Multinational Monitor

APR 2000
VOL 21 No. 4


The IMF on the Run: The International Monetary Fund Tries to Outrun its Critics
by Robert Weissman

Twenty Questions on the IMF
by the Monitor Staff


Unraveling the Washington Consensus
An Interview with Joseph Stiglitz

Globalization, Regionalism and Democracy
An Interview with Samir Amin


Behind the Lines

Against IMF "Realism"
- Brutal Banking

The Front
BHP's Big Mining Mess - The U'wa/Oxy Standoff

The Lawrence Summers Memorial Award

Book and Video Notes

Names In the News


The IMF on the Run: The International Monetary Fund Tries to Outrun Its Critics

by Robert Weissman

For two decades, the International Monetary Fund (IMF) has exerted a stranglehold over developing country economies, denying them the funding they need to make foreign debt payments and avoid default, unless they enact "structural adjustment" policies.

Now, for the first time, the Fund faces a real challenge to its continued existence, at least in its current form. So far, the IMF has been extraordinarily successful in turning the growing momentum against it to its own advantage.

The sources of the IMF's power lie in its funding from rich countries and its "gatekeeper" role -- the refusal of other creditors, public and private, to make loans to developing countries unless they earn an IMF seal of approval. The price of that seal of approval is adherence to a structural adjustment program.

The greatest threats to IMF authority are denial of new funding from the rich countries, and removal of its gatekeeper role. Such opposition to the Fund is now percolating, especially in the United States. The IMF strategy is to rush to get the last bit of money it now wants from the U.S. Congress before those threats reach the boiling stage, and to jealously guard its prerogative to impose structural adjustment on the poor nations.

Financial Gatekeeper

The origins of the IMF's gatekeeper role lie in the Third World "debt crisis" of the 1980s. In the 1970s, commercial banks made large loans to developing countries -- much of it directed to dictators and military regimes that wasted the monies on boondoggles, corruption and military expenditures. Heavily indebted countries suddenly found themselves drained of the money to make interest payments when oil prices spiked in 1979. Then, in the early 1980s, the sharp rise in interest rates engineered by Paul Volcker, the then-U.S. Federal Reserve chair, sent their interest charges soaring.

Many Third World nations were simply unable to make their loan payments -- a problem for both the commercial lenders and the country borrowers.

Following various financial rearrangements, however, the commercial banks emerged from the crisis in the mid-to-late 1980s. The banks wrote down their loans to developing countries, had loans effectively assumed by public institutions and otherwise lessened their outstanding liabilities.

But the crisis never ended for most developing countries. Most of the developing world continues to be burdened by extraordinarily high debt levels -- with countries routinely owing more in annual foreign debt payments than they allocate to education or health care spending. Even so, they can avoid default only with continual refinancing -- which is where the IMF comes into the picture.

The world's public and private lenders alike generally refuse to lend to countries unless the IMF certifies their economy is being restructured and maintained soundly. The IMF definition of sound maintenance is adherence to the policy package of structural adjustment austerity measures.

Structural adjustment can fairly be described as a virulent strain of Reaganomics or Newt Gingrich's Contract with America. The basic idea of these policies is to open countries' labor markets and natural resource riches to multinationals, shrink the size and role of government, rely on market forces to distribute resources and services and integrate poor countries into the global economy.

Key structural adjustment policies include: privatizing government-owned enterprises and government-provided services, slashing government spending, orienting economies to promote exports, lifting trade restrictions, implementing higher interest rates, eliminating subsidies on consumer items such as foods, fuel and medicines and imposing tax increases.

Asian Crisis: "A Blessing in Disguise"

Despite the IMF's advancement of the corporate agenda in the developing countries, there remained a residual opposition to the institution in elite circles, especially among conservatives in the United States. Many conservatives generally opposed the idea of international institutions. Growth-oriented conservatives opposed particular elements of structural adjustment, such as the recessionary tax and fiscal policy demands.

IMF bungling of the 1997-1998 Asian financial crisis finally sparked widespread criticism of the Fund in the industrialized countries.

As people like Harvard economist Jeffrey Sachs pointed out, whatever the problems of the Asian economies, it is clear that the problem was not profligate governments -- yet the IMF imposed its standard budget-cutting demands nonetheless. In countries whose currencies were under speculative attack, IMF-ordered removal of price controls led to sudden rises of food and fuel prices, exacerbating economic hardship and causing avoidable malnutrition and suffering. And many commentators pointed to the IMF's support for capital account liberalization (removal of currency trading and other financial regulations) as an immediate cause of the financial crisis.

In early 1998, the IMF admitted in internal documents that it had made the financial crisis worse.

But this acknowledged mishandling did not lead the IMF to scale back its operations. To the contrary, it sought to use the crisis to expand its power.

Then-IMF Managing Director Michel Camdessus repeatedly referred to the crisis "as a blessing in disguise," because it would enable the Fund to impose conditions on Asian countries, and force them to reduce the role of government intervention in the economy.

And the IMF's backers in the U.S. Treasury used the crisis to lobby for an additional $18 billion U.S. contribution to the Fund (as part of an overall $90 billion increase in funds). Republicans in the U.S. House of Representatives were highly skeptical of the request, and at one point voted it down. Although the vote represented partisan maneuvering to some considerable degree, it also evidenced widespread Republican opposition to the IMF.

The Clinton administration was able to win support for the IMF later in 1998, however, negotiating for its inclusion in an "omnibus" spending bill (a bill covering funding for many government agencies and programs, and effectively not open to amendment). The administration's successful negotiations depended in significant part on the strong support of Congressional liberals who acknowledged some of the problems of structural adjustment but argued, as Representative Nancy Pelosi, D-California, said, that "you don't turn off the hydrant when the house is burning down."

A few dozen Congressional progressives -- led by Representatives Bernie Sanders, I-Vermont, Dennis Kucinich, D-Ohio, and Peter Defazio, D-Oregon -- responded in effect that the IMF was adding fuel to the fire -- making the problem worse -- not working to put it out. They were unable to overcome the fear implanted by the Treasury Department that denying the IMF risked exacerbating the financial crisis, however, and the IMF funding was approved.

Debt Relief, IMF Relief

A new challenge to the IMF gained steam in 1999. Founded in 1996, a worldwide movement led by church groups and including development organizations and many others demanded "jubilee" -- debt forgiveness -- for the poor countries of the world.

The worldwide Jubilee 2000 movement succeeded in forcing debt relief onto the agenda of the rich countries. Prodded by Jubilee, many rich countries entered into what became a bidding war to forgive the poorest countries' bilateral debt (debt owed to governments by other governments).

At the G-8 meeting in Cologne, Germany, the rich countries also agreed to provide more debt relief through the IMF and World Bank's program of debt forgiveness. Originally, the program identified heavily indebted poor countries (HIPCs) based on a set formula, and then offered partial debt forgiveness to those who complete six years of structural adjustment. At Cologne, the rich countries agreed to send additional money to the IMF and World Bank so that the IMF's Enhanced Structural Adjustment Facility (ESAF) and the World Bank's HIPC program would provide more generous debt relief. Combined with pledges for bilateral debt relief, the Cologne initiative promised an additional $45 billion for poor country debt relief.

Some Jubilee members greeted the announcement with cautious approval, congratulating the rich country leaders, while urging them to do more.

"We urge the leaders not to think their work is done. Instead they must step up the pace," said Carole Collins, then-national coordinator of Jubilee 2000 USA.

Other Jubilee campaigners denounced the Cologne initiative as both completely inadequate and harmful -- a "cruel hoax," in the words of Jubilee South, a network of Jubilee coalitions in developing countries.

Although the $45 billion seemed like a large amount, in practice the Cologne initiative would only result in 16 countries making significantly smaller debt payments.

A large portion of the debt forgiveness would apply to loans that had already effectively been written off by lenders, but were still on the books as obligations of the poor country borrowers.

As Joe Hanlon, a Jubilee 2000 analyst, noted, "Of the $207 billion HIPC country debt, approximately $100 billion is not being serviced -- mainly with the agreement of the IMF and World Bank as most of these countries have Bank and Fund programs. This means the Bank and Fund have already admitted that this money will never be paid. So the $100 billion now on offer is only equivalent to the money that it is already accepted will never be paid -- in effect this much debt can be written off without real cost since it would never have been paid."

Moreover, Cologne stipulated that much of the money for debt forgiveness would be channeled through the IMF and World Bank -- and made available only to poor countries which enacted closely monitored structural adjustment programs.

"Increased debt cancellation has been won only at the price of increasing the power of the IMF," Hanlon noted. "Debt reduction is even more strictly linked to ESAF, and the IMF and World Bank have been given the power to impose additional conditions on 'poverty alleviation.' The words 'adjustment,' 'reform,' 'sound policies' and 'good governance' are liberally sprinkled through the documents."

The division in the Jubilee movement was mirrored in the United States [see "Against IMF Realism," this issue]. The Jubilee 2000 USA coalition lobbied in Congress on behalf of legislation that would provide funding to the IMF for enactment of the Cologne debt forgiveness. Other organizations, including the 50 Years is Enough Network, Results and Essential Action (a project of Essential Information, the publisher of Multinational Monitor), opposed the legislation, urging instead that the IMF be required to fund debt relief -- without structural adjustment conditions -- out of its existing resources. Again, the funding was included in a rushed end-of-the-year omnibus appropriations bill.

There was little question about how the IMF itself viewed Cologne-style debt relief. Then-IMF Managing Director Michel Camdessus greeted debt relief proposals with glee. More debt relief, he explained in April 1999, meant more structural adjustment.

"My personal inclination, I tell you very frankly, would be for broadening the list [of country beneficiaries of debt forgiveness]," Camdessus said at a news conference. "Having in mind that debt alleviation can be a powerful incentive to economic reform and economic progress, then the more countries going for economic reform and progress and benefitting from debt alleviation, the better for the global community. I insist on that."

"If we have learned one thing about debt relief," he added, "it is not so much that the amount of debt reduction matters -- of course, it matters a lot. But what matters even more is the quality and duration of the economic effort that must support the debt relief and create change for the better. This, of course, carries a message about the way in which money should be spent on debt relief. It must be in a way that creates incentives for countries to continue to persevere with adjustment and reform. And we must be inventive for that."

The Poverty of IMF Rhetoric

Unfortunately for the IMF, the U.S. legislation did not include all of the funding it sought. The new IMF monies for debt relief came from a complicated scheme for revaluing gold held by the IMF. The U.S. Congress, which had to authorize the scheme, permitted revaluation only of nine-fourteenths of the gold. Authorization of the final portion was deferred until 2000, keeping the issue alive in Congress for another year.

The IMF again became a focus of Congressional attention in March, when the Meltzer Commission, the informal name of the International Financial Institutions Advisory Commission, released a blockbuster report. The 1998 legislation providing the $18 billion to the IMF created the Meltzer Commission, and charged it with making recommendations on the IMF, the World Bank and the regional development banks. Republicans and Democrats separately appointed members to the commission, with Republican members outnumbering Democrats because of the Republican majority in Congress.

The final committee report split along party lines, but the commission unanimously agreed on two critical points: the IMF and World Bank should use their existing resources to cancel the debts of the HIPC countries, and the IMF should be phased out of long-term development lending, the kind to which structural adjustment conditions are most routinely attached.

The recommendation to phase the IMF out of long-term lending followed a similar recommendation by U.S. Treasury Secretary Lawrence Summers earlier in the year.

Despite the resonance with Summers' previous recommendation, the Treasury Department along with some Congressional Democrats sought to discredit the report. The report included very far-reaching recommendations, including an end to World Bank lending and replacement of Bank loans with aid; and a requirement of "pre-qualification" for loans from the IMF, which should only be made as a last resort and at penalty rates (with higher interest rates, to discourage borrowing). Treasury and the Democratic group tried to portray the report as extremist, isolationist and oblivious to the needs of the poor.

By and large, this effort failed. Mainstream commentators -- including the editorial pages of the New York Times and Washington Post -- took the report seriously, finding its recommendations worthy of careful consideration,. That in turn has given more steam to Congressional Republicans, along with many progressive Democrats, who are using the Meltzer Commission to urge far-reaching changes in the way the IMF does business.

Meanwhile, the Jubilee movement has continued to grow in strength, with calls for debt relief growing louder. The IMF response to both the demand for debt relief and calls for downsizing the IMF has been to reposition itself as a poverty-fighting institution. It changed the name of the Enhanced Structural Adjustment Facility to the Poverty Reduction and Growth Facility.

In February 2000, in his final public speech before leaving the managing director position, Michel Camdessus told the UN Conference on Trade and Development (UNCTAD) at a Bangkok meeting that, "Poverty is the ultimate systemic threat facing humanity.  ...  The widening gaps between rich and poor within nations and the gulf between affluent and impoverished nations, are morally outrageous, economically wasteful and potentially socially explosive. It is not enough to increase the size of the cake. The way it is shared is deeply relevant. If the poor are left hopeless, poverty will undermine societies through confrontation, violence and civil disorder.  We cannot afford to ignore poverty anywhere."

At the same time as it rushed to embrace the "poverty alleviation" mantle, the IMF also maneuvered to make sure that debt relief demands did not infringe on its authority to impose structural adjustment.

"Debt relief is, can be and should be an element in a strategy to secure global growth and to fight poverty," said the presumptive IMF managing director-to-be, Horst Kohler at his first IMF news conference in March.

"But debt relief or debt reduction without growth, macroeconomic stability and structural reforms makes no sense," he stated. "I have a bit of a concern that this discussion about debt relief and debt reduction is not strongly enough combined, with reforms, with macroeconomic stability."

New Momentum Against The Fund

In the United States, the short-term debate on IMF policy turns on whether the IMF should be authorized to revalue the remaining five-fourteenths of its gold reserves, an authorization that may be linked with funding for the World Bank's HIPC debt relief initiative.

Jubilee 2000 USA campaigners are actively advocating for the HIPC funding. Other economic justice organizations are echoing the Meltzer Commission call for the IMF and World Bank to fund debt relief out of their existing resources, and demanding a delinking of debt relief from structural adjustment.

At press time, it appears possible that the Clinton administration will manage to insert the gold revaluation authorization and HIPC funding into a House-Senate conference supplemental appropriations bill -- another maneuver to circumvent Congressional opposition. If not, the Congressional controversy will extend into the summer.

But even if the IMF wins the race for funding approval, the political climate in the United States may be permanently shifting against the IMF.

On April 16, during the IMF's annual spring meeting, thousands of demonstrators will take to the streets of Washington, D.C. to protest the deadly toll of IMF policies. Infused with the spirit of Seattle that shut down the World Trade Organization meetings, the demonstrators are planning a direct action to shut down the IMF's meeting, as well as a massive, permitted rally and march.

Energized grassroots opposition to the Fund, combined with the deepening criticism of the IMF in policy circles, may finally build enough momentum against the Fund to begin to restrict its power, and to provide more autonomy and freedom for developing countries to set economic and social policy according to their own democratically determined priorities.


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