Crisis of Credibility
The Declining Power of the International
by Walden Bello and Shalmali Guttal
Multinational Monitor, July/August
Bangkok - What a difference two decades
make! In 1985, the International Monetary Fund (IMF) and the World
Bank stood at the pinnacle of their power. Taking advantage of
the Third World debt crisis of the early 1980s, both institutions
were in the midst of instituting radical free market reforms via
"structural adjustment programs" - a cookie-cutter package
of economic policies including deregulation, privatization, cuts
in government spending and emphasis on exports - in more than
70 developing countries.
Ten years later, in 1995, the IMF stood
unchallenged as the centerpiece of the global financial system
and was launching its ambitious drive to make capital account
liberalization - a requirement that countries remove all restrictions
on inflows and outflows of capital - one of the articles of association
of the Fund.
But by 2005, the credibility of the IMF
was in shreds.
The Unraveling of the IMF
Distant, feared and arrogant, the IMF
met what amounted to its Stalingrad in Asia in the late 1990s.
East Asian economies were then widely
heralded as the leaders of the global economy in the twenty-first
century, economies whose average rate of growth would remain at
6 to 8 percent far into the future. When these economies crashed
in the summer of 1997, the impact on the reigning ideology of
globalization was massive. Perhaps the most shocking aspect of
the crisis for people in the developing world was the social impact:
over a million people in Thailand and some 21 million people in
Indonesia found themselves impoverished in just a few weeks.
Suddenly, the IMF was widely discredited,
seen as the architect of the capital account liberalization that
created the crisis, and of the severe contraction that followed.
The IMF was responsible too in large part for the worsening of
that contraction, as it demanded countries plunged into depression
restrain government spending - exactly the opposite of sound advice
for an economy in contraction.
Throughout the developing world, the January
1998 picture of Michel Camdessus, then the IMF managing director,
arms folded, standing over Indonesian President Suharto signing
an IMF agreement mandating harsh conditions of stabilization became
an icon of Third World subjugation to a much hated suzerain.
So unpopular was the IMF that in Thailand,
Thaksin Shinawatra and his Thai Rak Thai political party ran against
it and the administration that had sponsored its policies in 2001,
winning a lopsided victory for them and with it, inauguration
of anti-IMF expansionary policies that revived the Thai economy.
In Malaysia, Prime Minister Mohamad Mahathir
defied the IMF by imposing capital controls, a move that raised
a howl from speculative investors but one that ultimately won
the grudging admission of the IMF itself as having stabilized
an economy in serious crisis.
Indeed, an IMF assessment eventually admitted
- though in euphemistic terms - that its whole approach to the
Asian financial crisis of fiscal tightening to stabilize exchange
rates and restore investor confidence along the way was mistaken:
"The thrust of fiscal policy turned out to be substantially
different because the original assumptions for economic growth,
capital flows, and exchange rates were proved drastically wrong."
The Fund's close association with the
interests of the United States - it is often viewed as a vassal
of the U.S. Treasury Department - further discredited the Fund.
One of the episodes during the Asian financial
crisis that exposed the IMF as being essentially a tool of the
United States was the battle over Japan's proposal for an "Asian
Monetary Fund." Tokyo proposed the fund, with a possible
capitalization of $100 billion, in August 1997, when Southeast
Asian currencies were in a free fall. The idea was to create a
multi-purpose fund that would assist Asian economies in defending
their currencies against speculators, provide emergency balance
of payments financing and make available long-term funding for
economic adjustment purposes. As outlined by Japanese Foreign
Ministry officials, notably the influential Ministry of Finance
official Eisuke Sakakibara, the Asian Monetary Fund (AMF) would
be more flexible than the IMF, by requiring a "less uniform,
perhaps less stringent, set of required policy reforms as conditions
for receiving help." Not surprisingly, the AMF proposal drew
strong support from Southeast Asian governments.
Just as predictably, the AMF aroused strong
opposition from both the IMF and the United States. At the IMF-World
Bank annual meeting in Hong Kong in September 1997, IMF Managing
Director Michel Camdessus and his U.S. deputy Stanley Fischer
argued that the AMF, by serving as an alternate source of financing,
would subvert the IMF's ability to secure tough economic reforms
from Asian countries in financial trouble. Analyst Eric Altbach
claims that some U.S. officials "saw the AMF as more than
just a bad idea; they interpreted it as a threat to America's
influence in Asia. Not surprisingly, Washington made considerable
efforts to kill Tokyo's proposal." Unwilling to lead an Asian
coalition against U.S. wishes, Japan abandoned the proposal that
might have prevented the collapse of the Asian economies. The
episode left many Asians very resentful of both the IMF and the
Revisiting Structural Adjustment
The Fund's performance during the Asian
financial crisis led to a widespread reappraisal of the Fund's
role in the Third World in the 1980s and early 1990s, when the
IMF, along with the World Bank, became the main instrument for
the imposition of "market friendly" structural adjustment
programs in over 70 developing and post-socialist economies.
After more than a decade and a half of
such policies, it was hard to point to more than a handful of
successes, among them the very questionable case of Pinochet's
Poverty and inequality in most adjusted
economies had increased. Beyond that, structural adjustment institutionalized
stagnation in Africa, Latin America and other parts of the Third
World. A study by the Center for Economic and Policy Research
shows that 77 percent of countries for which data is available
saw their per capita rate of growth fall significantly during
the period 1980-2000. In Latin America, income expanded by 75
percent during the 1960s and 1970s, when the region's economies
were relatively closed, but grew by only 6 percent in the past
two decades. A more global comparison has been attempted by Robert
Pollin, and this showed that, excluding China from the equation,
the overall growth rate in developing countries during the interventionist
"developmental state" era (1961-80) was 5.5 percent,
compared to 2.6 percent in the structural adjustment era. In terms
of the growth rate of income per capita, the figures were 3.2
percent in the developmental state era and 0.7 in the subsequent
By the late 1990s, the Fund could no longer
pretend that structural adjustment had not been a massive disaster
in Africa, Latin America and South Asia. During the World Bank-IMF
meetings in September 1999, the Fund conceded failure by renaming
the Enhanced Structural Adjustment Facility (ESAF) the "Poverty
Reduction and Growth Facility" (PRGF). It promised to learn
from the World Bank by making the elimination of poverty the "centerpiece"
of its programs. But this was too little, too late, and too incredible.
Indeed, among the key consequences of
the IMF's calamitous record in East Asia and the developing world
was that it brought the long simmering conflict within the U.S.
elite over the role of the Fund to a boil. The U.S. right denounced
the Fund for promoting "moral hazard," that is, irresponsible
lending that ensured private foreign creditors that they would
be paid back no matter what. Some, including former U.S. Treasury
Secretary George Shultz, called for the IMF's abolition. Meanwhile,
orthodox liberals like Jeffrey Sachs and Jagdish Bhagwati attacked
the Fund for being a threat to global macroeconomic stability
and prosperity. Late in 1998, a rare conservative-liberal alliance
in the U.S. Congress came within a hair's breath of denying the
IMF a $14.5 billion contribution. With arm-twisting on the part
of the Clinton administration, the contribution was secured, but
it was clear that the long-time internationalist consensus among
U.S. elites that had propped up the Fund for over five decades
IMF reform: promise versus reality
As the crisis of legitimacy of the IMF
worsened, the agency felt the need for reform acutely. Reform
of the international financial architecture, debt relief and the
approach to financing development topped the agenda.
Calls for a new global financial architecture
to reduce the volatility of the trillions of dollars shooting
around the world in pursuit of narrow but significant interest
rate differentials came from many quarters. The United States
argued that the current architecture was basically sound, and
that there was no need for major reforms. Though there were differences
on some details, this position was shared by the other members
of the G-7 group of rich countries.
This approach advocated increased transparency
in government finances and national banking laws, tougher bankruptcy
laws to eliminate moral hazard, and greater inflow of foreign
capital to re-capitalize shattered banks and "stabilize"
the local financial system. This latter measure translated in
concrete terms into enabling foreign banks to freely buy up local
institutions or set up fully owned subsidiaries.
The G-7 also trumpeted the creation of
a "Financial Stability Forum." As originally proposed,
this body had no representation from the developing economies.
When this generated criticism, the G-7 issued an invitation to
Singapore and Hong Kong to join the body. The developing countries
were still not satisfied, however, leading the G-7 to create the
G-20, with more representation from the developing countries.
Wall Street and other financial centers,
as well as their government allies, strongly resisted Tobin taxes
(taxes on currency trades across borders) or similar controls
designed to slow down capital flows by imposing fees on them at
various points in the global financial network. Even when the
IMF admitted that capital controls worked to stabilize the Malaysian
economy during the 1997 financial crisis, it remained generally
opposed to capital controls. The IMF refused to endorse even the
gentlest capital controls, like the Chilean encaja, which sought
to deter capital volatility by taxing capital inflows that did
not remain in the country for a designated period of time and
thus avoid volatile movements that could destabilize an economy.
When it came to the role of the IMF in
financial crisis management, the G-7 supported the expansion of
the powers of the IMF despite its poor record. They gave the Fund
the authority to push private creditors to carry some of the costs
of a rescue program, that is, to "bail them in" instead
of bailing them out, an approach that was tried out in the Korean
financial crisis. This was a modest response to clamor on both
the right and the left that the Fund had encouraged future acts
of irresponsible lending by private creditors by bailing out previous
The G-7 also authorized the creation of
a "contingency credit line" that would be made available
to countries that are about to be subjected to speculative attack.
Access to these funds would be dependent on a country's track
record for observing good macroeconomic fundamentals, as traditionally
stipulated by the Fund.
The only problem was that no one wanted
to take advantage of this pre-crisis credit line, rightly worried
that speculative investors would view such a move as a sign of
crisis, rush to take their capital out of the country, and so
precipitate the crisis that the pre-crisis credit line was supposed
to avert in the first place.
Probably the most far-reaching proposal
came, surprisingly, from the U.S. deputy director of the Fund,
Ann Krueger. At the height of the Argentine crisis in 2002, Krueger
proposed an orderly work-out process similar to Chapter 11 bankruptcy
proceedings in the United States: the "Sovereign Debt Restructuring
A government suffering a financial crisis
would apply for IMF protection. If the IMF found that the country
was dealing with its creditors "in good faith," it would
grant a standstill in its payments to them. Protected in this
fashion, the debtor country would negotiate new terms of repayment
to its creditors, with the IMF providing it with emergency funding
to finance its imports of goods and services. The IMF then would
oversee the creation of some sort of tribunal independent of the
Fund that would adjudicate disputes between the debtor and the
creditors, and among creditors, and come out with a debt restructuring
program that would be binding on everybody.
Debt cancellation advocates generally
applauded the idea of a bankruptcy-type process for debtor countries,
but they remained strongly critical of Krueger's proposal. In
Krueger's design, the IMF would maintain a great deal of authority
to decide when countries were eligible to enter the bankruptcy
process and to certify if they had adopted "sound" economic
plans for recovery. This scheme might have actually intensified
IMF control over poor country economies, they feared.
More decisive opposition to Krueger's
proposal came from a different quarter: powerful interests in
the U.S. government and financial community were dead set against
it. The day after Krueger made her proposal public, John Taylor,
the international undersecretary of the U.S. Treasury, registered
his disagreement, saying that the "most practical and broadly
acceptable reform would be to have sovereign borrowers and their
creditors put a package of new clauses in the debt contracts."
In other words, maintain the status quo, where the creditors tend
to unite and have tremendous advantage over the debtor.
Krueger apparently had the support of
Secretary of the Treasury Paul O'Neill. But when O'Neill was fired
by President Bush in December 2002, Krueger lost her strongest
supporter. At its April 2003 meeting of the IMF's International
Monetary and Finance Committee, the United States squelched the
The lack of any real movement in reforming
the international financial architecture prompted warnings, by
of all people, Robert Rubin, that "[f]inancial crises have
continued to rock emerging markets and are likely to remain a
factor in the decades ahead."
The IMF blinks
The low state to which the fortunes of
the IMF had sunk in the estimate of its once compliant pupils
in the developing world was illustrated most significantly by
the case of Argentina.
After defaulting on $100 billion of its
$140 billion debt, Argentina's economy collapsed in 2002. Then
Nestor Kirchner was elected president in 2003. Kirchner told holders
of Argentine bonds that it would repay them - but only after writing
off 75 to 90 percent of the value of the bonds. He also played
hardball with the IMF, telling the Fund, in March 2004, that the
country would not repay a $3.3 billion installment due the IMF
unless it approved a similar amount of new lending to Buenos Aires.
According to Stratfor, an agency specializing
in political risk analysis, the future of the IMF was at stake
in the negotiations: "If Argentina walks away from its private
and multilateral debts successfully - meaning that it doesn't
collapse economically when it is shut out of international markets
after repudiating the debt - then other countries might soon take
the same path. This could finish what little institutional geopolitical
relevance the IMF has left."
The IMF blinked. Kirchner stuck to his
guns on his radically devalued payment to foreign bondholders,
one of the Fund's key constituencies, and the Fund came up with
a new multibillion dollar loan for his government.
Walden Bello and Shalmali Guttal are members
of the staff of Focus on the Global South, a Bangkok-based analysis
and advocacy institute focusing on issues of trade, development
and security. Many of the themes touched on in this article are
further developed in Bello's most recent book, Dilemmas of Domination:
the Unmaking of the American Empire (New York: Henry Holt and
International Monetary Fund (IMF) & World Bank