varieties of economies. Industrial economies were supposed to emphasize
sustained growth, reduction in unemployment and the prevention of a
resurgence of by now subdued inflation. Developing countries were
allocated the role of extending their growth. Countries in transition
had to engage in bold stabilization and reform to win the Fund's
approval. A new category was created, in the best of acronym tradition:
HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to
Borrow (NAB) were set in motion. They became the first and principal
recourse in case that IMF supplementary resources were needed. No one
imagined how quickly these would be exhausted and how far sighted these
arrangement have proven to be. No one predicted the area either:
Southeast Asia.
Despite these momentous structural changes in the ways in which the IMF
extends its assistance, the details of the decision-making processes
have not been altered for more than half a century. The IMF has a Board
of Governors. It includes 1 Governor (plus 1 Alternative Governor) from
every member country (normally, the Minister of Finance or the Governor
of the Central Bank of that member). They meet annually (in the autumn)
and coordinate their meeting with that of the World Bank.
The Board of Governors oversees the operation of a Board of Executive
Directors, which looks after the mundane, daily business. It is
composed of the Managing Director (Michel Camdessus from 1987 till
2000) as the Chairman of the Board and 24 Executive Directors appointed
or elected by big members or groups of members. There is also an
Interim Committee of the International Monetary System.
The members' voting rights are determined by their quota which (as we
said) is determined by their contributions and by their needs. The USA
is the biggest gun, followed by Germany, Japan, France and the UK.
There is little dispute that the IMF is a big, indispensable, success.
Without it the world monetary system would have entered phases of
contraction much more readily. Without the assistance that it extends
and the bitter medicines that it administers - many countries would
have been in an even worse predicament than they are already. It
imposes monetary and fiscal discipline, it forces governments to plan
and think, it imposes painful adjustments and reforms. It serves as a
convenient scapegoat: the politicians can blame it for the economic
woes that their voters (or citizens) endure. It is very useful. Lately,
it lends credibility to countries and manages crisis situations (though
still not very skilfully).
This scapegoat role constitutes the basis for the first criticism.
People the world over tend to hide behind the IMF leaf and blame the
results of their incompetence and corruption on it. Where a market
economy could have provided a swifter and more resolute adjustment -
the diversion of scarce human and financial resources to negotiating
with the IMF seems to prolong the agony. The abrogation of
responsibility by decision makers poses a moral hazard: if successful -
the credit goes to the politicians, if failing - the IMF is always to
blame. Rage and other negative feeling, which would have normally
brought about real, transparent, corruption-free, efficient market
economy are vented and deflected. The IMF money encourages corrupt and
inefficient spending because it cannot really be controlled and
monitored (at least not on a real time basis). Also, the more resources
governments have - the more will be lost to corruption and
inefficiency. Zimbabwe is a case in point: following a dispute
regarding an austerity package dictated by the IMF (the government did
not feel like cutting government spending to that extent) - the country
was cut off from IMF funding. The results were surprising: with less
financing from the IMF (and as a result - from donor countries, as
well) - the government was forced to rationalize and to restrict its
spending. The IMF would not have achieved these results because its
control mechanisms are flawed: they rely to heavily on local, official
input and they are remote (from Washington). They are also underfunded.
Despite these shortcomings, the IMF assumed two roles, which were not
historically identified with it. It became a country credit risk-rating
agency. The absence of an IMF seal of approval could - and usually does
- mean financial suffocation. No banks or donor countries will extend
credit to a country lacking the IMF's endorsement. On the other hand,
as authority (to rate) is shifted - so does responsibility. The IMF
became a super-guarantor of the debts of both the public and private
sectors. This encourages irresponsible lending and investments (why
worry, the IMF will bail me out in case of default). This is the "Moral
Hazard": the safety net is fast being transformed into a licence to
gamble. The profits accrue to the gambler - the losses to the IMF. This
does not encourage prudence or discipline.
The IMF is too restricted both in its ability to operate and in its
ability to conceptualise and to innovate. It is too stale: a scroll in
the age of the video clip. It, therefore, resorts to prescribing the
same medicine of austerity to all the country patients, which are
suffering from a myriad of economic diseases. No one would call a
doctor who uniformly administers penicillin - a good doctor and, yet,
this, exactly is what the IMF is doing. And it is doing so with utter
disregard and ignorance of the local social, cultural (even economic)
realities. Add to this the fact that the IMF's ability to influence the
financial markets in an age of globalisation is dubious (to use a gross
understatement - the daily turnover in the foreign exchange markets
alone is 6 times the total equity of this organization). The result is
fiascos like South Korea where a 60 billion USD aid package was
consumed in days without providing any discernible betterment of the
economic situation. More and more, the IMF looks anachronistic (not to
say archaic) and its goals untenable.
The IMF also displays the whole gamut of problems which plague every
bureaucratic institution: discrimination (why help Mexico and not
Bulgaria - is it because it shares no border with the USA),
politicisation (South Korean officials complained that the IMF
officials were trying to smuggle trade concessions to the USA in an
otherwise totally financial package of measures) and too much red tape.
But this was to be expected of an organization this size and with so
much power.
The medicine is no better than the doctor or, for that matter, than the
disease that it is intended to cure.
The IMF forces governments to restrict flows of capital and goods.
Reducing budget deficits belongs to the former - reducing balance of
payments deficits, to the latter. Consequently, government find
themselves between the hard rock of not complying with the IMF
performance demands (and criteria) - and the hammer of needing its
assistance more and more often, getting hooked on it.
The crusader-economist Michel Chossudowski wrote once that the IMF's
adjustment policies "trigger the destruction of whole economies". With
all due respect (Chossudowski conducted research in 100 countries
regarding this issue), this looks a trifle overblown. Overall, the IMF
has beneficial accounts, which cannot be discounted so off-handedly.
But the process that he describes is, to some extent, true:
Devaluation (forced on the country by the IMF in order to encourage its
exports and to stabilize its currency) leads to an increase in the
general price level (also known as inflation). In other words:
immediately after a devaluation, the prices go up (this happened in
Macedonia and led to a doubling of the inflation which persisted before
the 16% devaluation in July 1997). High prices burden businesses and
increase their default rates. The banks increase their interest rates
to compensate for the higher risk (=higher default rate) and to claw
back part of the inflation (=to maintain the same REAL interest rates
as before the increase in inflation). Wages are never fully indexed.
The salaries lag after the cost of living and the purchasing power of
households is eroded. Taxes fall as a result of a decrease in wages and
the collapse of many businesses and either the budget is cruelly cut
(austerity and scaling back of social services) or the budget deficit
increases (because the government spends more than it collects in
taxes). Another bad option (though rarely used) is to raise taxes or
improve the collection mechanisms. Rising manufacturing costs (fuel and
freight are denominated in foreign currencies and so do many of the
tradable inputs) lead to pricing out of many of the local firms (their
prices become too high for the local markets to afford). A flood of
cheaper imports ensues and the comparative advantages of the country
suffer. Finally, the creditors take over the national economic policy
(which is reminiscent of darker, colonial times).
And if this sounds familiar it is because this is exactly what is
happening in Macedonia today. Communism to some extent was replaced by
IMF-ism. In an age of the death of ideologies, this is a poor - and
dangerous - choice. The country spends 500 million USD annually on
totally unnecessary consumption (cars, jam, detergents). It gets this
money from the IMF and from donor countries but an awful price: the
loss of its hard earned autonomy and freedom. No country is independent
if the strings of its purse are held by others.
(Article written in January, 1998)
Return
The IMF Deconstructed
A Dialogue with Mr. Tom Rodwell
The following is a standard IMF document, taken from its own website.
Underlined phrases are related to categories A and/or B (see below).
The phrases here are general examples as part of general criticism of
the ideological tone and "aesthetic" of the IMF. This dialogue is a
combination of philosophy and economics: does/can the IMF (or any
organization) "facilitate the expansion and balanced growth of
international trade?"
The IMF is the cornerstone and centrepiece of the financial
architecture of the world. Long a sacred cow, it has lately become the
eye of a controversy. Its prescriptions to ailing countries as diverse
as Zimbabwe and Russia have, at times, proven to be inadequate, some
say: ruinous. The IMF is a result of an ideology and its instrument.
This is clearly revealed in its intentionally vaguely phrased
documents. Tom and Sam, a philosopher/journalist/composer and a
philosopher and physicist turned economist, try to read between the
lines (in the best of East European traditions...).
The IMF:
Statutory Purposes
The IMF was created to promote international monetary co-operation; to
facilitate the expansion and balanced growth of international trade; to
promote exchange stability; to assist in the establishment of a
multilateral system of payments; to make its general resources
temporarily available to its members experiencing balance of payments
difficulties under adequate safeguards; and to shorten the duration and
lessen the degree of disequilibrium in the international balances of
payments of members.
Areas of Activity
Surveillance is the process by which the IMF appraises its members'
exchange rate policies within the framework of a comprehensive analysis
of the general economic situation and the policy strategy of each
member. The IMF fulfils its surveillance responsibilities through:
annual bilateral Article IV consultations with individual countries;
multilateral surveillance twice a year in the context of its World
Economic Outlook (WEO) exercise; and precautionary arrangements,
enhanced surveillance, and program monitoring, which provide a member
with close monitoring from the IMF in the absence of the use of IMF
resources. (Precautionary arrangements serve to boost international
confidence in a member's policies. Program monitoring may include the
setting of benchmarks under a shadow program, but it does not
constitute a formal IMF endorsement.)
IMF IDEOLOGICAL TONE
Tom:
The nature of the IMF is inextricably linked with its controlling
member state and staff's economic and political viewpoints. The IMF
talks about itself, and about economic/political phenomena generally,
in precisely the same terms. The kind of economics it discusses is one
of authority, monitoring, and, dare I say it, intervention. While the
IMF allegedly intends to promote "international monetary co-operation"
and to "facilitate the expansion and balanced growth of international
trade" (standard free-market shibboleths), it consistently refers to
"enhanced surveillance", "close monitoring", and "precautionary
arrangements". Orwellian undertones are hardly muffled.
Sam:
The IMF has yet to adopt the "client-orientated" approach. It harbours
deep (and oft-justified) distrust of the willingness of governments to
blindly follow its dictates. It is a paranoid organization, based on
authoritarian techniques of "negotiations" and "agreement". Euphemisms
rule. Normally, the IMF holds "consultations" with the host
governments. These are rather one-sided affairs. The governments are
needy and impoverished ones. They lack the cadre of educated people
needed in order to truly engage the IMF in constructive discourse. They
are intimidated by the bullying tactics of the IMF and of its
emissaries. The tone is imperial and impatient.
Tom:
The IMF clearly sees itself as the authority on international
development ideology. International development becomes an ideological
construction, with subsets of subjective terms: free trade, financial
contact, and economic vision. Many of these terms are defined in such a
way that they enframe that which they discuss. The ideological position
of the influential members is often significantly different from the
developing countries. Sadly, the ideology only becomes reality when it
is part of every day life in the developing nations.
Sam:
Worse still, the IMF's language is riddled with contradictions in terms
and logical fallacies. Let us review a few: International monetary
co-operation in IMF lingo means exchange (rate) stability. But with
such stability the expansion and balanced growth of international trade
is not achievable. Trade is based on dynamic exchange rate disparities.
Moreover, there is nothing inherently wrong in such dynamism. The
changing disparities reflect the relative advantages of the countries
involved. In a world of fixed exchange rates - trade stagnates. And
what is "balanced" growth anyhow? Trade has been growing at 3-5%
annually for a few years now. Is this balanced, overdone or
insufficient, as some free trade zealots cry out?
Additionally, a regime of stable exchange rates won't go far towards
facilitating the second result: to shorten the duration and lessen the
degree of disequilibrium in the international balances of payments of
members. If a country runs a gigantic balance of payments deficit but
is not permitted by the IMF to devalue its currency, in the name of
exchange rate stability - its balance of payments is only likely to
worsen. Take Macedonia: with a 14% of GDP deficit in its BOP - it MUST
devalue and URGENTLY. Its currency is HEAVILY overvalued and the whole
economy is deflating. Yet, the IMF is about to repeat there the same
grave error it committed in Russia: to protect the currency, the whole
system is drained of liquidity (demonetised), interest rates are kept
insanely high and the balance of payments deficit skyrockets, until the
inevitable collapse. If the IMF is interested in self-perpetuating
crisis situations in order to preserve its clout - it is doing a fine
job indeed.
The IMF was never authorized to rate the creditworthiness of its
shareholders (=the countries). It is acting ultra vires in providing
clean or soiled bills of financial health. Its ability to strangle a
country financially if it does not comply with its programmes - no
matter what the social or economic costs are - is very worrying.
LANGUAGE
Tom:
The language in the IMF document can be roughly divided into two
sections.
A Phrases concerning the-history-role/activities-nature of the IMF B
Phrases concerning - subjective economic and political concepts - local
policy - international policy.
Here's my summary of the kind of language used:
1. Quasi-intellectual terms ("big words for a dismal science"),
e.g. disequilibrium, comprehensive analysis, policy strategy;
2. Spin-doctoring euphemisms, e.g. promote, facilitate, balance,
co-operation, safeguards, monitoring, responsibilities, precautionary
arrangements, endorsement, benchmarks. This also includes intimidating
terms such as "surveillance";
3. Distancing terms, e.g. members, general economic situation,
policy strategy.
(1) Is simply pretension. The average "comprehensive analysis"
undertaken by the IMF is often curiously selective and self-serving.
Sam:
Not to mention cursory "kangaroo-court" economic judgements replete
with clear contempt and disregard for the "natives". The latter are
held to be cheats who are merely trying to extort as much money as they
can and probably stash it in Swiss bank accounts (private ones,
needless to say).
Tom:
(2) Is the most obnoxious section. These phrases mislead. They paint a
picture of the stability and democracy that supposedly is Western
capitalism. They paint an image of the IMF as a fair, unbiased, caring,
and democratic organisation. These phrases also confuse in that they
connect "nice terms" (like balance, co-operation and safeguards) with
complicated and subjective economic terms. Thus the language often
functions as a "pacifier", or perhaps as a "chaser", softening the blow
of the "hard stuff".
(3) Indicates the insular attitude of the IMF. Their "grand scheme" is
apparently removed from localised activities and concerns.
Sam:
There is one place, which absolutely complies with the IMF utopia.
There is no inflation there. People do not particularly care if the
exchange rate never changes or what is the outlandish level of interest
rates needed to ensure this eerie stability. It is the cemetery.
The IMF's deadly sin, yet to yield its grapes of wrath, is not to
understand that economics is a branch of psychology and should be at
the service of humans and society. When setting economic goals one must
always act with pragmatism and compassion. In the realm of humans, to
be compassionate IS to be pragmatic. Otherwise, reality is bound to
frustrate the most rigorous planning. If social costs are not accounted
for - unemployment will bring about crime and a black market, which
will render the official market and its statistics meaningless, for
instance. If exchange rate stability supported by inanely high interest
rates prevails over the goals of industrial reconstruction and
export-enhancement, the result is erosion of the very fabric of
society. Lack of liquidity translates into a lack of trust in fellow
citizens and in institutions. If public expenditures are harnessed too
strenuously - corruption will flourish. The IMF's propensity to provide
a "catchall" one-measure-fits-all panacea is nothing short of
shortsighted and disastrous. It cannot be that the same financial
recipe will apply to Pakistan, Macedonia, Estonia and Russia. Yet, a
close scrutiny of the four IMF programmes imposed upon these countries
(Estonia wriggled out) - demonstrates striking similarities. It is a
fact that there are conflicting CAPITALIST economic models. Not because
human nature is so diverse - and it is - but because different people
have different preferences. Americans prefer profits and self-reliance
to social justice. Not so the French. Paradoxically, this is exactly
why markets exist: to trade in disparate preferences. The IMF is a
central planning agency but as opposed to previous models it believes
that it is omniscient - and knows that it is omnipotent.
Tom:
The IMF's desire to paint a kind of stasis on the world economy is, as
you have said, a kind of religious-ideological defence mechanism. The
language employed by the IMF is an attempt to give form to the
haphazard and contradictory nature of international trade and
development. This language functions in a similar way to their
policies, in that both seek to describe and promote a uniform
concept/practice of international economics.
The reference to economics as a branch of psychology is spot-on. It is
ignorant, unethical and unworkable to attempt to impose or promote any
kind of exclusive and conformist concept of "the economy". Indeed, the
IMF's bizarre language and policies reveal a mistaken view (commonly
held) that there is such a single practice or entity called "The
Economy", or "International Trade". Absolutist and limiting concepts of
economy (communism, now capitalism) are increasingly being shown to be
unworkable. The language used by the IMF is evidence of the
impractical, restrictive and unethical nature of an elitist
concept/practice of economics.
FINAL STATEMENT
Tom:
The IMF is a part of the industry of "trade", "development", and
"economics" in general. This criticism of the language found in their
promotional documents is, in some ways, a criticism of the
aforementioned "economics industry" in general. When I first read the
IMF's comments/reports, I was struck by the combination of arrogance
and defensiveness (in a tone of barely muted desperation). I now
believe that these documents were written with the first whiff of fear
in the NYC air-conditioned office ambience. No doubt that those miners,
steel workers, farmers, and manufacturers whose own industries were
flattened by free trade hysteria will feel a tiny degree of
satisfaction, if we really are seeing the decline of the "economics
industry".
The IMF is unethical because it espouses an abstract concept "free
trade" that influences the complex process of "development" (too often
defined with insufficient complexity) while being unconcerned with
specific and local realities and interactions. It is simply too
abstract: international development is not assisted on a truly local
level by investment in the military, state, or heavy industry. It is
ridiculous for a third world country to build massive steel-plants, or
allow foreign companies to extract vast amounts of timber or oil, when
local people are concerned with finding clean drinking water. This
abstraction criticism stands for the entire "economics industry", and
will continue to do so while it has an insufficiently perceptive and
complex understanding of localised realities.
The language of economics is murky, and our criticism of it will remain
justified as long as the IMF (et al) produce officious and misleading
documents. The practice of economics is also murky, and our criticism
of it too will remain justified as long as policies that are illogical,
impractical and unethical are produced and enforced.
Sam:
The IMF is an essential institution. There must exist a multilateral
organization geared towards the maintenance of the marketplace itself.
But the IMF should get rid of its Multiple Personality Disorder. It
must first decide WHAT is it: a lender of last resort? A
creditworthiness-rating agency, sort of an ominous Moody's? A
missionary organization, preaching a particular brand of the religion
known as capitalism? A commercially-orientated, return-on-investment
based financial organization? Dumping grounds for aging politicians and
third-rate bankers doing the USA's bidding? Whatever the definition, it
is bound to be far superior to the current muddled state of affairs.
Second, the IMF must maintain transparency. It controls vast resources.
It is prone to be inefficient (not to say corrupt). Transparency
humbles, ensures the injection of fresh intellectual blood, improves
performance, and gives taxpayers a good feeling. The IMF needs to be
humbled. Its actions have been politicised lately. It intervenes in the
internal affairs of dozens of sovereign, reasonably managed countries -
and its intervention is not confined to matters economic. It develops
an internal "Organizational cult" (we know best and always). It is one
of the most rigid and intellectually handicapped organizations in the
world, yet it considers itself a bastion of economic ingenuity and
righteousness. Delusions of grandeur are dangerous on such a scale.