Issue 244 of SOCIALIST REVIEW Published September 2000 Copyright © Socialist Review

IMF/World Bank

Get the banks off our backs

Mike Haynes examines the role of the IMF and World Bank, meeting in Prague this month, as policemen to the global paymasters

Double standards

Not everyone has the same stringent rules applied

  • For every US government dollar given to the World Bank to hand out, it is estimated that two dollars come back in terms of contracts for US business.
  • IMF salaries are up to 50 percent higher than in domestic American institutions.
  • Bankers call the shots while the poor suffer--like these children in Indonesia

    For 54 years the IMF and the World Bank have been able to have their annual meetings in style. Not that there weren't occasional demonstrations, but these did not appear to present a real threat. The protests against the World Trade Organisation meeting in Seattle in November 1999 changed that and gave the rulers of the globe a huge fright. Seattle, despite over 500 arrests, was a triumph of protest and civil disobedience, but for the authorities it was a 'fiasco' which shouldn't be allowed to happen again.

    When the IMF and World Bank held their Spring 2000 meeting in Washington last April the local police arrested 700 protesters even before the real demonstrations began, and then took a further 600 into custody. Then when the leaders of the G7, the richest countries in the world, held their annual meeting in Okinawa in July the Japanese government also took no chances. It did not need mass arrests because Okinawa was difficult even for ordinary Japanese people to get to. Even so 22,000 police and eight warships were deployed just in case. The Japanese government even closed its public ears by shutting down its open access e-mail servers, as it was inundated with protest messages.

    Now the annual season of meetings of the rulers of the world moves on to Prague, and what is officially called the 55th Annual Meeting of the World Bank Group and the Board of Governors of the International Monetary Fund, on 26-28 September. Only time will tell how far the 'spirit of Seattle' will inform the scale and mood of demonstrations, but the nervous Czech government is caught in a massive dilemma. Having the IMF in Prague is supposed to be a sign of acceptance in the 'global community'. But Prague is a city associated with resistance to Stalinism, and if the Czech authorities overreact to demonstrations then the echoes of Stalinism bludgeoning earlier generations of protesters will ring around its squares. The planned police deployment is therefore 11,000 at the time of writing, with 5,000 troops in reserve. But the aim is to minimise trouble. However, even this produces embarrassing contradictions in a land ruled over by a playwright president. Vaclav Havel used his plays as a cry against the lies of his country's rulers. Now current policing plans include the closure of the Prague theatres to avoid embarrassing protests from the audiences while the IMF and World Bank meet.

    Yet to judge by the propaganda of the IMF and World Bank they have done nothing to deserve this hostility. When Horst Kohler took control of the IMF in the spring he told the world that the IMF should get the credit for the extension of markets and democracy over the last 50 years. The World Bank now emblazons its publicity with the slogan 'Our dream is a world free of poverty'. And when its head, James Wolfensohn, spoke on Asia to a Harvard conference on 'Global leadership' in June he was anxious to talk about 'the Asia I know'. This was not the Asia of five star hotels but that of 'families living in huts, of raw sewer-infested canals where children swim...villagers struggling seasonally to survive, while their looms sit idle...[and] young mothers [who] sell their bodies to support their children and feed their family'.

    In fact the IMF and World Bank are institutions under siege. As global capitalism hit the rocks in the 1990s in places as far apart as Mexico, east Asia and Russia they applied their standard medicine and proceeded to make things much worse. Three of America's most prominent economists--Jeffrey Sachs, Paul Krugman and Joseph Stiglitz (the ex chief economist at the World Bank)--who in the past have not been afraid to sing the praises of the market are now bitter critics. A committee of the US Congress, which drew together right wing and liberal critics earlier this year, even proposed an enormous reduction in the role of these two organisations.

    Insider critics

    And that's where the current charm offensive comes in, for, as the Financial Times columnist Martin Wolf put it, 'it is impossible to defend the status quo without qualification. There have been too many disasters'. But the problems still continue. Each year the World Bank produces an annual development report. A top economist is invited to help prepare it, so this year, to improve their image, they asked a well known liberal development economist, Ravi Kanbur. Within months he had resigned, apparently frustrated at the way in which the bank's research department was reluctant to take seriously the arguments that a solution to the problems of the world's poor had to include a redistribution of wealth and income. The dream may be 'a world free of poverty'--but not, it seems, at the expense of the rich and powerful.

    The arguments of these insider critics provide powerful ammunition against the IMF and World Bank, but they are not enough. Experience shows that support for global capitalism is built into the structures of these organisations. And behind them, thinly veiled, stand the interests of the US Treasury (their immediate paymaster), Wall Street and the global corporations of the advanced world. The drive is therefore to pursue the neo-liberal agenda whatever the consequences, and just to put a bit more effort into marketing it.

    Bankers call the shots

    The history of the IMF and World Bank goes back to the Bretton Woods conference of 1944, where representatives of America and Britain attempted to plan the reorganisation of world capitalism at the end of the Second World War. The idea was simple. Capitalism needed a prosperous global economy. The World Bank Group (for it is really a cluster of institutions) would be developed to provide longer term development help to the poorer countries. The International Monetary Fund would watch over the world's financial system, providing short term help and assistance to economies to allow them to get through crises. A third organisation--the International Trade Organisation--would police the trade system to ensure that free trade took place. In the event the ITO never got off the ground and it was replaced by Gatt (the General Agreement on Trade and Tariffs) through which the liberalisation of world trade was loosely organised, especially from the 1960s. But in the 1990s the World Trade Organisation was created to take over Gatt's role and become the new trade policeman--effectively establishing the trinity of organisations that had been thought of more than half a century ago.

    But by this time much had changed in the world economy, and the recent history of these organisations goes back more to the changes in global capitalism that took place in the 1970s. These had three aspects. Firstly, with American capitalism no longer so dominant, US policy makers decided to shift the focus of their international economic aid towards the IMF-World Bank. The thinking was that these 'international' institutions would provide a more neutral face behind which the interests of the most powerful sections of global capitalism could operate. As 'international bodies' they would generate less hostility when they acted and would be insulated more from pressures from within countries. As the American politician Jesse Jackson put it in 1993, 'They no longer use bullets and ropes. They use the World Bank and the IMF.' There was also the added bonus that the financing of their operations could be shared more with other advanced states.

    The second aspect was the new instability of global capitalism. As the long postwar boom came to an end, the central role of the dollar as an international currency collapsed. Currency values were now determined on a daily basis by market fluctuations, causing currencies to float up and down as speculative capital washed around the world economy. Even advanced economies could be hit as confidence drained in the ability of a government to keep up the value of its currency. But worst hit were the poorer countries. With the slowdown, the prices of key commodities collapsed while oil prices and interest rates were pushed up. The result was a growing debt crisis which would periodically explode into a major financial crisis as nervous investors withdrew funds at the first signs of developing trouble. This gave the IMF and World Bank the leverage they needed, for, with markets rocking, the price of assistance to weak governments was the acceptance of the agenda of these institutions.

    The change in this agenda was the third aspect which created the current situation. These institutions had always had a strong free market bias. But in the 1970s they became champions of the thinking that would define the Reagan-Thatcher era. The official story is that this was a reaction to the bitter lessons of government failure, but the evidence is that the ideological rethinking was the thing that came first. The problems of global capitalism, it was now argued, were not the irresponsible actions of huge companies, not the fault of global inequality, but of governments themselves pursuing the wrong policies and interfering too much. Stop this and the world economy would boom again, stability would come back and development would occur. And the way to achieve this was through what became known as Structural Adjustment Programmes. Help would be conditional on liberalising trade and capital flows, cutting back government expenditure while raising taxes on the poor, and setting entrepreneurs free.

    Over time the IMF and the World Bank came to work increasingly closely together. In theory they have different functions and there has always been some rivalry between them. But it was argued that good local development policies could only work if 'sensible' national economic policies were pursued. The US also pushed for increasing harmony, and when the WTO was created the aim was for them all to speak with the same globalising, free market voice. Despite the disruption of the WTO meeting in Seattle they still managed to announce that 'the IMF, the World Bank and the WTO will continue to work together help increase the coherence of policy making'.

    But the recipe has not worked. Usually the poor suffer, growth suffers, some economic indicators might improve for a while, but then a new crisis comes along. For years the story was that it didn't need to happen because the Asian Tiger economies showed that success was possible, but then in 1997 they went down one after another too. The debt levels have continued to rise. Mexico in 1982, for example, with a debt of some $82 billion, was one of the first countries to be subjected to a broader Structural Adjustment Programme. By 1994, when the economy crashed again, the debt level had risen to $140 billion. But this has just served to increase the stranglehold of the IMF-World Bank. Clearly, they said, the old governments had not tried hard enough. The new ones would have to show even more willingness. And so the crazy system goes on.

    Echoes of empire

    Since the 1980s more than 90 countries have been forced to sign up to some kind of Structural Adjustment Programme which gives the representatives of these governments enormous leverage. Jeffrey Sachs, whose own hands helped mould some of the earlier programmes, now writes that 'without the debt overhang, the IMF's role in Africa would shrink dramatically... under current arrangements, the IMF has become Africa's proconsular power, holding the finances of the continent in its hands'. What he means by this is that the IMF representatives are like the 'consuls' sent out to rule the British Empire from London at the end of the 19th century and around whom all the local rulers gravitated. And it is not just Africa. I remember watching Bulgarian television in the autumn of 1997 and seeing as the first item of news the arrival of the IMF representative at Sofia airport--come to make her periodic check on the extent to which that country's adjustment programme was being followed through.

    Yet ironically all this costs very little, for these institutions work in insidious ways. One facet of this is the way that they manipulate the political and economic debate. Describing the role of the World Bank, two of its supporters write that it 'is the single most important external source of ideas and advice to developing country policy makers'. But, they add, 'it is difficult to pinpoint a single important idea or method in development economics that has its origin in the World Bank'. This apparent contradiction is easily solved, for what the World Bank does, in the words of one critic, is to 'disguise a multi-million dollar ideological programme as research'. Like the IMF, the World Bank is dedicated to proving the value of the free market. 'A period of service in one of these organisations provides the best training for economic policy makers in the world today,' writes John Williamson, a long term British insider. The idea is to have friends inside as well as outside. In this way supporters can praise an institution like the bank for 'assisting development in the presence of weaknesses and distortions in member countries' domestic political processes'--a phrase that we will leave readers to translate into plain English.

    In the past this has led these institutions to stand four square behind some of the world's most brutal dictatorships. Today this can be embarrassing but the basic philosophy has changed little--if their aims can be achieved through some kind of democracy then all the better, but if it needs authoritarian rule then so be it.

    A second facet of their operation is the way that they use crisis to achieve their ends. With the economic indicators going haywire and governments panicking the IMF's role is simple. Everything must be done to keep currencies stable and keep the value of foreign investments up. Huge resources are devoted to supporting the foreign exchange rate--loans are simply recycled into investors' pockets while crisis measures are inflicted at home. In each of the major crises of the 1990s the result was still that currencies collapsed--but that was not the point. Much international speculation involves loans for 90 days or less, and short term assistance is therefore crucial to keeping up its value. Sachs puts this well: 'The IMF has listened too closely to Wall Street in recent years... The key interests of these short term investors is straight forward... If you are a US bank with investments [in an economy in crisis] the main thing you want is for [that country] to maintain its currency exchange rates until the time that you have been paid--after that, who cares?'

    The third facet of their operation is then the longer-term loans and development aid for which they extract their conditions. Even these are not what they seem. Most loans are at near market rates and therefore become linked to the debt problems. Defending the role of the World Bank, US Treasury Secretary Larry Summers recently boasted that people shouldn't worry too much about its (relatively small) costs because half its loans came out of interest earned on previous loans. Even the claims about market criteria turn out to be hollow, as the World Bank has often pushed white elephant projects. But it is not too difficult to see why when it is realised that for every dollar the US gives to it to hand out it is estimated that two dollars come back in terms of contracts for American business.

    Bending the rules

    This well illustrates the two faced nature of these institutions. The one place where their prescriptions are not applied is to themselves. Who will run them is stitched up by deals between the American and European governments--an acceptable European to run the IMF and an acceptable American to run the World Bank. At times it smacks of corruption. The new chief economist of the World Bank is Nicholas Stern--a British public school educated economist fresh from running the European Bank for Reconstruction and Development's policies in eastern Europe. Unfortunately his brother is also a big figure in the bank and the rules forbid family clans developing--after all, isn't this what happens in corrupt dictatorships in the Third World? Never mind--let's bend the rules. What else goes on remains murky--the collusion at institutional level with corrupt governments, the deals on the side with contract research, and financial speculation by insiders and family members.

    J18 in London 1999: protest in the heart of the banking quarter

    Welfare for bankers

    What is not in doubt is how lucrative working for these organisations is. Not for them job cutbacks. Their staff continues to expand. And not for them salary cutbacks, for these are the government fat cats to beat all government fat cats. The World Bank is coy about what its staff earn. The IMF is more open. Salaries there are up to 50 percent or more higher than in domestic American institutions, and foreigners get theirs tax free. If you come from a poor country, a year at the IMF can set you up for life. And it's not just the salary. If we take the period 1997-2000, then the IMF salary bill rose by 25 percent, other personnel expenses by 14 percent, and business and other travel by 21 percent. Exactly how all this was distributed is not clear from the organisation's accounts. Possibly the lowliest secretaries do very well, but logic suggests that the benefits were focused on the key workers. However the results are revealing enough if we divide these bills by total staff. The average salary was over $100,000 per employee. Other personnel expenses average $50,000 per employee and travel expenses average over $30,000 per employee!

    Nor do their prescriptions apply in the advanced world. The world's biggest debtor economy is the US. Applying IMF logic to its position, there should be massive austerity programmes to clear the debt. But exactly the opposite applies. When the US is in difficulties then everyone else is asked to expand their economies to help it--exactly the prescription that the IMF denies to the poorer countries. Abolish trade barriers--of course, if you are poor. But if it is the protection of the strong in Europe and America, then no chance, despite the fact that these are estimated to cost developing countries $700 billion a year. Indeed with the attempt to develop patents and intellectual property rights controlling everything from plant genes and seeds to vital medicines, the problem is likely to become even worse, with control by a few giant corporations enforced across the world. 'It is outrageous,' writes a spokesman for Oxfam, 'that loan conditions are used to promote policy reforms in poor countries--such as agricultural market liberalisation, rapid trade liberalisation, financial market deregulation--which would be rejected in G7 countries.'

    He is right--but outrage is not enough. The protesters in Prague are quite right to attack the IMF and the World Bank, but it is important to see behind them to the interests that they represent. It is this that makes them so powerful. One of the most effective propaganda campaigns against them was run by Jubilee 2000 to end the debt of the poorest countries in the world. So effective was it that much was promised last year. But little or nothing has been delivered, because at the end of the day it is the powerful states themselves, and the financial and business interests within them that have ultimate control. Nor are these just concentrated in the advanced world. The agenda of support for private property, the protection of wealth, cutbacks and flexible wages has obvious appeal to local ruling classes everywhere.

    The language of the recent insider debate on the future of these organisations has been revealing. Two supporters of their role defend them by arguing that 'if the IMF is to be less of a fireman it must become more of a policeman...the IMF must play a continued role in the surveillance of its member countries, focusing on their financial policies'. This is a line of thought continued by US Treasury Secretary Summers. If the IMF-World Bank role is reduced, he writes, then 'from Thailand to Bulgaria to Brazil, our capacity to influence the direction and policies of these economies in ways that support global interests would be lost'. Note those phrases 'our capacity' and 'global interests'--just what do they mean? Strip the jargon away and the interests of the few stand out. The IMF-World Bank are like policemen--corrupt policemen--and a decent world would have no need for them. But getting rid of them is not enough--behind every corrupt policeman stands the paymasters who hold the real strings that allow them to function.

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