JUNE 1990 - VOLUME 11 - NUMBER 6
T R I N I D A D A N D T O B A G O
Playing With Numbers
The IMF's Fraud in Trinidad and Tobagoby Robert Weissman
Trinidad and Tobago was hard hit by the strong-arm policies of the International Monetary Fund (IMF) in the 1980s. Like much of the Third World, the country was forced to swallow severe austerity measures in order to bring its economy in line with IMF dictates.
The suffering inflicted on the people of Trinidad and Tobago by the IMF may be a special case, however. A former IMF senior economist, Davison Budhoo, charges the Fund urged Trinidad and Tobago to adopt austerity measures not on the basis of an honest evaluation of the country's economy but on the grounds of "manufactured statistical indices."
The IMF evaluations became an important influence on the economy, according to Budhoo, both because they suggested the government implement austerity measures and because they influenced the lending decisions of Western commercial banks on which the country depended. The IMF's "deliberate blocking of an economic lifeline to the country through subterfuge," Budhoo asserts, "served to accentuate tremendously the internal and external financial imbalances in the economy."
The austerity measures implemented by the Trinidad and Tobago government devastated the islands' economy and took an especially heavy toll on the poorer citizens. Responding to IMF concerns about its competitiveness, the Trinidadian government devalued its currency, laid off government workers, cut the wages of those it continued to employ, privatized state-owned entities and drastically cut back social programs. As a result, says David Abdulah, treasurer and education and research coordinator of the Oilfields Workers' Trade Union of Trinidad and Tobago, the "standard of living is lower, ... there is more hunger, the signs of poverty have increased [and] the social sector has been thrown into serious crisis, virtually strangling the country's public health system."
The Trinidad and Tobago economy
Like most islands in the Caribbean, Trinidad and Tobago emerged from colonization in the early 1960s extremely poor and with an economy structured around resource exports. Led by the charismatic and intellectual Eric Williams since its independence in 1962, citizens of Trinidad and Tobago, like people throughout the region, hoped and expected that political independence would bring not only dignity but economic improvement. The moderate growth Trinidad and Tobago experienced in the 1960s resulted in some gains for the population, but growth slowed to 3.6 percent annually from 1970 to 1973 and the economy appeared stalled.
In 1973, things changed. For the industrialized nations and most countries in the Caribbean Basin, the sudden increase in oil prices was a "crisis," but for oil-rich Trinidad and Tobago, the sharp rise in the value of petroleum marked the start of boom times which would continue throughout the decade. Real gross domestic product grew by 6 percent per year in the period 1974- 1981. By 1980, the country had accumulated net foreign exchange equivalent to 14 months of imports. The government's coffers filled, as its revenues almost tripled from 1973 to 1974 and grew at an average rate of 44 percent annually until 1980. Government expenditures rose at an average annual rate of 27 percent between 1974 and 1980.
Although many of the petrodollars were invested in inefficient state-run enterprises and many were siphoned off by corrupt government officials, the influx was still large enough to substantially raise the living standards of the population. "The Government's stated intention that the population should benefit from the energy windfall resulted in a welfare program based on comprehensive subsidy programs covering food, transportation, health, housing, education and utilities," according to Frank Barsotti of the University of West Indies at St. Augustine, Trinidad.
By the beginning of the 1980s, however, the oil boom slowed as quickly as it had come; production in the country declined and Trinidad and Tobago's petroleum income fell. Crude oil production declined from over 80 million barrels in 1978 to 61.6 million barrels in 1986.
In 1986, oil prices collapsed and Trinidad and Tobago's oil revenue fell by $719 million. The country had failed to successfully diversify its economy and was not prepared to adjust to the sharp decline in oil prices. Unemployment, which stood at 7 percent in 1981, reached 17 percent by 1986.
With more money leaving the country (primarily for imports and interest payments) than entering (mostly in payment for exports), the country registered a $684 million balance of payments deficit. The government looked abroad to foreign bankers for help, but it found that loans were not forthcoming. It managed to attract from foreign bankers only $100 million of the more than $600 million it needed.
Exactly why the bankers were unwilling to make loans to Trinidad and Tobago, which had a very good record of loan repayment, is a controversial issue, one which is central to the allegations Budhoo makes about IMF fraud.
Trinidad and Tobago respond to the crisis
Given the sharp drops in oil revenue, government income and the balance of payments ledger, restructuring of the Trinidad and Tobago economy was inevitable. Yet the country was not without choices. Abdulah believes the government could have "mobilized the population in a national recovery effort" and put the economy on course for self-sustaining growth, thereby avoiding the severe austerity measures it subsequently implemented. By rooting out corruption, investing in construction and agriculture and negotiating more favorable agreements with multinational oil companies, he believes the government could have stabilized the economy while minimizing the hardship inflicted on the population.
The government, however, chose a more traditional course. Unable to attract adequate financing to cover its balance of payments deficit, it adopted a set of IMF-style austerity measures, even though it did not receive any loans from the IMF and had no official obligations to the Fund.
In December 1985, the government devalued its currency 50 percent to TT$3.60 per U.S. dollar. In January 1987, it upped the prices of food and medicine, which were previously available at the old exchange rate, to the new rate. The intent of these devaluations was to discourage imports by making them more expensive and encourage exports by making them cheaper, and thereby improve the country's balance of payments.
Devaluation brought more pain than gain, however. Since many staples, like food and medicines, were largely imported, Abdulah explains, "the cost of living skyrocketed." And devaluation did not significantly improve the country's export position. Because many of Trinidad and Tobago's manufactured goods depended on imported parts and components, the rising cost of imports was reflected in manufactured exports, Abdulah says.
At the same time, government workers, who make up the largest sector of workers in Trinidad and Tobago, had their wages reduced and fringe benefits restricted. In January 1987, the government suspended cost of living allowances for workers in the public sector.
Budhoo charges fraud
The failure to diversify the economy during the oil boom years and the drop in oil prices in the early 1980s undeniably put a strain on the Trinidad and Tobago economy.
But Budhoo, who evaluated Trinidad and Tobago's external sector balance of payments for the IMF's mission (evaluation team) to Trinidad and Tobago in 1985 and 1986 and the country's national income account for the 1987 mission, charges that the severity of the crisis was exacerbated by the IMF's reviews of the economy, which manipulated statistics to make the economy appear to be weaker than it was. Because the government based its policies on this deception, the austerity measures which it implemented were more stringent than necessary, Budhoo asserts.
A series of statistical manipulations combined to create a highly misleading picture of the economy. Based on his access to IMF reports which are not made public, Budhoo claims that the IMF's 1985, 1986 and 1987 missions to Trinidad and Tobago misrepresented three important economic indicators: the relative unit labor cost (RULC), the government deficit and the real effective exchange rate.
Distortions of the RULC index (which compares the competitiveness of a country's labor costs in manufacturing to that of industrialized nations and is one of the key statistical indices used by the IMF to judge the state of a nation's economy) were central to the IMF's argument that Trinidad and Tobago needed shock treatment. If a country's RULC rises, it means that the costs of its manufactured exports have become higher versus those of other countries; the IMF's standard policy prescription for a rising RULC is devaluation, which lowers the cost of exported goods. The 1986 IMF mission reported that Trinidad and Tobago's RULC index rose 164.7 percent between 1980 and 1985. According to Budhoo, an accurate calculation, done in accordance with the Fund's methodology, shows the actual increase was only 66.1 percent.
Budhoo claims that similar inaccurate characterizations of the government's fiscal deficit supported the IMFs case for the imposition of austerity measures. A June 1987 briefing paper noted that "the approved budget for 1987 implies an overall government deficit equivalent to about 20 percent of GDP" and estimated that the government would need to cut its fiscal deficit to 9 percent of GDP that year if it was to confront its balance of payments difficulties. Budhoo argues that the deficit was significantly smaller. His claim is supported by the fact that the government was able to exceed the IMF's own target and cut the deficit to 6 percent of GDP without undertaking the additional austerity measures advocated by the FUND. When Trinidad and Tobago surpassed the Fund's target, however, the Fund called on the government to cut the deficit even further.
By distorting the indices of the real effective exchange rate and the terms of trade, which indicate how a country's exchange rate compares to other nations, the IMF "sewed up" the case for devaluation, Budhoo asserts. The Fund's 1987 staff report compared Trinidad and Tobago's exchange rate to 1980, found that it had risen and recommended devaluation. Budhoo points out, however, that using 1980 as the base year is misleading because while the exchange rate rose in comparison to 1980, it had fallen compared to any other point between 1981 and the time of the report. He says that in order to support its claims that Trinidad and Tobago's economy was uncompetitive, the IMF "simply had to" choose 1980 as its base year, even though for technical reasons it was a poor choice.
The World Bank's changing views
Budhoo was not alone in questioning the IMF's calculations. An early draft of a World Bank economic report on Trinidad and Tobago, dated December 14, 1987, differed sharply from the IMF conclusions. According to Budhoo, it stated that "the devaluation of December 1985 has restored competitiveness of the manufacturing sector to 1980 levels." The World Bank concluded that further devaluation was unnecessary; instead, it recommended relatively minor measures, such as subsidies to export manufacturers.
The final draft of the report told a different story, however. Issued on April 18, 1988, Budhoo quotes it as saying, "the evidence indicates that the Trinidad and Tobago dollar is still overvalued. In comparison with its 1976 level ... the real effective exchange rate, based on a basket of currencies of major trading partners, has appreciated by 16% by the third quarter of 1987."
Budhoo charges that the change was the result of intense IMF pressure on the World Bank. He says the chief of the World Bank's mission to Trinidad and Tobago was "distressed" by the changes in the report, believing that the first draft of the report contained the best possible advice to the country.
Hassan Fazel of the World Bank's Caribbean Division says he has "no knowledge that the IMF put pressure" on the Bank to change its report, although he added that he does not recall the details of the Bank's 1988 report on Trinidad and Tobago. Fazel states that the Fund probably reviewed the report,but that this is not an unusual practice: "Wherever the IMF has a program, it is invited to review Bank reports [prior to finalization]; it is on our standard distribution list ... [the Fund] can offer comments like any other recipient." In any case, Fazel says that whatever changes may be made in response to comments, the Bank "takes responsibility" for its final reports.
Truth or consequences
Taken as a whole, the IMF "statistics" created the illusion that the country was in far worse economic straits than was the reality. They indicated that the country was "uncompetitive" in the international economy and, from the IMF's perspective, in desperate need of devaluation and austerity measures. In 1985 and 1986, states Budhoo, the IMF "drilled home the point that the RULC was way out of line and that massive devaluation was needed; without such devaluation the country would slither progressively into mounting economic chaos."
The IMF evaluations also exacerbated the country's economic difficulties, Budhoo charges, by limiting its access to loans from commercial banks. While the Fund denies that its reports are made available to any outside organization or individual, it is widely held that commercial banks gain access to them and use them as the basis for their loan decisions. The horrendous report card contained in the various IMF reports on Trinidad and Tobago ensured the country would not receive the loans it needed to meet its balance of payments crisis, Budhoo claims. The IMF's "decision to start a virulent campaign of misinformation and statistical misrepresentation ... resulted--as we fully well knew it would--in the sudden and dramatic freezing up of all foreign funding."
Budhoo's explanation for the freeze on commercial bank loans to Trinidad and Tobago is not unchallenged. David Suratgar, a group director of Morgan Granfell in London who has been involved in rescheduling Trinidad and Tobago's loans, argues that credit was not available to the country "largely because of the international situation in financial markets." He says that "bank system operations go from one fashion to another," and loans to Latin America were out of fashion in the mid-1980s. According to Suratgar, Trinidad and Tobago was not able to procure new loans, even though it had been a "good client" and was only experiencing short-term "liquidity problems due to the drop in oil prices," because it was improperly grouped with Latin America in bankers' minds.
Internal politicking at the IMF
Budhoo claims he became aware of the manipulation of the RULC and other statistics in his third year of mission work, when he evaluated national income, prices and employment sectors of the Trinidad and Tobago economy. He says that even before he left Washington, D.C. for the mission in 1987, he saw the flaws in the RULC data. He pointed out what he viewed as errors to the mission chief, who acknowledged the mistakes and said that both the mistakes and the properly revised figures would be presented to the Trinidad and Tobago government while the mission was in the country. While in Trinidad and Tobago, however, the mission chief did not discuss the errors with government officials.
Back in Washington, Budhoo presented the mission chief with an analysis which reflected the new, correct figures. But the "mission chief continued to discuss the old figures--which were massively erroneous," Budhoo claims. Shown a table which included Budhoo's corrected RULC figures, the mission chief simply crossed them off and excluded the RULC entirely from the Fund's evaluation of the country's economy.
After his corrections were ignored, Budhoo determined that what he had believed were mistakes were in fact "premeditated and systematic" frauds, especially since the exact same miscalculations occurred in 1985 and again in 1986.
In 1988, Budhoo resigned from the Fund. He issued a public letter of resignation which ran over 100 pages and detailed his claims of IMF statistical fraud.
Trinidad and Tobago and Budhoo's revelations
While Budhoo's claims have been almost entirely ignored in the United States, they generated intense controversy in Trinidad and Tobago. The public responded angrily to his accusations, but the government, preparing to seek a loan from the IMF, did not actively investigate the charges. The government's decision to adopt austerity measures on its own accord further inhibited it from aggressively pursuing Budhoo's allegations; while the IMF's fraudulent statistics dramatically intensified the stringency of the austerity measures, the Fund's prescriptions were not qualitatively different than the policies chosen by the government. The country's strong trade union movement took up Budhoo's charges, however, and successfully pressured the government to establish an official investigating committee.
The government committee, chaired by Professor Compton Bourne of the University of West Indies at St. Augustine, found that the evidence substantiated Budhoo's claims. It determined that "there have been serious statistical irregularities and technical deficiencies in the IMF's economic analysis and reporting on Trinidad and Tobago." Although it declined to assess whether the Fund's manipulation was intentional, the Committee stated that the irregularities it discovered "are susceptible to one of two interpretations: deliberate manipulation as Mr. Budhoo claims or astonishing incompetence and shoddy professional work."
The Bourne Committee concluded that each of Budhoo's charges of statistical error--concerning relative unit labor costs, real effective exchange rates and the public sector fiscal deficit-- were correct. On the matter of the RULC index, the Committee found that the IMFs RULC index was even more inflated than Budhoo charged. The Bourne Committee also echoed Budhoo's claim that the IMF's statistical "irregularities" had a significant effect on the economy of Trinidad and Tobago, concluding that "The likely consequences of these errors are (a) unwarranted adverse judgment of the country's economic performance and national economic management, (b) inappropriate policy recommendations by the IMF and those agencies influenced by its economic analyses, and (c) international credit problems for Trinidad and Tobago."
A second government-commissioned investigation, undertaken by Professor Kari Levitt of McGill University, also upheld the substance of Budhoo's allegations, though it questioned their importance. Levitt argued that "there is no reason to believe that interference by the IMF has been a significant contributing factor to the present economic difficulties of Trinidad and Tobago," since "the relations of Trinidad and Tobago with the IMF have been minimal and normal [and the country] has never drawn on IMF facilities bearing conditionalities." She did not consider whether the government may have adjusted its policies in light of the IMF's review, however. Nor did she consider the importance of the IMF's negative evaluation on Trinidad and Tobago's ability to gain access to international loans, even though she acknowledged that "it is common practice for [commercial] banks to check with the IMF concerning the credit worthiness of a client country."
The IMF's reply
Even after the government committees upheld Budhoo's findings, the IMF refused to respond.
The trade union movement would not let the matter die, however. On January 9, 1989, Cecil Paul, the general secretary of the Council of Progressive Trade Unions, one of Trinidad and Tobago's two labor confederations, sent a telex to the IMF voicing the trade union movement's outrage over the "major statistical errors and inconsistencies" in the Fund's 1985, 1986 and 1987 reports and calling for redress.
On March 20, 1989, the IMF finally telexed a response. It issued a blanket denial of Budhoo's charges: "No error or manipulation of data has occurred in the IMF reports, as regards measurements of competitiveness." But a closer look at the full text of the telex reveals that the Fund's denial inadequately addresses and only partially contravenes Budhoo's charges.
The IMF asserted that the RULC in 1985 and 1986 was calculated based on figures provided by the Trinidad and Tobago government, and according to a proper methodology. It subsequently abandoned the RULC as an index to assess Trinidad and Tobago's competitiveness, instead relying on the real effective exchange rate. The IMF claimed that the switch only reflected "a desire for comparability with statistics published for all other member countries." Still, the Fund's abandonment of the RULC index jibes with Budhoo's claims that his supervisors simply decided to stop using the index when he pointed out the massive errors in the 1985 and 1986 calculations.
The telex asserts that the selection of 1980 as the base year for calculation of the real effective exchange rate was arbitrary, noting simply, "that is the base year chosen for the information notice system." It goes on to say, "of course [the selection of a base year] does not affect the analysis of movements of competitiveness," because the analysis still indicates whether the real effective exchange rate is rising or falling at a given point in time. But the selection of a base year does affect the determination of whether the aggregate movement of the real effective exchange rate has increased or decreased over a period of time, and the IMF failed to respond to this charge.
Budhoo's allegations concerning the IMF's misrepresentations of the public sector fiscal deficit and the pressure applied by the Fund on the World Bank to support the Fund's fraudulent claims also went unanswered.
In sum, the IMF's telex failed to dispel Budhoo's claims and never directly responded to the government committee reports. Yet the telex to the Trinidad and Tobago trade union movement is the Fund's last word on the subject, according to Graham Newman, acting chief information officer for the IMF. Newman told Multinational Monitor that the Fund would not respond in any greater detail to Budhoo's charges.
The government's lackluster response
Though the Trinidad and Tobago government's own committees had upheld Budhoo's allegations, delivering a stinging condemnation of the Fund, the government attempted to sweep them aside.
Given his commitment to implementing IMF-style austerity measures, Prime Minister A.N.R. Robinson apparently determined that he needed to work with the Fund and that adopting a confrontational posture would be counterproductive. "There was and is no realistic alternative to an accommodation with the Fund," he said. "And there is no escape from the pain of adjustment, whether this adjustment takes place with a Fund programme or without a Fund programme."
Robinson argued that Budhoo's claims could be used behind-the- scenes, to strengthen Trinidad and Tobago's bargaining position with the IMF: "Our own internal analyses of the situation, plus other information available to us internationally, all confirmed that the most effective way for Trinidad and Tobago to negotiate with the Fund in light of the Budhoo allegations, was through 'quiet diplomacy.'"
Although Robinson has indicated that Budhoo's allegations have been used as leverage in negotiations with the IMF, officials in his own ministry of finance contradict this assertion. John Andrews, permanent secretary in the Trinidad and Tobago Ministry of Finance, told Multinational Monitor, "the IMF says [Budhoo's charges] are not correct, so we were not able to use them for leverage."
These officials downplay the validity and importance of the allegations. Andrews states that the government committees' reports "say [Budhoo] may be correct in some of his allegations," even though the Bourne Committee report clearly substantiates all of Budhoo's claims. Another officer in the Ministry of Finance says that the committees "did not find anything to support [Budhoo's] claim" that the IMF's negative evaluation of Trinidad and Tobago's economy affected the country's ability to procure commercial loans, although the Bourne Committee explicitly concluded that the IMF evaluations did affect Trinidad and Tobago's access to international capital.
In 1989 and 1990, Trinidad and Tobago was finally rewarded for its austerity measures. It received two loans of $110.5 million each, but they came only after the government implemented further drastic austerity measures in 1988 and 1989. In early 1988, the government "introduced an income tax surcharge, raised a number of indirect taxes and acted to contain certain public sector expenditures," the IMF Survey glowingly reports. In the summer of 1988, the government devalued the currency 15 percent, placed an excise tax on gasoline and raised interest rates. In early 1989, the government slashed public sector workers' wages, cutting them 10 percent below the 1984 wage rates they had been receiving. "They are earning 1981 or 1982 wages, while the cost of living has risen 80 to 90 percent," says Abdulah of the Oil Workers Union. "The [government's wage cuts] were a tremendous blow to their real income." Even those workers making 1981 wages are not the worst hit by the austerity measures; many others have been fired. The government also began privatizing state enterprises, including the national phone company, and charging higher prices for public sector goods.
Fighting back against the government and the IMF
The government's austerity measures sparked social unrest. In March 1989, the nation's two labor confederations, the Council of Progressive Trade Unions and the Trinidad and Tobago Labour Congress, set aside their longstanding differences and joined together to lead a one-day general strike protesting the government's austerity programs. It was the nation's first general strike since 1937. It shut down the entire transport system, both public and private, kept schools and most public offices closed and attracted the support of 40 to 50 percent of the workers in the nation's manufacturing sector and most of the oil workers, according to Abdulah.
Budhoo has called on the Trinidad and Tobago government to resist the IMF's policy recommendations and instead to demand compensation from the Fund. The IMF has issued strong statements on the seriousness of country misreporting of data, either intentionally or by error; Budhoo argues that the Fund should be held to the same standard. He believes Trinidad and Tobago could successfully demand compensation; if the IMF refuses, he thinks Trinidad and Tobago should take its case to the World Court. He is hopeful that the Caribbean Council of Churches, which recently took up the issue of the IMF and Trinidad and Tobago, might be able to spur some compensation as well as an IMF acknowledgement of its fraud.
Abdulah is less optimistic. Although he continues to believe compensation is justified, he thinks the government has allowed the opportunity to "go by the board." Trinidad and Tobago's experience with the IMF, he says, is now most useful as an example which illustrates the dishonesty of the IMF and the devastating impact of its policies, an example which might lend force to an international effort to reform the Fund.