Beyond the World Creditors' Cartel
In Latin America and elsewhere,
the IMF may be re-emerging-but in a changed landscape.
by Dariush Sokolov
One group of financiers seems to be doing
nicely out of the global recession: the International Monetary
Fund and other international financial institutions (IFIs) are
enjoying a return to relevance and lining up for increased funding.
The London G20 Summit in April was the
IMF's big comeback gig. In 2007 the fund's loan book was down
to just $20 billion; now its capital is set to triple to $750
billion, plus permission to issue $250 billion in "special
drawing rights" (the fund's quasi-currency which allows member
countries to borrow from each others' reserves). Since September
2008 a range of East European and ex-Soviet states have taken
out new loans. So too have Pakistan, El Salvador, and Iceland-the
fund's first Western European client since Britain in 1976.
The World Bank and regional development
banks are also getting in on the party. In Latin America, the
World Bank's regional vice president Pamela Cox says she expects
lending to triple in 2009 to $14 billion. The Inter-American Development
Bank (IDB), the most active IFI in the region, expects to lend
$18 billion-its typical loan portfolio is under $8 billion. And
the development banks are queuing up behind the IMF with their
caps out for capital increases: the Asian Development Bank wants
to triple its capital to $165 billion; the IDB is asking for an
extra $50 to $80 billion on top of its current $101 billion.
Why now? The IFIs, says Vince McElhinny
of the Bank Information Center, a group that monitors them, are
opportunists at heart. Just like any private bank or corporation
they fight for market share, and as the world economy and global
capital markets grow they need to increase their lending apace
or lose relevance. The freezing of world capital markets, particularly
severe in emerging markets, has created a need which they can
seize as opportunity. The Institute of International Finance predicts
private net capital flows to emerging markets of $141 billion
in 2009, down from $392 billion in 2008, after a record $890 billion
in 2007. The IFIs see themselves helping to fill this gap.
But the issues at stake here go beyond
the IFIs' own agendas. On the one hand, their revival implies
a reassertion of U.S. and global North dominance. They aren't
called "Washington-based" just as a matter of real estate:
the United States has a 17% voting share on the IMF and World
Bank, enough to give it a veto on some major changes; Europe and
the United States control the top management positions.
On the other hand, the story underscores
how parts of the global South are gaining in economic power. In
the crises of the 1990s, or so the neoliberal story went, the
IMF stepped in to clean up the messes made when fragile Third
World economies exploded. This time around things are very different:
the mess is in the North, and the likelihood is that the emerging
economies of Asia and Latin America will emerge from it stronger
and more independent. (It's important to note, though, that large
areas in the South, notably Africa, are not part of this story-nor
is Eastern Europe.) The so-called BRIC nations in particular (Brazil,
Russia, India, China) are getting the bargaining power to back
up their claims on the global financial system. Will these claims
be met within the existing institutions, or by creating a new
financial architecture that bypasses Washington altogether? The
future of the IFIs is a key arena in which global rebalancing
of economic power is playing out.
New Financial Architecture?
In May 2007 finance ministers from Brazil,
Argentina, Venezuela, Bolivia, and Ecuador signed the "Quito
declaration" in the Ecuadorian capital. The plan includes
a regional monetary fund and moves toward a South American single
currency, but the first step is the creation of the Banco del
Sur, a new regional development bank. While the bank's launch
is behind schedule, this March its constitution was agreed to,
with an initial capitalization of $7 billion. Besides the original
five, Paraguay and Uruguay are also members. (Even Colombia had
announced its support before its late-2007 row with Venezuela
The aim of Banco del Sur is to replace
the Washington-based lenders altogether with institutions run
by and for South America. Maria Jose Romero, who researches the
IFIs at the Third World Institute in Montevideo, encapsulates
this spirit. "In responding to the crisis Latin American
countries have two options," she says. "We can return
to the old institutions and the failed recipes of the 1990s, or
we can move forward with alternatives."
For many Latin American countries a return
to the IMF is politically out of the question. According to Mark
Weisbrot, co-director of the Center for Economic and Policy Research
in Washington, the decline of the IMF started with the Asian financial
crisis over a decade ago. After the fund's failure to act as emergency
lender of last resort to Asian banking systems in 1997, those
states moved to build up sizeable currency reserves, determined
not to be dependent on the fund again; others followed suit.
This turning away has been more dramatic
in Latin America, where IMF policies are blamed for precipitating
the 1998 crisis in Argentina which led to the collapse of its
banking system and eventually to its 2002 default. Argentina and
Bolivia both paid off the last of their debts to the fund in 2006;
in April 2007 Ecuador announced it had paid off its IMF loans
and requested the fund withdraw its country manager; the same
month Venezuela announced itself debt-free, and a few weeks later
said it would withdraw from fund membership altogether. When Daniel
Ortega won the Nicaraguan presidential election in May 2007 he
promised the country would be "free from the fund" within
How has this freedom-from-Washington line
held in the current crisis? U.S.-friendly Mexico was the first
to sign up for the new Flexible Credit Lines the IMF is granting
without conditions to "pre-approved" governments, followed
by Colombia-though neither has yet drawn on them. So far only
El Salvador and Costa Rica have taken out new loans. In sharp
contrast to Eastern Europe, most Latin American states had healthy
reserve cushions coming into the crunch. And with commodity prices
now rising again, it may be that the region's anti-IMF resolve
is not going to face the test many had anticipated.
As for Banco del Sur, the arrival of crisis
no doubt slowed the process: domestic firefighting comes before
regional cooperation. But, according to Romero, in the medium
term it will help push change:
"The crisis has focused attention
to the failings of the existing financial system," she says.
"It is helping build the impetus for Banco del Sur, as well
as for moves to settle bilateral trade in local currencies [rather
than dollars], which is the first step towards monetary union,
and for broader South-South cooperation initiatives."
To be fair, Banco del Sur may not live
up to proponents' hopes. With just $7 billion in capital, the
bank won't be in the same league as the Washington-based IFIs.
Nor is there any immediate plan to create an emergency monetary
fund-an Ecuadorian proposal to that effect has been dropped. And
the principle of one country one vote, perhaps the biggest rallying
point of all, has been modified: equal votes will apply only on
loans under $70m, above which approval is required from members
with 2/3 of the capital contributions.
Finally, there is still no clarity on
the focus of lending. Campaigners hope for a true emphasis on
poverty reduction and projects to build regional cooperation,
and have scored the provision of a socially focused "audit
board." But some fear that more conservative members (read:
Brazil) could push Banco del Sur toward being just one more development
Across Asia, there are parallel developments.
A proposal by Japan to set up an Asian Monetary Fund met the same
fate as an earlier Malaysian-backed scheme called the East Asian
Economic Caucus-both were dropped after expressions of disapproval
from the IMF and U.S. officials. But now the Chiang Mai Initiative,
a longstanding plan for a system of swap arrangements between
the central banks of the southeast Asian countries plus China,
Japan, and South Korea is expected to come on line this year,
and the proposed size of the scheme was upped to $120 billion
in February. Chiang Mai is linked to the IMF (members need IMF
agreements in place to withdraw more than 20% of the total), but
some see it leading towards an eventual independent regional fund.
For now, though, at least officially, the talk is usually of "complementing,"
not supplanting, the IMF.
Rise of the BRICs
If the Quito project is the idealistic
side of the regionalization movement, the BRIC bloc is global
power shift as realpolitik. The BRICs together now account for
22% of world production (by purchasing power parity), up from
16% ten years ago and rising.
Even as they move ahead with building
regional institutions independent of the IFIs, the BRICs are pushing
for more power within the Washington-based institutions. Increased
say at the IMF is one of the four governments' main demands. In
March 2008 China's vote share was raised all the way up to 3.7%-putting
the world's most populous country on a par with Belgium plus the
Netherlands, combined population 27 million. The BRICs jointly
muster a 9.82% quota.
According to Vince McElhinny, the BRICs'
contributions to the fund's current capital boost are aimed at
bolstering their demands for more say in IFI governance. When,
a week before the BRIC summit, Brazil's President Lula announced
a $10 billion contribution, he talked of thereby gaining "moral
authority to keep pushing for changes needed at the IMF."
The IMF's desire to placate emerging powers
such as the BRICs may explain the makeover it has displayed in
its current comeback-dubbed "IMF 2.0" by Time magazine.
Managing director Dominique Strauss-Kahn has called for the fund
to spend against recession: less structural adjustment, more counter-cyclical
stimulus. But the changes may be largely cosmetic. According to
a study by the Third World Network, the actual conditions of recent
IMF loans to Pakistan, Hungary, Ukraine, and other countries are
familiar: the borrowers must reduce their fiscal deficits through
public spending cuts, wage freezes, higher fuel tariffs, and interest
What real changes are the BRICs really
likely to get? There's plenty of gossip flying around: some are
touting Lula as the next World Bank president; perhaps China will
get to pick Strauss-Kahn's successor.
Mark Weisbrot, however, does not see the
U.S. government giving any ground on voting shares. "The
U.S. would rather walk away from the IMF than give up control,"
Beyond the Cartel
Weisbrot describes the IMF as "the
most important instrument of influence the U.S. government has
in developing countries-beyond the military, beyond the CIA. Or,
at least, that's the role it's played for most of the last 30
years. A good part of that influence has been lost recently; now
they're trying to get it back."
The IMF's power has never really been
about its own lending, however. Its influence over countries'
economic policies is far greater than would be suggested by its
share in overall capital flows. The real issue is the fund's role
as "gatekeeper" of a global "creditors' cartel."
Multilateral loans from the World Bank
and regional development banks and bilateral loans from the wealthy
countries typically come with some form of "cross-conditionality"
clause. You only get your loan if you first have an IMF agreement
in place; installments only keep flowing so long as you stick
to it. Similar conditions can also apply in private capital transactions.
For instance, Venezuela's 2007 threat to give up its IMF membership
triggered a market sell-off because under covenants written into
its sovereign bonds, a break with the fund would count as a "technical
Now, though, recent shifts in Latin America
have dealt what Weisbrot says could be "a final blow to the
IMF creditors' cartel in middle-income countries."
This is a continental tale, but Argentina
is a good place to begin. The country cut itself off from international
capital markets with its 2002 default, and is still being chased
by "hold-out" bond investors in the New York courts.
Yet Argentina grew at almost 9% a year from 2003 through 2007-the
country's most rapid growth in 50 years, and some of the fastest
growth rates on the continent. This expansion has been funded
largely by selling bonds to another emerging regional power, Venezuela.
These bond transfers are no subsidies-Argentina pays commercial
interest rates-but they do come free of Washington conditions.
For Weisbrot, "Venezuela's offers of credit, without policy
conditions, to Argentina, Bolivia, Ecuador, Nicaragua, and other
countries has changed the equation."
It's true that easy Venezuelan credit
dried up early on in the crisis as oil prices plummeted. It's
also true that Argentina is now allowing IMF staff in to monitor
its economy and taking out new loans from the World Bank and the
IDB. But it's telling that Argentina got these loans without any
IMF agreement in place: the cartel, at least in its old form,
appears to be broken. And then there's the other plank in Argentina's
current crisis management strategy: a $10.2 billion swap line
direct with China.
In short, the IMF and allied institutions
have regained some lost ground in the crisis, but forms of "South-South
cooperation" that stand to weaken the Washington-based creditors'
cartel have kept on building too.
According to one very plausible interpretation,
this crisis has been about the consequences of the rich countries'
capital piling into the financial services sphere to compensate
for the loss of manufacturing production to the Third World. Control
of the world's financial capital flows was one last highly profitable
channel where Northern capital still ruled unopposed. Increasingly,
though, global-South states and corporations are cutting out the
middle man to trade directly with each other. It's against the
background of these new possibilities that the next chapter in
the story of the IFIs will play out.
Dariush Sokolov Dariush Sokolov is an
activist and independent journalist based in Argentina. He writes
about political philosophy, anarchist economics, and global finance,
among other things, and sometimes updates his blog, La Parte Maldita.
IMF, World Bank