[stop-imf] NYTimes: IMF/World Bank failures

[Robert Weissman]

March 17, 2002
New York Times
As Global Lenders Refocus, a Needy World Waits
By DANIEL ALTMAN

Meddling relatives usually mean well but, as everyone knows, sometimes
they just make things worse.

To many critics, both expert and casual, the World Bank and the
International Monetary Fund fall into the same camp.
Created 57 years ago to reduce poverty and to stabilize foreign currency
markets, the institutions, based a block apart in Washington, have
continually struggled to meet the expectations of their big shareholders
— the world's rich nations — as well as those of their supposed
beneficiaries in the developing world.

In Haiti, for example, the World Bank has supported 41 projects over the
last 50 years with more than $1 billion in loans, and the I.M.F. has
lent the country $150 million in the last two decades alone. Yet more
than 80 percent of Haiti's population still lives in poverty, compared
with 65 percent in 1987. And the conditions on the aid from the World
Bank and the I.M.F. — including removing tariffs and growing crops
intended mainly for export, like coffee — have allowed imports to
displace food crops like sugar cane and rice. While political upheavals
in Haiti undoubtedly share the blame for its destitution, critics say
mismanagement and economic policies mandated by the aid packages bear
some responsibility.

Tomorrow, global policy makers will convene in Monterrey, Mexico, for
the United Nations Conference on Financing for Development; and when
President Bush speaks there, on Friday, he is expected to repeat his
calls for reform and accountability at the World Bank, which has
recently been accused of squandering billions on ineffective projects.
The I.M.F. will also have much to answer for. Argentina's recent
economic collapse, despite policy prescriptions and billions in aid from
the I.M.F., threw millions of middle-class people into poverty.

The decades-long debate over the role of the bank and the fund heated up
in 1997, when Kofi Annan became secretary general of the United Nations
and called for a dialogue on development financing. Since Sept. 11, as
rich nations have focused on resentment in the developing world, matters
have grown more urgent. 

Those rich nations have sent the World Bank and the I.M.F. to face down
some of the world's toughest economic problems. Yet the two institutions
have often failed to turn deep political backing, world-class brainpower
and billions in funds into good results.

Both now say they are improving their performance through internal
reforms, even as they also grasp for new responsibilities. But the
world's hunger for radical change — in terms of which countries receive
aid, how much is made available and how it is distributed — could
overtake their efforts.
 
The World Bank makes loans to countries, usually for specific projects,
at interest rates that reflect their fiscal conditions. Its locally
based staff helps to manage the projects, which in the past focused on
building dams, paving roads or wiring electricity grids but now deal
more with improving health and education. The I.M.F. sends teams of
economists, with billions in loans, to rescue countries facing financial
crises. But it, too, makes loans for development.

The bank — which has lately taken to trumpeting its success in leading
fast-developing countries like China and India to higher literacy and
lower infant mortality rates — acknowledges some failures. Its reports
state that living standards simply have not improved in much of
sub-Saharan Africa, where since the 1960's it has invested tens of
billions of dollars, some stolen by corrupt rulers and some built into
huge power and transportation projects idly awaiting the use of foreign companies.

The bank's president, James D. Wolfensohn, is vocally urging rich
countries to increase foreign aid, disbursed both directly and through
the bank. But his many critics, including some who question his
management style, do not trust him to use more aid effectively.
"He's not a good manager," said Nancy Birdsall, president of the Center
for Global Development, a new policy group in Washington. "He's a
visionary," she said, adding that she respected his passion for
development but that his ability to lead the bank was limited.

Mr. Wolfensohn acknowledged that the bank had been ineffective in the
past. But he contended that it had made significant strides. "Reform
takes time in an institution with a 57- year history," he said by
e-mail. "But I wouldn't underestimate how much change has already taken
place at the bank. Some of our critics seem to be stuck somewhere in the
bank of the 1980's."

The I.M.F., meanwhile, has been under attack for its handling of the
crisis in Argentina. Despite billions in aid and advice, the country
defaulted on about $141 billion in public debt, froze private bank
accounts and devalued the peso, instantly destroying the purchasing
power of millions of families and resulting in mass unemployment, hunger
and civil unrest. Economists say the situation shows just how little the
fund understands economic fundamentals of many countries.

In its defense, the fund's officials have said repeatedly that countries
must take credit and blame for their own situations. They also said that
advice offered earlier, when Argentina did not need the fund's money,
went unheeded.

Critics are unconvinced. "It's disingenuous to say that it was the
country's own making," said Joseph E. Stiglitz, a Nobel laureate in
economics and professor at Columbia University who sparred with the
I.M.F. while serving as chief economist of the bank. "The I.M.F. is
taken seriously in the advice that it gives."

The bank and the fund gained reputations for uncompromising and often
unsuccessful policies in the 1980's and early 90's, when they encouraged
countries to pursue development plans that were based on rigorous
economic logic but failed to consider local circumstances.
Like an emergency room doctor who gives every patient an appendectomy
regardless of the symptoms, the institutions treated almost every
developing nation the same — with a package often referred to as
"structural adjustment." Usually, in return for aid, they imposed strict
budgetary discipline, the ending of subsidies for food and other basics,
increases in the cost of public services like health care and the
elimination of trade barriers.

With so many changes coming at once, depressed economies struggled to
grow as imports flooded in and traditional industries collapsed.
Sometimes, poverty worsened.

"A lot of the structural-adjustment agenda was right, but was too
brutally implemented," said Clare Short, Britain's secretary of state
for international development. Changes were necessary in countries with
high tariffs, big subsidies for manufacturers and decentralized
agriculture, she said, but the bank and the fund were not mindful of
economic disruptions and eroding support for their policies.

"The political price in resistance to any reform was a very serious
obstacle to further progress," Ms. Short said.

In the last decade, critics of the two institutions' methods went on the
offensive. "The signals came from outside the World Bank that things
were not going all that well, that the structural adjustments policies
were not delivering what everyone hoped," Dr. Birdsall said. The
countries that put the programs into effect became more stable, she
said, but economic growth and a reduction in poverty did not
automatically follow. Nonetheless, the bank continues to offer a third
of its aid — $5.8 billion in 2001 — for structural adjustment.
Though both the bank and the fund engage in development, the fund takes
the lead in ushering countries through financial crises. There, too, the
policies of the last two decades have come under fire. "They went into
countries facing economic downturns and said, `Make them worse,' "
Professor Stiglitz said. 

The results were sometimes perverse. In Argentina, an I.M.F. price
stabilization program pegged utility prices to the dollar, he said. As
the peso fell in value, the cost of electricity soared, enriching
utilities while straining ordinary families.

Professor Stiglitz said I.M.F. policies, including lower government
spending and higher interest rates on central bank lending imposed on
East Asian nations in 1998, had never brought a country to prosperity.
The I.M.F. has also been criticized as failing to encourage countries to
make the most difficult economic decisions. Many economists say that in
Argentina, the fund focused on nit- picking reforms of the government's
budget and financing rules instead of the harder task of advising the
country how to unhitch its currency from the American dollar.

"Everybody knew for months that the currency board had to go, and
everybody knew that it would be a terribly messy affair," said Charles
Wyplosz, co-director of the international macroeconomics program at the
Center for Economic Policy Research, based in London.
Yet the fund made several other conditions for aid instead, as it had in
East Asia. "The conditions often tend to be millions of little details,
and not the big picture, so countries can pretend to fulfill part of the
request," Dr. Wyplosz said. "They fulfill the menial ones and not the
main ones, so there's a game going on that can go on for years."
 
CRITICISM of the bank and the fund peaked in 2000, when a commission
organized by Congress and headed by Allan H. Meltzer, a professor of
economics at Carnegie Mellon University, released a report calling for
wholesale reform of both institutions, especially the World Bank.
Lately, complaints about the bank have centered on Mr. Wolfensohn, a
former investment banker who became its president in 1995 and said he
expects to remain in office until his second term ends in 2005.

In the journal Foreign Affairs last fall, Jessica Einhorn, a former
managing director at the bank, accused Mr. Wolfensohn of taking on too
many disparate missions. The bank's mission, she wrote, has become so
complex that it "strains credulity" to portray it as a manageable
organization. "The bank takes on challenges that lie far beyond any
institution's operational capabilities," she wrote.

Mr. Wolfensohn acknowledges pushing the bank in new directions and says
it has made progress in areas like debt relief, anti-corruption programs
and community-driven development. Yet on the basic goal of eliminating
poverty, the numbers show mixed results: progress in big countries like
China and India but little change in many poor, sometimes war-torn areas
like sub-Saharan Africa, which is also ravaged by AIDS.

It is hard to distribute blame precisely or to know which solutions will
work better. That has not stopped everyone from street protesters to
world leaders from offering ideas. Lately, many of them have come from
the United States Treasury Department. Paul H. O'Neill, the secretary,
has recommended that the bank turn half its lowest-interest loans into
grants, so that countries trying to grow do not incur a debt burden.

Opposition to that proposal, mostly from Europe, has been fierce. "We
think it's profoundly wrong," said Ms. Short, the British cabinet
member. She argued that governments would be more likely to use grants
in wasteful ways, because no one would ever come looking for repayment.

Professor Stiglitz said some countries should be asked to repay loans so
that the money can be recycled for other countries to use. "If a country
like Chile or China is getting richer," he said, "they're going to be
able to repay that debt."

Some economists support the shift to grants because, they say, private
markets can now finance developing countries where the money is likely
to be used wisely. J. Bradford DeLong, a professor of development
economics at the University of California at Berkeley, said countries
that did not attract lenders in the open markets probably should not be
borrowing at all.

Nicholas H. Stern, the chief economist of the World Bank, counters that
private markets would not finance the kind of long-term projects that
lay the groundwork for higher standards of living. "The markets are
looking at their return," he said. "What we're looking for is the return
to growth and opportunity over a long period of time."
Though he noted that the rich countries that control the bank would make
the final decision, Dr. Stern indicated that the two sides could be
nearing a compromise on replacing some loans with grants.
Skeptics, including Professor Stiglitz, have suggested that Mr.
O'Neill's true aim is to reduce the scope of American aid, a sensitive
issue in a time of budget deficits. But Dr. Stern said he saw evidence
that the Bush administration was "seriously devoted" to development.

Among Mr. O'Neill's other recommendations was to shift the bank's focus
from reducing poverty to raising labor productivity, which he says can
be more accurately assessed, to bolster the bank's accountability. In
"The Elusive Quest for Growth," a book published last summer, William
Easterly, an economist formerly at the bank, asserted that billions in
aid had been squandered on poorly designed programs.

Critics say Mr. O'Neill's focus on productivity smacks of 1980's-style
"trickle down" economics because productivity gains among the poor can
end up lining the pockets of wealthy employers. They also say that
rising productivity may not be any easier to measure than falling
poverty is now. "I don't know how you measure the productivity of
projects," Dr. Wyplosz said. "People will produce numbers that have no
precision whatsoever, so we'll be massaging numbers instead of massaging reports."
 
REFLECTING the historically cozy relationship between the Treasury
Department and the I.M.F., Mr. O'Neill has left the fund to plan its own
reforms. It has begun to seek ways to help bankrupt countries without
resorting to expensive bailouts, which critics like Professor Stiglitz
say were meant primarily to allow wealthy investors to recover their
money. As a substitute for bailouts, the fund has proposed a tribunal
for restructuring the debts of insolvent countries.

Last November, Anne O. Krueger, the first deputy director of the I.M.F.,
suggested that the fund could sponsor a bankruptcy procedure for
countries in crisis. In such a system, claims would be frozen and the
fund would provide interim aid and help work out who will be repaid and
how. Investors cried foul, arguing that the fund could not supply money
to a country and, as a creditor itself, decide who ought to be repaid.
The fund is revising its proposal.

Few people expect the meeting in Monterrey to generate new aid pledges
or innovative development strategies. But the dialogue could speed the
process. Neither the World Bank nor the I.M.F. is close to completing
its mission. More than a billion people still live on less than $1 a
day, and crises strike developing countries with alarming frequency.
"This," Dr. Stern said, "is a long haul."