[lbo-talk] (Fwd) Soren on the IMF's demise

[Patrick Bond]

IMF Confidence Crisis

Soren Ambrose | April 12, 2007

Foreign Policy In Focus
www.fpif.org

As International Monetary Fund (IMF) and World Bank officials engage in 
their joint semi-annual meetings in Washington, the Fund has a 
nettlesome new task: convincing its shareholders (most of the world’s 
governments, represented at the meeting by Finance Ministers and Central 
Bank Governors) that the institution should continue to exist.

After some 30 years of making “bail-out” and “structural adjustment” 
loans to indebted and impoverished countries in return for their 
adherence to a long list of neo-liberal economic reforms–trade and 
investment deregulation, privatization, tightening access to credit, and 
rapid budget cuts and public-sector layoffs, to name a few–the IMF has 
been confronting a crisis of confidence for the past two years. Demand 
for its services has been shrinking. Its reputation has never recovered 
from its disastrous interventions in the East Asian and Argentinean 
financial crises (1997-1998 and 2001-2002 respectively).

The IMF was jolted out of any lingering complacency in mid-December 
2005, when Brazil unexpectedly announced that it was paying off all its 
IMF loans ahead of schedule. Two days later, Argentina said it would 
follow the same course. Less diplomatic than the Brazilians, Argentine 
President Nestor Kirchner made it clear that he saw the move as an 
emancipation from the suffocating conditions imposed for decades by the IMF.
Liberation

After the two South American countries, who happened to be the IMF’s 
largest borrowers, set the example, others followed. Serbia, Indonesia, 
Uruguay, and the Philippines made similar announcements. With the 
addition of Indonesia to the list, three of the four largest debtors to 
the IMF had liberated themselves. The fourth, Turkey, is reportedly 
considering taking the same step before the end of 2007. With all these 
early repayments, and the gathering certainty that virtually no 
“middle-income countries” would be giving the IMF more business, it soon 
appeared that the IMF might face a crisis of solvency. Indeed, the 
institution is expected to post its first loss in decades–about $100 
million–this year.

After six months of high-level public fretting about the IMF’s relevance 
and role, the Fund’s shareholders gathered again last April in 
Washington to hear Managing Director Rodrigo Rato announce the IMF’s new 
role: it would convene talks among the major economic powers with the 
aim of reducing the huge imbalances that have recently plagued the 
global economy. It was widely assumed that the two big topics would be 
China’s currency valuation and U.S. deficits–and with the accent on the 
former, given that the United States is the Fund’s largest shareholder. 
The Ministers and Governors smiled broadly and declared that the IMF had 
found its new path.

Coming Up Empty

Now, with the IMF’s semi-annual roll into the limelight just around the 
corner, its “new role” can no longer avoid examination. After all the 
hearty handshakes last year, it appears that its attempt to get its five 
chosen economic powers–the United States, the Eurozone (the European 
Union nations that use the euro as their currency), Saudi Arabia, Japan, 
and China–to sit down and hammer out some hard decisions has come up 
empty. While no one has issued a press release declaring the failure of 
the initiative, virtually no one is saying anything about it.

Another well-advertised glittering coat has failed to cover the ailing 
emperor’s nakedness, and for now at least, the courtiers are trying to 
look the other way. It has been left to the usually-reticent Japan to at 
least acknowledge that there will be nothing to report at the April 
meetings.

With the new function that mollified the official critics apparently a 
non-starter, it seems only logical to assume that hand-wringing about 
the relevance and future of the IMF will return to dominate 
conversations at the meetings.

Of course the IMF still has some of its “old role” left to play. While 
most of Asia and Latin America may have headed for the exits, the IMF 
can still play financial viceroy in some of the world’s poorest 
countries–mainly in Africa, with a few in Central America, the 
Caribbean, and Southeast Asia. Those countries are in no position to pay 
off their IMF loans early, and still need the IMF’s “seal of approval” 
to attract credit and grants from other sources.
Poor Record

So it can hardly have been welcome news for Mr. Rato and his colleagues 
in IMF management to have two high-profile reports released in the last 
two months, one from a commission jointly appointed by the IMF and the 
World Bank and the other from the IMF’s own internal watchdog, slamming 
its record in low-income countries, and Africa in particular.

The commission http://www.imf.org/external/np/pp/eng/2007/022307.pdf 
looking at IMF-World Bank cooperation, chaired by former Brazilian 
Finance Minister Pedro Malan, suggests that the IMF stop making loans to 
low-income countries, leaving that responsibility to the Bank. The 
report also notes that the issue of “fiscal space” – the IMF’s 
insistence that low inflation targets must be maintained even as they 
limit growth and critical health and education programs–has caused 
increasing friction between it and the World Bank.

The second report, “An Evaluation of the IMF and Aid to Sub-Saharan 
Africa,” http://www.imf.org/external/np/ieo/2007/ssa/eng/pdf/report.pdf 
from the IMF’s Independent Evaluation Office, goes further in raising 
questions about the Fund’s philosophy and practice for the last 30 
years. Indeed it is the strongest critique of core IMF practice to come 
from the IEO, established after the application of external pressure in 
2001, or any other part of the IMF.

The IMF has, to put it a little less diplomatically than the report 
does, been lying to Africa and the world about what it does on the 
continent. In 1999, in reaction to the notoriety the IMF’s “structural 
adjustment programs” had garnered in nearly a hundred developing 
countries, the IMF announced a shift in how the policy conditions 
attached to its loans would be determined. Under the new “Poverty 
Reduction & Growth Facility” (PRGF), which replaced the Enhanced 
Structural Adjustment Facility (ESAF), the policies were to be 
determined through consultations between government and citizens groups.

But the report finds that although the IMF consistently claims to have 
changed its ways, all it has really done is to change the name of the 
programs. There is little difference, in either process or product, 
resulting from the transition from ESAF to PRGF. The same harsh 
austerity measures are demanded from governments with no leverage to 
resist the IMF, and input from civil society, or from any part of the 
government besides the Finance Ministry, is ignored.

The report finds that the IMF has “done little to address poverty 
reduction and income distributional issues, despite institutional 
rhetoric to the contrary." Looking, like the Malan Report, at the 
“fiscal space” issue, the report concludes that the IMF has “blocked the 
use of available aid to SSA [sub-Saharan Africa] through overly 
conservative macroeconomic programs.” Large chunks of increased aid 
flows – often as much as 85% in countries that have inflation rates 
above 5% (an extremely low figure for countries that need to spur rapid 
growth) – are, on IMF orders, not spent, but instead added to the 
country’s international reserves, where they avail no poor people of 
better health care or education.

The IMF, says the report, has also failed to be “proactive in mobilizing 
aid flows” and has “done little to analyze additional policy and aid 
scenarios and to share the findings with the authorities and donors.” 
Given the international community’s consensus on the importance of 
reaching the much-vaunted Millennium Development Goals, the IMF’s muting 
of the impact of international aid should be nothing less than a global 
scandal.

We don’t yet know whether the mounting crises of legitimacy, relevance, 
confidence, and solvency will be publicly discussed at the IMF and World 
Bank meetings. But you can be sure they will be the subject of much 
private conversation. The survival of the IMF, a 3,000-strong 
international bureaucracy which just opened a gigantic addition to its 
headquarters building in Washington, is at stake. Unless someone can 
find a role the IMF can be trusted with soon, a glut of economists, and 
some prime Washington real estate, may soon flood the markets.

Soren Ambrose is the coordinator of the Solidarity Africa Network in 
Nairobi, Kenya and a contributor to Foreign Policy In Focus.