[stop-imf] Monbiot: IMF is engineering disaster

[Robert Weissman]

http://www.zmag.org/sustainers/content/2003-08/27monbiot.cfm
August 27, 2003
Stealing Nations
By George Monbiot

The International Monetary Fund does not make its "mistakes" by accident.

For how much longer should we give those who run the global economy the
benefit of the doubt? The International Monetary Fund has made the same
"mistake" so many times that only one explanation appears to remain: it is
engineering disaster.

The crises over which it has presided in Thailand, South Korea, Russia, and
Argentina are well documented, by Joseph Stiglitz, the former chief
economist of the World Bank, among others.1 But we have, until now,
lacked a
comprehensive description of the way it worked in eastern Europe. A new boo=
k
by the economist Pongrac Nagy shows for the first time how the IMF smashed
Hungary.2

Communist economic management was hopeless: coercive, unaccountable,
incompetent, and wasteful. So when Hungary began to democratise in the late
1980s, it was plain that a new economic system was required. There were a
number of options for transition. But before anyone had considered them,
Hungary's na=EFve and trusting new government was persuaded by the western
powers that it had no alternative but to turn to the IMF.

Unless a country's economic policy is approved by the Fund, it cannot obtai=
n
foreign capital. Post-communist Hungary needed foreign capital for just one
purpose: to help repay its enormous external debt. It could have
applied, as
many other countries had done, for debt relief, but the Fund, in the
face of
substantial evidence, told it that this would deter foreign investors. The
only option was to implement the policies the IMF recommended.

It has just one set of policies. Governments must impose restraints upon th=
e
supply of money and credit, open the door to foreign capital, privatise
state assets and cut public spending. It justifies these demands by
persuading them that they are suffering from unmanageable debt and gallopin=
g
inflation.

So in 1990 the Fund told Hungary that it was undergoing an inflationary
crisis. Prices, it pointed out, had risen by 17% in 1989. In truth this ris=
e
was caused not by inflation (demand outstripping supply), but mainly by
policy changes, such as the introduction of VAT and the abolition of
subsidies. The IMF insisted on pretending that it was caused by excess
demand.3

The best way of reducing demand, the Fund maintained, was to restrict the
amount of money the banks could lend. So between 1990 and 1996, the central
bank ensured that the credit made available to businesses halved. The
immediate and predictable result was that interest rates soared (to 50%),
and businesses all over Hungary collapsed. As workers were sacked and wages
were cut, consumer demand crashed. The IMF, Nagy writes, had "artificially
plunged the Hungarian economy into its greatest ever depression in
peacetime".4 Between 1990 and 1993, Hungary's gross domestic product
fell by
18%.

Far from curing inflation, this treatment caused it. Between 1993 and 1996,
prices rose by 130%. This was not because demand was rising, but simply
because it wasn't falling as fast as supply. But the IMF, once more, treate=
d
this new problem as if it was caused by runaway demand. It insisted on
further economic restriction, which, predictably enough, pushed Hungary
further into depression.

To ensure that Hungary serviced its debt, the Fund demanded that it cut
every possible public service, and privatise every possible state asset.
Entire economic sectors were flogged swiftly and cheaply, with the result
that foreign corporations acquired complete market control. To ensure, in
the government's words, "the desirable reallocation of income ... towards
the business sector",5 Hungary was then obliged to introduce one of the mos=
t
regressive tax policies in the world: 43% of government revenue came from
taxes on consumption, but just 20% from income tax and 14% from business
taxes.

All this was carried out, as all IMF programmes are, in conditions of total
secrecy and institutional deceit. The lie the Fund tells is that it simply
approves the "letter of intent" written by a government, in which the new
economic policies are contained. This story relieves it of all
responsibility for what happens.

But the letter of intent is actually written by the IMF, and simply signed
by the government. It is massive and detailed, and guides the economic and
political life of the nation for between one and three years. It is entirel=
y
confidential. The only sight the people of Hungary have ever received of IM=
F
policy was a leaked letter from a senior Fund official to the finance
minister.6 His demands precisely matched the policies the government was
implementing.

One and a half million people (almost 30% of the workforce) lost their jobs=
.
The incomes of those who stayed in work declined by 24%; pensions fell by
31%. By 1996, most people were living on or around subsistence levels.
Public services shrivelled. Between 1989 and 1998, the crime rate rose by
166%. This, we must remember, was the result of a process almost universall=
y
described as "the triumph of capitalism".

Then, in 1996, suddenly, without announcement or explanation, the policy
changed. The banks were permitted to start issuing credit again and the
recession, as a result, came to an immediate end. Over the next four years,
industrial production climbed by 45% and gross domestic product by 21%.
Wages and pensions began to rise again.

The experiment, in other words, could not have had a clearer outcome. You
apply the IMF's medicine and the economy collapses. You stop, and the
economy recovers. It has been repeated often enough for us to trust the
results. In Thailand, South Korea, Indonesia, Russia, and Argentina, the
IMF's financial liberalisation and forced restrictions led to economic
crisis, which was relieved only as those restrictions were lifted. Those
nations which refused to take the medicine, even though they were
confronting almost identical conditions (Malaysia, China, Poland) prospered
while their neighbours collapsed.

So why, knowing what the results will be, does the IMF keep applying the
same formula for disaster? It has been imposed so often that this cannot
possibly be a mistake. And the results happen to suit its sponsors very
well. While the Fund works mainly in poor nations, it is controlled, throug=
h
its one-dollar, one-vote system, entirely by the rich. As a result, as
Stiglitz says, its programmes reflect "the interests and ideology of the
Western financial community".7

Desmond Tutu once remarked that "when the missionaries came to Africa, they
had the Bible and we had the land. They said 'let us close our eyes and
pray'. When we opened them, we had the Bible, and they had the land". The
Hungarians were handed the Bible of economic orthodoxy by its missionaries.
Through deceit and secrecy, the IMF ensured that their eyes were shut. By
the time they opened them, foreign banks and corporations owned the economy=
;
the public sector was giving way to foreign capital; structural unemploymen=
t
had produced a pliant and desperate workforce. The IMF, in other words, had
engineered the theft of an entire nation. How many more times does this nee=
d
to happen before we can see what the game is?

www.monbiot.com

References:

1. Joseph Stiglitz, 2002. Globalization and its Discontents. Penguin/Allen
Lane, London.

2. Pongrac Nagy, 2003. From Command to Market Economy in Hungary under the
Guidance of the IMF. Akademiai Kiado, Budapest.

3. ibid

4. ibid

5. Government of the Republic of Hungary, September 1995. Medium-term
economic strategy of the Hungarian Government, cited in Nagy, ibid.

6. Letter from Massimo Russon, Director of the Europe I Department of the
IMF to Lakros Bokros, Hungarian Finance Minister, 1995, reproduced in Nagy,
ibid.

7. Stiglitz, ibid.