The Multinational Monitor

OCTOBER 1982 - VOLUME 3 - NUMBER 10


F O C U S   O N   B A N K I N G

The IMF and World Bank Tighten Screws on Developing Countries

by Matthew Rothschild

TORONTO - The annual meeting of the World Bank and International Monetary Fund (IMF) took place in early September amidst the growing recognition that the world's financial arrangements are teetering on the brink of disaster.

"The whole international system of trade and finance could collapse," warned a statement issued by officials of the developing nations attending the conference.

In this time of economic crisis, the World Bank and the IMF took only minor steps to stave off the trouble. What is more, the policies they insist on pursuing are causing increasing divisions among the 146 members of the institutions, not only between developing nations and the West, but among the Western industrialized countries themselves.

As usual, the role of the United States government loomed large during the four days of meetings. The U.S. is the biggest contributor of funds to the IMF and the World Bank, and as a consequence, holds the most sway over the policies of the two organizations. Under Reagan, the U.S. government has been placing strong pressure on these institutions to stick to tough monetary policies and promote foreign investment more than ever before.

"An economic environment which enhances the opportunity for private sector enterprise also enhances the prospects for sustained economic growth," U.S. Treasury Secretary, Donald Regan, intoned at the meeting.

Both the IMF and the World Bank seem to be heeding Regan's words - much to the consternation of developing countries.

The IMF and "Conditionality"

The most prominent issue of debate concerning the IMF was its policy of "conditionality," that is, the terms the IMF requires a country to accept before allowing that country to borrow money from the Fund.

Typically, the IMF insists on devaluation of the currency, removal of subsidies on basic food items, and wage and salary freezes - all of which raise the cost of living for Third World citizens, and often lead to social unrest, such as riots (see side bar).

Over the past year and a half, the IMF has tightened its conditionality. As a consequence, fewer countries have been willing or able to draw on the Fund's money.

"The hardening of Fund conditionality and the growing number of inoperative programs (where the Fund has suspended disbursement) raise serious doubts about the adequacy of the Fund as an institution entrusted with the management of world monetary affairs," said A. Muhith, finance minister from Bangladesh, a country that has been embroiled in a particularly bitter dispute with the IMF over terms for a loan. "With its policy of strict conditionality," Muhith continued, "the Fund is shying away from helping countries who have encountered difficulties due to reasons beyond their control."

The whole range of developing countries, with the possible exception of Jamaica, expressed similar sentiments. The African Nations, India, Korea, Nicaragua, and Brazil all called for an easing up on lending terms. Sri Lanka's minister warned that the IMF's policy of conditionality may "drive countries to the wall."

To some extent, the developing countries' concerns over conditionality are not new, though they were expressed with more intensity this year than in years past. More striking was the recognition among some industrialized countries that the Fund should change its ways.

The new socialist governments in Europe - France and Greece - both urged a more humane approach to lending. But the strongest criticism from a Western country came from the conservative government of New Zealand.

Calling for "a more flexible and sympathetic approach to conditionality," Prime Minister Robert Muldoon argued that "where existing standards of living are already abjectly low, conditionality which is too harsh or oriented excessively to the short term will simply push these standards down to levels that would be quite unacceptable to any reasonable person and that will inevitably create political instability."

The IMF's managing director, Jacques de Larosiere, was irritated to hear these criticisms. "The Fund is not an anti-cyclical institution" designed to reflate economies, he snapped during his closing press conference on September 9. De Larosiere, in his opening address to the conference blamed developing country governments for "lack of political commitment" necessary to adopt IMF policies.

In holding the line against his critics, de Larosiere clearly sided with the United States, which had urged the Fund last year to pursue a policy of tougher conditionality. This year, the U.S. praised the IMF for its strictness. "We are pleased with the progress" the IMF has made in this area, said U.S. Treasury Secretary Regan.

The World Bank and "Development"

More than one year into A.W. Clausen's stewardship, the World Bank is facing increasing criticism from developing countries. "The institution is losing, at least in part, its development character," said Bangladesh's finance minister.

Representatives of developing nations objected to a number of World Bank policies. For one, they complained about the increased cost of borrowing from the Bank. "Since we last met, the World Bank has introduced new measures which add to the financial costs borne by the borrowing countries and which might, in the long run, change its role as a development institution," said Ousmane Seek, Senegal's finance minister, who represented all African members at the conference.

Second, developing countries express concern about "co-financing," the World Bank's policy of attracting private commercial banks to join in the funding of World Bank projects. Clausen has greatly increased the amount of projects funded in this manner. "Co-financing should not be a substitute for the transfer of resources and the improved terms and conditions of such resources," the ministers representing the developing nations stated, cautioning "against co-financing becoming a precondition for lending by the World Bank."

Developing nations, particularly Nicaragua, also took issue with a new World Bank initiative to set up a "multilateral investment insurance agency to guarantee foreign investors against political risk. At the conference, the World Bank released a background paper on this scheme. The insurance agency is necessary "to stimulate the flow of foreign direct investment to developing countries," the paper said, claiming that "political risks" discourage foreign companies from investing.

Nicaragua's finance minister, Joaquin Cuadra Chamorra, strongly opposed this scheme. Nicaragua and other Latin American countries, Chamorra said, "have serious reservations concerning initiatives of this kind, which would conflict with our countries' legislations and internal policies by giving foreign investors a privileged position in relation to their national counterpart."

At Clausen's closing press conference, however, he reaffirmed his commitment to the insurance agency. "An investment insurance mechanism ought to be launched," said Clausen. "It would be a better world if there was such a mechanism in place."

Stop-Gap Measures

In spite of what Third World representatives saw as the overall troubling trend within the two global economic institutions, the World Bank and the IMF did manage to adopt a couple of stop-gap measures which met with general approval: an increase in funding for the International Development Agency (IDA) and a boost in IMF quotas.

Over the past two years, IDA has suffered from a cutback in funds, due to the reluctance on the part of the U.S. to cough up its share of the money. At the meeting, however, a number of industrialized countries - with the notable exception of the U.S. - agreed to make a $2 billion additional payment to IDA, earmarked for a special fund. In retaliation against the U.S., the organizers of this special fund will not allow money from the fund to go to any U.S. contractors; when foreign company contracts arise in IDA projects, the special fund will award contracts only to businesses from countries which contribute to it.

The IMF as well may soon be able to provide more funds to the developing countries. "Widespread support has been expressed on the urgent need for a substantial increase in quotas," said Jacques de Larosiere. Most countries, but not the U.S., supported an increase from 50-100% on quotas, that is, the amount of money developing countries can draw upon. Originally, the U.S. opposed the idea, then let out word that it could settle for a 25% increase; by the end of the meeting, the U.S. delegation appeared willing to give some more ground.

The U.S. did make one positive proposal at the meeting: Urging the creation of an emergency fund to bail out countries - like Mexico - that suddenly lurch toward bankruptcy. "We must assure that the Fund maintains the capacity to respond to genuine needs for temporary financing and to cope with situations that place strains on the whole system," said Regan. "Consideration should be given to the establishment of an additional borrowing arrangement, which would be available to the IMF on a contingency basis for use in extraordinary circumstances." The IMF agreed to study the idea.

The U.S. proposal for an emergency funding facility at first appears odd, since the U.S. opposed expansion of IDA lending and balked at the idea of large boosts in IMF quotas - both measures designed to help ailing economies.

Apparently, the U.S. government will not concern itself with the general economic plight of developing countries. Only when countries cannot pay their bills - many of them to U.S. private banks - is the U.S. willing to propose aid. Until that point the U.S. under Reagan does not appear willing to lend a hand.


Table of Contents