You have said that you have been forced to the conclusion that the IMF works in the interests of Western capital. This seems a remarkable view for a former chief economist of the World Bank.
I watched carefully what the IMF had done, the mistakes that it had made in crisis countries in East Asia, Latin America, Africa and the economies in transition. The mistakes were sufficiently frequent that they clearly weren’t just an accident – as an academic you look for patterns.
There were a couple of obvious explanations. One was that they were incompetent, stupid people. But that argument is just not persuasive – they pay among the highest wages, they get good people.
You could say it was bad economic models. But there is an array of economic models out there and they chose to use ones that led to wrong predictions, wrong policies and really negative consequences.
So why did they choose them? One is left with a possible answer that they had different objectives, that their objective in going into a country was not, for example, to keep employment as high as possible or to minimize poverty.
And then of course it all starts to make sense. You ask: ‘Who makes the decision, and on whose behalf do they make those decisions?’ You look at the decision-making structure – at the IMF the United States is the only country with a veto, other countries are represented by central bank governors and finance ministers. They were looking at the world with a particular perspective, a particular ideology that was in accord with their interests. And their interests were to make sure the creditors got paid. That took precedence over what would be good for the country.
Occasionally I almost got them to say that explicitly. For instance, senior people would say: ‘We can’t have bankruptcies or standstills, that would be an abrogation of the sanctity of the debt contract’. And I’d say: ‘Well, what about the social contract?’
Another case would be they might say: ‘if we let the exchange rate fall it might make it very difficult for foreign creditors to get repaid.’ And I would say: ‘if you raise interest rates to try to keep the exchange rate from falling, it will cause enormous problems for domestic debt.’ They focused on the foreign creditors explicitly. And that led them in fact to pursue policies that were in many cases not actually good for the foreign creditors. Some people say: ‘well they didn’t save the foreign creditors’. That’s not the point. Their models were so bad that in trying to focus on the foreign creditors that they didn’t even serve what they were trying to do.
They believed raising interest rates would attract more capital into the country and that this would support the exchange rate. That was wrong because as they raised interest rates and cut back expenditures it led to deep recessions – and people leave countries in deep recession. So their simplistic models didn’t work even for the objective that they were trying to reach.
You’ve gone as far as to talk about the ‘free-market fundamentalism’ of the IMF?
One of the reasons why I was so sensitive to some of these controversies is that I had previously chaired President Clinton’s Council of Economic Advisers. In that administration we had been trying to forge what we called a Third Way, a balance between the role of the market and the role of government.
Free-market economists on the Right in the United States were saying: ‘We want to privatize social security.’ We looked at the numbers and saw that the transaction costs in a public social-security programme are much lower than in a private one. And the private sector doesn’t provide insurance against inflation, it doesn’t protect people against the volatility of the stock market. There are strong arguments for having at least a core public social-security programme. We weren’t against a complementary private one but we thought we needed a mixed system.
I go to the World Bank and find our sister institution the IMF is pushing countries the world over to privatize their social-security systems. Going from a public system to a private one is very difficult and there are enormous budget constraints. The IMF ignored those and that was one of the main problems in Argentina and Bolivia.
So what I saw happening when I started dealing with the IMF was the same battles that I had fought inside the Clinton Administration against the Republicans. And whereas I had thought our views were obviously balanced, or at the very least debatable, developing countries were being told: ‘There is no debate; there is no other way’. And for me that was totally unacceptable, it was like saying I had wasted four years at the White House and obviously I found that objectionable.
It was intellectually dishonest and many of the things that they pushed had no research basis to them at all. For instance, capital-market liberalization was the source of the instability in East Asia. I said before the meeting in Hong Kong where they forced that through: ‘Shouldn’t you have evidence to show that this is good for economic growth? Okay, it’s good for Wall Street but your mandate is not making profits for Wall Street, it should be to increase global stability and promote growth in developing countries. Where is the evidence?’ None.
Weren’t they at all troubled when they heard these arguments coming from the World Bank? What was their comeback?
It was basically: ‘This is what we always do, this is the right thing.’ No sense of self-questioning, no research.
Things are getting better. For instance, the chief economist of the IMF, Rogoff, after labeling all this stuff snake oil, was induced to go back and look at the evidence, and did come out with a report saying that I was right. Well, he didn’t say I was right but he did say capital market liberalization is dangerous, can create instability and doesn’t enhance growth. I mean it’s shocking that this came out six years later but at least they’re looking at some of the evidence. But there was issue after issue where this kind of thing happened. Take the issue of raising interest rates to 40, 50 or even 60 per cent to stabilize the economy, which was a standard part of their prescription in the East Asia crisis.
That’s plainly not going to produce stability.
Developing countries were being told: ‘There is no debate; there is no other way’. It was intellectually dishonest
That’s what I thought, and I tried to have a debate with them. They would say: ‘Everybody always does it.’ And I would say: ‘If everyone always does it then you have a rich data set to see whether it worked.’ And they weren’t interested. Finally, with one of my colleagues, I published a study and found that it worked sometimes but failed on numerous occasions. I’m pretty sure I know when it’s not going to work – when you have high debt, because you’ll tip countries into bankruptcy, which is East Asia. If you don’t have that big a debt then it’s not that big a deal. But the IMF were completely uninterested.
One of the things that got me quite angry about this, or maybe sad is the right word, was that these are supposed to be democratic institutions, or at least public institutions in which the dominant members are democracies. The nature of a democracy is not just that there’s an election every four years but that it is a deliberative democracy where you deliberate, you discuss, you bring things into a wider circle, you don’t simply work behind closed doors. They were very explicit about this: ‘As long as you talk about these issues anywhere in public we won’t have any discussions with you’. It was like they were saying ‘we don’t believe in deliberative democracy’.
You portray a hermetically sealed body, impervious to outside influence or self-questioning. Yet this unaccountable body has a licence to impose policies that do enormous damage. When you remove food subsidies and cut health spending then the impact on the poor is disastrous. People die.
And it’s not only in the short run. The consequences of malnutrition are lifelong, intergenerational even. It will have long-run consequences if, as in Thailand, you cut out money for anti-AIDS programmes – they had been doing a tremendous job getting rid of AIDS and then suddenly it started going back up again. That’s why, in countries like Thailand and Indonesia, the moment they have had the resources they have repaid the loan and said: ‘Get out of here, we don’t want an IMF programme.’
But one of the issues we need to engage with is that the IMF says repeatedly: ‘We get the sick people’. My father used to joke all the time that he didn’t want to go into hospital because people die in hospital. The IMF has a similar argument. It says: ‘Don’t blame us for all the problems because they come to us when they can’t balance their budget, when they have hyper-inflation, when they have a crisis. These are really sick people.’
But their hospital is one where people get sicker. We saw in East Asia, Latin America, Russia and Africa how they made things worse. Unequivocally. If they had fully followed the IMF advice the patient would have been much sicker. In East Asia, the country that did not take IMF advice, Malaysia, had the shortest and shallowest downturn and the least legacy of debt. The country that was best in managing the IMF in some way, Korea, recovered the fastest. The countries that took the medicine – Thailand and Indonesia – had the worst performance.
There has actually been an interesting study which has tried statistically to get at this issue. And it observes that how much money countries get from the IMF correlates to how closely they vote with the US at the UN. So countries that are politically correct get more money, all things being equal. Then the question is, do the people who get more IMF attention, more medicine, actually heal faster? And the answer is no.
Most people in the rich world have no idea that the IMF has such power?
Most people in the North do not spend much time in the South and therefore don’t get to feel and see what people in the South do. It was only when I became chief economist of the World Bank and had to spend a very large fraction of my time in developing countries that I really began to see what was going on. That was a real wake-up call for me. I’d read about it but it didn’t have the emotional impact until I saw at first hand in Ethiopia how bad things were.
The IMF always defines the problem in terms of corrupt government, high inflation and so on – they shift the blame to the country. An outsider finds it very difficult to know how much weight to attach to these various factors. The IMF are the ‘experts’, the outside economists who are trying to say: ‘But for us things would be worse.’ I have the advantage of being an economist and have the time to ask the question: ‘But for the IMF, would it be worse?’ And I came to the conclusion that the IMF made it worse.
In Ethiopia, here was a country that had no inflation, high growth, a government committed to helping the 85 per cent of the population in the rural sector and to cutting back on military expenditure even though it had come into power by the gun – really quite striking. And the IMF cut off their programme for no reason. The budgetary stance of the IMF was completely unreasonable.
So here I had an A-plus student, getting an F from the IMF. At that point you say something is wrong with the grading.
You worked at a high level in the Clinton Administration. Why is there no interest on the part of the more liberal Western governments, those that at least claim to care about developing countries, in reining in the IMF?
Let me reflect back on my experience in the Clinton Administration. The problem was that who represents each government within the IMF is the finance ministry and treasury. Also, the United States is the only country with veto power and it is very close to the creditor countries. It doesn’t even represent the business community, which actually wants economic stability. It represents the financial community. So what happens is that President Clinton doesn’t get informed about what is going on, he has to delegate it to the Treasury, which has every incentive not to let him know. President Clinton’s heart is with the developing countries. Had he been able to get involved on a lot of questions he would not have supported what the IMF and the US Treasury did. But they worked very hard to make sure that he did not get involved. It was fine, you know, let him go visit some schools – but the hard-core issues were basically kept away from him.
Moving on to the World Bank. It’s clearly a much more complex and multifaceted institution than the IMF which has all kinds of different people working there. You came in when there was a new leader in James Wolfensohn who seemed more open to new ideas. You’ve left now. Do you have a sense that whatever window of reform might once have been open is now closed? Are you shut out?
No. The Bank continues to struggle with how to facilitate broad-based, successful development. It knows now that development is a very complex, multi-faceted thing, it’s recognized the importance of good governance, of corruption. It recognizes that many of the things that it did in the past are only part of development. As you say, it’s a large, multifaceted institution. Unlike the IMF, where there’s much more of a hierarchy and much more of a single view, the Bank today is a place where a variety of views are heard and different country directors will often go in different directions. There were periods in the Bank when Anne Kruger, who is now the number two person at the IMF, really tried to shape the Bank into a narrow ideological perspective – free trade is good, free markets are good, and if you disagreed with that you left the Bank, it was so unpleasant. You weren’t pushed out, it’s just that it wasn’t where you wanted to be. What I tried to do as chief economist was recognize the different views and create an atmosphere in which people could openly debate these alternative views. And I think that is why it’s harder to characterize the Bank’s position because it has very many people with different views.
But the Bank still insists that countries follow IMF prescriptions before it will offer loans.
There is what I call a démarche, an agreement, whereby the IMF is in charge of macroeconomic policy and this is often the source of the difficulty. So they defer to the IMF and the part of the Bank working in that area often winds up thinking much like the IMF.
So there are free-market fundamentalists at work in the Bank, too?
That’s right. They tend to be a little more aware of the limitations but for instance, while most people in the Bank supported privatization in Russia, many people were very much against the loans for shares scheme in 1995 which was the most corrupt part of the privatization. Whereas in the Fund it was the faster the better, don’t worry about how it is done. So even though they may be in the same ideological spectrum they were much more cautious, much more questioning at the Bank.
Aren’t they a bit like a ‘good cop-bad cop’ act? The Bank, aware of its image, makes gestures that the IMF needn’t bother with. But as a unit, isn’t their impact on developing countries very similar?
In some countries that is true. But in the case of Ethiopia we tripled lending even while the IMF cut off funding. That was an unusual case, though.
I think the stranglehold that the IMF has on finance is wrong, and it’s not only Bank lending it affects. European lending is also conditional on IMF approval – that’s what gives it so much power.
But other things make the Bank different from the Fund. Half the Bank’s employees live in the developing world. That gives them a feeling for the developing world that’s quite different from people that fly in overnight. Having that many people means that even the people from Washington when they go in have an enormous base of people on whom they can rely – not just one person but a whole team. The Bank’s governance is also different – it’s not just the central banks and the finance ministers, it’s also the aid ministries which always tend to be among the more left agencies in government. What that means is that you tend to have a spectrum of views between the finance ministers and the aid agencies and development people. So you end up with a debate, which you don’t when there are only central bank people and finance ministers. And finally because the Bank is involved in environment, health and education it interacts with the whole local administration, not just the finance minister. It gives you a completely different perspective on society than someone who goes in and only looks at the national GDP data and money supply numbers.
So the cultures of the two institutions are markedly different. A lot of people do see them as reinforcing each other, but I think that doesn’t give full weight to the ways in which they differ and in which the World Bank has tried to moderate, not always successfully, the extremism of the IMF.
I sense from all that and from your book that you’re still optimistic about the possible reform of the World Bank. What I’m less clear about is how you think reform could possibly happen in the IMF given that it is impervious to outside influence. Even if we accept that there is a need for some kind of Keynesian facility to smooth out the wrinkles in governments’ budgets, is it not better just to start from scratch? The staff group at the IMF is so imbued with the wrong way of looking at things that it’s very hard to believe the organization could be renewed.
I understand that perspective but let me give a slightly different perspective. I actually think that over the last five years there have been a lot of changes. Not necessarily changes that the IMF would have brought about on its own but because it’s a public body and there was a group of good finance ministers – people like Gordon Brown in Britain and Paul Martin in Canada – who were very concerned about developing countries and really did have a social agenda. The IMF now recognizes that capital market liberalization was problematic; they now recognize that they had too much conditionality, that they need more participation; they admit their faults in excessive deficit reduction in East Asia; they talk about a need for bankruptcy rather than just a bailout. It’s striking how on many areas that I talk about in my book they’ve made concessions, some of them quite large concessions. I don’t pretend to think that they implement all of these fully but the mindset is beginning to change. They still have this fundamental problem with governance and it’s going to take a long, long time. But they’ve shown that there is some ability to move when enough public pressure and scrutiny is put on them. So that’s the reform view – it is possible, it’s not going to be easy, you can’t just have Jubilee 2000 say we’re going to have debt relief and then walk home, because if you do that they’ll set up standards and make sure nobody gets the debt relief when no-one’s watching. You have to be there every day but if you’re there something can happen.
The other side of it says: yes, they’re wedded to a model of the world created when there were fixed exchange rates, so that when it went flexible they didn’t know what their mission was supposed to be. They are an institution that seems to believe in market fundamentalism but yet exists because of market failures – an internal contradiction that they’ve never come to terms with. An intellectually incoherent institution where it says ‘we believe in markets’ but what are they doing? Intervening in exchange-rate markets all the time. Bailing out Western creditors.
In one of my chapters of my book I talk about the deep-seated intellectual contradictions which they have never recognized. They say there’s contagion – contagion is another word for externality, it’s like a disease, but then they don’t do anything about the disease, just build a bigger hospital, give them more bailouts. Really striking, the intellectual incoherence. So that kind of view says this is going to be a really difficult institution to reform. Because they don’t even recognize their own intellectual bankruptcy.
The only thing that worries me is that if you were to recreate it again you would have the finance ministers and the central bank governors going to a meeting, winding up probably with the same mistakes, and maybe it is easier to correct the mistakes of the existing institution – partly because the history is so bad that we can see what’s going wrong. And we may actually be able to get more reform because of the history, bad as it’s been, than we might be able to get with a new institution. I think it’s an open question.
But you think the pressure exerted by the global justice movement post-Seattle is better directed towards reform than towards sweeping the whole thing away?
I think there’s a real need for an institution. We wind up creating a new institution and it would likely have many of the same faults and it would just take us longer to figure them out. One of the things I try to raise in my new book is that with the end of the Cold War there was the opportunity for the United States to try to create a new global economic order based on social justice. The United States decided to use its position as sole superpower to push for a new economic order based on its parochial commercial and financial interest. You saw that most strongly in the Uruguay Round but you also saw it in the way it managed the global financial crises.
I think one of the things that’s come out of the Iraq war is that around the world, if not in the United States, there is much greater awareness of the need for multilateralism, of the dangers of unilateralism. Even in the United States that’s true – not among everybody but there are increasing sentiments that something went wrong. Not within the Bush Administration but within the people. I think that provides an opportunity to try to create a more balanced multilateral framework. And trying to diagnose what went wrong with the IMF could help us do that.
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