November 2000

I.M.F. AND WORLD BANK COME UNDER SCATHING ATTACK

The International Monetary Fund and the World Bank have been criticised by non-governmental organisations and thousands of street protesters around the world. But now the attacks are coming from within the establishment itself: that their policies have made the conditions in developing countries worse. Will the two financial institutions ever learn?

By Martin Khor

New studies showing how the International Monetary Fund and the World Bank have been acting against the interests of developing countries have emerged in recent weeks.

The most remarkable aspect of these studies is that they have come from within the establishment in Washington itself.

One of the studies has been done for a usually pro-IMF think-tank and is written by a former veteran IMF staff member. Another is done by an economist working in the World Bank itself.

These studies, and their widespread publicity in the major mainstream media, are further denting the already battered image of the two financial institutions and eroding their legitimacy, even as they continue to dish out advice to developing countries, which have to follow the policies in order to continue getting loans to avert debt default.

On 21 October,  the  New York Times  carried  an article reporting on a  new study using the IMF’s own unpublished data that shows the heavy hand of the IMF’s domination of Third World economies.

It started by commenting that the Indonesian bailout, and several others like it around the world during the financial crisis of the late 1990s, was often criticised as the IMF’s equivalent of ‘imperial overstretch’.

Said the New York Times: ‘Under heavy pressure from wealthy nations that control its policies, the Fund demanded a king’s ransom from Indonesia as the price for its $40 billion assistance package. Indonesia was told to raise taxes on state-owned companies; cancel 12 road, bridge and port projects; remove protections on dairy farmers; and eliminate price controls on cement - part of a long list that at one point included 140 items, the study shows.’

The study was done by Morris Goldstein, who worked for the IMF for 25 years and is now with the Institute for International Economics.

‘I think it’s clear that both the scope and the depth of the Fund’s conditions were excessive,’ said Goldstein, who has often defended the IMF as an important force for global financial stability.

But according to him, the recent push for radical overhauls of nations that borrow money has undermined the Fund’s reputation and strained its competence.

‘They clearly strayed outside their area of expertise. If a nation is so plagued with problems that it needs to make 140 changes before it can borrow, then maybe the Fund should not lend,’ he said.

The New York Times says that the IMF became the primary vehicle for rich nations to export capitalism to developing countries, including heavyweights like Russia and Brazil, as well as the former Communist states of Eastern Europe and poverty-stricken nations in Africa.

‘As its mission has expanded, its track record has not always kept pace. Some nations that received IMF aid during the financial crisis have recovered quickly. But Russia and Indonesia are examples of high-profile lending efforts sodden with detailed instructions that have not, to date, led to sustained economic growth.’

Lending programmes often intrude on areas well outside the IMF’s traditional mandate. Thailand was told to remove a tax on foreigners who buy condominiums. South Korea was given a  blueprint for tax reform.  The list of  demands on Russia  at one point topped even Indonesia’s, with the Fund overseeing 200 changes in the way the Russian government spent money, collected taxes, managed banks and regulated the oil industry.

‘The fear is that the IMF has been acting a little like a heart surgeon who, in the middle of an operation, decides to do some work on the lungs and kidneys, too,’ said the New York Times. ‘The Fund has used financial emergencies, when borrowers needed help urgently, to extract the sort of concessions that nations are often not willing to make in healthy times.

‘If the operations worked perfectly, few would complain. But they often do not work perfectly, Mr Morris asserted, again citing the Fund’s own data. Compliance with the Fund’s lending conditions in Indonesia was a negligible 20%, he estimated. The IMF has had little success raising growth rates for its African clients.’

Citing the study, the New York Times says the pressure to use the Fund as a lever to bring about changes in developing nations comes primarily from the Group of Seven wealthy nations, the United States foremost among them.

The US Treasury Department, which must satisfy Congressional concerns that taxpayers’ money going to the IMF is not squandered, insists that the Fund attach many conditions to loans. It recently backed another one: making the IMF a global police officer to fight money laundering.

Still, Mr Morris’s study, which was presented to a high-level meeting of government officials and private economists, ‘may reflect a new consensus that the fund should do fewer things, and do them better’.

‘Exactly which things - Is trade reform essential? Must a nation fully open its capital markets to foreign investors? - is still up for grabs.’

Another critical study, reported on by Bloomberg news agency on 7 November from Washington, is by World Bank economist William Easterly, who says the IMF and World Bank-led reforms have left the poor in developing countries further behind.

‘The poor in developing countries are often better off when their governments ignore the policy advice of the International Monetary Fund and World Bank, according to a study by a World Bank economist,’ was how the Bloomberg report dramatically began.

The Bloomberg article continues: ‘That conclusion by Easterly, who in the past has  co-written  papers  with  IMF  Deputy  Managing  Director  Stanley  Fischer  and  US Treasury Secretary Lawrence Summers, calls into question one of the main objectives of the two global lenders - fighting poverty.’

China, India and other countries that don’t follow IMF and World Bank economic programmes have seen more of their people lifted out of poverty in times of economic growth than have nations that take the advice of the Washington-based lenders, according to the research, to be presented at an IMF conference.

‘A lot of the countries that have gotten a lot of lending from the IMF and World Bank are worse off,’ Easterly said in an interview, citing Zambia and the Philippines. ‘I don’t think the record is real encouraging.’

According to the Bloomberg article, advocates for the poor have long complained that IMF and World Bank advice to countries to cut government payrolls, lower trade barriers and raise interest rates benefits rich residents of those countries and foreign investors, while hurting the poor.

That criticism turned increasingly harsh, and even violent, in the last year, with the IMF and World Bank meetings in Washington in April and Prague in September disrupted by protesters.

That has prompted the lenders to repeatedly underline their concern about poverty, with Bank President James Wolfensohn and IMF chief Horst Koehler calling on rich nations to open their markets and forgive developing-country debt.

The Bank has also redoubled its efforts to research the effect of its lending on the poor. Easterly’s work is part of that effort.

‘This is not the most convenient finding from the point of view of the World Bank’s image,’ Easterly said.

He said the poor don’t have the skills to benefit from the new businesses, the cheaper imports and the high-technology jobs that often come with IMF-backed economic overhauls.

‘The World Bank and IMF affect the modern, formal economy, but the poor are not in the modern, formal sector. The poor live on the margins.’

Comments the Bloomberg article: ‘IMF and World Bank policy-makers say their reforms often generate necessary short-term pain for long-term gain.

‘Easterly dismissed the charge that he’s focusing on the short-term pain in recipient countries that are merely headed for long-term economic gains. He cited countries such as the Philippines and Tanzania that borrow for decades.’

These two recent studies will add fuel to the criticisms that the IMF and World Bank medicine to indebted developing countries often make the patients more sick. And that countries that do not follow the IMF-Bank advice can do better to recover.

Hopefully all the criticisms (now coming fast even from within the Washington establishments themselves) and the protests will lead to basic policy changes within the two financial institutions. - Third World Network Features

About the writer: Martin Khor is Director of the Third World Network.

2123/2000