[stop-imf] IMF, WORLD BANK from Foreign Policy in Focus

[Robert Weissman]

The Progressive Response 11 April 2000 Vol. 4, No. 15
Editor: Tom Barry
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The Progressive Response (PR) is a weekly service of Foreign Policy in
Focus (FPIF), a joint project of the Interhemispheric Resource Center
and the Institute for Policy Studies. We encourage responses to the
opinions expressed in PR, and may print them in the "Letters and
Comments" section.
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I. Updates and Out-takes

*** IMF: CASE OF A DEAD THEORY WALKING ***
By David Felix, Washington University in St. Louis

*** IMF & GOOD GOVERNANCE ***
By Carol Welch, Friends of the Earth

*** STRUCTURAL ADJUSTMENT AND POVERTY REDUCTION ***
By Carol Welch, Friends of the Earth


II. Letters and Comments

*** ANOTHER PERSPECTIVE ON TIBET ***


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I. Updates and Out-Takes

(Editor=92s Note: The IMF and World Bank facing criticism from all
sides--from a congressional commission, from former officials, from
countries impacted by their programs, and this week from protesters in
the streets of Washington. FPIF has produced three new policy briefs on
these international financial institutions. We lead this issue of the
Progressive Response with an excerpt from David Felix=92s =93IMF: Case of a
Dead Theory Walking,=94 and follow with excerpts from Carol Welch=92s brief=
s
on the =93IMF and Good Governance=94 and on the IFI=92s =93Structural Adjus=
tment
Programs and Poverty Reduction Strategy.=94 All three briefs are posted at
http://www.foreignpolicy-infocus.org/briefs/iflistv5.html)

*** IMF: CASE OF A DEAD THEORY WALKING ***
By David Felix, Washington University in St. Louis

The Asian financial crisis has eased, but its reverberations have
enmeshed the International Monetary Fund (IMF) in a major legitimacy
crisis over its recently assumed mission and its ability to implement
it. That new mission--promoting free capital mobility around the
globe--parallels U.S. policy, though deviating sharply from the IMF's
original function. The IMF's crisis is thus also a U.S. policy crisis.

Under the Bretton Woods Agreement, reached by the major capitalist
powers toward the end of WW II, the World Bank was to provide
reconstruction financing, while the IMF was to provide short-term
financing to stabilize exchange rates. The basic objective of the
agreement, whose terms still serve as the IMF's charter, was to
establish an economic order in which multilateral trade and investment
(together with stable, convertible exchange rates) would be compatible
with full employment, progressive taxation, and other components of
welfare capitalism.

Controlling international capital flows was judged essential for these
goals to be mutually sustainable. Hence Article VI authorizes member
countries "to exercise such controls as are necessary to regulate
international capital movements" and empowers the IMF to request tighter
controls and to deny emergency credits when used "to meet a large or
sustained outflow of capital." In practice, the IMF has neither
requested borrowing countries to tighten capital controls nor denied
credits when they were used to finance capital flight.

However, during the first three post-war decades, the IMF as a major
source of emergency credits to developing countries, was largely
sidelined by bilateral foreign aid driven by cold war politics and, in
the 1970=92s, as =93foreign aid fatigue=94 set in, by private bank loans.
Beginning in the late 1970s, however, the U.S. found the IMF
increasingly useful for handling debt crises in the developing world and
opening developing country asset markets to international capital. From
a minor lender of last resort, the IMF became a major enforcer of
foreign debt service and a leading advocate of removing all obstacles to
the entry of foreign capital. In pursuing these functions, the IMF has
attacked capital controls throughout the developing world, thus moving
from neglect to active violation of Article VI.

As the IMF has pursued its campaign to rid developing countries of
capital controls, it has steadily expanded the set of policy changes it
demands from countries seeking its credits. Prior to the 1980s, the IMF
advocated policies intended largely to relieve foreign exchange crises
at moderate socioeconomic cost to the borrowing economies. The IMF
insisted on monetary-fiscal tightening and devaluation but did not
demand that capital controls be removed.

By 1980, however, its primary goal became resolving balance-of-payments
crises by attracting foreign private capital. The IMF's policy demands
now included measures that cut deeply into the socioeconomic structures
of the borrowing countries and increased their adjustment costs. It
required countries to ease capital controls and to rely on raising
interest rates to halt capital outflows and attract inflows. By
intensifying domestic bankruptcies, banking crises, and credit crunches,
this strategy often deepened declines of output and employment. To
attract equity investment, the IMF also pressured borrowers to privatize
state assets, reduce social expenditures, and repeal measures that
protected wages and favored domestic firms over foreign competition.

These tougher IMF conditions and increased IMF meddling sparked popular
unrest and political crises. Fearing popular reaction, many borrowing
countries took IMF funds without fully implementing associated IMF
demands. Mounting resistance to its austerity conditions and political
meddling has contributed to the crisis currently enveloping the IMF.

The IMF is also under attack for its failure to provide adequate debt
relief. In the past, when bilateral government loans constituted most
developing country foreign debt, the IMF could ease the debt-servicing
burden by persuading lender governments to stretch out repayment
schedules. More recently, eager to keep private capital flowing and to
promote increased global financial integration, the IMF has emphasized
sustaining the full servicing of private loans as a core principle.
Indeed, to assuage panicky creditors the IMF even required borrower
governments to rewrite private debt contracts. In the early 1980s, the
IMF encouraged debtor governments in Latin America to guarantee the
foreign liabilities of their domestic private banks, whose copious
borrowing had helped bring on the crisis. To obtain bailout funds to
mitigate its 1995 crisis, Mexico was required to pay out dollars to
holders of its tesebonos, though contractually these treasury notes
merely required repayment in pesos.

In compensation for such government guarantees, the IMF has been
enlarging emergency credits. But as currency/banking crises have become
more frequent and severe, there is mounting legislative resistance in
the U.S. and other creditor countries to the rising fiscal burden of
replenishing IMF coffers and providing supplemental bailout funding. The
$50-billion Mexican bailout of 1995 dwarfed previous packets, yet it was
nearly quadrupled by the sum of the Asian-Russian-Brazilian bailout
packets of 1997-98. Since 1995 the international bailout packets have
amounted to over $250 billion, with around 35% supplied by the IMF. Its
coffers nearly emptied, the IMF has been campaigning for enlarged
replenishment quotas from its members to enable it to respond more
expansively to future crises. The campaign is falling flat.

The IMF is being buffeted as well by growing criticism that its "sound"
crisis policies have had a low success rate and that the substance of
what it dubs "sound" has evaporated in a fog of ad hocism. Typically,
the IMF's pre-crisis assessments failed to foresee the impending crises.
Its "sound" crisis remedies concentrated the adjustment costs on the
borrowers while protecting the lenders. The IMF tried to obscure overt
failures by ad hoc modifications of its remedies. In the process, the
optimistic performance targets of the initial IMF policy package fade
from view, along with clarity as to which fiscal, monetary, and exchange
rate policies are indeed "sound." Accordingly, mainstream economists
have been defecting from the theoretical perspective on financial market
behavior that has underpinned the IMF's current mission--compounding the
IMF's legitimacy crisis.

(David Felix <felix@wueconc.wustl.edu> is Professor Emeritus at
Washington University in St. Louis.)


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*** IMF & GOOD GOVERNANCE ***
By Carol Welch, Friends of the Earth

Given that the increasing dominance of private financial flows relative
to official flows has shifted power and influence toward private sector
capital, the role of the IMF has come into question in the last several
years. This identity dilemma has been fomented by the continued
stagnation of the poorest countries, despite many years of structural
adjustment. Now, since the IMF will have a new managing director for the
first time in thirteen years, is a propitious time to examine the fund=92s
role in the global economy of the twenty-first century.

Reform of the IMF must be a key component of U.S. foreign policy
priorities. The reform agenda includes downsizing the fund=92s role and
determining exactly how it carries out its more restricted mission. The
IMF was created to monitor economic developments in the global economy
and to address short-term external imbalance when necessary. Treasury
Secretary Summers=92 recent call for a refocused IMF is welcome, and this
should be the starting point for a new U.S. policy. The IMF should
return to its original mandate and lend to countries (rich or poor)
facing short-term balance-of-payments problems. Conditions would be few,
dealing strictly with core macroeconomic problems and with repayment to
the IMF. Longer-term development lending for the poorest countries is
better left to agencies with the appropriate mandate and staff
expertise, such as the World Bank and certain UN agencies.

A surveillance function should remain part of the IMF=92s mission, with
one important change needed to ensure improved global economic
governance: the monitoring of private capital flows, which played a
major role in the crises of 1998. But though the IMF should track these
flows, imbalance created by such flows may not warrant IMF assistance,
nor can the IMF realistically expect to match the volume of private
capital. In today=92s world of massive, volatile capital flows, the IMF
should not step in and bail out banks and private lenders who knowingly
took risks investing overseas.

Good global governance means that speculators and bankers should not get
special treatment. An independent, rules-based system that equally
balances the importance of meeting human needs and public services with
meeting obligations to creditors is necessary to ensure effective global
governance. Because it is dominated by the finance ministries of the
wealthy countries (particularly the U.S.), the IMF is incapable of
achieving this important balance. With respect to the problem of
mounting third world debt, the creation of an independent debt
adjudication board (similar to U.S. bankruptcy courts) outside IMF
control would be one way to establish such a rules-based system. The
U.S. should give such an alternative proposal due consideration.

But while the IMF reins in its activities, it must itself adhere to
principles of global economic governance, and the U.S. should take a
strong role in ensuring that this happens. One step would entail freer
access to information. The IMF=92s annual economic surveys--the Article IV
consultations--should be public documents, although certain sensitive
information could be withheld. Currently, the IMF only makes
available--on a voluntary basis--a brief, sanitized summary. Drafts of
loan documents should also be made public, so that civil society has an
opportunity to voice concerns about IMF loan programs.

In addition, IMF governance would be improved by making the board of
executive directors more democratic and more accountable for its
decisions. The executive board=92s process of reaching decisions by
consensus makes it very difficult for outsiders to verify the position
of a particular country=92s representative. The current U.S. executive
director admitted in an April 1998 congressional hearing that, in 2,000
decisions, she has only formally voted about twelve times. At a minimum,
minutes of board meetings should be made available expeditiously, and
board votes should be public. However, improved democracy and
representation will not be achieved without a significant change in
voting power within the board. For example, population size should
factor into voting share, and no one country should have veto power at
the IMF.

To enhance its credibility, the IMF should establish an independent
evaluation unit that can systematically assess the effectiveness and
impact of IMF policies and programs. This unit should be independent of
IMF management and should consult with all interested parties to
determine the full effect of IMF operations around the world. These
reviews should be public, and the executive board should issue a
response or action plan for each review=92s recommendations. The IMF
should also establish a grievance office so that affected people have
recourse to challenge a flawed IMF loan program in a country.

Finally, discussions between the IMF and a borrowing country must
include the full range of government ministers and parliamentary
leaders. Without the representation and agreement of a wide array of
government authorities, IMF programs may not identify core problems,
predict negative outcomes, and win broad support. Although broad public
consultation is neither feasible for short-term lending nor absolutely
critical if conditions are narrowly defined, the IMF should pursue
opportunities, through its resident representatives, to establish more
regular, informal contact between IMF officials, government officials,
and the public in order to better assess the economic situation in
member countries.


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*** STRUCTURAL ADJUSTMENT AND POVERTY REDUCTION ***
By Carol Welch

Since the late 1970s the U.S. has been a principal force in imposing
structural adjustment programs (SAPs) on the governments of the global
South. Formulated as loan conditions by Northern governments and the
international financial institutions (IFIs), SAPs require recipient
countries to change their economic policies, generally to encourage
greater economic liberalization (deregulation) of trade, investment, and
finances.

Bilaterally, Washington attempts to restructure the economic policies of
developing nations through its aid programs and trade negotiations.
Multilaterally, using its influence in international financial
institutions like the World Bank and International Monetary Fund (IMF),
where it has the largest voting share of all countries, the U.S. also
promotes a restructuring agenda. In addition, debt relief for the
poorest countries is contingent upon successful completion of structural
adjustment programs.

Few would deny that problems such as budget deficits, high inflation,
and inefficient government enterprises require policy reforms. Nor can
lenders be expected to extend loans with no assurance of how money will
be spent. However, SAPs are driven more by ideological principles than
by objective evaluations of a country's specific economic situation.
SAPs have also come to include more policy requirements that
increasingly strengthen the hand of Washington and the IFIs. The IMF,
for example, was originally designed to lend to countries experiencing
short-term balance of payments problems, not longer-term restructuring.
Its involvement in SAPs has increased the IMF's leverage over countries
and enabled it to demand policy changes in areas far beyond its mandate
and expertise. As a result, the standard structural adjustment package
advocated by the IFIs and the U.S. government fails to address a
country's individual needs, thereby generating an array of economic,
social, political, and environmental problems.

These latest initiatives by the IFIs could merely continue the same
structural adjustment policies (albeit with improved social safety
nets), or they could represent (if associated with strong public input)
a major change in how development policies are set in the poorest
countries and who sets them. The national forums could be another public
relations exercise by the IFIs, or they could start a genuine popular
debate on the direction of national economic policies.

SAPs often succeed in achieving specific objectives such as privatizing
state enterprises, reducing inflation, and decreasing budget deficits.
However, the GDP growth of countries undergoing structural adjustment is
routinely limited to a few sectors like raw materials extraction or
goods produced with cheap labor. Thus, even when a SAP-driven economy
grows, such growth is generally environmentally unsustainable and fails
to generate employment or increase incomes, particularly at a rate
sufficient to affect population growth and compensate for SAP-induced
layoffs.

Reforms aimed at opening countries to foreign trade and investment may
result in increased exports and greater access to capital, but they also
flood the affected countries with imported luxury goods, undermine local
industry, and thereby constrict local buying power. SAPs benefit a
narrow stratum of the private sector-mostly those involved in export
production and trade brokering. Those involved in these growth sectors
are usually well-connected elites and transnational corporations.

Layoffs of government workers, wage constraints, higher interest rates,
reduced government spending, and the shutdown of domestic industries all
contribute to the shrinking of the domestic market. The weak state of
the domestic market exacerbates deteriorating socioeconomic conditions.
Although there may be a new dynamism in certain sectors, social and
economic insecurity deepens for most people in countries subjected to
SAPs. The result can be increasing political instability, such as
disaffection with political systems and riots over price increases.

The emphasis placed by SAPs on increased exports can hasten the
destruction of ecosystems by accelerating extractive enterprises such as
the timber, mining, and fishing industries. In agriculture, SAPs augment
the economic liberalization resulting from free trade agreements to
undermine peasant agriculture while reinforcing export-oriented
agribusiness (and its dependence on dangerous agrochemicals). The
insistence of SAPs on the deregulation of laws and the downsizing of
enforcement agencies further obstructs government capacity to protect
the environment.

Although reduction of world poverty is proclaimed as a major goal of
U.S. and multilateral lenders, SAP policies often hit the poor hardest.
Increased unemployment and shrinking government services are the most
direct hits on the poor, who are also adversely affected by SAP-directed
tax policies that emphasize easy-to-collect, regressive sales taxes.
Tightened credit requirements and higher interest rates make it
virtually impossible for small farmers and businesses to invest.

The failure of structural adjustment can be attributed both to its
specific policies and to the process by which SAPs are implemented in
countries. SAPs are inadequately scrutinized and assessed, and they are
largely imposed on countries in an undemocratic and nontransparent
manner. Unlike development project lending, structural adjustment
lending at the World Bank is not subject to social or environmental
impact assessments. The IFIs contend that assessing structural
adjustment is too complex, and they assume that any impacts that occur
are positive ones. It is clear from experience, however, that SAPs often
negatively affect social groups and impact the environment. Without a
social and environmental assessment policy, these impacts are not taken
into account. A 1999 World Bank desk review found that even cursory
environmental assessments rarely occur in World Bank adjustment lending,
and social impacts were not reviewed at all. The IMF has no formal
process to assess possible impacts, claiming to rely on the World Bank.

Information disclosure on structural adjustment lending is also
inadequate. Structural adjustment program documents are not released by
the World Bank or IMF until they are approved by the board of executive
directors, making it extremely difficult for civil society groups to
have input and affect the final outcome. World Bank development project
lending, on the other hand, is subject to information disclosure
standards.

In addition to its other problems, structural adjustment programs fail
because they are largely imposed in countries. The IFIs usually
negotiate SAPs with a small set of government officials from the finance
ministry, central bank, or planning ministry. Often, important
ministries are excluded from loan negotiations, as are key members of
parliament, despite the fact that parliaments must implement new laws
and measures to comply with any structural adjustment package.

(Carol Welch <cwelch@foe.org>is an international policy analyst at
Friends of the Earth in Washington, DC, where she specializes in
international financial institutions.)


Sources for More Information on the IMF and World Bank:

Bretton Woods Project
Email: awood@gn.apc.org
Website: http://www.brettonwoodsproject.org/
Contact: Angela Wood

Center of Concern
Website: http://www.igc.org/coc/
Contact: Jo Marie Griesgraber

Centre for the Study of Global Governance
London School of Economics
Website: http://www.lse.ac.uk/Depts/global/

Development Gap for Alternative Policies
Structural Adjustment Participatory Review Initiative (SAPRI)
Email: dgap@igc. org
Website: http://www.developmentgap.org/
Contact: Doug Hellinger

European Network on Debt and Development (EURODAD)
Email: eurodad@agoranet.be
Website: http://www.oneworld.org/eurodad/

50 Years is Enough Network
Email: wb50years@igc.org
Website: http://www.50years.org/
Contact: Njoki Njehu

Financial Markets Center
Email: info@fmcenter.org
Website: http://www.fmcenter.org/

Focus on the Global South
Email: admin@focusweb.org
Website: http://www.focusweb.org/
Contact: Walden Bello

Friends of the Earth
Email: cwelch@foe.org
Website: http://www.foe.org/
Contact: Carol Welch

Third World Network
Email: twn@igc.apc.org
Website: http://www.twnside.org.sg/
Contact: Martin Khor

The Tobin Tax Initiative, USA
Email: cecilr@humboldt1.com
Website: http://www.tobintax.org


Websites

Christian Aid
http://www.christian-aid.org.uk/

Jubilee 2000 Coalition
http://www.jubilee2000uk.org/

Oxfam International
http://www.oxfaminternational.org/

World Development Movement
http://www.wdm.org/


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II. Letters and Comments

(Editor=92s Note: FPIF recently published a policy brief, =93Reassessing
Tibet Policy=94 by Tom Grunfeld that holds that U.S. policy has been
pushed dangerously to the right by the Tibet Lobby, which calls for
Tibetan independence even though official U.S. policy holds that China
rightfully exercises sovereignty over Tibet. The FPIF calls for a
negotiated solution in which separatist ambitions are renounced and
semi-autonomy is granted. The brief is posted at:
http://www.foreignpolicy-infocus.org/briefs/vol5/v5n09tibet.html)

*** ANOTHER PERSPECTIVE ON TIBET ***

I suggest you refer to Dr. Warren Smith's book, "Tibetan Nation, A
History of Tibetan Nationalism and Sino-Tibetan Relations."

Dr. Smith is an independent scholar in Alexandria, VA with a Ph.D. in
international relations from the Fletcher School of Law and Diplomacy.
His book is an extensive study of Tibet from ancient times all the way
to present day. I have read Melvyn Goldstein and found his perspective
on historical accuracy lacking.

As Dr. Smith states in the introduction, "The volume of Chinese
justificatory propaganda on Tibet has been tremendous, especially at
times when Tibet has come under international scrutiny. Much factual
information is contained in that propaganda, often unintentionally, as
well as many revelations about the reality of the Chinese conquest and
rule of Tibet. For this reason, and for the obvious reason of
availability, this book employs the PRC propaganda on Tibet for a large
extent; it is my contention and my experience that, if one is willing to
read vast quantities of it, Chinese propaganda reveals much of what it
intends to obscure."

"My technique throughout has been to let the story tell itself rather
than to excessively synthesize and analyze. This reflects the enormous
amount of primary source material available in English translation,
especially for the post-1950 period, and a preference for the reader to
discover those materials, as I did, the story contained within."

Orville Schell, Dean, Graduate School of Journalism, Univ. of California
at Berkeley said, "Warren Smith's sweeping history of the Tibetans as a
people does much to fill in the holes that have long existed in our
general knowledge about Tibet. This well-written and thorough account is
a crucial companion for anyone who wants to know how this singular land
came to its present impasse with China."

- Tina Boyd <TBoyd@WhitneyWeb.com>

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Editor, Progressive Response
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Email: tom@irc-online.org

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Email: ipsps@igc.apc.org