insisted that the government prioritize inflation reduction over spurring
growth. IMF policies have impeded Mozambique's use of aid for development
purposes, forcing the country instead to bank some of its aid. Government
spending has plummeted, so that doctors earning $350 a month saw their
salaries drop to less than $100 a month by 1996. IMF policies have forced
a credit crunch, with available credit in 1995 just one third the 1990
level. I have attached to my testimony an article, "Strangling Mozambique"
from the July/August 1996 Multinational Monitor, which describes the
desperate situation in Mozambique in more detail.

In aggregate terms, the IMF's policies have inflicted extreme suffering on
the world's population. In sub-Saharan Africa, where the IMF has exerted
enormous influence, poverty is rampant -- 40 pecent of Africans suffer
from malnutrition and hunger. In general, poor countries following IMF
mandates in ESAF programs are experiencing stagnant growth rates,
according to the IMF's own statistics, and doing worse or no better than
non-ESAF developing countries. These aggregate numbers tend to conceal the
ways that IMF stabilization programs injure the most vulnerable
populations in developing countries -- the very poor, women, indigenous
people.

There are beneficiaries of the IMF stabilization programs, of course.
Among the most significant are the multinational corporations that benefit
from trade liberalization policies that enable them to access natural
resources in developing countries and to exploit cheap labor for exports
to industrialized nations. These "benefits" come directly at the expense
of the environment in developing countries and working people in
industrialized countries.

It is worth contrasting the IMF's inflexible adherence to structural
adjustment with an evolving rethinking of these policies at the World
Bank. In an important speech in January, Joseph Stiglitz, chief economist
at the World Bank, criticized the rigid "Washington Consensus," his name
for the structural adjustment policy package. "The Washington Consensus
does not offer the most important answers for every question in
development," he said. "Deluding ourselves into thinking it does can lead
to misguided policies." In more desirable, complicated and nuanced policy
approaches, he said, "there may be trade offs, in which the economist's
task is to describe alternative consequences of different policies, but in
which the political process may actually have an important say in the
choices of economic direction. Economic policy may not just be a matter
for technical experts!"

D. The IMF's Power Grab: Capital Account Liberalization

There is no sign of such humility at the IMF, nor any such willingness to
defer to elected policymakers.

With the Asian crisis suggesting above all the need to put brakes on the
process of corporate globalization and especially to consider regulatory
restraints on international capital flows, the IMF is now advocating for
an amendment to its Articles of Agreement that would make promoting
unfettered capital movements one of the purposes of the IMF and to extend
Fund jurisdiction over such movements. Such an amendment would effectively
give the Fund the authority to regulate national investment policies, with
an eye toward eliminating any restrictions on capital flows. It is a
back-door attempt to do what citizen opposition is blocking OECD
(Organization for Economic Cooperation and Development) negotiators from
doing with the Multilateral Agreement on Investment.

This is an especially brazen power grab given how the Asian crisis
highlighted the dangers of capital liberalization. There, the heavy
reliance on short-term loans created the condition where countries were
vulnerable to sudden withdrawal of foreign funds.

In light of the Asian crisis, even the IMF now acknowledges that capital
controls can sometimes be appropriate, in some limited transitional
contexts. But the IMF commitment to such controls is exceedingly modest.
Capital account liberalization, said IMF First Deputy Managing Director
Stanley Fischer at a September 1997 seminar, "is an inevitable step on the
path of development, which cannot be avoided and therefore should be
adapted to." With the amendment to the Articles of Agreement in place,
Fischer sees the IMF keeping member countries' capital controls on a very
short leash: "Until they are ready to [fully liberalize], they would avail
themselves of transitional arrangements that would be approved by the
Fund," he said at the seminar (emphasis added). 

This is a deeply flawed vision. Especially in wake of the Asian crisis,
there are good reasons to believe in the merits of capital controls, such
as Chile's effective taxation of short-term loans and investments. Capital
controls may also be necessary to maintain national democratic control
over economic policymaking, protected in part from the herdlike, faddish
influence of the international financial markets. They may be desirable to
advance a variety of policy goals, such as community reinvestment or
national control over media or natural resources. Most importantly,
whether to maintain capital controls, and of what kind, are decisions
properly left to elected national governments -- not to the unaccountable
IMF bureaucracy.

E. Reining in the IMF

Because of the speed and severity with which financial markets can react
even to rumors of bad news, the uncertainties surrounding new technologies
and other developments, publicly subsidized insurance against risk is a
top priority of multinational investors. This drive to socialize risk
while privatizing profit is evident in the corporate drive for tort
deform, the tobacco companies' effort to limit their civil liability, the
seemingly disproportionate importance that business attaches to the
corporate welfare of the Overseas Private Investment Corporation, the
drive to consolidate the U.S. banking sector which obtains free,
"too-big-to-fail" government guarantees and in the megacorporate campaign
to ensure more funding for the IMF. 

Like other forms of socialized insurance, IMF bailouts exacerbate risky
behavior by the private beneficiaries of the free insurance -- here,
private sector international lenders. But the IMF is perhaps unique among
corporate welfare insurance providers in affirmatively promoting risky
conditions, as it seeks to do with the new drive to promote capital
account liberalization that is sure to increase the volatility of the
international financial system. 

IMF officials are fond of touting the disciplining effect of the
marketplace on governments and others. But the corporatist IMF is a form
of governance and is itself is wildly out of control, with no serious
mechanisms of accountability in place.

If Congress genuinely wants to influence IMF policy in the direction of
ensuring that lenders share the burdens of bad loans with borrowers, of
becoming more transparent, of requiring the Fund to take into account
considerations relating to worker rights, the environment, poverty
alleviation, women, indigenous people and other critical interests, then
it should deny the Fund new monies until it demonstrates meaningful
reforms in this area. It is the only way to rein in the Fund. Through
appropriate means, Congress should also direct the Treasury Secretary to
oppose any amendment to the Articles of Agreement that would give the Fund
a mandate to promote capital account liberalization. Since this is a rare
case where a vote can be expected, this instruction, unlike those now
included in H.R. 3580, will actually affect IMF policy. And Congress
should begin holding hearings now on the IMF capital accounts
liberalization power grab, so that it can be alerted to reject the IMF
scheme well in advance of its coming to Congressional vote.

It would also be appropriate for Congress to request Mr. Camdessus appear
publicly at a hearing to respond to questions from the legislative body
that is being asked to authorize billions for the world's "most
magnificent bureaucracy."

In the longer term, much more thinking needs to be done about how to
foster a shift away from the corporate globalization model with its
emphasis on export-driven economies and foreign-investment dependence.. The
model throws countries into a perverse competition in which low wages and
weak environmental standards are rewarded and only multinational
corporations are winners; and it leaves nations overly vulnerable to the
vagaries of international financial managers. Economies should instead be
free to pursue diverse, democratically determined policies, including the
mobilization of domestic resources and domestic markets to meet pressing
domestic needs.