Tweedledum or Tweedledee choice

by Chakravarthi Raghavan

Geneva, 27 Apr 2001 - As finance ministers and senior officials, and their various groupings, as well as the powerful lobbies of banking and financial private sector interests, gather in Washington for the Spring meetings of the IMF and the World Bank, and try to come to grips with the fragility and global incoherence of the monetary/financial and trading systems, the US-Europe-IMF arguments about ‘bail-out’ packages, present the developing world with a Tweedledum or Tweedledee choice.

The epithet was originally used in a 1728 satire by John Byram about rival composers Handel and Bononcini. The epithets became more popular, as two characters in Lewis Carroll’s, ‘Through the Looking Glass.’

The arguments between the IMF (and World Bank) managements for large ‘bail-out’ funds (in tranches) to be used to force ‘reform programs’ in the countries concerned, and in the latest IMF versions by ‘private sector’ participation, are now being countered by the US Treasury Secretary Paul O’Neill who is advocating reforms first (legislative and administrative) in the crisis countries, and ‘bail-out’ funds later.

However, it is not very clear how the US Treasury Secretary thinks a debtor nation would be able to first put through the legislative and administrative reforms, even if there is some consensus on the reforms and their ability to pull the country out of the crisis (and the IMF and World Bank packages lack this, and time and againn have been proved to be faulty), and then get the foreign funds needed.

As it is even now, any reform package involves considerable domestic hardships and suffering for the middle-income and poorer classes, and undertaking such reforms without initial finance, is a Herculean task that even the major industrialized countries cannot undertake and have not so far - since the advent of neo-liberal economics from the early 1980s.

The arguments between the IMF and the Treasury, involving the issues of the Fund getting more resources and (expanding its empire) and the rising criticism in the US Congress, however does not seem to address these real problem and crisis of the debtor countries and the consequences for the international system.

The Tweedledum and Tweedledee arguments in Lewis Carrols tale ended up in a particular farcical way - but that was a story book end. The bail-out first or reform first arguments (and the more likely mixture of both) may end up with some tragic consequences for everyone.

It is to meet these types of problems, and ensure that the private creditors are subject to ‘market disciplines’ and the ‘moral hazards’ of borrowers and lenders are prevented, that the UN Conference on Trade and Development has been advocating the idea of an orderly workout, internationally authorized debt standstill by the debtor country, and availability of international funds (not for repaying the creditors wanting to take out the capital) but to enable maintenance of imports and economic activity, and enable debtor nations and private creditors to negotiate on a level playing field for restructuring the debts.

As Mr.Yilmaz Akyuz, the chief author of UNCTAD’s annual Trade and Development Report puts it, “No one who is opposed to an IMF ‘bail-out’ package, can put a ban on it without accepting and enabling a temporary standstill being called by the debtor nations. Otherwise, there will be messy defaults of international debts, and this will be in no one’s interest.”

The arguments about ‘bail-out’ first or ‘reform first,’ are taking place, some in public, and much more in ‘private talks’ between top IMF staff and their largest single share-holder, the US Treasury, and within the G-3, the G-7 and the various combines - with the developing world largely on the sidelines, partly because there is no democratic and accountable governance in the Bretton Woods systems and institutions, and partly because the developing nations have not in fact attempted to piece together a common position.

The arguments have to be viewed in the light of the claims and actual experiences of the Mexican crisis (1994- 95), the Asian crisis (1997-98), and then the Russian (August 1998) and Brazilian (January 1999) crises, and the management and mismanagement of these (by the IMF/US treasury combine), and the latest crises in Turkey, Argentina - and the ever-lurking dangers of crisis arising in the major centres themselves.

The current arguments turn around countries that were encouraged or forced to liberalize their financial sectors, nationally and on their international accounts, borrow and/or invite foreign funds - short-term, medium-to-long term and socalled FDI (for acquisitions or socalled brick-and-mortar investments) are all fungible because of use of derivatives - and end up with some serious payments crisis, not on current account but capital accounts (opened for convertibility under the motivated advices of the IMF, World Bank, WTO, and the US and European financial service industries.

Invariably in all cases, the outbreak of the crisis is blamed on mismanagement by the countries, and their ‘crony’ capitalism, and the need for the debtor countries to ‘bite the bullet’, undertake painful structural reforms to their economy, privatize and deregulate and liberalise more. And conditional on carrying out all these - under programs written by the IMF and World Bank staffs, (and more recently packaged into the socalled poverty reduction programs and strategies to be ‘owned’ by the countries), the debtor nations are ‘lent’ the conditionality funds and carry out reforms - that don’t even restore growth.

Though all the financing packages - involving IMF funds, and funds from the major creditor nations - are frequently described as ‘bail-out’ packages, they are not in fact packages to ‘bail-out’ the debtor countries or their poor (despite all the talk of poverty alleviation and reduction goals), but to ‘bail-out’ the private sector creditors who lent imprudently, confident that when they run into trouble, their government, central banks and the IMF will come to the rescue and enable them to ‘squeeze’ and collect their funds.

The ‘bail-out’ is of the big banks, investment funds and others, in the major centres - all of them closely linked to their governments and funding political parties and leaders for their elections - and safeguarding their profits and capital, and the stock-options of their CEOs and market/fund managers.

In the case of Turkey, now the focus of the arguments about ‘rescue’, that country has a current account surplus this year, and has enough reserves to meet imports and even interest payments.

What it does not have is money on capital account to pay for the debt repayments. So, any IMF ‘package’ of lending involves borrowing money from the IMF to pay the private creditors.

Often in such cases, the money does not even come into and stay in the country treasury overnight. They are merely book-adjustments and transfers taking place in Wall Street or their equivalent ‘markets’ overseas.

This is what happened in the case of the Mexican ‘bail-out’ - which subsequently was identified in the critical literature of the bailout of major financial firms well connected to the US administration.

Mexico borrowed money from the IMF and the US to pay to the US private creditors, got its credit restored, and then took money from them to repay the US and IMF. Technically, Mexico came back to the market and got over its crisis - but the poor in that country are still paying the price.

The Mexican package, as brought out in the detailed critiques and literature from activist civil society as well-equipped in macro-economics and ability to read and decipher data as the international systems and their organizations, was a case of crony-capitalism’, of the US’ Treasury acting to rescue the major financial interests linked to it, and the Mexican government assuming responsibility for the debts and squeezing the poor to repay it.

The Asian crisis - in Korea, Thailand, Malaysia and Indonesia too - were the result of the financial liberalisation carried out in these countries, under ‘advice ‘ (in fact pressure) of the IMF and the World Bank. As UNCTAD, in its 1998 Trade and Development Report, pointed out that while financial crisis had been occurring with increasing frequency after the breakdown of the Bretton Woods system, and the crisis in the industrial centres have involved either banking or currency crisis, in developing countries it has been both.

And in developing countries, the crisis have been preceded by financial deregulation and by liberalisation of capital transactions - banking crisis associated with excessive lending on certain categories of assets, and the currency crisis by periods of sharply increased capital flows and by their sudden withdrawals (all the result of herd behaviour of foreign investors, without reference to the fundamental realities of the economy).

With ever increasing frequency of these crisis, and the larger and larger ‘bail-out’ packages needed (to bail out the foreign creditors and facilitating their exit from the developing markets), the IMF came up with talk of involving the private creditors and making them share the burden.

These very nice-sounding words in theory, however have proved to be no more than another conditionality - the conditionality of the debtors being asked to reach some ‘restructuring accord’ with the private creditors, who in fact have the upper hand in such talks, particularly since debtor countries face a major crisis on their capital accounts and creditors could easily threaten actions against their foreign assets.

And in restructuring and renegotiating, the banks and financial institutions, in fact make more money.

This is why the UNCTAD’s TDR 2001 has called for ‘orderly workout mechanisms for international debt’ - combining voluntary mechanisms designed to facilitate debt restructuring with internationally sanctioned (meaning authorized) temporary standstill to be used when needed, and accompanied by provision of international liquidity aimed primarily at helping the debtor countries to maintain imports and economic activity, rather than maintaining open capital accounts and allowing private creditors and investors to escape the crisis without losses.

And UNCTAD, has also underscored the need for an independent panel, rather than the IMF and Bank who are creditors, and thus have a conflict of interest, to adjudicate between the debtor nations and the private creditors on an orderly workout.

As UNCTAD has pointed out, ‘market disciplines’ will only work if creditors bear the consequences of the risks they take. Without a statutory protection of debtors, negotiations with creditors for restructuring loans cannot be expected to result in equitable burden sharing.

And recent examples of such negotiated settlements, UNCTAD has added, have shown that creditors have not borne the consequences of the risks they had taken, but rather have forced developing country government to assume responsibility for the private debt and accept a simple maturity extension at penalty rates. – SUNS4885

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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