The Multinational Monitor


I N T E R N A T I O N A L   M O N E T A R Y   F U N D


An analysis of the International Monetary Fund's role in the Third World debt crisis, its relation to big banks, and the forces influencing its decisions.

by Walden Bello and David Kinley

The International Monetary Fund is a secretive institution. Its staff economists and bankers who delve in the nether-world of international finance assiduously avoid publicity. In a cloistered, oak-panelled office twelve floors above busy downtown Washington, 22 men representing all 143 member governments decide the financial fate of many of the world's countries. Afterward, they submit confidential reports of their deliberations and invariably refuse to speak to the press. But lately the IMF has been thrust into the public limelight.

The Fund has traditionally served as a source of emergency financial aid to countries suffering balance of payments difficulties. But with Third World debt rising over tenfold in the last decade, from $50 billion in 1972 to about $640 billion in 1982, the Fund, critics charge, has been transformed into a debt-collection agency for the big multinational private banks, and a key instrument for achieving American foreign policy objectives.

About 35 countries, mostly from the Third World, are currently under strict IMF "conditionality" programs designed to "cure" their liquidity crisis with harsh deflationary measures.

These programs have provoked anti-IMF riots in Sao Paolo, Brazil, and in Chile. They have united virtually all sectors of Philippine society - including the business elite - against the technocrats who do the IMF's bidding. And in debt -ridden Mexico, the specter of demonstrations against the "stabilization program" haunts the government.

In contrast, the Fund is proving to be a great asset to the big U.S. private banks which are dangerously overextended in the Third World. The multi-billion IMF credits to Brazil, Argentina, Mexico, and Chile have been attacked across the political spectrum as simply "bail-out" mechanisms for the overextended banks. As Congressmen Bill Patman of the House Banking Committee put it, "The IMF makes a loan of $5 billion to Brazil, and Brazil takes that and pays off Chase Manhattan. Is that not a payoff to Chase Manhattan?"

The banks and the IMF have nothing less that full repayment in mind. While arguing for an increase in IMF contributions from the United States, Treasury Secretary Donald Reagan, a man with a solid Wall Street background, stated: "I don't think we should just let a nation off the hook because we are sympathetic to the fact that they are having difficulty... As debtors, I think they should be made to pay as much as they can without breaking them... You just can't let your heart rule your head in these situations."

The Bail-out Process

Bailing out the banks is a three-step process. First, the IMF draws public money contributed by member-governments and hands it over to, say, Argentina or Brazil. This enables the latter to repay the amounts falling due on its debts to the big banks, in addition to replenishing the foreign reserve credits needed to purchase imports.

Second, with the IMF presence guaranteeing payment of future installments of the debt, the IMF and the banks draw up a plan for rescheduling future payments and an "emergency finance package" from the banks. The interest payments on the rescheduled debt and the emergency finance package are usually significantly higher than the average rate. This accounts for two seemingly paradoxical phenomena. On the one hand, the banks most heavily involved in international lending - which are supposed to be in great trouble - are posting record profits. On the other hand, the arrangements increase the risk of future default on the part of the debtor country.

The third element in the process is the stabilization program imposed by the Fund on the debtor country. This usually consists of sharp cutbacks in imports, "maxi-devaluation" of the currency, repression of wages, massive reductions in government expenditures, and big tax increases. The idea is to save on foreign exchange and generate the internal resources to pay off the debt.

Not only have these measures provoked popular discontent, but they threaten to wipe out these countries as markets for U.S. products. Twenty-three percent of U.S. exports are currently purchased by Third World countries under IMF stabilization programs - a fact which is leading some sectors of the U.S. establishment to worry that the proposed schemes may merely prolong and deepen the recession in the U.S. itself. According to Congressman Charles Schumer of New York (see interview, p. 18), IMF stabilization programs mean that "we cannot prosper and grow rapidly when IMF austerity forces our best customers to reduce their consumption and investment in U.S. products." Henry Kissinger, always on the lookout for the long-term stability of the establishment, calls this "the inherent contradiction in the IMF's basic strategy."

Who's Responsible?

The IMF is now projected as the savior of the international financial system by both the Reagan administration and liberals, who have united in an effort to increase IMF quotas (the contribution of member states) by 47 percent under the rationale of enabling the agency to assist the debt-ridden countries. They conveniently forget that the IMF bears a great deal of the responsibility for the generation of the current debt crisis.

Possessing huge amounts of surplus capital (including petrodollars deposited by the OPEC countries), the banks inaugurated a period of easy lending to selected Third World countries in the mid-1970s. They were, however, reluctant to enter a country unless it had an ongoing program with the IMF - the "seal of approval" of the borrower's policies, and a catalyst for additional private and official financing. Thus, throughout the 1970s, the big private banks were the most powerful lobbyist for the expansion of IMF credit facilities to Third World countries.

"The reason is obvious," asserted Congressman Tom Harkin in 1980. "With the IMF providing the funds to underpin the riskiest loans and providing the muscle to squeeze repayment from the world's poorest countries, the private banks can continue to reap enormous profits in the Third World." Even the Wall Street Journal termed the 1978 creation of a new IMF credit facility "the Bankers' Relief Act."

In choosing preferred clients in the Third World, both the Fund and the banks tried to reduce the "political risk factor" - which meant that the biggest loans often went to capitalist countries with superficial signs of stability imposed by authoritarian regimes, like Chile, the Philippines, Argentina, and Brazil. Yet, these were often times the borrowers who were not likely to invest the bulk of the loans in creating productive assets that could generate the wealth from which the loans could be later repaid.

As one student of Argentina's debt put it, "Between 1978 and 1982, the Argentinian external debt increased by roughly $18 billion. Where did the money go? Two to three billion went to pay for the increase in the current account deficit. A couple of billion went for interest. The generals used a couple of billion to buy airplanes and Exocet missiles. And the Argentinian private parties took $10 to $12 billion from the Central bank and parked it in condos in Miami, bonds in New York, and ski lodges in Vail."

Creating the Debt-Prone Economy

Encouragement of easy lending to irresponsible elites was not, however, the IMF's only contribution to the financial crisis. IMF stabilization programs were themselves responsible for creating the structural conditions which led to consistently huge deficits that demanded external finance.

The Philippines is a classic example of the type of economy that the IMF, together with its sister institution the World Bank, attempt to forge throughout the Third World. Through the 1970's, the Philippines was under one or another kind of stabilization program, making it by mid-1980 the Third World country most indebted to the IMF.

Working closely with the World Bank, the Fund used its tremendous power to restructure Philippine production along the lines of an "export-oriented" development strategy. This consisted of a concerted effort to push productive capital away from production for the internal market - by destroying the mechanisms sheltering Philippine firms from multinational competition - to a one-sided emphasis on producing labor-intensive manufactured exports. Attracting investment to export production also meant a policy of low wages and constant currency depreciation to ensure the competitiveness of Philippine products in export markets.

This growth strategy, however, could only succeed if the international economy continued to expand and Western and Japanese markets remained open to Philippine imports. Both these conditions began to vanish in the mid-1970s. First, the international prices for sugar and coconut products, the Philippine's chief export crops, plunged. Then, in 1980, demand collapsed further with the onset of the international recession. In reaction to the economic downspin, the United States, Japan, and Western Europe began erecting protectionist barriers against labor-intensive manufactured imports from the Philippines and the rest of the Third World. In a confidential internal report, the Fund admitted that its strategy of export-led growth in the Philippines had failed: "The staff shares the view ... that export promotion has become more difficult in the present climate of uncertainty of the international economy as well as the trade restrictions faced by Philippine exports."

This confession was, of course, no help to the Philippines, whose current account deficit widened sharply with the combination of weak exports and inexorably rising imports (which included imports of raw materials and machinery for the ailing export industries). By mid-1983, the deficit has risen to almost $3 billion, up from $2 billion in 1980. To bridge the gap, the country borrowed heavily from the Fund and the big banks.

In a more balanced economy, the decline of the export sector can be balanced by the expansion of internal demand to ensure continued growth. But in the Philippines, years of following the IMFWorld Bank strategy of depressing wages to gain "export-competitiveness" had so gutted the internal market that deep recession became the only possible outcome. In 1982, the Philippines' GNP growth rate was down to 2.4 percent - the lowest in Southeast Asia. The Fund, then, has helped saddle Filipinos with the worst of all possible worlds: an economy racked by deep recession and weighed down by an impossible external debt burden.

The Fund as an Instrument of U.S. Foreign Policy

As Third World countries scramble to get last-resort financing from the IMF, another ugly side to the institution has become evident: its responsiveness to political manipulation by the U.S. The U.S., with the largest contribution to the Fund, holds more than 20 percent of voting power.

Perhaps the most glaring example was the recent approval by the IMF Executive Directors of a $1.1 billion loan to South Africa. The Fund, under U.S. pressure, not only ignored the immorality of apartheid. It also refused to face the fact that apartheid is a key factor behind South Africa's balance-of-payments difficulties.

As Professor Colin Radford of Yale emphasized in recent congressional testimony on the loan: "In the language of the economists, sometime soulless language, apartheid is a qualitative restriction on the labor force. In the interests of economic efficiency, the position of the IMF has been stated over and over again in opposition to qualitative restrictions which interfere with the operation of the economy."

But it is futile to look at the Fund's economic "performance standards" to explain the South Africa loan. For the key factor behind its approval was the Reagan administration's desire to tighten up its political and military ties with South Africa, which is strategically located off the Indian Ocean, where the Pentagon is undertaking a major military build-up.

Deserting its economic performance criteria in favor of decision-making on political grounds is not unusual for the IMF. In 1982, for instance, at least three loans to Third World countries were evaluated mainly in terms of their relevance to U.S. foreign policy.

  • In July 1982, the Fund granted El Salvador a credit of $83 million in spite of what it acknowledged to be a state of economic chaos. In its confidential report, the IMF did not hesitate to describe its mission in political terms: to maintain a "holding pattern" which would be "instrumental in restoring and retaining an economic setting conducive to the renewal of growth and investment - once noneconomic factors permit it" (i.e., when the country is pacified politically).

  • More recently, it has been revealed that the IMF approved two $35 million loans of another type to El Salvador during 1981 and 1982, although the country failed to meet the Fund's own criteria for the loans (see box).

  • Again in July 1982, Haiti received a $38 million standby credit - despite dismal economic performance and despite the failure of the government of "Baby Doc" Duvalier to meet all the conditions attached to a different three-year credit extended in 1978. Baby Doc got the loan because Washington considers him a strategic ally in its efforts to isolate Cuba in the Caribbean.

  • While the Fund extended credits to El Salvador and Haiti, it refused a request from Socialist Vietnam. In terms of economic performance, Vietnam clearly deserved the loan for it had met the key goal of a previous IMF credit extended in 1981: raising the gross domestic product by three percent. It had also begun to introduce market norms in a limited fashion and moved toward export-oriented development, as prescribed by the Fund.

    But while the Fund took a sympathetic view toward the Salvadoran regime's preoccupation with "noneconomic factors," it criticized the Vietnamese for "the continued diversion of resources toward military purposes." The staff report, in fact, sounds remarkably similar to arguments advanced by the State Department for denying bilateral aid to Vietnam unless it withdraws its troops from Kampuchea: "The continued diversion of resources toward non-economic purposes . . . contributed to a decline in total investments ... Military manpower requirements also continue to absorb a disproportionate share of technical and managerial skills that are in short supply."

  • A recently leaked study by the Congressional Research Service indicates that the politicization of the IMF loan process has become especially marked under the Reagan administration. The study lists numerous instances in which the U.S. has disregarded the economic guidelines in order to advance its political interests. For instance, the study quotes an administration source as saying that the leftist government of Grenada, should not "get a penny of indirect aid" from the IMF and other multinational institutions.

In sum, the International Monetary Fund, by serving as an undisguised agent of debt collection for the big international banks and a selective political instrument for the advancement of Reagan's foreign policy, is part of the problem and hardly the solution to the massive liquidity crisis now racking the Third World.

Co-authors of Development Debacle: The World Bank in the Philippines (Institute for Food and Development Policy, 1982) Walden Bello and David Kinley are presently at work on a book on the IMF.

El Salvador won improper loans under U. S. patronage

IMF data together with internal IMF documents reveal that El Salvador received loans that it did not qualify for by the Fund's own rules - and that approval came as a result of some strong arm-twisting from the U.S.

According to an analysis by the Center for International Policy, which obtained the internal documents, El Salvador was not eligible for the two $35 million loans it received on easy terms from the IMF's Compensatory Finance Facility in 1981 and 1982.

The United States championed the 1981 loan as part of its campaign to place the IMF and other international financial institutions at the service of U.S. political objectives in Central America. A number of IMF executive directors objected to the loan because the IMF staff refused to endorse it. The staff failed to provide estimates of El Salvador's future export income, claiming that internal conflict in El Salvador made such estimates impossible.

In confidential minutes of an IMF executive directors meeting of July 27, 1981, IMF Managing Director Jacques de Larosiere says "I can tell you very frankly that I would have preferred" the staff to recommend the loan. Executive Director Richard Erb, clearly irked at the staff's resistance, is described as saying that he "would have liked to see the staff make a forecast" for future export earnings, and that "the implication of not making a forecast is that the internal situation [in El Salvador] will become much worse."

Erb and de Larosiere argued that the executive directors should make their own judgment about the likelihood of El Salvador hitting the targets and that in this case they should approve the loan.

Directors representing nearly all the developed nations objected to this unprecedented intervention in the staff's work, and abstained from voting. One executive director pleaded for the board "to be well aware of the impact on the Fund's . . . reputation for objectivity that would result from . . . slipping into the practice of considering requests that did not carry .., the initials of staff and management." Nevertheless, the loan was approved with 57 percent of the board's voting power, 20 percent coming from the United States. According to sources within the IMF, this is the first time in the institution's history that a loan has been granted without the approval of the staff.

IMF data published in June of this year proves that the loan was in fact not justified; El Salvador's export earnings in the two following years (1982 and 1983) have declined, rather than rebounded.

Perhaps taking a cue from Erb's and de Larosiere's displeasure in 1981, the IMF staff did recommend to the executive board in June 1982 that El Salvador would qualify, though barely, for a second $35 million loan. But it appears likely that this additional loan will also prove to be improper, since earnings continue to slide. Only a doubling of export income in 1984 would make El Salvador eligible for the loan. In fact, a confidential IMF study of the Salvadoran economy dated April 25, 1983 notes that export income has declined since 1980, contrary to previous projections, and will at best hold steady in 1984.

Under IMF rules, El Salvador should have to pay back most of the $70 million immediately.

- Caleb Rossiter

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