Twenty Questions on the IMF

by Robert Weissman

from the book

Democratizing the Global Economy

Kevin Danaher - editor

Common Courage Press 2001


1. What is the IMF's mission and how has it changed over time?

The International Monetary Fund (IMF) was created in 1944 to maintain the standard of fixed exchange rates that was established at the end of World War II. Since the abandonment of the gold standard in 1971, the IMF has adopted a new core mission, providing loans to economically troubled countries.

Countries with balance of payment difficulties-meaning their earnings from imports and other sources are insufficient to pay off their foreign debts-turn to the IMF for two reasons. First, the IMF provides loans to cover immediate obligations to foreign creditors. Second, private lenders and other public lenders, such as the World Bank, generally will not lend to troubled economies unless they have a loan agreement with the IMF.

Thus the IMF plays a "gatekeeper" role: If you are a poor, indebted country, you can't get access to foreign credit unless you have a deal with the IMF. Agreements with the IMF typically require countries to adopt "structural adjustment" policies as the condition for a loan.

2. What is structural adjustment?

Structural adjustment is a policy package in line with what is often called "neoliberalism," a far-reaching version of the "free trade" agenda. In many ways, it is a harsh version of Newt Gingrich's Contract with America.

The central goals of structural adjustment are to open up countries to having transnational corporations get access to their workers and natural resources, 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, liberalizing trade and investment rules, raising interest rates, increasing taxes, and eliminating subsidies on consumer items such as food, fuel, and medicines.

3. What is the relationship between the IMF and World Bank? How has that changed over time? Do their functions overlap?

The World Bank was also formed in 1944 to help with European postwar reconstruction. It later shifted its focus to assisting development efforts in the Third World. It has funded major infrastructure projects: roads, hydroelectric dams, coal plants, and other major investments that private capital would not initiate because they are not profitable. These projects have been highly controversial for their effect on the environment, indigenous people, rural communities, and women.

Starting in the 1980s, and while continuing to do project lending, the Bank began shifting its loans toward structural adjustment and sectoral adjustment loans. About two-thirds of the Bank's lending now goes for structural adjustment and sectoral adjustment. The World Bank's structural adjustment programs are not appreciably different than those of the IMF.

The IMF and World Bank jointly administer a program, now called the Heavily Indebted Poor Country/Poverty Reduction and Growth Fund, that provides very modest debt relief to the world's poorest countries on the condition that they undergo years of structural adjustment.

The World Bank respects the IMF's unofficial gatekeeper role, and generally will not make loans to countries that have not received an IMF seal of approval.

4. What is the IMF's and the World Bank's relationship to the World Trade Organization (WTO)?

The IMF, World Bank and the WTO all share a commitment to "free trade" and binding developing countries into the global economy. The WTO, which implements agreements governing world trade and administers a binding mechanism to resolve trade disputes between nations, generally operates independently of the IMF and World Bank.

In November 1999, however, the IMF, the World Bank and the WTO announced a new "coherence agreement" in which they pledged to coordinate future activity. It is unclear what this will mean in practice, but some fear the IMF and World Bank may incorporate some of the worst elements of WTO agreements into their lending conditions.

5. How does the IMF set its policies?

The IMF is governed primarily by an executive board that consists of representatives of IMF member countries, with voting weighted in favor of those countries that provide more money to the Fund. The executive board sets broad policy and approves loans. The agency's bureaucracy handles the massive, day-today operations and exerts a strong, de facto influence over policy.

Voting at the IMF is weighted, with bigger contributing countries having proportionally more say. The United States-the largest shareholder at the IMF with more than 17 percent of the votes-maintains effective veto power over major decisions at the Fund. In practice, the U.S. Treasury Department exercises overwhelming control at the IMF; The New York Times has referred to the IMF as a "proxy for the United States."

6. How open is the IMF to outside scrutiny and participation?

Although "transparency" (openness) is a favorite buzzword in development circles, the IMF is extremely secretive in its operations. In recent years, as criticism of the IMF's secrecy has grown in developing countries, the IMF has made public "Policy Framework Papers"-the documents establishing the parameters of structural adjustment programs in specific countries-and some other important materials. These are all papers that a few years ago the IMF said it could not make public out of respect for the sovereignty of the countries they affected. Meanwhile, other critical documents remain secret.

Although the IMF assumes a dominating role in economies undergoing structural adjustment-with IMF officials often posted in national finance departments-precise IMF demands are concealed from the affected populations. As a general matter, the IMF does not seek public input into the policies it imposes on borrowing countries.

7. Given that the U.S. taxpayer contributes large amounts of money to the IMF, what kind of oversight of the IMF is provided by Congress or other agencies?

The IMF is generally viewed as following a policy line set by the U.S. Treasury Department. Congressional efforts to influence policy at the Fund have generally failed. Congress has directed the U.S. Executive Director to the IMF to use "voice and vote" to push for certain reforms, but this has had virtually no effect on IMF policy. Almost all decisions at the IMF are reached by consensus, and recorded votes are rarely taken. The U.S. Executive Director to the IMF, Karen Lissakers, told a Congressional committee in 1998 that the Fund's executive board had taken votes on approximately a dozen out of 2,000 decisions taken during her tenure. The only time Congress has affected IMF policy is when it refused to provide requested funding increases.

8. How do IMF policies benefit transnational corporations?

Structural adjustment policies open up developing countries to foreign investors on terms most favorable to transnational corporations. Structural adjustment requires countries to remove barriers to foreign investment, and push countries to orient their economies to producing exports-typically produced by or sold to transnational companies. State-owned enterprises privatized under structural adjustment are frequently sold to transnationals, often at bargain-basement prices.

IMF-orchestrated bailouts-assistance to countries whose exchange rates are plummeting-provide money primarily so that developing countries can pay off their foreign creditors (including private banks). Many critics view these bailouts as bailouts of the creditors who don't absorb the cost of risky loans gone bad.

This particular kind of corporate welfare can have especially pernicious effects, since it may encourage excessively risky lending by bankers and others. If they know they have free, de facto insurance from the IMF, they can make very risky loans at high interest rates without fear of paying for failures.

9. What is the IMF's approach to helping countries that are deeply in debt?

The IMF program for helping poor countries that are deep in debt was, until recently, called the Enhanced Structural Adjustment Facility (ESAF). In 1999, under fire for a program poorly run, the Fund changed the name to Poverty Reduction and Growth Facility (PRGF). This program is operated in conjunction with the World Bank's Heavily Indebted Poor Country (HIPC) Initiative.

The purpose of PRGF/HIPC is to provide some debt relief- that is, to cancel part of the debts-for poor countries that have no hope of paying back their total foreign debt and for whom debt payments are draining their economy.

However, the debt relief under PRGF/HIPC is very modest. Under the plan, many countries find that while the absolute amount of their debt may decline, the amounts they actually pay are only minimally affected. That is because many poor countries cannot make their debt payments, and, often with the agreement of their creditors, they pay just a portion of what they owe.

Compounding the problem, the price of receiving debt relief under the PRGF/HIPC program is to implement a supervised structural adjustment program for three years (previously six years) prior to receiving any debt relief.

10. What would the alternative be?

An alternative would call for immediate debt cancellation of the debts of the poorest countries and far-reaching debt cancellation for other developing countries. For less poor countries, debt cancellation could focus on "odious" debt-debt incurred by dictators, military regimes or for boondoggle projects pushed by foreign interests. This cancellation would come without any structural adjustment conditions.

Many economic justice advocates from developing countries urge conditions related to the establishment of democracy, or a commitment to devote resources to meeting the basic needs of the poorest segments of society.

In the case of the poorest nations, debts could be cancelled by drawing on the existing resources of the IMF and World Bank, that is, without rich countries providing these institutions with any new funding.

Beyond approaches to debt cancellation, many in the developing world are also calling for an alternative approach to economic development. One of the demands arising from grassroots movements is respect for a diversity of national approaches, so there would be no "blueprint" for development to parallel the IMF's cookie-cutter structural adjustment policies. But there is growing agreement about the importance of a number of principles: national food security, land reform, devoting attention to production for local needs, an emphasis on egalitarian wealth distribution, emphasizing smaller enterprises, empowering workers and respecting worker rights, imposing regulations on foreign capital to limit a country's exposure to volatile international capital markets, involving civil society in development planning, and preserving a substantial role for government in planning, regulating, and carrying out economic activity.

11. What are the economic and social impacts of structural adjustment?

Structural adjustment has been successful at its goal of reducing the scope of government and integrating developing countries into the global economy. Yet it has failed by many other measures. Most countries undergoing structural adjustment have not experienced economic growth, even in the medium term.

Those developing countries that have experienced the greatest economic successes in recent decades have violated many of the central precepts of structural adjustment. They have protected certain parts of their economy, and they have maintained an active government role in economic planning.

An external review of ESAF programs sponsored by the IMF illustrated the basic failure of structural adjustment. Countries undergoing ESAF-sponsored structural adjustment experienced stagnating growth rates and saw their foreign debt nearly double: dramatic evidence of failure, since reducing foreign debt is one of ESAF's ostensible purposes.

In the two regions with the most structural adjustment experience (Latin America and Africa), per capita income has stagnated in Latin America, and collapsed in Africa, where per capita income dropped more than 20 percent between 1980 and 1997.

The emphasis on exports tends to be socially disruptive, especially in rural areas. Poor subsistence farmers frequently find their economic activity described as nonproductive, and they experience land pressures from expanding agribusiness, timber companies, and mines. Pushed off their land, they frequently join the ranks of the urban unemployed, or move onto previously unsettled, and often environmentally fragile, lands.

Structural adjustment has generally contributed to rising income and wealth inequality in the developing world, a fact tacitly acknowledged by both recently retired IMF Managing Director Michel Camdessus and World Bank President James Wolfensohn.

12. How did the Asian financial crisis of 1997 start and what was the IMF* response?

The Asian meltdown was caused in large part by a heavy reliance on short-term foreign loans by South Korea, Thailand, the Philippines, Malaysia, and Indonesia. When it became apparent that private enterprises in those nations would not be able to meet their payment obligations, international currency markets panicked. Currency traders converted their Asian money into dollars, and the Asian currencies plummeted. That made it harder for the Asian countries to pay their loans, and it made imports suddenly very expensive.

There were other underlying causes for the financial crisis, including over-investment in real estate and other speculative and unnecessary ventures, but almost everyone agrees that the currency crash and financial disaster were vastly disproportionate to the weaknesses in the Asian economies.

The IMF treated the Asian financial crisis like other situations where countries could not meet their balance of payment obligations. The Fund made loan arrangements to enable countries to meet foreign debt payments (largely to private banks in these cases) on the condition that the recipient countries adopt structural adjustment policies.

But the Asian crisis differed from the normal situation of countries with difficulties paying off foreign loans. For example, the Asian governments were generally not running budget deficits. Yet the Fund instructed them to cut spending: a recessionary policy that deepened the economic slowdown.

The Fund failed to manage an orderly roll-over of short-term loans to long-term loans, which was most needed, and it forced governments, including those in South Korea and Indonesia, to guarantee private debts owed to foreign creditors.

In retrospect, even the IMF admits that it made things worse in Asia. Malaysia stood out as a country that refused IMF assistance and advice. Instead of further opening its economy, Malaysia imposed capital controls, and sought to eliminate speculative trading in its currency. While the IMF mocked this approach when adopted, the Fund later admitted that it had succeeded. Malaysia generally suffered less severe economic problems than the other countries embroiled in the Asian financial crisis, and rebounded faster from its recession.

13. Did the 1997-1998 global financial crisis lead to a shift in the debate surrounding structural adjustment policies in the developing world?

The IMF's structural adjustment prescriptions for countries suffering through the Asian financial crisis were roundly denounced, including by many conservative and mainstream economists and opinion makers. The widespread criticism of the Fund undermined its political credibility.

The IMF response has been to make some minor concessions in making its documents more publicly available, increasing its rhetorical commitment to poverty in its structural adjustment programs, and by limiting its demands that countries liberalize their capital markets (e.g., by allowing unlimited trading in their currency, and permitting foreign investors to invest in domestic stocks and bonds without restriction).

14. What were the consequences of the Asian financial crisis in countries like Thailand and Indonesia? Did IMF policies help those countries?

The financial crisis led to massive human suffering. In South Korea, a country whose income was approaching European levels, unemployment skyrocketed from approximately 3 percent to 10 percent. "IMF suicides" became common among workers who lost their jobs and dignity.

In Indonesia, the worst hit country, poverty rates rose from an official level of 11 percent before the crisis to 40 to 60 percent in varying estimates. Gross Domestic Product (GDP) declined by 15 percent in one year. In September 1998, UNICEF reported that more than half the children under two years old in Java, Indonesia's most populous island, were suffering from malnutrition. At one point, the food shortage became so severe that then-President B.J. Habibie implored citizens to fast twice a week. Many had no choice.

IMF-mandated reductions in government spending worsened the Asian recession. The forced elimination of price controls and government subsidies for the poor imposed enormous costs on the lowest income strata. In Indonesia, food and gasoline prices rose 25 to 75 percent overnight or in the course of a few days.

An October 2000 study by 25-year veteran IMF economist Morris Goldstein found that "both the scope and the depth of the Fund's conditions were excessive." Goldstein concluded that his fellow policymakers at the IMF "clearly strayed outside their area of expertise."

15. What has been the IMF's role in Russia?

Russia in the 1990s has witnessed a peacetime economic depression of unprecedented scale. Much of the blame for this social and economic catastrophe rests with the IMF, which has had a central role in designing and supervising Russia's economic policy since 1992.

The number of Russians in poverty has risen from 2 million to 60 million since the IMF came to post-Communist Russia. Male life expectancy has dropped sharply from 65 years to 57. Economic output is down by at least 40 percent.

The IMF's "shock therapy"-sudden and intense structural adjustment-helped bring about this disaster.

"In retrospect, it's hard to see what could have been done wrong that wasn't," Mark Weisbrot of the Center for Economic and Policy Research told a Congressional committee in late 1998. "First there was an immediate decontrol of prices. Given the monopoly structure of the economy, as well as the large amount of cash savings accumulated by Russian households, inflation soared 520 percent in the first three months. Millions of people saw their savings and pensions reduced to crumbs."

Then the IMF and Russian policymakers compounded their mistakes, Weisbrot explained. "In order to push inflation down, the authorities slammed on the monetary and fiscal brakes, bringing about a depression. Privatization was carried out in a way that enriched a small class of people, while the average person's income fell by about half within four years."

Meanwhile, Russia kept its economy functioning with an influx of foreign funds, loaned at astronomically high interest rates because of the strong possibility of default. In 1998, with the Asian crisis still unfolding and with Russian default seemingly near, the IMF agreed to a $23 billion loan package to Russia, seeking to maintain the ruble's overvalued exchange rate. An initial $4.8 billion portion of the loan left Russia immediately- some used to pay off foreign lenders, much of it stolen by Russian politicians. Soon after, the ruble collapsed anyway.

For the IMF, the prospect of Russia deciding to continue not to repay loans was extremely worrisome. To avert this problem, the Fund continued its loan program, but its loans to Russia didn't actually go to Russia; IMF money disbursed to Russia was and is held at the IMF to pay off prior IMF loans to Russia.

Does the IMF think it made fundamental mistakes in Russia? No. From the IMF's perspective, the problem has been not enough IMF-style reform. Here's how former IMF Managing Director Michel Camdessus put it in September 1999: "[Russia's economic] shortcomings represent not so much the failure of reform as the effects of 70 years of central planning and the incomplete implementation of reform policies-itself a result of a lack of domestic political consensus on reform."

16. How do IMF programs affect workers?

As outgoing World Bank economist Joseph Stiglitz says, the IMF views labor as just another commodity. One IMF priority has been promoting "labor flexibility," meaning making it easier for workers to be fired. The Fund has supported regulatory changes to remove restrictions on government and private employers firing or laying off workers.

The IMF has actively promoted government downsizing, even though in many countries the government is the major employer and there are few prospects for alternative employment.

The IMF also views many worker benefits as too costly (if they are provided by the government) or too inefficient (if required of private employers). It has urged major scaling back of government pension programs around the world.

The IMF has also called for reducing minimum wages in countries such as Haiti. Respect for the workers' right to organize is not included in the structural adjustment policy package.

17. To what extent do IMF / World Bank structural adjustment policies incorporate environmental considerations? How do structural adjustment policies impact the environment?

"The IMF claims to defer to the World Bank on environmental matters, but promotes export-led development that has major environmental impacts without asking the World Bank for any formal assessment of the environmental implications of its approach," explains Friends of the Earth in a recent report, IMF: Selling the Environment Short.

"The World Bank has failed to provide environmental guidance to the IMF, and is even delinquent in assessing the environmental impacts of its own structural adjustment loans," Friends of the Earth concludes. "A recent internal World Bank study found that fewer than 20 percent of World Bank adjustment loans included any environmental assessment."

But the failure to consider environmental implications does not mean there aren't any. Here is how Friends of the Earth summarizes the effects of structural adjustment on the environment: "The IMF's economic policies affect the environment in various ways. One major goal of structural adjustment programs (SAPs) and stabilization programs is to generate foreign exchange through a positive trade balance. To meet the IMF's ambitious targets for currency reserves and trade balance, countries must quickly generate foreign exchange, often turning to their natural resource base. Countries often overexploit their resources through unsustainable forestry, mining and agricultural practices that generate pollution and environmental destruction, and ultimately threaten future exchange earnings."

"Exports of natural resources have increased at astonishing rates in many countries under IMF adjustment programs, with no consideration of the environmental sustainability of this approach. Furthermore, the IMF's policies often promote price-sensitive raw resource exports, rather than finished products. Finished products would capture more added value, employ more people in different enterprises, help diversify the economy, and disseminate more know-how."

"Structural adjustment and stabilization also aim to generate positive government budget balances. In the effort to rapidly trim budget deficits, governments are forced to make choices, and inevitably, the environment loses. Lower spending weakens a government's ability to enforce environmental laws, and diminishes efforts to promote conservation. In addition, governments are told to increase private investment and to reduce the role of the state in favor of private sector development. Budget priorities are often directed toward business promotion, creating a further strain on cash-strapped environmental enforcement agencies. Governments may also relax environmental regulations to meet structural adjustment program objectives of increasing foreign investment, as occurred in the case of the Philippines."

As an example of how IMF-mandated budget cuts hurt the environment, Friends of the Earth points to the Brazilian Amazon: "Because of IMF budget restrictions, as of July 1999, funding for the enforcement of environmental regulations and supervision programs was reduced by over 50 percent."

18. What is the Meltzer Commission and what did it say?

The Meltzer Commission, formally known as the International Financial Advisory Commission to the U.S. Congress, was created by the 1998 U.S. legislation that allocated an additional $18 billion to the IMF. The Commission was charged with reviewing the operations of the IMF and World Bank, and making recommendations for changes in the international financial institutions. The Commission, which included both Republican and Democratic appointees, unanimously agreed on two points: the debts of the forty-one most indebted and impoverished countries should be cancelled; and the IMF should get out of the business of long-term development lending.

Commission members split over how severely the IMF's functions should be limited (with most Democratic members aiming to preserve a broader role for the IMF), and over proposed changes for the World Bank. Eight of the eleven Commission members supported a proposal to change the World Bank to the World Development Agency, to eliminate the Bank's lending function, replace Bank loans with grants, and generally to shrink the size of the Bank.

19. Given the international nature of markets, does structural adjustment indirectly affect the U.S. economy even if the United States is not directly forced to structure our economy in response to IMF guidelines?

Structural adjustment in poor countries and trickle-down economics in richer countries such as the United States reinforce one another. Just as structural adjustment carries the U.S. system of privatized, fee-for-service health care to the Third World, those seeking to privatize the U.S. social security system point to Chile's social security system as a model.

More concretely, structural adjustment forces developing countries to orient their economies to produce exports. The primary target for those exports is the United States, and secondarily, other rich countries. The IMF and World Bank economic programs do not support regional trade.

The IMF model of unregulated global economic integration places countries in competition with each other to produce goods with the lowest possible wage bill. That puts downward pressure on wages in all countries, including countries such as the United States (particularly in markets like steel and textiles that are produced in both rich and poor countries).

20. What should Congress do to reform / abolish the IMF / World Bank? What could the IMF do to promote sustainable development?

Were the IMF actually concerned about sustainable development, there are various policy measures it could promote. Friends of the Earth has called on the IMF to emphasize ecological taxes rather than value-added taxes, among other measures.

Some organizations, including some members of the Jubilee 2000 coalition in the United States, have called on the IMF to pay more attention to poverty and the effect of its lending on the poor. They place hope in the IMF's newly stated commitment to address poverty in its lending practices, and hope that the renaming of the Economic Structural Adjustment Facility-now the Poverty Reduction and Growth Facility-will signal more than just a name change.

Others, however, believe the IMF is irredeemable. They believe the emphasis should not be on pushing the IMF to adopt better policies, but on finding ways to shrink the IMF's influence and power, so it has less say over developing country policies. This group is loathe to support more funding for the IMF, even funding that is supposed to be allocated for debt relief. Instead, they say, the IMF should draw on its existing resources to enact immediate debt cancellation for the poorest countries. And, if the Fund is to continue at all, they call on IMF lending to be delinked from structural adjustment conditions.

There is growing support for the idea of limiting the IMF's reach. Even U.S. Treasury Secretary Lawrence Summers has urged that the Fund be restructured so that it cease engaging in long-term development lending-the sort of lending done to the poorest countries, invariably with structural adjustment conditions attached. The Meltzer Commission echoed this position, as has the head of the German central bank.

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