[stop-imf] Bullard: The puppet master shows his hand

[Robert Weissman]

from Focus on Trade, April 2002 (www.focusweb.org)

THE PUPPET MASTER SHOWS HIS HAND
By Nicola Bullard*

YOU could almost hear the yelp when the US treasury yanked the
IMF's chain last week.

On 1 April IMF deputy managing director Ann Krueger told
Washington's Institute for International Economics that she supported
the creation a "single international judicial entity" to oversee and
arbitrate debt restructuring of bankrupt governments.

The very next day, John Taylor, the international under-secretary at
the US treasury, disagreed. "The most practical and broadly
acceptable reform," he said, "would be to have sovereign borrowers
and their creditors put a package of new clauses in the debt
contracts." In other words, the US is willing to go as far as collective
action clauses in bonds, but not a step further. This is a public setback
for Krueger who has been shipping her ideas around governments,
lawyers and investors for several months. Maybe she just forgot to
ask Paul O'Neill, or maybe it's a well-choreographed exposition of
the already limited terms of debate. Whatever the game plan, any
reforms along the lines proposed by Krueger would require a change
to the IMF constitution which, in turn, requires an 85 per cent
majority vote. As luck would have it, the US controls 17 per cent of
the votes.

Broadly, Krueger's proposal is to establish a set of binding
international rules on debt restructuring that could override national
courts. These rules would allow the establishment of a "single
international judicial entity" that would "oversee disputes and oversee
voting" in sovereign bankruptcy and debt restructuring negotiations.
IMF officials suggest that the "entity" could be modeled on the WTO
disputes panel. Such an approach would give the IMF a quasi-legal
status overseeing the establishment and implementation of binding
international rules. Given the current balance of power within the IMF
the resulting framework is most likely to be biased in favour of the
creditors and could seriously undermining national sovereignty. What's
more the mere suggestion that it would be modeled on the WTO,
where the processes and rules are dictated by the major powers,
should set alarm bells ringing.

The IMF proposal is not progressive and portends an even greater
concentration of power in the Fund. Although the European Union
supports the IMF proposal, the US is clearly willing to use its weight
to sink the initiative because it prefers a laissez faire approach and
because it doesn't want the IMF to assume a life of its own. In fact,
strong sentiments must have been stirred in the US Treasury because
it is usually more discreet when issuing its directives to the Fund. But,
it's a useful reminder to see the puppet master's hand from time to
time.

CAUGHT BETWEEN THE DEVIL AND THE DEEP BLUE SEA

Deep divisions between the World Bank, the EU and the US are also
coming to the surface in the great "loans versus grants" debate. The
splits first appeared at last year's G7 meeting in Genoa when Bush
strode into town announcing that the US wanted to see the World
Bank use up to 50 per cent of its $6 billion annual outlay for grants to
the poorest countries. Currently, the level is about one per cent.
World Bank president James Wolfensohn and the EU reject the idea,
saying that unless the US is committed to dramatically increasing its
contributions such a plan would bankrupt the Bank. The EU has also
put forward the strangely Calvinistic argument that paying interest
"instills disciple" among borrowers and lenders. What is not stated, by
either the Bank or the EU (for obvious reasons of good taste) is that
they fear a reduction in tied-loans would reduce their power to dictate
the economic policies of poor and low-income countries. In contrast,
others - such as Jubilee South -- believe that the US proposal would
simply give the Bank even more leverage to impose conditions
because poor countries would jump through any old hoop to get free
money. At first glance, this does not seem convincing because
borrowing countries are jumping through the hoops already and pay
interest for the pleasure. However, if the ideas of Lerrick and Meltzer
(see below) were implemented, they may be proved right.

Wolfensohn doesn't like the idea because he fears that increasing the
grants portfolio would eventually bankrupt the Bank and reduce their
policy leverage. But he is trapped by his need for the political
patronage of the US treasury (and besides, who's going to get access
to all that lovely new money that Bush promised in Monterrey).
Despite the poor hearing in Genoa, the US keeps pushing the
proposal. When Treasury Secretary Paul O'Neill raised it at the IIE in
February this year, he said that the World Bank had "driven poor
countries into a ditch" by lending money for projects to fight poverty
rather than making grants (New York Times, 21 February).

So far though, the US proposal, as articulated by Bush and O'Neill,
has been long on rhetoric and short on detail. However the clue to
what the US treasury has in mind may lie in a recent paper entitled
'Grants: a better way to deliver aid' by Adam Lerrick and Alan
Meltzer (of the Meltzer report). (1)

Based on a briefing note (and not the paper itself) their proposal
seems to be a cunning mechanism for liberalising services in
developing countries via grants. The bottom line is that social service
programs eligible for grants, such as education and health, would be
put out to tender for competitive bids from both local and foreign
public and private providers. Such an approach would segue very
neatly into the WTO GATS negotiations and raise the bar of aid
conditionality to unprecedented levels. Perhaps this is what the WTO
and the World Bank means by "policy coherence."

But the US administration's basic proposition (while we await the
details) has merit.

Poor countries would be absolutely better off with much greater
access to free and unconditional money so they can guarantee health,
education, housing, water and other fundamental economic and social
rights. But we know that neither the US nor the Bank works that way,
so we are still left wondering why Bush and O'Neill are pushing the
"grants barrow" in the first place. It's probably not altruism. It may be
a desire to weaken the Bank (Republicans, after all, are far less
attached to the Bank and the Fund, having little appreciation of how
much bang they actually get for their buck). It may, on the other hand,
be part of a more complicated plan to link "grants" to liberalisation of
services such as health and education. In short, yet another way of
channeling public money into private hands in the name of aid
effectiveness.

Until we know what the US is up to, it is impossible to "take sides" in
this debate. Paul O'Neill, however, is right about one thing: poor
countries have been driven into a ditch by loans. We should,
therefore, support the essential proposition that poor and low-income
countries should have access to "no-costs no-conditions" grants from
the Bank, especially for the universal and free provision of social
services such as health, education, housing and water.

IMF 'STUNG' BY CHARGES OF LENIENCY

Finally, congratulations are due to the IMF's public relations
department. Without missing a beat, they have shown their Teflon-like
ability to deflect any responsibility for the crisis in Argentina AND
rewrite history.

In the latest wave of public relations revisionism, IMF officials are
apparently "stung" (sensitive creatures that they are) by criticisms that
they were "too lenient" with Argentina. Not wanting to be seen as
softies, the IMF has vowed to take a tough line in the latest round of
negotiations, insisting that Argentina trim its budgets even further,
change its bankruptcy laws (which apparently make it "hard for
creditors to collect on bad debts"), revise tax sharing arrangements
with the provinces and stamp out "pseudo-currencies."

The pressure to cut public expenditure is particularly bloody-minded,
and not only politically. A recent study by the Washington-based
Center for Economic and Policy Research (CEPR) shows that from
1993 to 2000, Argentina's spending on government salaries,
programs and operations was stable, while interest payments tripled
due to a lethal combination of high interest rates and the currency peg
to the ever-rising dollar. As the authors conclude, "the commonly
believed story that the government could not accept a sufficient dose
of the painful medicine of austerity, or spent its way into a hole, is not
supported by the data." (2)

The IMF's record in Argentina is disastrous: their policy advice,
backed by loan conditions, created and perpetuated the ruinous
combination of a fixed exchange rate and capital account
liberalisation. Then, when default seemed the only option, they tossed
the hot-potato of "restructuring" to their Man in Buenos Aries,
Domingo Cavallo, who spectacularly dropped the potato and is now
behind bars for his alleged involvement in illegal arms deals. (And,
although harshly rejected by his own people, Cavallo must be
comforted to know that he is still a welcome member of the unofficial
club of international financiers, the Group of 30, which includes Paul
Volcker, Larry Summers and Stanley Fisher.)

The IMF's reckless (and unfathomable) attitude to Argentina seems
likely to continue. They know that insisting on more belt-tightening,
more austerity and more sacrifices from the population will almost
certainly push Duhalde's government to the precipice. What is the
IMF's objective? Is it ideological bloody-mindedness, or are they
simply protecting their shareholders interests? As always with the
Fund, it's impossible to know where the economics ends and the
politics begins.

* Nicola Bullard is deputy director of Focus on the Global South.

(1) Quarterly International Economics Report, Carnegie Mellon
Gaillot Centre for Public Policy, January 2002

(2) 'What happened to Argentina?' Mark Weisbrot and Dean Baker,
CEPR, January 2002. www.cepr.net