BEFORE the week finishes we really ought to talk some more about the international banking institutions - more about the IME of course, but also about the commercial banks and the World Bank.
I’m beginning to feel sleepy already.
That’s not always the kind of reaction that the IMF provokes. In countries like Jamaica and Brazil there have even been ‘IMF riots’. The organisation has cut so deeply’ into peoples’ daily lives that they have taken to the streets in protest.
They obviously understand more about banking than I do.
Maybe so. But all they really understood was that the price of their foodstuffs was shooting up, or that they were losing their jobs, or that the government was putting up bus fares yet again. The IMF takes the blame for such things because these are often the remedies it demands before it will give the country’ a loan.
You will remember that the IMF is the place that countries can go to when they’ get into balance of payments difficulties. It was set up for this purpose following the Bretton Woods Conference of t 944 which met to reorganise the world’s monetary system. This same meeting also suggested founding the World Bank to offer longer term finance - we will come to that later.
But the IMF was never intended to be a kind of financial welfare agency to which needy’ governments could go for help. Its purpose was to support a particular economic philosophy - that of ‘free trade’.
After World War II there was a great fear that governments which got into financial difficulties might put up tariff barriers to defend their industries against cheap imports from healthier economies. This, it was argued, would damage world trade as a whole - though, as we have seen, those who would have the most to lose from this would be the most powerful economies. The IMF offered a temporary but reassuring source of money on which countries could draw to help them weather any crisis.
You haven’t said who puts money into the Fund.
All the member governments - 147 of them. Their contribution varies according to their wealth. Those with the highest GNPs and the highest shares of world trade have to supply’ the most.
That seems fair.
Yes, but this has political implications because voting power in the governing body is weighted according to contributions to the Fund. The United States, which supplies the most, finishes up with 20 per cent of the votes. And, given that any major change of policy requires an 85 per cent majority, you can see that the US has something of a stranglehold. Developing countries, which represent over three-quarters of the total population of IME countries, are only entitled to 35 per cent of the votes. The organisation is supposed to be a neutral financial institution. But, not unnaturally, it follows the economic philosophy of its dominant member. S/be who pays the piper calls the tune.
What tune is that?
Mostly variations on the theme of free enterprise. The IMF belief is that if international trade is unrestricted then balance of payments problems will sort themselves out ‘naturally’ as exchange rates move to reflect changes in international competitiveness.
And don’t they?
Well they might do if they were allowed to’ In fact the exchange rates of most Third World countries are fixed by their governments rather than ‘floating’ as ours do - so they only change every so often. Fixing the rate gives the government more control. But fixed or floating the likelihood is that all the natural adjustments in their case would be downwards.
This is because the industrialised countries have taken the more profitable part of international business - and have grown steadily wealthier as a result. And once countries get such a lead they stand a very good change of retaining it.
Watching this inexorable process, many Third World countries have tried to keep a grip on their international trade by controlling the exchange of their currencies. They make it difficult for their own people to buy foreign currencies so they cannot so easily buy goods from abroad. And they often ‘overvalue’ their own currency by quoting a high official rate so that when foreigners buy their goods they are effectively charged more in dollars or pounds.
This kind of thing is very much frowned upon by the IMF which dislikes any kind of obstacle in the way of natural market forces.
What does it matter what the IMF thinks? Surely sovereign governments can do more or less what they like.
Within their own shores they can. But there are too many things over which they have very little control and which can put them into the hands of the IMF. The first is a drop in the price of their exports. A violent downward lurch in the price of cocoa or sugar can be disastrous for a country’ which relies upon one or two such commodities for the bulk of its export income.
Then there are the goods they have to import. The same oil price rises we are familiar with have dealt a real body blow’ to many poorer countries. There has been a steady rise too in the price of all manufactured goods. So back in 1959 when a small truck could have been bought with six tons of jute fibre from Bangladesh, today that same truck costs the equivalent of 26 tons.
So it’s not too surprising that a country’ s balance of payments can suddenly swing into the red. At this point they could always stop imports altogether. But that really’ would bring them grinding to a halt. There would be no oil to fuel the trucks, supplies of spare parts would dry up and all kinds of machinery and vehicles would become useless. And, for those countries which have to import much of their food, starvation would loom up on the horizon. Eventually most governments find themselves turning at some point to the IMF.
I suppose the wicked IMF slams the door in their face.
Far from it. This is the kind of opportunity which allows the IME to demonstrate the superiority of its financial morality.
Generally speaking it advocates the same remedy regardless of what might have caused the problems in the first place. The IMF always assumes that the crisis is internal rather than external and due to profligate overspending.
Balance of payments problems arise, they say, because demand for goods in the country is higher than can be met by local supply - so exports are sucked in to meet the gap. The excess demand, they say is caused by high government spending and probably because general wage levels are too high. This in turn raises the price of the country’s exports and makes them less competitive overseas.
The list of actions to be taken always involves cutting government expenditure and cutting wages all round. It usually insists on devaluing the currency as well to bring the price of their exports down.
I gather that you don’t agree with this.
Well in some cases governments do spend more than they really have - on grandiose armies, for instance, or on food subsidies for the poor. But to place the whole weight of the solution on cutting spending, given the number of factors outside the government’s control, is hardly fair.
But you can see how this approach fits into the kind of monetarist philosophy that we have seen within rich countries. This philosophy disapproves of the government’s taking too much responsibility for the economy and would like to see that responsibility shift to the shoulders of the private sector.
The argument the IMF puts forward in poor countries has the old, familiar ‘supply side’ character. If wages are cut, they say, production costs will fall, there will be a greater chance of increasing exports, and local entrepreneurs will make more profits to re-invest in the economy. Everyone will live happily ever after. The IMF’s role as international financial policeman gives it the opportunity to impose such policies on ‘erring’ governments whether they like it or not. And when agreements are signed regular six monthly visits are made to see if the government continues to toe the IMF line before more funds are handed over.
It still sounds very sensible to me. Anyway they wouldn’t suggest such things if they didn’t really work.
In a very limited sense much measures do work to right a balance of payments problem. But you will remember that monetarist policies only reduce inflation by causing unemployment. So the IMF’s similar solutions act on poor economies by causing a similar kind of recession. As government spending and wages fall the multiplier goes into operation and demand and income certainly’ do fall and imports drop as a result. But local industry usually goes into decline as well, since consumption of local goods drops too. So the balance of payments tends to be righted at the cost of recession and permanent damage to the economy.
In addition the human cost can be enormous. Governments might have been spending some of their money on subsidising food and transport for the poor: real basic needs. But these and other government services will be casualties of the general cutback.
Put that way, it does seem harsh. But some changes are needed - surely?
True. If international market forces continue to make them poorer they will have to do something. But there are several questions, which this raises. The first is to do with timing. The IMF usually sets impossibly fierce targets: governments find it very difficult to comply with those kinds of changes overnight. And the IMF has been criticised for demanding too much too quickly.
Then you might ask what sort of adjustment should be made. A better solution to excessive imports might be to produce more locally - this goes by the name of ‘import substitution’. Yet what the IME usually suggests has the effect of damaging local industry. This is what happened in countries like Jamaica and Chile. But building up local industry in this way would probably involve protecting it for a time from outside competition - not something the IMF would approve of at all.
Then again you might ask why it is that the poor countries are the ones who should be making the adjustments at all. After all, for one group of countries to be in deficit requires others to be in surplus. Should they not be reducing their surpluses? This would be a good deal less painful than what is happening in the poor world.
But, as we have seen, very productive countries like Japan - and West Germany too - are reluctant to take such steps. Rather than taking advantage of mechanisation to reorganise their working styles and to distribute leisure, they prefer to export their leisure time to other countries in the form of unemployment. Poor countries have forced onto them the ‘disadvantages’ of technological progress.
I don’t see much chance of people volunteering for the dole queue so that the poor countries can have a bigger share of industry.
You’re right. Unemployment is already a problem in the rich world and we don’t want to make it worse. Most Western nations are not even adjusting to the microchip revolution in their own countries let alone worrying about the international implications. For the time being it is the poor countries who must take the strain. And while they are doing this, they have to deal with the IMF.
Surely there are other places they can go. What about the commercial banks? Isn’t that what the ‘debt crisis’ is supposed to be about?
Yes the commercial banks can and so lend money. But many of them wait to see what the IMF does before they will lend their support. Their problem is that, unlike the IMF, they cannot impose conditions on the borrowing government. So they watch what the IMF does and then go in after it.
There has been a massive quantity of money lent to developing countries in this way’ in the recent years by the private banks. This is because the oil producers have placed their funds in overseas accounts. The banks concerned have then needed to lend the money out to earn interest and the faster-growing developing countries like Brazil and Mexico had plenty of appetite for such funds.
The banks also like lending to such places because the risks are higher there so they can justify charging higher rates of interest. Citicorp, for example, is one of the largest US banking companies and finds that lending to Brazil is five times more profitable than any of its other lending operations.
But if the risks are higher presumably they should also count of losing some of their money.
You would think so. But this has become the great conundrum of the debt crisis. The scale of debts is now’ so great it w’ould not just be a case of one or two bad debts offsetting the good ones, butane or two huge crashes. Brazil, for example, owes $90 billions, and if she were to default this would cause a whole series of collapses. The banking system is based on depositors believing that they’ could always take their money out - if they wanted to. Once this confidence is shaken there could be a disastrous ‘run’ on the banks. Western governments cannot afford to let this happen - and in the end will have to support the debtor countries in some way. So the banks have charged more money for taking risks yet are effectively blackmailing their own governments into removing those risks.
Very clever. Did they know they were doing that when they made the loans loans?
That’s difficult to say. They were probably so excited about the potential profits that they simply lent too enthusiastically.
I should add that there would not be a ‘debt crisis’ even now if the debtor countries were capable of paying back their loans or even the interest on them. But since the loan series was started the whole world has gone into recession. This has had two important results. The first is that the exports of the countries concerned have fallen as the rich countries are buying less. The second is that interest rates have shot up as monetarist approaches have been adopted in Western nations.
As you can see all of these financial issues rebound very’ quickly back on each other. The character of the international financial scene has changed dramatically in recent years. Rather than having national economies that have links with each other, we now have a global economy which has regional or national aspects to it.
It all sounds a bit out of control to me. And frankly a bit unreal. Can’t we talking more practical terms? What were these countries actually doing with the money that they were borrowing?
In the case of Brazil this money was for ambitious projects in things like mining, shipbuilding and nuclear power. Brazil has always fancied itself to be well on the way toward developed country status. This new money seemed to offer a shortcut towards this. The recession means that many of these projects have had to slow down or stop altogether, resulting in high unemployment.
It could be argued, however, that the poor in Brazil were never going to benefit much even if those projects had succeeded. The new projects would just have concentrated Brazil’s wealth into fewer and fewer hands. But this is generally the way things have gone with massively funded outside projects. They have rarely been of the scale that would cause money to flow around productively inside the country. Usually the benefits have been confined to a small elite in the large cities.
So it’s the projects that are wrong. Not the IMF or the international economy.
There have unfortunately always been development schemes like this regardless of who is financing them. Before the commercial banks entered the scene in this direct way they had usually channelled their funds through a particular international agency - the World Bank.
Another baddie, I’ll be bound.
I can’t, unfortunately, say much that is complementary. The World Bank was set up at the same time as the IMF. There was a recognition thaUwbile the IMF could cope with short-term problems, the World Bank should loan the funds over much longer periods to finance long-term development projects. The money today for this part of the organisation, which is more properly called the International Bank for Reconstruction and Development, comes about a third from governments or central banks of those countries which have surpluses and the rest from the commercial banking system.
This seems unnecessarily complicated. Why couldn’t people borrow directly?
The most important reason is that the Bank guarantees the loans. It might raise the money from banks in West Germany and lend it out in Nigeria. But if the borrowers in Nigeria were to default then the governments who make up the Bank’s founder members would have to cough up to repay the West Germans. So basically taxpayers round the world would foot the bill. This means that there is much risk for the West Germans in lending so there is no justification for high interest rates. Countries who borrow from the World Bank would usually pay close to the general commercial rate.
That still doesn’t seem very generous.
No, and it might be very difficult for many countries to borrow even at the standard commercial rate. That was why part of the Bank called the International Development Association (IDA) was started in 1960. This gets almost all its funds in the form of grants from donor countries and lends them out at close to zero interest over long periods to those countries too poor to make use of normal Bank money.
Sounds like the kind of bank I need.
It’s certainly more like aid than banking. The IDA is only supposed to help countries that would not be credit-worthy on normal Bank terms. This means that a large part of IDA funds have been taken up by low income countries like India, Pakistan and Bangladesh - so much so that the IDA has sometimes been called the India Development Association. Most of the Bank’s money is tied to specific projects like dam construction or building a new steel works. So the money is actually paid over to the corporations who win the contract to do the job. Advance notice of the forthcoming contracts to be tendered for can be seen in a UN publication which advertises itself as ‘a unique source of advance notices for more than $16,000,000,000 worth of world-wide projects’.
That all sounds like very healthy competition.
Well it’s certainly healthy for the corporations But whether the poor people who live in the countries concerned are going to benefit is quite another matter. Most of the projects which the Bank funds favour high-technology solutions.
A good way of increasing agricultural efficiency, for example, might be to redistribute land to landless labourers, instead of having it used inefficiently by large landowners. This, however, will be politically difficult. So a more typical World Bank solution would be to assist those who already own land to use it more efficiently by increasing irrigation and mechanisation. Indeed large numbers of peasant farmers are actually being evicted in Bank-financed projects to make way for larger and larger farms, or roads. They see little of the benefits of increased efficiency.
Surely you are being a little unfair - the Bank must be helping poor people somewhere.
Maybe they are. But such examples have proved very difficult to find. This is not so much a criticism of what the Bank does with its money though it often does use it very badly. The problem lies with the very idea that massive capital-intensive projects, however well-conceived, will help the poor. The very poor are totally unhelpable by the Bank. If you have no land you will not take part in agricultural development at all. And if you rent a little land the chances are that when the new Bank-financed technology moves into an area you will be thrown off and replaced by a tractor.
The central problem with the activities of the World Bank - as with the IMF - is that those who control large amounts of funds are in a position to determine the style of development that poor countries take. It is not that their economic-theories of how progress should be made are superior. It is just that they have the power to put those theories into practice.
The fact that such approaches do not seem to work at all does not seem to dissuade them. Rising unemployment in rich countries and steep industrial decline do not seem to have noticeably disturbed the economists who proposed monetarist strategies. They just argue that their policies have not been properly put into practice.
The permanent stagnation and sometimes total collapse of poor countries who have taken the IME medicine does not seem to unduly affect that organisation’s approach to similar difficulties elsewhere. And that World Bank projects have thrown people out of work and steeply’ increased inequality in the places they operate does not seem to dissuade them from doing the same thing over and over again.
Surely they are not that stupid?
Nobody says they are stupid. They’ have a particular philosophy and this will be reflected in what they put forward as sound economic policy’. It’s up to the rest of us to point out just how unsound such approaches are, no matter how much jargon and theory they come cloaked in.
This is not easy to do given the weight of statistics or academic authority they can usually muster. That’s why I’d like to suggest a few more books you might like to read.
Wait a minute. I thought you said this was going to be ‘Economics in seven days’. I’m supposed to be a modest expert by now.
Well, there are degrees of expertise. You’ve had one kind of shortcut through the more daunting books, but there are a few easier volumes that I could suggest which are only slightly longer cuts. In any case you didn’t really think it was going to be that easy did you?
I had hoped...
Besides, this is a subject so broad that the New Internationalist will always be coming back to it in one way or another. Next month, for example, we’ll look in more detail at multinational corporations - throwing up some interesting aspects of the food industry.
I can’t wait.