New Internationalist

The Power and the Folly

Issue 365

Unelected, unapproachable, indefensible. Chris Brazier introduces the IMF and the World Bank.

Mark Henley / Panos / www.panos.co.uk
Mark Henley / Panos / www.panos.co.uk

The closest thing we have had to a world government over the last two-and-a-half decades is not the United States, despite its own tendency to behave as if that were the case. Nor is it the United Nations, still flailing around trying to assert itself as it stumbles into the 21st century with a structure born of the power politics of 1945.

It is rather a secretive, unelected organization which has been hijacked by fundamentalists who have thereby gained the opportunity to dictate economic and social policy to almost every country in the world.

Sounds unlikely, doesn’t it? Like the stuff of science fiction or the maddest conspiracy theory. If only that were so.

The organization is the International Monetary Fund (IMF), which is based in the American capital, Washington DC, and both the power it wields in the world and its appalling record in the misuse of that power should be one of the greatest scandals of our age. Instead, if you stop any inhabitant of the rich world on the street and ask their opinion of the IMF you are likely to meet the blankest of stares. British people of a certain vintage might recall a time (in 1976) when Labour finance minister Denis Healey was forced to go cap in hand to the IMF for a loan but, that incident aside, the International Monetary Fund does not touch the lives – or even the thoughts – of most people in the West.

Stop almost anyone in the Majority World and ask the same question, from farmers in East Africa to shopkeepers in East Asia, and you are likely to get a very different, much more informed response. And if you happen to be making your inquiry in Accra, Ghana, or Buenos Aires, Argentina, then you might do well to take care they don’t think you are in the employ of this august institution.

The IMF has been taken over by fundamentalists as extreme and narrow-minded as an al-Qaeda lieutenant or a US Bible-Belt preacher

How could ordinary citizens of developing countries normally much more concerned with putting food on the table and making ends meet than with global politics have come to such a strong opinion of an international finance house based in Washington DC?

The answer is that their own ability to put food on the table and make ends meet has been directly affected by the policies of the IMF. This is because all countries in debt or seeking new loans to tide them over (which takes in all but the most fortunate nations) have to seek IMF approval of their economic policies. This does not just apply to the Fund’s own money. The World Bank requires national governments to have won the IMF seal of approval before it will fund major new projects. So too do the overseas aid departments of Western governments.

In practice governments of whatever political stripe have little alternative but to knuckle under to IMF ‘advice’, even if it contravenes everything they believe in. Take President Luiz Inácio Lula da Silva of Brazil. The country’s first working-class leader, his electoral victory last year was hailed as an epochal moment: here was a true child of the Left at long last given the opportunity to reshape the largest country in Latin America. Yet even during the election campaign Lula was careful to calm the global financiers who were panicking at the prospect of a Workers’ Party victory – Brazil, he said, would continue to follow IMF-approved economic policies.

He has certainly been true to his word. The events of a few days at the end of last year paint a telling miniature. First, news emerged that the average Brazilian pay packet had dropped by 15.2 per cent in 2003. Then, on 12 December, the Brazilian Senate passed Lula’s pension reform bill, which raised the retirement age and cut pensions for public employees. The move was applauded by the global financial community but decried by local trade unions. On the same day, the IMF approved a new $14.8 billion loan for the country. Four days later IMF Director Horst Köhler called Lula’s economic management team ‘an example’ and congratulated them on their economic policies.1

When Lula and the other political leaders of the Majority World have to swallow their principles at the behest of the IMF, is it not just a case of profligate, debt-ridden countries being shepherded back to the straight and narrow by an impartial international body of experts?

This is certainly what the IMF would like you to think – and it seems very successfully to have persuaded Western governments and media to that effect. The reality is shockingly different. The IMF has been taken over by fundamentalists as extreme and narrow-minded as an al-Qaeda lieutenant or a US Bible-Belt preacher.

The fundamentalism of the IMF lies in its religious adherence to the idea that the untrammelled free market is the solution to every economic problem. Its own equivalent of a holy commandment is the idea of 18th-century economist Adam Smith that the profit motive acts as an ‘invisible hand’ driving an economy towards efficiency. Even were we to accept that in a perfect model of a free market this would be so, the lesson of much recent economic theory has been that no such perfect market exists – least of all in the troubled economies of the Majority World over which the IMF primarily holds sway.

This picture of the IMF as an institution blinded by its own obsession has been most powerfully painted by no less an authority than Nobel Prizewinner and former World Bank chief economist Joseph Stiglitz, who notes: ‘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 that says “we believe in markets” but what are they doing? Intervening in exchange-rate markets all the time. Bailing out Western creditors.’ [Stiglitz is interviewed on page 14.]

Stiglitz makes it clear that he believes the IMF to be working in the interests of the Western financial community – an extraordinary indictment of an international institution, and one that in any sane world would prompt a formal public inquiry.

Unaccountable power

How has the IMF come to have such unaccountable power? It was established at the Bretton Woods Conference, which was convened 60 years ago once it had become clear that Allied victory in the Second World War was imminent.

The British economist John Maynard Keynes was one of the prime advocates at the Conference of a new global financial system, including a fund that would offer loans to tide countries over balance-of-payments difficulties. But he also argued that the world needed a balanced trade system and strict controls on the movement of capital across borders – he believed that the free movement of all goods and capital, advocated by the US delegation, would be bound to lead to instability, as well as inequality.

Unfortunately the US view won the day and the IMF and the World Bank were created as a result.2 Nevertheless it was not until around 1980 that the two institutions moved to centre stage. In that year all the stars of the financial firmament came together. Margaret Thatcher and Ronald Reagan had come to power determined to export their extreme right-wing vision to the world. The economic version of this was called ‘monetarism’ but was really just a resurgence of ‘weakest-to-the-wall’ market economics under another name. Plenty of havoc was wreaked in its name in Britain and the US but voters in these countries were eventually able to rid themselves of their extremist right-wing governments. Unfortunately for the rest of the world, there was a more lasting legacy in the shape of a newly aggressive IMF and World Bank which were not subject to democratic control – the governance of the institutions is dominated by the most powerful economies (see Facts, page 18).

In the 1980s the two institutions launched a crusade to remake the world in the image of the free market. Debt-ridden countries forced to seek their help were required to jump through the hoops of ‘structural adjustment’. Government spending was slashed across the board: food subsidies were removed (they distorted the market by making it possible for the poor to eat); government expenditure on health and education was savaged.

This produced such pain and protest that even UN organizations campaigned for ‘adjustment with a human face’. The tragedy was that it failed even on its own terms, stifling the very economic growth in whose name it squeezed the poor: there is no more damning indictment than the graph on page 19 which shows that, over decades, the rise in adjustment lending by the IMF and World Bank was mirrored by a decline in economic growth. A study by the World Bank itself in 2000 concluded: ‘Growth of per-capita income for a typical developing country during the 1980s and 1990s was zero’3 – and in sub-Saharan Africa ‘zero’ can justly be considered a wild overestimate.

The Malawi Economic Justice Network is clear that this is an exercise primarily conducted for the benefit of the West: ‘Throughout colonialism, they openly dictated to us. These days they purport to advise us. The difference, in the light of Malawi’s recent experience, is purely semantic. They still wield the big stick.’

Spectacular failure

The IMF record in restoring countries to rude financial health is so appalling that were it a private corporation selling its advice on the open market it would long ago have gone bust. Its advice to any finance minister is exactly the same, whatever the international economic climate, whatever the local market circumstances: cut government spending; privatize your public-sector organizations; remove subsidies of all kinds; open up your economy to transnational finance and corporations. Even leaving aside the moral or political problems with such a programme, its imposition without research, without taking account of local knowledge or circumstances, is bound to result in failure.

And those failures have been spectacular. In the Former Soviet Union the ideological insistence of the IMF and the World Bank on a headlong plunge into a capitalism raw in tooth and claw such as no North American or Western European would recognize, still less tolerate, proved calamitous (see Wild West goes East, page 16). In the Far East, the IMF’s dogmatic advocacy of capital-market liberalization turned to disaster.4 While Argentina, a once-prosperous country which had followed IMF prescriptions to the letter, was reduced to survival by barter and the begging bowl.

Where, you might ask, does the World Bank fit into this picture? The Bank is a much larger and more diverse organization. Whereas the IMF is impervious to criticism and feels no need to justify itself, the Bank was in theory set up to combat poverty and needs to guard its own reputation. The Bank itself now avoids the term ‘structural adjustment’, which has become too tainted. It talks instead of Poverty Reduction Strategy Papers (PRSP) – every country has to produce one of these if it is to qualify for debt-reduction or new loans. The renaming has been a smart public-relations move, since neither governments nor aid agencies seem to have woken up to the reality that the distinguishing features of a PRSP are the same old staples: privatization, an open door to foreign companies, user fees for essential services such as water and health.

The Bank also feels obliged at least to pretend that it engages with its critics. During the 1990s it participated in a review of the effects of structural adjustment with key grassroots organizations all over the world, only to withdraw from the process when the conclusion was that ‘adjustment policies have contributed to the further impoverishment and marginalization of local populations, while increasing economic inequality’5 (see No Prescription Needed, page 24).

In some ways this seems to draw a line under the attempt at constructive engagement with the Bank which began when James Wolfensohn, who appeared open to the idea of reform, took over as President in 1995. Since the turn of the century, if anything, there has been a retrenchment, a reinforcement of the ‘Washington Consensus’ (with the IMF and the US Treasury) that once seemed to be crumbling in the face of worldwide dissent and conspicuous failure. And the Bank has never failed to fall in line behind the IMF’s pre-eminent role as global economic enforcer.

In these circumstances there is little alternative but to resist. Most people in the rich world may remain ignorant of the damage being done by the IMF and the World Bank but in all other parts of the world the protest is proliferating (see States of Unrest, page 12). When the Bretton Woods organizations were half a century old the rallying cry was ‘50 Years is Enough’. As we reach the latest anniversary it becomes ever clearer that 60 years has been far too much.

  1. Kenneth Rapoza, ‘A Tough First Year for Brazil’s Lula’, World Press Review Online, 17 December 2003.
  2. The third pillar of the system created at Bretton Woods was the General Agreement on Tariffs and Trade (GATT) which mutated in 1995 into the World Trade Organization.
  3. William Easterly, ‘The Lost Decades: explaining developing-country stagnation 1980-98’, World Bank, January 2000.
  4. Joseph Stiglitz, Globalization and its Discontents, WW Norton/Penguin 2002, pp 89-132.
  5. Structural Adjustment – The SAPRI Report: The Policy Roots of Economic Crisis, Poverty, and Inequality, Zed/Third World Network, 2004. http://www.saprin.org

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