Erik Growen
The purpose of this paper is to attempt to shed some light onto the International Monetary Fund (IMF) and the World Bank (WB) and their role in perpetuating the inequalities inherent within the global economic system. The theories behind their creation as well as those they use to justify such policies as the Structural Adjustment Loans (SAL) and austerity programs will be examined to show the flaws within them. How the two are used by Transnational Corporations (TNC, largely US based) and the US government will also be briefly covered. The impacts of the theories that have been devised will be shown using Ghana as a test case for the international credit system and it will show how the system has failed those they have a mandate to help.
The IMF/WB system came into being at the Bretton Woods conference in 1944 to help in post-war reconstruction. The WB was used in conjunction with the Marshall Plan in Western Europe but the IMF was not widely used until 1958 with the one exception of bailing out the pound sterling following the fiasco of the Suez Crisis in 1956. Between 1958-1968 the IMF was only made workable by a series of support measures taken by the industrialized countries to support the fixed rates of both the pound sterling and the US dollar despite the vulnerability of the pound, as shown in 1956, and the mounting payments deficit of the US as they began to enter the Vietnam War. The measures included: setting up the Gold Pool; a set of reinforcing funds for the IMF were made available through the 1962 General Arrangement to Borrow; a 'swap' network where various central banks could automatically borrow foreign exchange from each other in times of solvency crisis; and the 1963 American Interest Equalization Tax which was set up to deter foreign borrowers from borrowing on US capital markets.(1)
By the late 1970s- early 1980s the IMF began lending more money but for shorter terms until the inevitable bunch-up of debt repayments occurred whereby the debtor nations could no longer keep up with their payments to their creditors. In 1985 the WB came up with the Baker Plan to use official US credit as a bait to get the banks to increase their lending to developing countries to 'prime their economic pump' and allow the developed nations to export more consumer goods into the Lesser Developed Countries (LDC). This was not as successful as the Brady Plan, which although it was very similar, by this time the financial markets had devised a system for wiping off old, bad debts by offering them up for sale at a discount. This was so successful that by 1993 half of all LDC debt had been rescheduled on Brady Plan lines which kept the money ball rolling, if not actually solving the problem. This did of course also keep the IMF/WB and other banks solvent.
By this point only the most desperate LDCs went to the IMF/WB for aid. The IMF/WB now possess a "greater significance than many nation states, developed or underdeveloped"(2) due to their holding of the credit strings. What is was that shaped these two extremely powerful organizations will be examined next.
The concepts behind the IMF/WB were based upon two things: 1) liberal economic world theory on free market enterprise with little, or preferably no, state interference and 2) the realities of US hegemonic power after World War Two. The US preference for liberalized trade and the belief in private sector led development and growth has driven the two organizations since their inception. The fact that the US is the biggest contributor has led to this ideological hegemony. As the US is one of the largest educators of foreign nationals, their particular economic world view has been spread across the globe through these educated elites.
The US began in the 1940s by using consent and not coercion to bring it's allies along but starting in the mid-1960s the US has become "less willing to subordinate it's own interests to those of it's allies; instead it [has begun] more and more to exploit it's hegemonic status for it's own narrowly defined purposes."(3) These purposes included economic policy harmonization on an international scale so that all nations shared the insolvency risk together (the theory of Interdependence). This requires all countries to participate and the US was willing to use the IMF/WB to bring nations in line. A problem can develop however as the measures imposed marginalize "perhaps one-third of the world's population"(4)and have led to poverty fueling revolutions against the very system that is supposedly helping them. To keep things in line the US has had almost total control over IMF/WB policy. For example, there has always been an American as president of the WB and in fact the last two, MacNamara and Clausen, had been CEOs of huge TNCc (Ford and Bank of America respectively).
The IMFs mission has changed from is initial conception. Bretton Woods initially had the maintenance of fixed exchange rates and standardizing the rules of monetary conduct as the institutions main purposes. This was changed in the 1960s with the end of fixed exchange rates which also showed that there really were no rules of conduct to enforce thanks to the US unilaterally declaring an end to the gold standard. Their new role became one of "exercising some discipline over...debtors while at the same time seeing that they were kept sufficiently solvent so that they did not become drop-outs in the financial system."(5) This is covered in IMF Article (V):
To give confidence to members by making the general
resources of the Fund temporarily available to them
under adequate safeguards, thus providing them with
the opportunity to correct maladjustments in their
balance of payments without resorting to measures
destructive of national or international prosperity.(6)
The anxieties shown in the Article underlay many of the IMF measures. They must keep debtors alive financially by exports to keep them within the international system. Defaulting or decoupling in an attempt to become self-sufficient cannot be allowed as it might set a precedence for others to follow. By the logic of interdependence, which the US also follows, if nations leave, the whole system could fold. To prevent this the IMF provides loans to countries with balance of payments deficits in order to provide time in which they can make adjustments to the economic policies to keep them solvent, or at least still in the system. This links the IMF as well as the WB "symbiotically...to expansive capital [primarily from TNCs], and with collaborator governments (or at any rate parts of them linked to the system) in the system's periphery."(7)
Although the IMF and WB co-ordinate their efforts they do have slightly different mandates. The WB was to be for longer term financial assistance and, in the beginning at any rate, was used primarily to provide capital for major infrastructure projects like hydroelectric dams. It has no agenda to change political systems, just economic ones. This is clearly stated in Article IV Section 10 of the WB Articles:
The Bank and it's officers shall not interfere
in the political affairs of any member; nor shall
they be influenced in their decisions by the
political character of the member or members
concerned. Only economic considerations shall be
relevant to their decisions, and these considerations
shall be weighed impartially.(8)
Of course this impartiality depends on the ability to separate politics and economics which on any level is almost, if not entirely, impossible. Virtually all Structural Adjustment Loans (SAL) given out include reforming conditionalities which effect domestic politics and a quick glance into the recent past (such as barring WB loans to Cuba or Chile under Allende precisely because of the USs dislike for their governments) shows that this ideal of non-interference is a farce.
There has been a theoretical shift in policy that has occurred since 1989 when the WB announced a greater focus on governance (an area they are mandated to stay out of) and poverty as a response to disappointments with the SAL programs results. They say "African governments...need to go beyond the issues of public finance, monetary policy, prices and markets to address fundamental questions relating to human capacities, institutions, governance, the environment, population growth and distribution, and technology."(9) This is an ironic turn-about. To actually achieve any of this would require challenging the privileges of the powerful, changing the orientation of the police, judiciary system and the local government all of which is outside the WB mandate. Their solution is the same failed policy of more economic liberalization and decentralization in order to mystically produce "an economically enabling and in turn politically empowering environment."(10) The WB is not well placed to tackle these issues however as it is constrained by regime interests because it works through, not around, national governments.
The programs used by the IMF/WB are known as Structural Adjustment (SA) and Austerity. SA is "the process of deliberately adjusting the structure of an economy to mitigate the effects of negative shocks or to take advantage of new opportunities."(11) Generally SA has been used as a reaction to negative external shocks. The methods used have been a combination of devaluation, deregulation, desubsidization, privatization, reduced welfare and infrastructure budgets and reduced bureaucracy. More specifically IMF loans are used to help pay for import imbalances by reducing the volume of imports and inflation by reducing demand. Demand is cut by lowering real wages, cutting government expenditures on imports and devaluation to make imports more costly. This is the short-term financial goal. WB SALs, which accounted for 10% of all funding in 1982 and rose to 25% by 1989 with half going to Africa, are more long term in conception. Import demand and government expenditure are reduced so that domestic demand goes down leaving more goods to export to pay for essential imports. Market prices are introduced with the ending of government subsidies and price controls and privatization is expanded to increase supplies of export items. Another important aspect is the deregulation of foreign exchange allowing for free flowing capital. To increase the lot of the poor, agricultural driven growth is encouraged to utilize unskilled labour. The money they make is supposed to help drive the domestic economy. This is all done in a short time frame as both the IMF and the WB favour the idea of immediate, drastic, shock-therapy in order to stop any political resistance from having time to mount an effective campaign against the austerity measures.
The broad objective of all of this is the "attainment of viable balance of payments, satisfactory long-term growth performance and low inflation."(12) This should lead to the LDCs emulating the Newly Industrialized Countries (NIC) and specifically in Africa, to create the first 'African Tiger'. There of course is one major underlying rule: conform to the systems of SA and austerity and continue to receive loans and remain solvent, if you do not conform you are cut off.
These underlying theories and concepts are fraught with contradiction, mis-assumptions and out-and-out lies. The IMF/WB follow the basic liberal ideals that government is bad and the private sector is good without understanding that the governments they are there to help provide infrastructure, educational and social programs that hold societies together. As the governments blame external shocks to their economic system the IMF/WB ignores them believing that the problems stem primarily from incorrect government policies.
Conditionality is another much-hated part of the programs. The IMF/WB monitor specific economic indicators to see if the government's performance is good enough to warrant the next influx of funding. Therefore the governments are constantly forming short range policy goals to achieve each next step with little chance to formulate any sort of long range economic policies. There is also the belief that conditionality impinges on national sovereignty but there is little choice in most LDCs but to follow the programs.
The homogeneity, or standardized approach, of the programs has also been contentious. The reasoning for this approach is that generally those in charge of implementing the programs have limited knowledge of the countries they are dealing with, they want to preserve the specific ideological thrust of the programs and one simple style cuts down on political and administrative difficulties. Besides those reasons the IMF/WB want to avoid the appearance of favouritism.(13) LDCs have called for a more nation-specific approach but have been largely ignored.
There are a large number of very specific problems with the solutions offered by the IMF/WB. Devaluation leads to higher import prices and lower export prices leading to a lowering of inflation and an increase in exports and therefore in a surplus of foreign capital, theoretically. The difficulty is that "there is no evidence of a significant effect of these programs on inflation"(14) and on top of that devaluation on exports has done more to drive down export revenues through falling prices than to expand revenue through increased export volumes.
The removal of price controls and the introduction of a market driven pricing system has led to situations where the poor cannot afford even basic necessities and an underground barter economy is created as people circumvent the new system through smuggling and the black market. "Despite the euphoria about privatization [and the market economy it creates], there is very little evidence that it is a solution [to the] neocolonial economic crisis."(15) As if this is not enough the drastic cuts in real wages lead to political and social unrest which causes instability and uncertainty and directly to the flight of capital out of the country.
The evidence of the effectiveness of the SAL and austerity programs after over ten years is still inconclusive. In Africa, for example, balance of payments have been improved through the cutting of imports and not by increasing exports. What little growth there has been gets fed immediately back international debt repayment. Overall growth is still stagnant or negative in many African LDCs even though SAL/austerity was supposed to be a three to five year quick fix.
This of course calls into question some major underlying assumptions such as the belief that the "free movement on international capital is a fundamental and necessary part of the capitalist world economy."(16) Ignored here is the fact that during the two World Wars capitalism flourished domestically especially for the US in spite of major controls on the flow of international capital. If this is so why destroy the LDCs domestic economies to facilitate capital flows? The market-based financial structure in inherently unstable and by definition it necessarily increases inequality in the pursuit of market gain (a zero-sum game). The IMF/WB use deregulation in the LDCs and what happens to them domestically mirrors the international reality that the poor get poorer and the rich, richer.
The poor are hit disproportionately hard due to cuts in government services such as education and health where the WB has demanded user fees which prices some, if not all, the basic services out of reach of the poor. Cutbacks in the area of agriculture drastically effect the poor and these cuts as a result of SA may have more than wiped out the gains from pricing reforms.(17) There is also a cruel 'catch-22' in the emphasis placed by SA on traditional export crops. As the LDC grows more and exports more it leads to a glut on the international market driving the price down. For Africa even volume has dropped along with prices and their share of the world market which has largely been lost to the 'Asian Tigers'. "by the 1960s the phrase 'IMF Riot' has a firm place in the lexicon of development politics."(18)
SA has led to inflation, poverty, ecological deterioration, the disappearance of the middle class in LDCs, a diminished state, a privatized and informalized economy and disappearing infrastructure. Economic and political decay has led peasants to return to subsistence agriculture and out of the cash economy lowering tax revenues and causing a decline in consumerism. As well there have been numerous instances of civil unrest. The declining state has shown a tendency to use violence to retain control and thereby creating rebel groups who now vie for control using armed insurrection. This of course leads to capital flight due to uncertainties. Even in the face of coups and civil wars the IMF/WB have continued to push through austerity measures showing a stunning ignorance (or disregard) of the realities of the political situations in the LDCs. The threat used on any nation thinking of declaring a unilateral moratorium on debt payments to create stability is that they would "find [themselves] blacklisted from international credit markets for many years"(19) which would effectively destroy the now highly dependent LDCs. Or would it? In the 1980s, 'the lost decade' for the LDCs, per capita income dropped over 10% in fifteen of the most heavily indebted countries. "Instead of capital flowing from the rich North to the poor South, the indebted countries were transferring close to 5% of their annual income to their creditors in the rich countries. The LDCs often felt that they were being made the scapegoats of an inherently unjust and unstable system of credit creation."(20)
This system is not just used to benefit the IMF/WB it is also quite specifically pro-TNC. WB contracts are usually given to US TNCs and they get to set up in tax-free havens and exploit labour who's real wages have been lowered by SA. The very structure of the "inter-state system of formally sovereign nations makes it all the easier for transnational to play off one government against another in their search for concessions."(21) It is made an even easier game when the governments involved are LDCs under austerity.
With the US debt at over $2.3 trillion (1990), that's around 40% of it's GNP(22), the country needs a buffer to stop the system from crashing and taking the US down with it. The IMF gets used in two ways. The first is to "help resist speculative pressures against the dollar"(23) and the second is as a buffer, or scapegoat, if countries default on massive debts the IMF/WB will take the fall and not the US central banking system. In order to ensure this buffer the US government has at times tied bilateral aid to the one condition of accepting IMF austerity and loans.
How all of this effects individual LDCs is shown with the example of Ghana which has been held up as the model of SA in Africa. From 1967 the IMF/WB have taken a direct role in the running and ruining of Ghana's economy. One year after SA was introduced the cost of living index had risen 85%, inflation was out of control, unemployment was up drastically, industrial output dropped 50% (from 1966 levels), there was no significant rise in the GDP and the balance of payments situation had deteriorated dramatically. This triggered off social and political unrest and a 'fixed' election in 1969. The governments next budget was based on an IMF stabilization plan that called for a wage freeze, devaluation of the cedi (Ghana's currency), cuts to education and social welfare, reduced military expenditure and it led to plummeting living standards, protests, the government outlawing strikes and finally a military coup.
The January 13th 1972 coup was avowedly anti-IMF and repudiated selective external debts, revalued the cedi and restored union rights. They created a new agricultural policy that led to some surpluses and used selective nationalization of TNCs. Unfortunately corruption became endemic and the IMF cut credit totally to prevent Ghana from becoming a model for others to emulate.
The 1974 oil crisis severely damaged the economy and inflation rates soared (some of the highest levels in the world) from 3% in 1970 to 116.5% by 1977. There were food shortages, the GDP dropped and wages could not keep up with inflation. This was followed by numerous riots, failed coup plots and protests. On July 5th 1978 the military sacrificed their own leader and installed another General in his place. He immediately "declared unashamedly, that his regime was waiting for the IMF to tell [him] what to do."(24) The IMF obliged with a 50% devaluation of the cedi, reductions of public expenditures, relaxation of price controls and a general further liberalization of the economy which led to economic chaos and crisis especially for the poor. IMF riots followed and industries shut down due to a lack of raw materials. By April 1979 Ghana was on the verge of a social revolution. In May there was a failed air force officer coup followed on June 4th by a successful coup by lower-ranking officers and ncos. Both the US and the UK condemned the coup.
Elections were set up and civilians took over in September 1979. They attempted some liberalization policies such as removing subsidies on essential items, rasing the price of fuel, privatizing vital industries, in short aspects of an IMF-style stabilization program. The IMF/WB thought they had an ally so called for the government to devalue the cedi. The government refused noting that the last four times that had been done it was followed by "social explosions and executions."(25) By mid-1981 unrest and coup plots finally led to the December 31st 1981 successful coup by radical soldiers.
A new agricultural policy which benefitted large land owners over peasant farmers (including the seizing if land) was implemented. The economic policies were ad hoc and inconsistent until they began secret negotiations with the IMF/WB. The export sector was down, banks were short of money and Ghana was running a huge deficit. The IMF/WB solution was devaluation as well as guarantees against the nationalization of TNCs and the removal of radical organizations and individuals from the government. In return Ghana would receive a standby agreement facility of Special Drawing Rights (SDR) of $238.5 million, the opportunity to purchase SDR of $120 million under the compensatory financial facility, and a second standby facility of $180 million to cover from July 1984 to December 1985.(26) A November 1982 coup attempt failed and the doors were opened to the IMF/WB and the TNCs. From December 1982 on WB officials attended all cabinet meetings.
The first Economic Recovery Program (ERP) lasted from 1983-1986. Subsidies were removed on social services including water, health, education, electricity and transportation, fuel prices rose and were also taxed, the producer price of cocoa went up and a policy of no nationalization without compensation was adopted. Radical movements were banned, press attacks against the US and IMF were outlawed and the cedi was devalued by 99%. The budget led to more IMF riots and inflation skyrocketed from 32.5% (January 1982) to 174% (June 1983). The cedi was devalued by 5 454% between 1983-1986 and education expenditures dropped from $20 per capita (1972) to $1 per capita (1983).
The second ERP went from 1987-1988. By 1987 hospital services had been commercialized at exorbitant rates. Education was cut further leading to plummeting enrollment. By 1987 less than 7% of students got to secondary school and only 0.8% went on to university. Ghana's debt soared from $1.6 billion (1983) to $3.5 billion (1988). By 1986 the debt was consuming over 65% of Ghana's export earnings.(27)
Ghana's major banks and financial institutions are under the control of IMF/WB officials and consultants. Political decisions are not taken without consulting the IMF/WB and US and UK embassy officials. The situation in Ghana's economy despite this unprecedented level of technocratic control is conveniently explained away without acceptance of any responsibility. Blame instead goes to the government for a "deteriorating flow of economic information upon which to base investment decisions [thus the governments] decision-making process became increasingly chaotic."(28) This is a situation they now have to take care of. No longer will the 'irrational' government fail to recognize the usefulness of 'comparative advantage' or keep the cedi over-valued. "the foregoing [situation in Ghana] serves to draw attention to the pervasive importance of government policies and the importance, therefore, of getting them right. The failings of both the agriculture and the industry were due essentially to policy mistakes."(29)
The IMF SDR has loaned Ghana $1 208 million between 1983-1991.(30) This figure does not include monies from the WB or other lenders. In spite of this the poor get poorer and the creditors richer. The local textile industry has been destroyed. Deforestation is creating 'dry areas' which hamper the growth of cocoa trees (a major export) and the country is utterly dependent on credit to keep the country running at all.
Today the annual growth rate is in decline, agricultural production is down causing a rise in prices (by 40.2% in 1990 over 1989 (31)), inflation still has not been checked and any sort of sustained growth has not happened. There has been little direst foreign investment in the private sector and with Ghanian banks having interest rates of 40% local business expansion is highly unlikely. The only real industrial growth has come from the non-tax paying TNCs, especially in gold mining ( up 400% since it was opened up to TNCs). Ghana is presently in debt approximately $8 billion to the IMF/WB and is only sustaining a growth rate of 2.5%.(32) There has been only limited success in diversifying industry for export markets. Demonstrations continue as does military intimidation (selective electrical blackouts, torture, arrests, 'disappearances', executions, et cetera).
Flying in the face of these trends the WB predicts an 8% growth rate and only 5% inflation from 1995-2000 and even a balance of payments surplus.(33) This will happen because of policies that will "focus even more clearly on the removal of the remaining structural, institutional and financial impediments to growth."(34) To ensure compliance the IMF has a representative in the office across the hall from the finance minister.
Structural adjustment cannot possibly function properly no matter what small tinkering the IMF and the WB try as the programs were, and still are, based on the assumption of much larger capital flows than are currently available globally. These flows provide the 'fuel for the pump' of economic growth under SA. Compounding this problem is the fact that donors have not kept their promises under the Brady Plan to provide increased finances in return for policy reforms. Global protectionism by the OECD nations has ensured that foreign direct investment has dwindled down to virtually nil in the LDCs and voluntary commercial bank lending has ceased after the 1982 fiasco of the Latin American debt crisis and the IMF/WB bailout of the banks. Due to these factors the IMF/WB programs may lead to a strange outcome of financial pseudo-solvency (thanks to perpetual aid) and economic ruin at the same time.
The interconnectedness of all the factors thus far mentioned is seen at an international level as well. Global balance of payments grew to a deficit of over $100 billion by 1980 and continues to climb. This is money the world owes itself. A huge part of this belongs to the US which is therefore absorbing global capital to cover the payments. This leads to higher global interest rates which in turn causes the LDC debt burden to increase even more. It has also led the US to cut down on the amount of money it has been paying into the IMF/WB so there is less money available for the LDCs to draw upon.
For Ghana and other LDCs the debt crisis has surpassed the Depression in severity and there is
little hope that things are going to change any time in the foreseeable future barring a total
international system collapse. As long as this situation continues the IMF/WB will continue to
be regarded by the LDCs as a "modern and somewhat more genteel gunboat"(35) for the spread of
US backed liberal free-market theories.
Bibliography
1. Adams, Paul."Ghana: Cycle of Dependency."Africa Report. vol 40 no 2 (Mar-Apr
1995),p.34-38.
2. Barkin, J.Samuel & Cronin, Bruce."The State and the Nation: Changing Norms and Rules of Sovereignty in International
Relations."International Organization. vol 48 (1994),p.107 -130.
3. Block, Fred."Political Choice and the Multiple Logics of
Capital."Theory and Security. vol 15 (1986),p.175-192.
4. Broad, Robin & Cavanaugh, John."No More NICs."Foreign Policy.
Fall (1988).
5. Conway, Patrick."IMF Lending Programs: Participation and Impact."Journal of Development Economics. vol 45 no 2 (Dec
1994),p.365-391.
6. Cox, Robert.Production, Power and World Order.NY:Columbia,
1987.
7. Gill, Stephen & Law, David.The Global Political Economy. Baltimore:Johns
Hopkins,1988.
8. Gilpin, Robert.The Political Economy of International Relations.NJ:Princeton U,1987.
9. Glover, David."A Layman's Guide to Structural Adjustment." Canadian Journal of
Development Studies. vol 12 no 1 (1991),p.173-186.
10. Gnanaselvam, Shiro & Stevens, Mike."The World Bank and Governance."IDS
Bulletin. vol 26 no 2 (Apr 1995), p.97-105.
11. Goetz, Anne Marie & O'Brian, David."Governing for the Common Wealth? The World Bank's Approach to Poverty and
Governance."IDS Bulletin. vol 26 no 2 (Apr 1995),
p.17-27.
12. Hadjimicheal, Micheal T. et.al.Ghana: Adjustment and Growth
1983-1991.Washington:IMF,1991.
13. Haggard, Stephan.Pathways From the Periphery.London:Cornell,
1990.
14. Haynes, Jeff."Sustainable Democracy in Ghana? Problems and Prospects."Third World Quarterly. vol 14 no 3 (1993),
p.451-467.
15. Krasner, Stephen.Structural Conflict.Berkeley:U of California
,1985.
16. Meier, Gerald M. & Steel, William F.Industrial Adjustment in Sub-Saharan Africa.World
Bank:Oxford U,1989.
17. Morna, Colleen Lowe."Interview: Kwesi Botchwey, Ghana's Finance
Minister."Africa Report. vol 40 no 2 (Mar-Apr 1995),p.39-41.
18. Naylor, R.T.Hot Money and the Politics of Debt.Montreal:Black
Rose,1994.
19. Radice, Hugo.International Firms and Modern Imperialism.
Harmondsworth:Penguin,1975.
20. Rosecrance, Richard."Regionalism and the Post-Cold War Era."
International Journal. vol 41 no 3 (Summer 1991),p.373-393.
21. Strange, Susan.New Diplomacy in the Post-Cold War World.London:
St.Martins,1993.
22. Strange, Susan.States and Markets.London:Pinter,1988.
23. Stubbs, Robert & Underhill, Geoffry.Political Economy and the Changing Global
Order.Toronto:McClelland & Stewart,1994.
24. Yeebo, Zaya.Ghana:The Struggle for Popular Power.London: New
Beacon,1991.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.