IMF and the World Bank

In November 1999, tens of thousands of people converged on Seattle to protest the undemocratic procedures and decisions of the World Trade Organization. Anger over the effects of a globalization process geared towards the interests of large transnational corporations, finally erupted into a major US protest. Yet the WTO has existed only since 1995. Another undemocratic international organization, which was founded over 50 years ago, has been wreaking havoc upon economies around the world for the past two decades — causing massive unemployment and impoverishment; contributing to environmental degradation; encouraging the transfer of wealth from poor to rich; and exacerbating ethnic and racial conflicts. That organization is the International Monetary Fund.

Most Americans don’t know much about the IMF, despite the fact that the US has been the major player in the organization since its founding. This ignorance is partly because the workings of the IMF, like those of the Federal Reserve Board, have been presented as involving the application of “value-free” technical economic knowledge, impenetrable to the average layperson. Another reason is that IMF actions have in the main only directly affected other countries. But the lack of knowledge is also intentional: The IMF works in secret, even keeping information from government officials in member countries. In the past few years, however, the IMF has been subjected to increasing criticism from both the left and the right in the US. What is the IMF and what does it do?

Founders

In July 1944, as World War II was coming to an end, 44 representatives of Allied countries met in Bretton Woods, New Hampshire, to create international institutions that would encourage free trade among nations and avoid the beggar-thy-neighbor protectionism of the Great Depression. The IMF was one of these institutions, its major mission being enforcement of fixed system of currency exchange rates based on the gold standard. This fell by the wayside in 1970 when the Nixon administration, under pressure from Vietnam-era balance-of-payments deficits, unilaterally abandoned the fixed exchange system and declared that the US would no longer redeem dollars with gold. Since that time, the IMF’s primary function has been lending money to developing nations and former Eastern-bloc countries that have difficulty meeting their international payment obligations. The IMF’s loan authority is supposed to help keep countries who are in trouble from resorting to trade and investment restrictions.

Votes

At first glance, the activity of the IMF seems benign: lending money to countries in trouble. Certainly, countries hastened to join; 182 countries are now members. However, the real purpose of the IMF is not to help individual countries, but rather to keep trade and investment flowing. Furthermore, the IMF is not democratic in any sense of the word. Voting power is based on the contributions made by each member country. Those contributions, in turn, are based on the size of the country’s economy. The US, with the world’s largest economy, has always held the most votes (currently over 18 percent), followed by the other Western industrialized countries and Japan. This means that a handful of countries really control the IMF.

In practice, the influence of the US and like-minded countries over the IMF has meant that its activities have been geared towards the interests of Northern-based transnational corporations. In exchange for assistance, the IMF requires developing countries to adopt “structural adjustment policies” (SAPs) that usually include cutting government spending; keeping wages low; privatization and deregulation; eliminating trade barriers and restrictions on foreign investors; devaluing the currency; and raising interest rates. These measures are supposed to lay the basis for sustainable growth. In fact, they simply encourage production for export instead of internal development and produce favorable conditions for foreign investors and lenders

Debt Crisis
During the 1950s and 60s, when developing countries were experiencing extraordinary growth, most nations were not interested in subjecting themselves to the restrictions of SAPs; but the situation began to change with the oil crisis of the 1970s. As major importers of oil, most developing countries suddenly had difficulty paying their bills. At first, they got by with commercial loans from European and American banks, which were flooded with money deposited by the newly wealthy oil-exporting countries.

For a time these loans proved to be extremely cheap since escalating inflation throughout the 1970s sometimes made the interest rates charged on the loans lower than the inflation rate. In effect, the debtors were making money on the deal. But by 1979, stagflation in the US — the combination of inflation and increasing unemployment — caused Paul Volcker, the new chairman of the Federal Reserve Board, to put the brakes on the US economy by raising interest rates sharply. By 1981 the US and the rest of the world were in a major recession. Suddenly, most of the developing world found itself with massive debts at interest rates that, in the absence of inflation, were extremely high. At the same time, the worldwide recession sent the prices of basic commodities, the major exports of many developing countries, to bargain basement levels. With their huge debts and decreased incomes, developing countries were no longer attractive targets for commercial lenders. Unable to get further credit, and unable to make the interest payments on their outstanding loans, even large economies such as Brazil and Mexico were threatening to default on their debts. Enter the IMF.

In exchange for the adoption by debtor countries of SAPs, the IMF promised direct short-term loans and also arranged new lines of credit from commercial sources. Faced with the alternative of defaults that would effectively cut off essential imports, many countries entered into SAP agreements. The immediate results were usually widespread unemployment and falling living standards. Forced cut-offs of government food, transport and housing brought widespread unrest. Riots broke out in several African and Latin American countries. Countries often ignored parts of their agreements in the face of public uproar.

But the IMF would have many other opportunities to put on the pressure, because SAPs did not work as advertised. Even countries that seemed to be making progress kept falling back into trouble and needing further aid. Mexico, a prime example, has needed large-scale financial assistance four times since 1976, each aid package larger than the last. Each time the IMF’s prescription has been more of the same; each time poverty has intensified in Mexico. In fact, although the Zapatista uprising in 1994 has usually been associated with NAFTA, the devastating effects of long-term “structural adjustment” were an important source of the unrest.

World Bank

Another international institution shares the responsibility for the results of these policies: the International Bank for Reconstruction and Development, or World Bank. The World Bank was also conceived in 1944 as part of the Bretton Woods system, and at first focused on aiding in the reconstruction of war-torn Europe — for which it proved to be totally inadequate. Like the IMF, the World Bank turned its attention primarily to the developing countries, where it was supposed to give longer-term assistance that would help countries reach the point where they would be capable of independent economic development.

From the 1960s on, the World Bank was criticized for perpetuating dependency in the developing world by preferring projects geared towards export industries, a policy that only increased the reliance of the developing world on trade relations with the industrialized countries of the North. It was also criticized for funding environmentally destructive projects such as huge hydroelectric dams, criticisms that continue today.

Under the leadership of Robert McNamara, president from 1968 to 1981, the Bank shifted policy towards human development and the provision of basic human needs. This policy proved difficult to sustain, however, since the loans given by the Bank, as well as those from the IMF and international commercial lenders, eventually came due, and programs providing education, health care, etc., did not earn the foreign currency necessary to pay back these loans. By the time of the Eighties debt crisis, with McNamara out as head of the World Bank, and Reagan-Thatcherism at its height, the World Bank joined with the IMF in enforcing structural adjustment programs as conditions for aid. The Bank also began to give shorter-term aid which, like much of the aid from the IMF, went for interest payments to international commercial banks. And, finally, the Bank again focused on projects geared towards exports, especially exploitation of natural resources and the use of low-wage workers.

Moral Hazard

For a decade, the structural adjustment policies of the IMF and the World Bank seemed to serve the purposes of Northern elites. According to Jerome Levinson, a former official of the Inter-American Development Bank, “It has been calculated between 1984 and 1990 ‘developing’ countries operating under SAPs transferred $178 billion to Western commercial banks….” Low wages were welcomed by transnationals, which not only benefited directly by shifting operations to these countries, but also used the situation to put pressure on the working classes of their own countries by the threat of plant relocation. At the same time, privatization, the removal of trade barriers, and the elimination of investment restrictions opened up an array of commercial opportunities for transnationals.

Nevertheless, since the Mexican recovery package of the mid-1990s the IMF has come under attack from the right. In April 1998, Edwin Feulner, president of the conservative Heritage Foundation, testified unsuccessfully before the US Congress against an increase in the US’s IMF quota. The right argues that the IMF’s ever longer-term and ever larger loans distort the market by creating a “moral hazard” — that is, an incentive for an economic actor to engage in “imprudent” behavior. The right contends that IMF low-interest loans to countries in danger of default encourage private lenders to make riskier loans than they would otherwise consider. Countries, on the other hand, may take out loans more readily, relying on IMF aid if they have repayment problems.

Conservatives like Feulner certainly don’t disagree with many IMF prescriptions such as low wages, privatization and encouragement of foreign investment; and, if the effects of IMF policies were uniformly good for the capitalist system, it is unlikely that they would be concerned about moral hazard. However, the obvious failure of IMF policies has begun to threaten the stability of the world economy. Feulner summed up the results of IMF loans:

Of the 89 less-developed countries that received IMF loans between 1965 and 1995, 48 are no better off economically today than they were before receiving IMF loans. Of these 48 countries, 32 are poorer…; and of these 32 countries, 14 have economies that are at least 15 percent smaller than when they received their first IMF loans.

For those Northern firms engaged in exporting to the developing world, this is a dangerous situation. As the economies of these countries contract, the benefits of IMF loans go more and more only to the banking and financial sectors, since most of the money goes to make loan payments rather than to pay for exports or make other investments. As Feulner put it, “IMF bailouts aid international investors, well-heeled domestic businessmen, and others with connections to the ruling party.”

As bad as the results of IMF policies are in terms of human poverty and misery, the results can be even more deadly. There is a great deal of evidence that the social upheavals caused by these policies are contributing to, if not setting off, ethnic and racial conflicts. Several analysts, such as economist Criton Zoakos, Canadian author Michel Chussodovsky, and Susan Woodward, have traced the conflicts in the former Yugoslavia to the structural changes imposed by Western creditors, led by the IMF. Under this restructuring, which forced the closing of hundreds of public enterprises, currency devaluations and wage freezes, the standard of living in Yugoslavia fell by 40 percent between 1982 and 1989, while Yugoslavia’s external debt stayed almost the same. In the first six months of 1990, real wages dropped by 41 percent. The ethnic conflicts that developed have to be seen against the backdrop of hardships that crippled the Yugoslavian economy. Warfare traceable to the IMF probably goes beyond Yugoslavia: almost all of the countries of sub-Saharan Africa, many of which are currently involved in warfare, have been subjected to the ministrations of the IMF.

Solutions

What can be done about the IMF? A commission appointed by the US Congress has recently called for major reforms in IMF policies, including large-scale debt forgiveness. But it is questionable whether an institution structured as undemocratically as the IMF can be reformed so that it serves the interests of developing countries instead of the interests of the Northern governments and the transnational corporations that have so much influence over them. Assistance to developing countries needs to be funneled through democratically constituted international organizations, or at least through responsive international non-governmental organizations free from corporate interference. Aid also needs to be in the form of grants and not in the form of loans that, no matter how low the interest rates, dig countries deeper into debt and force them to focus on export industries in order to earn the foreign currency needed for repayment. Finally, prior loans must be immediately forgiven, as urged by the Jubilee 2000 movement, so that developing countries can be relieved of the huge burden of debt service they now bear. Such a transfer of resources from North to South is fully warranted in view of the history of transfers of natural and financial resources in the other direction. Only then could these countries begin to focus on the needs of their citizens and build healthy economic actors that could become true trade partners instead of subjects of exploitation.