May 2000 Hermes Article- Mo' Money Mo' Problems

Mo' Money Mo' Problems
A Vicious Cycle
by Molly Biklen

On April 16, 2000, at the conclusion of a day of meetings, protests and police escorts, Gordon Brown of the International Monetary Fund argued that his organization and the World Bank “are doing what we can contribute to the process of reducing poverty throughout the world, as well as making it possible for people to see economic development. We look for a virtuous circle of debt relief, poverty reduction, and economic development.”

Despite their searching, the International Monetary Fund (IMF) and the World Bank have only found a vicious cycle of debt, structural adjustments, economic crises, bailouts and more debt. Established at the end of World War II, the IMF and World Bank are international financial institutions whose structural adjustment policies and loan agreements involve 182 member countries and billions of people. As a result of this long reach, the IMF and World Bank are subject to serious criticisms, from students in Washington, D.C., to Bangladesh’s Agricultural Minister Bagum Matia Chowdury. Almost every structural adjustment program that has been implemented by a member country since the late 1970s highlights a different area in which the IMF and World Bank need institutional reforms. The two most salient critiques, however, regard their neoliberal economic policies and anti-democratic nature. Imposing economic plans that privatize, liberalize trade and remove capital controls, the IMF and World Bank have increased the volatility of financial markets while limiting national economic control and democratic intervention. Together, these policies are a vicious cycle of social and economic hardships that, despite Gordon Brown’s best wishes, have not been successful in finding a virtuous circle.

In the first half of its institutional life (1946-1976) the IMF followed its mandate, making short-term financing loans to stabilize exchange rates. In the late 1970s and early 1980s, a number of Latin American countries that had taken out many loans from imprudent private banks were unable to pay them back and ready to default. The IMF agreed to bail these countries out, but only if they instituted a series of economic, social and regulatory policies, now known as structural adjustment programs (SAP). Concurrently, the World Bank also began adding policy conditions to their loans. In moving to implement SAPs, the IMF strayed from its charter—in both spirit and letter—to become an enforcer of foreign debt service and an in-house policy maker for the thirty-five countries with outstanding loans. As many economists have pointed out, prior to this imposition of structural adjustments, many countries had been able to weather financial crises with only moderate socioeconomic costs.

For the most part, these SAPs have involved the removal of capital controls; the privatization and deregulation of the public sector and state-owned enterprises; and trade liberalization. These policies created the cycle of debt and dependency that has entrapped many poor countries. Since 1980, when the majority of SAPs began to be implemented, multilateral debt has grown enormously, but the development gains that these programs were supposed to generate never materialized. Multilateral debt is the debt a country owes to international financial institutions such as the IMF and World Bank. Conveniently, the IMF’s bylaws prohibit them from writing off this debt. Private banks and even other countries often write off debt that they are unable to collect. For low-income countries, multilateral debt increased by 544% between 1980 and 1997. In middle-income countries, this debt-burden increased by 481%. Debt-servicing requires poor countries to divert their resources to the repayment of foreign debt, rather than investment in their country.

Ghana, for example, has been implementing World Bank designed institutional reforms since the early 1980s. These loans were marked for capital infrastructure improvements, rather than educational or health care investments. As a result, Ghana has had to raise user fees for primary and secondary schooling, leading to a 40% drop in enrollment. Ghana’s Integrated Social Development Centre has argued that this de-funding of education will have disastrous results for the economy in the long run. According to them, the population will be largely illiterate by 2020 and without the skills required for the few jobs that the World Bank programs are creating.

Zambia has also seen an economic downturn as a result of its implementation of World Bank and IMF prescriptions. Even worse than the state of the economy, however, is the state of the healthcare system. In 1980, before the structural adjustments that decreased public sector hospital funding and rural clinics, the infant mortality rate in Zambia was 97 deaths per 1000 babies. Now, thanks to the World Bank’s “model” healthcare delivery reform program, the infant mortality rate has risen to 202 deaths per 1000 babies. As Rodger M.A. Chongwe of the Zambian Liberal Progressive Front explains, when public health or food security crises happen in countries in the Global North, their governments often impose new regulations or closer oversight. In countries subject to SAPs, however, privatization programs cannot be reversed—even when the infant mortality rate is rising while the average life span falls.

Responding to criticisms about problems in Zambia, the World Bank’s Phyllis Pomerantz argues that the economic and health problems in Zambia are a result of the precipitous drop in the price of copper, production of which constitutes a significant portion of the economy. Her—and the Bank’s—answer to Zambia’s economic woes has been similar to that of every country’s request for assistance: liberalize economic policies, deregulate markets and remove subsidies. Unfortunately, these remedies have not worked in Zambia, nor in the other countries on which they were imposed.

Ghana and Zambia’s experiences are not unique. A study funded by the Charles Stewart Mott Foundation and the Moriah Fund found that IMF reform prescriptions in Mexico, Nicaragua, Hungary, Senegal and Tanzania have almost uniformly led to “the destruction of local demand and domestic productive capacity, growing poverty and inequality, the deterioration of education and health-care systems, the increased degradation of the environment and…a dangerously expanding vulnerability of the economies to external forces beyond their governments’ control.” As economist Carol Welch explains, the failures of SAPs have a simple explanation: “The IMF makes decisions with major implications for poor countries yet lacks the expertise to provide far-reaching policy prescriptions.”

Rather than abandoning policies that have not met their goals, however, the IMF has continued to meet economic problems with the same capital control liberalization strategies. Even in Chile and Costa Rica, where IMF reforms have supposedly been successful, officials have had a hard time putting their finger on the actual “success.” The reforms in Chile, for example, have produced economic growth in the cities, but the countryside has been almost completely left behind, creating an ever-widening gap between the rich and poor. Furthermore, much to the IMF’s chagrin, Chile found its “success” under a dictator and while ignoring some of the key SAP provisions, such as the privatization of copper mines.

The implementation of SAPs have not only caused social hardship on national scales, but generated more international financial instability. Since the IMF began linking loans to structural adjustments and capital control removals, there have been more, not less, major financial crises. Consider the crises of the Mexican peso and the East Asian economies: in both those cases, the IMF was lauding the economies as sound right until their respective crashes. In response to these crashes and the subsequent costly bailouts, the IMF and the United States Treasury (its largest contributor) have put the blame on aggressive currency speculation. Yet IMF policies that prohibit countries from defending their currencies and that lift most capital controls are a contributing factor to the ability of investors to speculate so freely.

China, the only East Asian country relatively unaffected by the crisis, was able to remain so because it maintains many of the capital controls that the IMF eschews. Even the IMF’s charter recognizes the importance of some capital controls. Article VI of the IMF charter concedes that member countries may “exercise such controls as are necessary to regulate internal capital movements.” In the name of “good governance,” another of its mandates, the IMF has consistently ignored its own charter regarding capital controls.

In short, many of the IMF and World Bank’s policies inflict just the kind of damage they are meant to deflect. The British Bretton Woods Project, for example, has found that the capital account liberalization and commercial flow programs propounded by the IMF are not economically sound for developing countries because they are “volatile” and “subject to serious problems of contagion.” Why do these policies continue to be implemented? For one, they can be extremely profitable for private investors. According to economist Ellen Frank, currency speculators in 1998 took in “$130 billion in emerging market reserves” and a further “$150 in bailout funds.” The bailouts of aggressive currency speculators and risk taking private banks is the “moral hazard” about which conservatives are so concerned. Since 1995, emergency bailouts have totaled $250 billion, of which the IMF has supplied 35%.

Despite their dismal track records and poor predictive power, the IMF and World Bank continue to insist that their motives are pure. According to Phyllis Pomerantz’s defense of SAPs in Zambia, “these programs are not the cause of the suffering one continues to see in poor countries throughout the world.” Regardless of their well-intentioned social and economic programs, both the IMF and World Bank face a crisis of scale. They are imposing too many top-down policies on too many countries. The World Bank’s land reform proposal for Zambia, for example, was drawn up at the University of Wisconsin and then implemented by the IMF-friendly government despite the opposition of Zambian church, civic and traditional leaders. As former President of Costa Rica Rodrigo Carrazo said in a speech critiquing the IMF last October, it is hubris to believe that any institution can run the economies of dozens of different countries—from Hungary to Senegal to Ecuador—at one time.

For the ten thousands protesters in D.C. and the millions of people subject to SAPs, there have been—and continue to be—many reasons to resist the economic prescriptions of the IMF and World Bank. Looking at the diverse messages of the a16 protesters, critics on the New York Times op-ed page concluded, wrongly, that the demonstrators had no knowledge of the current state of international finance. In response, we need only to point out that, until the IMF and World Bank reduce the number and magnitude of their flaws, we will not be able to reduce the number and size of our complaints.