The Multinational Monitor

NOVEMBER 1986 - VOLUME 7 - NUMBER 15


I N T E R N A T I O N A L   F I N A N C E

The ABCs of Multilateral Lending

by Samantha Sparks

This month, the Multinational Monitor begins a regular column on international development and finance.

To a visitor, the large number of limousines and foreigners in three piece suits outside an uptown hotel in Washington, D.C. last month might have suggested a convention of international businessmen. In some ways, it was just that. The businessmen, however, were civil servants from all over the world in Washington for the fortieth annual joint meeting of the World Bank and the International Monetary Fund (IMF), the two most powerful institutions in international development.

The Bank and the IMF were created in 1944 by the major Western powers in a post-war effort to restructure the world's economy and protect against the kind of isolationism and economic disarray which had contributed to earlier international tensions. The demands placed upon the Bank and the ILiF have changed enormously since their creation, when they were used primarily to finance the reconstruction of ivar-torn Europe and Japan. Today, the multilateral lenders direct their assistance (in descending order of magnitude) toward the countries of Latin America and the Caribbean, Africa, the Middle East, East and Southern Asia and the Pacific.

Since it began functioning in 1946, the Bank has made loan commitments totaling about $165 billion-not all of which have been disbursed. The IMF has made agreements of over $100 billion since it began operating in 1947. The sheer magnitude of their lending operations makes these sister institutions the most powerful of the several hundred multilateral lenders.

The World Bank and the IMF are funded in part by the contributions of member nations, and in part by borrowing and investing. In both institutions, voting power over lending and policy is determined by the size of a member's contribution, which in turn is proportional to its share in the world's economy. In the World Bank, this arrangement gives the United States about 20 percent of the vote, [the United States, Japan, Britain, West Germany and France together wield about 40 percent), while major developing nations like Brazil and Argentina hold only about 2.5 percent and 1.5 percent, respectively.

Traditionally, the president of the Bank is a U.S. citizen, while the managing director of the IMF is European.

The IMF is also governed by its member countries. Each member is entitled to a basic 250 votes, and additional votes are allotted according to a country's payment into the Fund. As of September 1986, the United States held just under 20 percent of total votes, with Britain trailing a distant second at nearly 7 percent, followed by West Germany with 6 percent and Japan with just over 4.5 percent. The vast majority of the IMF's members hold less than 1 percent of total votes each.

The World Bank is made up of three different institutions. The International Bank for Reconstruction and Development, the largest and oldest of the three, lends to governments for large-scale development projects that typically have a five-year gestation period and may take 20 or more years to complete. The International Finance Corporation, established in 1954, co-finances and guarantees private investments in the developing world. Increasingly, these investments are concentrated in the food and agribusiness industries. Finally, the International Development Association (IDA) was created in 1960 to funnel money to the poorest members of the Bank. In May 1985, IDA established the Special Facility for Sub-Saharan Africa, in recognition of that continent's particular and pressing development needs. Although the Special Facility's resources are technically distinct, it is administered by IDA.

The IMF with 151 members was created in conjunction with the World Bank, to provide short-term financial assistance to members having difficulty making income and expenditures meet. Through regular, committeelevel meetings, the IMF also attempts to monitor the world's economy.

Both the World Bank and the IMF condition their loans upon the borrowing country's willingness to institute or maintain economic reforms, broadly speaking those which promote an open international trading system and emphasize free market economics. The World Bank does this through its increasingly-favored Structural Adjustment Loan (SAL), released in support of macro-level policy reform. Conditioning loans upon members' willingness to oblige Fund economists is a fundamental tenet of the IMF, expressed in practice through the Fund's policy of releasing loans in a series of "credit tranches." Release of each tranche depends upon the successful implementation of previous Fund requirements by the borrowing country.

Thus, although both bodies are supposed to be ideologically neutral, their lending policies usually-and, under the Reagan administration, increasingly frequently-end up working against socialist economies, in favor of capitalist economies. The overwhelming weight of the United States and the Western democracies in both institutions inevitably sets less powerful members at a disadvantage when it comes to decision-making. The political repercussions of IMF austerity programs are well documented. IMF programs to slash public sector expenditures, food subsidies, inflation and imports have led to widespread popular opposition in countries as diverse as the Sudan, Jamaica, Brazil, and Nigeria.

This year's annual meetings marked a turning point of sorts for the sister institutions. A new president has taken charge of the World Bank and a new director will be appointed to the IMF by the end of the year. Although the debt crisis will remain the overriding concern of the two agencies, both the Bank and the Fund are expected to tackle loan repayment problems in new ways. The traditional distinction between the two institutions' roles-short-term, policy-based balance-of-payments assistance from the IMF and longer-term, development aid from the Bank-will be less evident. The Bank is placing a greater emphasis on quick-disbursing loans and economic policy reform by its borrowers, while the IMF in March 1986 created a new Structural Adjustment Facility to provide low interest or "concessional´┐Ż balance of payments assistance over the medium term.

After a disappointing debut, the Reagan administration's much-vaunted initiative to alleviate the Third World's debt burden-the Baker Plan-will come under increasing scrutiny as it enters its second year. And with the U.S. trade deficit at an all-time high, the IMFs traditional prescription of increased exports and domestic austerity for the developing world seems to make less sense than ever.

The New World Bank President

Barber J. Conable became the president of the World Bank on July 1, 1986. A former Republican congressman from New York, Conable makes no attempt to conceal his inexperience in the field of international development. "By training I am a lawyer, a negotiator," not a banker or a development technician, Conable told an assembled crowd of finance ministers and country representatives at the opening of the annual talks Sept. 30, 1986.

But Conable's 20 years in the House of Representatives may give him the edge he needs to successfully represent the Bank to a tight-fisted Congress. Over the last few years, and particularly since enactment of the 1985 Gramm-Rudman-Hollings deficit reduction law, Congress has balked at the bank's periodic requests for money.

Last summer, progress on a new Bank agency to promote investment in the Third World was stalled when the House Banking Committee, voted not to approve the $222 million that the administration requested to establish the agency. After months of indecision, the Reagan administration last month agreed to back the maximum level of funding sought for the Bank's softloan affiliate, the International Development Association. The real test, however, lies ahead when the administration must fulfill its commitment to the Bank out of the meager funds allocated for foreign aid by Congress. The 1987 foreign aid budget deeply cuts U.S. assistance to all but a handful of strategic allies.

Here, Conable who was the ranking Republican on the House Ways and Means Committee and who left Capitol Hill only two years ago, may be able to persuade his former colleagues to come up with the money necessary if the Bank is to realize the "new leadership role" envisioned for it over the next few years.

IMF Head Leaving Soon

Just as Barber Conable is settling into his new office, his counterpart at the International Monetary Fund (IMF) is moving out. After eight years as managing director of the IMF, Jacques de Larosiere announced last month that he plans to retire at the end of 1986. I

De Larosiere's resignation, a year and a half before the scheduled end of his term, comes at a time when the IMF, like the World Bank, claims to be rethinking its role as a major multilateral force in international development. In theory, a timely injection of IMF money should enable the borrowing country to maintain a healthy balance of payments and avoid disrupting its credit and trade relationships in the international markets.

In practice, however, Fund money has often created more disruptions than it has prevented. Unlike a commercial loan, IMF money is usually lent at below-market rates of interest. Repayment is typically required within three to five years, and reschedulings are not made. At the same time, an IMF loan comes with plenty of strings attached. The essence of IMF lending, according to a recent IMF survey, is that "financing and adjustment go hand in hand". While this may sound good in theory, in practice the principle of conditionality has meant that developing countries who go to the IMF for help soon find themselves committed to harsh programs of economic austerity that can place social needs a clear second to balancing the books.

As unsuccessful and unwelcome as the IMFs programs are, IMF agreements remain a high priority for most developing countries today, primarily because the IMF represents a coveted key to commercial assistance. Although an IMF agreement does not guarantee that commercial bankers will follow with a loan, it has become virtually impossible to find a banker who will lend new money to a country that lacks the IMF's blessing.

The overwhelming importance attached by a majority of developing countries to an IMF agreement was recently underscored by Nigeria's Ibrahim Babangida government. When the drop in oil prices put Nigeria's economy in a tailspin, a legacy of ousted predecessors made Babangida cautious enough to initiate a year-long public debate over whether the country should seek an IMF bail-out. The Nigerian public finally decided it did not want IMF money with all its incumbent conditions, leaving the Babangida administration to impose various forms of austerity on its own-but without the stigma of the despised IMF.

In order to implement his economic reforms, however, Babangida needed new money. The commercial banks were generally appreciative enough of Lagos' initiatives to rollover its short term debt obligations, but would go no further without the IMF"s seal of approval. So the Babangida administration struck a compromise: it would sign an IMF "stand-by" agreement-to please the commercial banks, but would not draw on any of the money the agreement contained-to please the Nigerian people.

The Baker Plan

Three years after the "Third World debt crisis" became front-page news in 1982, the Reagan administration proposed a solution. Treasury Secretary James Baker's proposal, made at the 1985 annual meetings of the World Bank and IMF, was aimed at relieving the debt burden of 15 heavily-indebted, middle-income countries-Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela, Cote d'Ivoire, Morocco, Nigeria, Philippines, and Yugoslavia. The "Baker Init,}ative," as the plan was quickly dubbed, contained three major provisions: Commercial banks would come up with $20 billion in new money for the targeted debtors over the next three years; The World Bank and regional multilateral development banks would provide some $27 billion-about $9 billion more than they might otherwise have done; And the debtor countries would commit themselves to policy reform to make their economies more efficient and productive.

But only one year later, the Baker Initiative has been found wanting by a wide range of participants and observers alike. "The results have been extremely disappointing," says Richard Feinberg, a former Treasury official who now works with the Washington-based Overseas Development Council. Feinberg suggests that on at least three counts-external financing, economic growth, and structural economic reform in the developing world-Baker's proposals have failed to produce satisfactory results.

Commercial financing still flows sluggishly to the 15 debtor nations and in some cases is dwindling. Although Bank officials point proudly to last year's 16 percent increase in loan commitments to the big debtors, total aid has actually dropped from $1.3 billion in fiscal year 1985 to $400 million in 1986. Most damaging of all, says Feinberg, "Private creditors are receiving much more money in interest payments" from their debtors than they are giving out in new loans. Not unexpectedly, economic growth in the 15 countries targeted by Baker was also "rather dismal" in 1985, according to Feinberg.

In the area of structural economic reform, some of the countries singled out under the Baker Plan have taken significant steps toward the kinds of reforms sought by the Bank in conjunction with the IMF and commercial creditors. Governments such as those of Nigeria, Cote d'Ivoire, and Bolivia have raised taxes, lowered wages, trimmed the size of their public sectors, adjusted exchange rates, to name a few of the measures undertaken. But as Feinberg points out, most of these countries began implementing or considering these reforms even before Baker unveiled his initiative. Many of the countries that have not made a commitment to economic reform are today more centralized than they were in 1980.

Two major breakthroughs recently announced by the Bank and the IMF-lending packages to Mexico and Nigeria-have been hailed by officials of these institutions as the kind of successes that Baker's principle of reinvigorated cooperation among commercial banks and the multilateral institutions can produce. The same officials, however, are quick to contradict themselves when asked if other debtor nations can expect the same kind of generous funding obtained for Nigeria and Mexico. What the recent aid package to these two countries illustrate, officials have been saying, is only that the Bank and the Fund are prepared to take a "flexible, case-by-case" approach to the enduring problem of Third World debt.


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