Dear Mr Camdessus
Today I resigned from the staff of the International Monetary Fund after over 12 years, and 1,000 days of official Fund work in the field, hawking your medicines and your bag of tricks to governments and to people in Latin America and the Caribbean and Africa. To me resignation is a priceless liberation, for with it I have taken the first big step to that place where I may hope to wash my hands of what in my mind's eye is the blood of millions of poor and starving peoples. Mr Camdessus, the blood is so much, you know, it runs in rivers. It dries up too; it cakes all over me; sometimes I feel there is not enough soap in the whole world to cleanse me from the things that I did in your name ...

Photo: Anthony Swift

Thus begins the unprecedented, open, 150-page resignation letter of Davison L Budhoo, who this year relinquished his position as an economist on the staff of the IMF in order to raise public clamour for the Fund's reform. Blasting through the grey language that usually cloaks such matters he accuses the Fund of corruption, self-interest and deceit.

The IMF's programme in Trinidad and Tobago is a case in point and in his resignation letter Budhoo asserts: 'We manipulated, blatantly and systematically, certain key statistical indices so as to put ourselves in a position where we could make very false pronouncements about (the) economic and financial performance of that country.'

According to Budhoo, IMF employees 'manipulated' a key indicator of Trinidad and Tobago's ability to compete and export (the labour cost index) to hammer home the point that massive devaluation was needed if the country was not to head for mounting economic chaos; the true figure he says, was far more encouraging. 'What we had done was to manufacture this and other statistical indices to allow us to prove our point and push a particular policy line, irrespective of the economic realities of the country,' says Budhoo who claims that such 'errors' were commonplace within the Fund.

Even when the inaccuracy was exposed by the Fund's own statisticians, the IMF neither owned up, nor apologized to the government, nor publicly corrected its misinformation despite the implications of its judgement for foreign investment.

'It was simply dropped as a hot potato and not referred to. Publication of a correction would have damaged the case for further devaluation, real wage cuts and other demand management measures wanted by the Fund.'

Budhoo puts the excesses of such 'joyrides in the IMF bulldozer when the moon is high' down to the zeal of what he calls the Fund's 'professionalized' political ideology, rather than to a political conspiracy. The generous financial rewards paid in salaries and extras to Fund staff, combined with a lack of accountability, have produced a 'honeypot' mentality; a preoccupation with material gratification and a lust for power which has stimulated personal greed and ambition, commitment to the status quo and an environment of 'yesmanship and stultifying conformity'.

Budhoo was allegedly on short rations from the honeypot because of his intransigence, but he nevertheless pulled $143,000 a year in salary and other subsidies, excluding those related to official travel and mission work. A staffer on the same rate of pay but on assignment in the Third World and with five children being educated in Geneva 'compliments of the honeypot', receives more than the basic pay of any head of state.

And the IMF's charms become virtually irresistible when supplemented by the 'intangibles': VIP treatment at airports, royalty-class and first-class travel, Dallas-style hotels, generous allowances for overnight stays in playground cities and for high-class nightclubbing in 'sin cities', personal secretaries on every mission, G-5 Visas allowing staff to bring maids into the United States, not to mention medical, insurance and pension perks.

'In a very meaningful way,' writes Budhoo, 'our staff perversion is the logical consequence of... the prevailing 1944 international ethos of superior man (sic) and inferior man, and the Western man and his system to be saved and nurtured, and the Southern man to be overlooked and cast aside ...'

Hopes of joining what Budhoo dubs the 'new nobility' in this 'ultimate paradise' are often enough to gain the compliance of Third World officials who might otherwise oppose the introduction of Fund programmes. The honeypot's charms make it easy for the Fund to poach skilled personnel from Third World administrations already desperately short of such skills.

Lured by the honeypot, staff sent on IMF missions to applicant countries develop an evangelical zeal. 'You go saying: "This is what we want. This is the programme. We must get it anyhow - whatever is necessary to get it". It's from this spirit that a lot of the manipulation comes.' What is wanted out of a mission is contained in a briefing paper, drawn up in advance by the mission chief and approved by the managing director of the IMF. 'You refer to the briefing paper in everything you do, because it details the official Fund stand for the country. It's the way the Fund operates.'

Less flamboyant and more measured in person than in print, Budhoo speaks with disillusionment about the Fund: 'The IMF was never designed to help the Third World or end poverty. It was established by the Bretton Woods conference of 1944 to restore economic and financial order to the Western world. There was no element of compassion for humanity in its formulation. The Fund's aim is first and foremost to secure the interests of developed countries.'

Budhoo asserts that the IMF and World Bank are key elements in an economic order that is deepening Third World poverty, the debt crisis, and a flight of capital from developing to developed countries which has soared in recent decades: in 1986 it amounted to well over $30-billion from the Caribbean and Latin America alone.

The IMF package for Trinidad and Tobago is an example of how Fund policies worsen Third World poverty. This programme required the removal of Government subsidies from basic food-stuffs, school books and drugs, The Fund also wished to cut the public wage bill (increase unemployment); lift import controls (allowing an influx of consumer goods, thereby undermining local production); privatize national industries at outrageously discounted prices; raise interest rates (also hitting the competitiveness of local producers); and remove exchange controls ('so that a privileged few could legitimately drain the country of the few remaining dregs of foreign reserves').

'Quite frankly, our "program" is nothing but a hotchpotch of irreconcilable and conflicting elements and objectives; it reduces economics to a farce,' writes Budhoo. 'It's like a terrorist attack, you know, splashing around rifle fire and bazookas and even nerve gas indiscriminately so as to get the highest death toll in the shortest possible time.'

Such packages - which are repeated in scores of countries around the world - affect the poorest first, and amount to economic suicide for the governments concerned. In effect, Budhoo writes, 'we are asking the Government of Trinidad and Tobago to ... self-destruct itself and unleash unstoppable economic and social chaos'.

Budhoo also explains why the IMF never suggests cuts to defence, police or public control measures instead of to basic services and subsidies for the poor: 'It's one thing to push around countries and say, "OK you have to treat the poor that way". But with the arms industry you are talking about very powerful people - both inside and outside the country. They won't be pushed around. They are supposed to be among those who benefit. The US being a Fund shareholder and the staff taking its cue from the US, who is the Fund to tell a country to limit its arms expenditure? You can tell them to let people die, but not to limit their arms.'

Meanwhile, there is little evidence that IMF programs have set countries on any sort of breakthrough path. Claims have been made about Taiwan and South Korea, but tremendous amounts of US aid have been pumped into those countries for political purposes. 'I dare anyone in the Fund to point to a country and say it is much better off economically today because of a Fund programme,' says Budhoo. And this is not an empty challenge. For Budhoo deals in cold, stark facts. He is a man in the know, whose voice is now unfettered.

'As from today,' he writes in his resignation letter, 'I tear off the mask of studied ambiguity that your organization did give me twelve years ago. As from today conscience becomes my only guide.

'In guilt and self-realization of my own worthlessness as a human being... I would like to enlighten public opinion about our role and our operations in our member countries of the Third World. Do I hear you bristling with disapproval? "Enlightening public opinion" are nasty words in the vocabulary of the Fund; I know it; I know it. Well, not so for me. In my new dictionary, 'enlightening public opinion' spells the only means to salvation. For If I can do that - if I can get people to begin to comprehend the universality and the depth of our perversion - I would have achieved something rare and precious for the starving and dispossessed two-thirds of mankind (sic) from whose ranks I come, and for whose cause I must now fight.'

Anthony Swift is a freelance journalist who is currently working on a book about children in difficult and dangerous circumstances.

The impact of IMF policies

Hunger
In one third of recent cases countries were required by the IMF to reduce badly needed food subsidies. The result was a dramatic increase in malnutrition: in Peru it rocketed amongst under six year-olds from 41% to 68% between 1960 and 1983; Ghana saw pre-school malnutrition swell from 35% to 54% between 1980 and 1984; and in Botswana child malnutrition increased from 25% to 31% between 1982 and 1984.

Sickness
Government spending on health was cut in nearly half the African countries and in 60% of Latin American countries where the IMF was involved from 1980 to 1985: the money spent on an individual's health plummeted by 85% in Ghana between 1974 and 1982; by 78% in Bolivia from 1980 to 1982; and by 32% in El Salvador from 1980 to 1984. The grim harvest of these cuts was an increase in preventable diseases and hence deaths - especially in Ghana.

Poverty
Between 1980 and 1985 inflation soared, and wages crashed by 9 per cent in Latin America and 15 per cent in Sub-Saharan Africa from 1980 to 1985: in Mexico they tell by 30% between 1981 and 1984; in Ghana by 22% between 1979 and 1984; and in Sri Lanka by 18% between 1978 and 1983. The number of people below the poverty line increased by up to 75% in parts of Ghana between 1974 to 1984.

From Adjustment with a Human Face: a study by UNICEF 1987.

Punta del Este is an enchanted enclave of fantastic wealth, much of it of doubtful origin. For two months after Christmas every year the doings of the rich and famous fill the media with events few local people will ever witness themselves. For though Punta del Este lies at the heart of Uruguay, it is foreign territory to the people of that country. They live in a land wrecked by the progressive collapse of its foreign trade in wool and meat over the past 30 years. A uniquely gentle, progressive society, where nothing much ever happened, fell to tyranny, torture and impoverishment as a result.

I visited relatives in Uruguay in 1987, as unaware as anyone else that, the year before, the functionaries of world trade had repaired to Punta del Este, there to launch the 'Uruguay Round' of the world's most important trade negotiating body, the General Agreement on Tariffs and Trade (GATT). No doubt the intention was commendable - the notorious 'Rich Man's Club' that is GATT had finally made it to the Third World. But by the time the Uruguay Round of negotiating is completed at the end of this year, all the signs are that it will have addressed itself no more closely to the real challenges facing world trade than those visiting functionaries had to the fate of the Uruguayan people in 1986.

How to get a handle on trade? How to rescue it from the doldrums of public interest in which it has languished for so long? Try this. Try thinking of the global economy as an organism. Its brain and nervous system, exercising the power of decision, are capital and finance. The muscle is our labour. Trade is its bloodstream, sustaining its life, supplying its limbs with energy - but carrying infection too if the organism becomes diseased.

Two of the features of this global organism stand out. The first is its astonishing growth. This growth has for the past 200 years nourished itself on a suitably mundane food - industrial manufacturing. The centre of this manufacturing has shifted constantly, from Britain to the United States to Japan and West Germany, but its tentacles have spread, since the last World War, to places like Hong Kong, South Korea, Taiwan and Singapore. Now Thailand, Malaysia, Morocco and tiny Mauritius are joining in. Giants like Brazil and Mexico have been trying for some time to get in on the act. By the end of this century, India, Pakistan and China may be with them too, hitching up one-third of the world's population. And, increasingly, what links these places together within a single, 'global' market, is world trade.

The second feature of the organism is an aspect of the first. For although industrial manufacturing and world trade generate enormous wealth, they also devastate large sections of the populations over whom they hold influence - from the urban slums of nineteenth century Britain to the pervasive poverty within and around the industrial cities of today. Here, as elsewhere, they prey upon those whom they exclude.

According to the World Bank, 'some 60 low- and middle-income economies have suffered declining real GNP per capita in constant prices'.¹ Translated, this means that half the countries in the world are getting poorer. They are scarcely participating in the global economy. They have escaped the political, but as yet not the economic, bonds of the traumatic colonial era, when the sense of the world as one place first began to grow. What characterizes these colonial bonds is reliance upon the export of primary commodities (the things that go to make other things).

Everyone knows perfectly well that dependence on primary commodities is not good for your economic health. The natural resources of your country disappear with the minimum possible benefit to you. Once commodities reach world markets, they are subject to wild price fluctuations and speculation, making it impossible to plan. And, over time, the value of primary commodities just keeps on falling, relative to other prices. If you want to make a real profit you need to be in the business of manufacturing, of converting raw materials into marketable finished goods.

All this has been known for a very long time, and certainly since the Great Depression of the 1930s. When recession hit the world economy again in the early 1980s, commodity prices plummeted once more. Countries that still depended upon them for their economic life found the only, readily available alternative was to borrow to make up the difference. So, to a greater extent than is generally recognized, the commodity crisis led to the 'Third World Debt Crisis'.

The debt crisis may eventually be overcome. But, unless something radical happens soon, the problem with commodities will remain. So the commodity-dependent Third World countries struggle on, slowly dying, infected rather than nourished by the arteries of world trade.

But if the global economy is indeed a single organism, this decay of almost half its form threatens the life of the whole. It is a cancer. And it is driving people in despair to destroy the very planet on which they, like the rest of us, depend.

What is new, and truly alarming, about the current situation is that one half of the world is trying to cast off the other, like a reptile shedding its skin. The poor have come to seem dispensable to the rich. As one commentator put it, after the almost manically 'up-beat' annual gathering of the World Bank and International Monetary Fund in Washington last autumn: the big industrial nations have convinced themselves that they have done all that they can'.²

What, then, has GATT got to say on such topics? Pick up its latest Annual Report and you find expressions of regret but absolutely no practical proposals to meet the real challenges facing world trade. You get TRIPs and TRIMs (see the Glossary below), but no suggestions whatever, not even of the most reactionary kind as to why this glistening 'engine of growth' has so patently failed to couple itself up to the needs of more than half the globe. Even the ice-cream trade between Canada and the US can generate more heat at GATT than the prospect of another decade as disastrous for the Third World as the last one.

GATT was founded in January 1948. The original intention had been to set up an International Trading Organization as a specialist agency of the United Nations. But the dominant industrial nations, flushed with victory in the War, decided to keep the rich pickings of trade to themselves. Only 23 countries, those 'responsible for most of the world's trade', many of them with colonies still in tow, signed the original agreement.³

It was a very clever fix. The basic principle was that each 'contracting' country had to offer all the other contracting countries the same terms as the 'Most Favoured Nation' among its trading partners. This would prevent a return to the disastrous 'dog-eat-dog' protectionism of the 1930s that brought mutual ruination to the rich and led to war. By and large it has succeeded in this aim, and we should be grateful for that at least.

But it was a strictly business deal, a bargain that's been kept unchanged ever since. As Mr Arthur Sunkel, Director-General of GATT, recently told a gathering at the Wharton Business School in the US: 'GATT's future will depend mainly upon whether its activities benefit, as they have until now, the business community, who are the actual users of the trading system. This is the link between GATT and the "real world".'⁴ The real world of the peasant or the shanty town remains way out of sight, out of mind.

Nor must you go away thinking that GATT's stance against protectionism, its advocacy of free trade, is born of principle. On the contrary, its industrialized member countries operate tariff and quota systems that discriminate against imports of cheap manufactures from the Third World. So long as only countries outside the 'club' suffer, that's OK by GATT.

Photo: Claude Sauvageot

The net effect on the poor is to discourage them from trade in manufactured goods. They are encouraged instead to produce those primary commodities, like coffee or mineral ores, for which there is either no substitute or no competition in rich countries. In other words, this system seeks to maintain the old colonial order, in which the poor produced primary commodities and bought manufactured goods in return. It is precisely the reverse of what is really required.

So blatant was this fix that the United Nations decided to establish its own Conference on Trade and Development (UNCTAD) in 1962. By 1968 it had convinced GATT to introduce a Generalized System of Preferences giving better treatment to at least some of the Third World's manufactured goods. But even today this System covers just 11 per cent of total imports by the rich from the poor.⁵

UNCTAD spent the better part of the 1970s and 1980s trying to establish a Common Fund for Commodities. The idea was to create a fund to stabilize commodity prices. Because neither consumers nor producers like speculation and price instability, this seemed like the most obvious area of common interest between rich and poor. But no. The Common Fund only came into being in 1989: too small and poorly supported to stand much chance of influencing commodity markets at all; too late to avoid the catastrophic collapse of commodity prices in the early 1980s.

Marginalized by GATT, UNCTAD has been undermined and discredited. It spends $36 million on its offices and staff, and just $1 million on 'programmes to promote and expand world trade.⁶ I recall how in 1972 UNCTAD gathered in Santiago, Chile, where I was a student at the time. Natty little machines zipped up and down the streets of the city centre painting new white lines in honour of the visiting dignitaries. A protest demonstration outside the specially constructed, earthquake-proof conference centre resulted in tear gas being sucked into the air-conditioning system and the functionaries of world trade making a rare, unscheduled and inarticulate appearance on the streets of Santiago. Nothing much is remembered of what the conference was about. The conference centre itself became a landmark of a sort - as the government seat of the Pinochet dictatorship.

In the absence of any meaningful intervention by the UN, there is no-one working to promote a genuine, global approach to critical questions of world trade. What makes the situation so intolerable is that the way forward has been known and clear to everyone who has cared to look at it for decades.

A genuinely global approach to world trade would, first and foremost, seek to enhance the ability of poor countries to develop their manufacturing industry, selling on world markets. This would involve the kind of initial protection always required for 'infant industries'. Every single country that has ever launched itself successfully into industrial manufacturing has always had to do so, initially, behind some kind of protectionism - Japan preserves this approach to the present day. Yet GATT requires of the increasing number of poor countries seeking membership in desperation, that they disavow all forms of protectionism.

Once manufacturing had been made easier for the Third World, it would be possible to return to the issue of primary commodities. Not many people, and certainly not those of us who like coffee but could never grow it in our own back gardens, would seriously suggest that Central America, or Africa, must stop producing coffee altogether. Apart from anything else, that would be to revert to the sort of prescriptive arrogance that has so bedevilled development.

But the total dependence of many countries on primary commodity exports has to be reduced - and if the leap to manufacturing were made easier, this could at last happen. The cut-throat competition between commodity producers could be halted and perhaps even reversed. And an effective Common Fund for commodities might then become a practical possibility.

Sensible trade arrangements would feed into, rather than subvert, the more vigorous economic aid that is still essential for the poorest. Perhaps then the rich would finally get out of the habit, born in the nineteenth century, of giving with one hand and taking away with the other, transforming one half of the world into a gigantic object of charity in the eyes of the other.

But who would be launching this Trade-Related Action Programme (in a world obsessed with acronyms, why not a TRAP to join the TRIPs and TRIMs)? The truth is that both GATT and UNCTAD are a compromised part of the post-War settlement and have proved unequal to the task. They have failed to mobilize the internationalist potential of world trade and left it as a monument to inequality and inhumanity. They have to go.

Now that the end of the Cold War is in sight, and even the most 'cautious' of the protagonists on the world stage are talking of tearing up the script and starting again, the time may finally be right for a United Nations International Trading Organization. That in itself would take us a step closer to the United Nations we really deserve, one that would be a political match for the power of the global economic organism. The end of the East-West divide could also be a unique opportunity to bridge the North-South chasm.

This is not a fail-safe route out of the disgusting poverty that wrecks the lives of so many of us. But nor is it an invention of idealism - it is to some extent already working. Let us not forget that immediately after the last World War, the two most successful economies of today, Japan and West Germany, were among the most devastated places on earth. Both have become prosperous by manufacturing for world markets. So too have the Newly Industrializing Countries - and one of those, South Korea, was also destroyed by a terrible war no more than 30 years ago.

South Korea and Taiwan were probably helped along the way by strategic US aid in the 1950s. Hong Kong, Singapore and Taiwan again perhaps had a kick start from rich people fleeing revolutionary China with their capital. This shows aid and investment can change things. But the real lesson of the Four Little Tigers is that there are chinks and openings in the Great Wall of world trade waiting to be exploited. Poverty can be overcome.

The poor are stepping up. The means for them to do so are available, but the functionaries of world trade and rulers of rich nations do their best to hold them out of reach. When you become aware of this, the present state of affairs seems all the more intolerable. That is why it is in the interests of the powerful that you ignore world trade, that your eyes continue to glaze over at the mere mention of the words. Trade wars are for real but, invisible as it may be, knowledge could be the weapon that decides their outcome.

1 World Development Report 1989, World Bank.
2 Financial Times. UK, 27.10.89.
3 What it is. What it does, GATT, 1989.
4 GATT Press communiqué. 19.10.89.
5 History of UNCTAD 1964-84, UNCTAD, Geneva, 1956.
6 Lords of Poverty. Graham Hancock, 1989.

If all economists were laid end to end they would not reach a conclusion. GEORGE BERNARD SHAW

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.