IMF Funding

James Devine jdevine at
Thu Oct 8 08:17:38 PDT 1998

At 11:39 AM 10/7/98 -0400, Carl Remick wrote: >Re Michael's: "It looks like we have a left--right alliance not to fund the IMF. The left thinks the IMF actions are distructive the right thinks American money is wasted. This is probably a good thing. Without American Funds the G7 will probably want non--American leadership (no cure all but can't be much worse than the present)."

>This global turmoil *is* having a refreshing hegemony-busting effect.
Interesting article in today's NYT re this... <

Charles Kindleberger might argue that the decline of US hegemony (since the 1950s and 1960s and now in the international conferences) would undermine the effectiveness of the response to the sinking world economy. But that assumes, of course, that "hegemon knows best," that US elitist internationalists (i.e., closet US nationalists with a longer-term perspective than Pat Buchanan or Ross Perot) know what's best for the world economy.

(That reminds me of the old semantics game: I'm a patriot; you're a nationalist; he's a national chauvinist. People in the US -- especially newspaper editorialists -- usually see "nationalism" as a disease that only infects those unwashed masses outside the US.)

Now, do the US policy-makers (and their cronies at the IMF and the World Bank) actually know best? They've been pushing what an article in yesterday's L.A. TIMES calls "naive globalism" since the USSR fell. ("American foreign policy was guided by a new set of beliefs: that free markets and the free flow of capital would spread growth and prosperity around the world; and that the increasing wealth and the free flow of information would lead inexorably toward democracy. Governments would be powerless to stem the tide." See below.) This ideology is of course neo-liberalism. Did the hegemon know best back then (a few months ago)? I don't think so: events are now clearly showing otherwise. Naive globalism helped produce this mess. (How many such blunders do the US policy elite have to engineer before they are retired?)

But to understand how this ideology will change (is changing) in response to the global melt-down, we have to look at the material basis.

The economic experts amongst the policy-makers are chosen according to their willingness to go along with the powers that be. (If not, they end up like Lani Guinier; some simply squelch their own opinions, hoping vainly that they can work from the inside to attain them.) Those that rise to the top in academic economics are practioners of a theory that clings mightily to seeing the world as nothing but a bunch of markets and imperfections, ignoring the class relations (and other power relations) behind them. (This is what's called commodity fetishism or neoclassical economics. Most Keynesian economics is a version of the latter.) So it's part of their basic theory that the power of the powers that be should be ignored or or its role minimized. Since they ignore its role, they are continually blind-sided by it and succumb to it.

So it's better to look at what Greenspan, Rubin, Clinton, Armey, Gingritch, etc. -- and of course their financial sponsors (Murdoch, etc.) -- are going to think in order to figure out in what direction policy will go in response to the melt-down.

My assumption is that the best policy -- from a capitalist perspective -- is some sort of global Keynesianism: pumping up world aggregate demand through government spending, especially in the form of aid to places like Indonesia (as suggested in the article below) and/or coordinated Central Bank interest-rate cuts. Will the powers that be move in the direction of that policy?

Below, Jeffrey Sachs is quoted as saying that US policy-makers wanted to attain their goals "on the cheap." (That is, they hoped that the laissez-faire trickle-down theory would work.) This seems likely to continue. Our fearless leaders want to avoid any kind of extra spending, now that they've balanced the government budget on the backs of the poor and powerless. They'll continue their free-market rhetoric, as Clinton did at the recent IMF confab. Is Clinton thinking about providing aid to Indonesia? I doubt he is. Even if he is, he'll probably drop those thoughts because their imprudent, impolitic.

Also, a lot of Republicans cling to a short-sighted version of US nationalism, which sees all "foreign entanglements" as bad, unless of course the US is calling the shots and constituents are gaining in a material way. (Contrary to the idea of a left-right alliance, I don't think the left critique of the IMF and World Bank has much influence in Washington, DC. We don't have the power.)

(These "isolationists" are very similar to those of the period between WW 1 and WW2: the ones back then -- also most often GOPsters -- wanted to avoid dealing with Western European countries as equals (thus their being labeled "isolationists") but were rarin' to go invade Nicaragua and other areas bordering the Caribbean in order to show who was boss and expand the US sphere of influence.)

The Dem. vs. GOPster mini-civil war, which is exemplified by the impeachment hearings resulting from the Monica Lewinsky affair, will likely prevent any major changes in policy. Government outlays are most likely to be blocked by political stalemate. (This, of course, is how the "division of powers" works in the US constitution.) Neither the Dems nor the GOPs want to spend on things international. The GOPs want tax cuts for their friends and/or military spending hikes (the anti-ballistic missile program), while Clinton officially wants to save Social Security.

The Fed's feeble interest-rate cut (like those of other central banks, most of which are standing pat) is a result of the fight between the fear of inflation (mobilized by the Monetarists and the bond-lovers) and the consciousness that something is going wrong with the economy outside the US (represented by Greenspan). So far, the Soros school has had little influence. Even if it does, we have to face the weakness of monetary policy in affecting the real economy. Monetary policy, which is relatively easy to use in a crisis, also has weak and long-delayed effects. (In a period of crunch like 1992 and the immediate future, most new mortgages in response to low rates are for refinancing, not new building.)

This all means that the (weakened) hegemon is unlikely to live up to its Kindlebergian responsibilities. This US indecisiveness is similar in its effects to the controversy with the other G-7 powers. These combine to encourage indecisiveness. It's not just the international controversy.

The above suggests that money will start flowing only _after_ the world crisis hits the richer countries in a significant way. The Fed stepped in to help LTCM because it was its cronies that were being hurt. They don't help financial institutions that are "too small to count" but rather those that are "too big to fail."

(The argument is that when a big institution fails, it has a bigger impact -- in terms of the contagion effect on smaller institutions -- than when a small institution fails. But what about when a _bunch_ of small ones fail? The "too big to fail" policy forgets that a bunch of small failures can have a large impact, as with the abundant failure of rural banks in the 1920s, in addition to the moral hazard problem of encouraging the Big Boys to continue their speculative games. Methinks it's just a matter of the Big Boys having more political influence on the Fed and the government. Instead of using policies that shore up _all_ of the banks, big and small, they help the big when they're in trouble and let the small be taken over -- by the big.)

Now what does it mean that "the world crisis hits the rich countries in a significant way"? First, it might mean further stock market decline, not just a gentle decline, but an out-and-out Panic with a capital "P" -- likely a result of continued economic decline outside of Wall Street. The Fed would then step in to bring liquidity to the rich, as it did in 1987.

But that would be a minor blip; financial stability would be restored, with the DJIA at a signficantly lower level than at the start of 1998. And the economy would likely be in much worse shape than 10 months ago, too, in terms of real GDP and unemployment measures.

To get a full-scale "global Keynesian" policy, there would likely have to be severe economic depression and social unrest. Even the 1992 L.A. riots/rebellion/civil disturbance didn't evoke many bucks from Washington, even though it was an election year. It would have to be something much bigger, all over the advanced capitalist world. A full-scale legitimation crisis. And to stimulate that, we'd have to have severe depression. After all, it was only sustained and strong working class agitation that pushed FDR away from his status-quo policies. Of course, as Louis would point out at this point, it was only World War II that got the US and much of the rest of the world out of the Great Depression. (War is not an automatic or a rational response to depression, by the way. Rather, it's made more likely as depression encourages irrationalities.)

(NB: the unrest resulting could just as well be right wing as left wing. Maybe right-wing rebellion is more likely, given the sad state of US politics.)

The theme of this missive is left-Keynesian (by assumption): if the capitalists want their system to prosper, they have to act to distribute the goodies much more equally, all around the world. They may have to actually sacrifice the short-term (particularistic) interests of the rich in order to serve their long-term (class) interests. (Old ideolgies have to go, too.) But given the power of those who fight like hell to preserve their status, this is unlikely to happen, until financial Panic and, more importantly, social unrest push them off their duffs. So it seems unlikely that they'll act soon. Which implies more economic stagnation and social unrest.


Wednesday, October 7, 1998


Turmoil Marks End to Naive Globalism


WASHINGTON -- Make no mistake. Amid the tumbling of markets around the world, we are witnessing the passing of an era--the age of naive globalism that followed the end of the Cold War.

The economists and Wall Street tell us that we are coming to the end of a cycle of remarkable expansion dating back to 1991. In business terms, that's true. But in a larger sense, the era now drawing to a close dates back to 1989 and the fall of the Berlin Wall.

With the collapse of communism, American foreign policy was guided by a new set of beliefs: that free markets and the free flow of capital would spread growth and prosperity around the world; and that the increasing wealth and the free flow of information would lead inexorably toward democracy. Governments would be powerless to stem the tide.

"America wanted global leadership on the cheap," Harvard University economist Jeffrey Sachs wrote recently in an incisive essay on global capitalism in The Economist. "It was desperate for the developing world and post-communist economies to buy into its vision, in which globalization, private capital flows and Washington advice would overcome the obstacles to shared prosperity. . . .

"In essence, America has tried to sell its social ethos: The rich need not help the poor, since the poor can enjoy rising living standards and someday become rich themselves."

The ruins of this shattered edifice of beliefs can be best observed now in Indonesia, the world's fourth-most-populous country.

One year ago, Indonesia was hoping to follow the path of its Asian neighbors to the good life: bring in foreign investment, offer low-cost labor, pump up exports. But as the Asian financial crisis spread, investors once enamored of Indonesia fled even more quickly than they had arrived.

Today Indonesia is poorer than Bangladesh. Over the last year, its economic output has dropped by nearly 25%. Inflation is approaching 100% a year, and tens of millions of people are unemployed. It is, by many accounts, one of the most rapid economic declines in history.

The inevitable result of the financial turmoil spreading around the world will be a new period of disenchantment with globalization.

Over the next few years, developing countries will be increasingly skeptical about the wisdom of opening themselves up to the global economy. They will be more resistant to advice from the United States, the world's leading proponent of free markets.

Look at Asia. Malaysian Prime Minister Mahathir Mohamad has imposed currency controls. China, its leadership rejoicing that it did not make its currency freely convertible into Western currencies, has thus been hurt less by the Asian financial crisis than its neighbors.

In some countries, America is already a symbolic target. Two weeks ago, in the streets of Surabaya, one of Indonesia's largest cities, students demonstrated outside an American consulate, complaining that the United States wasn't doing enough to speed up money from the International Monetary Fund to help out the Indonesian economy.

For its own part, in the coming era of disenchantment, the United States is likely to become gradually more skeptical of economic entanglements overseas. If other countries won't conform to America's prescription for free markets, America is likely to distance itself a bit from the rest of the world.

The best example is Congress' recalcitrance throughout the past year to approve $18 billion in new borrowing authority for the IMF, despite repeated appeals by the Clinton administration and the U.S. business community.

"How can we acquiesce in a plan to vastly expand an international agency that covers other people's debts and undermines free-market processes the world over?" asked House Majority Leader Dick Armey (R-Texas) last Friday.

That's an American perspective. However, the rest of the world may well wonder why Congress can't come up with new money for the IMF at a time when the government has just reported a $70-billion budget surplus, and when the titans of American capitalism have just let their free-market principles lapse long enough to rescue Long-Term Capital Management, the mammoth hedge fund that was on the brink of bankruptcy. Even if Congress approves the money in the waning days of its 1998 session, it will do so only with reluctance and conditions.

At the moment, Washington is trying to figure out how to fix the international financial system. Everyone has an idea. Some think the IMF should be overhauled, while others think it should be abolished or replaced.

None of this long-range planning will mean much in Indonesia, where 47 million people are now facing food shortages.

The Clinton administration is quietly trying to iron out some plans for emergency food distribution in Indonesia. It must overcome the objections of commercial grain exporters in Australia, who fear that food-relief efforts in Indonesia could undermine their markets.

Indonesia serves as a fitting symbol of the end of naive globalism. Not long ago, America was telling Indonesians to open their markets to foreign capital, and the world would make them rich. Indonesia didn't follow the advice well enough. The foreign investors vanished, and now the United States may find itself helping to feed an impoverished nation.

Over the last six years, one of the great bromides about President Clinton was that he had the misfortune to hold office during an unchallenging era when America was prosperous. As a result, it was said, Clinton didn't have the opportunity to become a great president like, say, Franklin D. Roosevelt.

That was always a curious way of thinking. If it was true, Clinton is about to become a very lucky man.

Jim Mann's column appears in this space every Wednesday.

Copyright 1998 Los Angeles Times. All Rights Reserved

Jim Devine jdevine at &

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