The annual meeting of the International Monetary Fund is an extraordinary event, half cult gathering, half beauty contest. The beauty contest takes place in the darkened seminar rooms of the palatial Marriott Hotel in Washington as one Third World official after another steps up to the podium and pitches to the bankers and fund managers who make up the audience. Reforms are on track, they say. We have the political will: inflation is coming down, banks are being overhauled.
This is the quest for that elusive beast, ‘market confidence’. By publicly swearing fealty to the market, the officials hope to reassure investors and prevent the disastrous capital flight which has brought down economies in Asia, Latin America and Eastern Europe over the last three years.
The cult is built on the endless repetition of free-market mantras (liberalize, privatize, encourage foreign trade and transnational corporations) combined with attacks on the cult’s enemies – protectionism, government interference, capital controls. One investment banker in a seminar on Korea adds to the quasi-religious feel by demanding that the government ‘respects the sanctity of contracts’. The uniform dark suits and neat haircuts ensure the delegates even look like cult members. After a week of mutual brainwashing, thousands of them emerge blinking into the sticky Washington air, fortified and resolute, and scatter across their globe to continue leading their peoples on the long march towards the market.
In the midst of this talkshop it’s easy to forget that the IMF was born with a vision: the creation of a new system to guarantee global economic stability out of the wreckage of depression and World War Two. As initially conceived it was supposed to ‘facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income’. It would oversee a system of fixed exchange rates which would stop countries devaluing to get a competitive edge over their neighbours – a feature of the chaos of the 1930s. It would promote currency convertibility in order to encourage world trade, and it would act as a ‘lender of last resort’ putting together emergency financing for economies which ran into short-term cash-flow problems.
For 25 years it worked like a dream and the global economy boomed. But then the system collapsed and the ‘age of insecurity’ began, characterized by wildly fluctuating exchange rates, growing volumes of uncontrolled capital flows and endemic financial instability.
Deprived of its role in policing exchange rates, the Fund shifted its focus to the Third World, increasing its emphasis on loans designed to expand the role of market forces in the economies of developing nations.
Today the Fund remains a true believer in the panacea of market forces. It has forced the poorest countries to take their medicine in return for debt relief. In middle-income countries like Korea and Brazil, which have crashed in recent years as the money markets have targeted and destroyed their currencies, the IMF has led the international ‘rescue packages’. In return, it has insisted on conditions which include austerity, privatization and structural reforms which try and make over Third World economies along the lines of Anglo-Saxon capitalism. In Korea in 1998, sacked workers demonstrated with placards saying ‘IMFired’ and restaurants advertised cut-price ‘IMF meals’.
The Asia crash of 1997-98 affected the Fund in contradictory ways. Its experts completely failed to predict the crash and it now admits making serious mistakes, forcing austerity on to governments when a dose of public spending would have been more appropriate. Such public humiliation has dented the Fund’s previously limitless self-belief. Yet the reforms to the ‘global financial architecture’ which followed the Asia crash have made the agency’s influence more pervasive than ever.
So, given its spectacular failures, should the IMF be abolished? My answer is no. Both because it is a political impossibility and because, in a world of global capital markets, some kind of international rules-based institution is required to place checks on the ambitions of the most powerful nations. If the IMF did not exist, it would have to be invented.
So could the Fund be turned into a pro-poor, instead of pro-rich, organization? Could it stop obsessing about inflation and return to its original mandate of working for full employment and stability? Or go even further and concentrate on ending poverty and reducing inequality?
At its annual meeting last September, the Fund committed itself to poverty reduction for the first time, but critics will need to see what this means in practice. For the organization to become a truly ‘pro-poor’ institution would require massive changes on a number of broad fronts.
The IMF does not exist in a vacuum. Governments fund it and in return receive votes based on a ‘one dollar, one vote’ principle – in contrast to the UN’s ‘one country, one vote’ system. As a result, industrialized countries account for over 60 per cent of the voting strength at the IMF and World Bank, compared with just 17 per cent in many UN bodies.
The chief beneficiary is the US which is the only country with a large enough slice of the votes to enjoy an effective veto of major IMF decisions. That, and the Fund’s location in Washington, has helped give the US disproportionate power in using the IMF to pursue its own international agenda.
For example, the IMF rescue package to Korea in December 1997 included a demand that the country open its market to imports of car parts: hardly crucial to stemming the flow of capital, but a persistent US demand in bilateral trade negotiations for much of the 1990s. One negotiator reportedly told economist Robert Wade that the US had done more to achieve this goal in six months of crisis bailout talks than in ten years of bilateral trade negotiations.
So, a first step in reforming the IMF should be to ensure that its power structure gives a fairer voice to developing countries – especially those most affected by the Fund’s operations.
The Fund must also be made more accountable to its members. In the past it has been arrogant and closed to criticism or suggestion. The Fund’s negotiators typically arrive in a country with their blueprint for economic reform in their briefcases already drafted, awaiting signature. Only the details are negotiable. It has made some welcome progress in publishing more of its documentation in recent years, but it needs to go further.
In its operations overseas, the Fund should consult with social and environmental ministries, parliament and civil society organizations in addition to the ministries of finance. To improve its accountability, it should also be subject to regular external evaluations of its programmes and policies.
The Fund must end its love affair with ‘conditionality’ – Fund-speak for the political and economic conditions attached to its loans. A largely unaccountable body like the IMF should not be telling elected governments how to do their job.
Fund staff have to move beyond their current comfortable circuit of Finance Ministry officials to talk (and listen) to trade unions, peasant organizations, women’s groups and non-governmental organizations – the people who will be on the receiving end of the social impact of any agreement. Its programmes must reflect more than the concerns of a handful of IMF macro economists. It should have to convince governments that it is right, rather than coerce them into adopting policies with which they disagree.
The Fund must make improving the lives of ordinary people central to its policies. Its staff often behave as if people were at the service of markets, not the other way round. That still leaves the IMF with an important role in promoting economic stability and low inflation. Boom-bust cycles and escalating prices hurt the poor more than anyone.
But there is no point in achieving low inflation by sacking thousands of workers and cutting health and education services. When an agreement was signed with Nicaragua in 1994, the IMF did just that. It cut thousands of public-sector jobs, froze social spending despite high inflation, introduced fees for health and education and jacked up sales taxes which hit poor people the hardest.
There also needs to be a complete change in the organizational culture of the Fund. It must become open to the public, not closed. Pluralist and open-minded, not dogmatic. It must listen, not lecture; and it must learn from its mistakes.
How to achieve that change of heart and mind is a real challenge. Maybe staff should be sent for six months to live with the poor in countries affected by their programmes. Or maybe their pay should be linked to their success in reducing poverty.
A shift in power to the Third World, away from Washington where all decisions are now taken, would help sensitize Fund staff to local realities and reduce the degree of dogma. Till now foreign postings have been seen almost as a punishment. As one European IMF director recently confessed: ‘In the old days, when someone was no good, we said “oh, just send them to Honduras”.’
The IMF enters the new millennium at a crossroads. A dogmatic, deregulating Fund will merely exacerbate the chronic instability and inequality of the global market. A Fund with a renewed moral purpose and democratic mandate could bring those same forces of chaos under control, to the benefit of the majority of the world’s citizens.
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