The IMF’s internal and global incoherence

Korea has complained that financial-sector policies it pursued at the IMF’s behest are now being challenged at the WTO, bringing to light the incoherence between the international systems of finance and trade.

by Chakravarthi Raghavan

GENEVA: The increasing incoherence in the international systems - of money and finance and trade and the United Nations system and its agencies - as a result of the policies and activities of the Washington-based International Monetary Fund (IMF) and World Bank has again been illustrated in two recent cases.

They relate to Korea (a high-income OECD member) and Uganda and Mozambique (two of the least developed nations in Africa), and the policies they have had to undertake as part of IMF loan and rescue packages.

In the case of Korea, when the IMF provided an “emergency rescue package” during the 1997 Asian financial crisis, the government was asked to restructure its financial sector (in particular consolidate the banking institutions and enhance their soundness) as part of the IMF conditionalities.

In the case of Uganda, as part of the Poverty Reduction Strategy Paper (PRSP) and other conditionality programmes of the IMF and the World Bank it has to undertake to qualify for debt relief, ceilings on government expenditures (including health) are required.

According to Gorik Ooms, a Mozambique-based health activist in Southern Africa (see following article), while the President of Uganda Yoweri Museveni on 11 December was challenging the developed nations to make available antiretroviral drugs to fight AIDS, the conditionalities imposed by the IMF and World Bank’s Poverty Reduction Strategy Programmes and the ceilings on government expenditures made it impossible for Uganda’s Health Ministry to accept a $52 million grant from the Global Fund to fight AIDS, TB and Malaria. The Global Fund grants are conditional as “additional” expenditure in the health sector, and under the IMF conditionality, to the extent of the grant, the Health Ministry of Uganda would have to reduce other parts of its contribution/expenditure on the health sector.

Mozambique, according to Ooms, is facing a similar situation.

In the case of Korea, a statement its representative made at the World Trade Organization’s Working Group on Trade, Debt and Finance (WGTDF) on 16 December, and the IMF’s response at that meeting, show there is incoherence not only between the rules and obligations of the WTO multilateral trading system on the one hand and the IMF-based international monetary system on the other, but also incoherence within the IMF itself.

The material relating to Uganda are on public record: Museveni’s challenge in the New Vision of 11 December, and the problem of the Health Ministry in the Lancet of 7 December. Ooms’ article has been on the Internet and relayed over a listserver (stop-imf) run by US-based civil society groups closely monitoring the activities of the Bretton Woods institutions.

The Korea case, as others at the WTO, is behind closed doors, but a copy of the statement of Korea and of the IMF response was obtained by the South-North Development Monitor (SUNS) from participants.

Inconsistent

At the WGTDF meeting, Korea complained of the incoherence between the IMF and the WTO and said that while it was pursuing policies in close cooperation with the IMF and the international financial institutions, these policies had become the basis for legal challenge at the WTO, where a dispute was being raised (about Korea illegally subsidizing its banks and banking services).

No details were available immediately about who was raising the dispute and whether it was in relation to the GATT 1994 and other agreements of the WTO in the goods sector or in relation to the GATS (the General Agreement on Trade in Services), or, as disputes in the WTO go under its Dispute Settlement Understanding (DSU), a catch-all residuary complaint to enable bundling of obligations.

Trade diplomats from other delegations said that in the WTO Committee on Subsidies (under the GATT 1994), Korea has been accused by other industrialized countries of providing illegal subsidies to its major corporations in their operations abroad with reference in that connection to the loans provided by its banks.

In its statement at the WGTDF, Korea raised the issue of greater coherence between the WTO and IMF/World Bank in global economic policymaking as an important function of the WTO (in terms of the Marrakesh Agreement Establishing the WTO), and said: “If a policy pursued by a WTO member in close cooperation with the IMF and other international financial organizations were to serve as the basis for legal challenge in the WTO, the policy objectives of greater coherence between the two international institutions would be seriously undermined.”

“During the Asian financial crisis which started in late 1997,” explained Korea at the WGTDF, “the IMF and the World Bank provided Korea with emergency bailout loans, and the Korean government pursued policies, as part of IMF conditionality, that were designed to overcome its economic problems. The Korean government, in particular, restructured its financial sector in line with the recommendations of the IMF. The important elements of the measures were discussed between the government of Korea and the IMF, and were reflected in the Letters of Intent by the Korean government to the IMF. Actually the disbursements of IMF loans were contingent upon these Letters of Intent. The goal was first and foremost to consolidate the banking institutions and to enhance their soundness.”

As other countries, in the initial stages of financial restructuring, “public funds which eventually totalled 157 trillion won ($125 billion) were injected by the Korean government into the financial sector to clean up non-performing loans and replenish capital.” This resulted in a “temporary increase” in government equity in the financial institutions.

“However,” continued the Korean representative, “as was indicated in the Letters of Intent to the IMF dated 10 March 1999 concerning sale of government’s shares in commercial banks, such increase was temporary in nature as plans were prepared for re-privatization of the commercial banks. Furthermore, the Korean Government has faithfully abided by the principle that even under government ownership, the financial institutions shall operate on a fully commercial basis without government intervention in the day-to-day management in this process, as indicated in its Letter of Intent to the IMF dated 24 November 1999.

“As a result of these efforts, the financial sector evolved into an industry driven by market principles, returning to profitability starting from early 2001 period and Korea succeeded in overcoming financial crisis, repaying the full amounts of emergency loan of $19.5 billion from the IMF in August 2001 - two years and eight months ahead of schedule.

“As of July 2002, the average BIS capital adequacy ratio for the banks has risen to 11.4% from 6.7% in 1998 - way above the IMF benchmark of 8 percent. Up until now, the Korean government has recovered about 1/3 of the public fund and expect to achieve the redemption ratio over 50% in the near future.”

“However,” complained Korea, “the implementation of financial reforms by the Korean Government as recommended by the IMF has become the basis for a legal challenge as inconsistent with Korea’s WTO obligations by some members. They claimed that the measures taken by Korea during the financial crisis constitute actionable subsidies under the Subsidies and Countervailing Measures Agreement.

“This claim stemmed from the lack of understanding on the joint efforts made by the IMF and the Korean government, aimed at financial restructuring. In accordance with the understanding it reached with the IMF, the Korean government set up a mechanism through which debtors and creditors could make use of the out-of-court workout debt restructuring programme whereby they could agree on the conditions for the rescue of the ailing companies. These restructuring measures were taken strictly on a fully commercial basis.”

The corporate restructuring packages were not specific to a company nor a specific industrial sector. “Under the workout programme, debt forgiveness, equity infusion and interest relief were provided on commercial grounds by financial institutions, which acted in accordance with the market principles.”

Korea was concerned that allowing measures taken under IMF guidance to be challenged in the WTO would have the “perverse effect” of penalizing members who embark on necessary financial reforms as recommended by the international financial institutions, since “this would go against the goal of achieving greater policy coherence between the WTO and the IMF.”

IMF intervention

It is difficult to judge Korea’s complaint until the dispute, if any, and the claims unfold.

However, the IMF representative, according to participants, in some preliminary remarks insisted that the IMF policy advice and conditionalities were on macroeconomic policy, and not individual or sectoral policies.

It is not clear whether any developing countries intervened or spoke. Few developing countries are keen to rush to support Korea these days, as that country has become an egregious example of what an eminent Korean economist has called “kicking away the ladder”, i.e., preventing other countries from pursuing policies that it had itself adopted earlier to climb  the  ladder  of  industrialization. (The latest instance of Korea’s stance  was  in the discussions  in the same week over the TRIPS-and-public-health debate, where Korea joined the WTO head in pressurizing developing countries to accommodate the US position.)

The stance or comment of the IMF, if correctly reported by participants on a non-attributive basis (the minutes and records of WTO meetings are not often made public, and even in private for members, they come out only after some time and the participants always can vet or revise what was attributed to them), would however be running in the face of facts.

At least in relation to the financial sector, specifically the negotiations in the WTO on a financial services agreement, when the talks were concluded - when the Asian crisis was in full swing and Korea, Thailand and Indonesia among others were having IMF accords or negotiating them - the then Director-General of the WTO is on record as thanking the IMF for helping the conclusion of the pact.

In the case of Indonesia, the subsequent publication of its letters of intent showed how far the IMF went in laying down sectoral conditions: one of the conditions related to Indonesia’s accepting a WTO panel ruling in the dispute against it over the automobile sector, and this was cited by Indonesia as among the reasons why it did not even go in appeal against what was a palpably wrong panel decision.

In all the countries affected, the governments announced in the media (in response to public complaints about foreigners taking over banks and other institutions for a song) that they were being forced to adopt the policies as part of IMF loan conditionalities.

Reports to the UN human rights bodies from the High Commissioner on Human Rights as well as special rapporteurs have similarly catalogued and complained about IMF and World Bank micromanagement in sub-Saharan Africa under the PRSPs. (SUNS5260)   

From Third World Economics No. 297 (16-31 January 2003)