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27 March 2000

Northern City Journal
(ISSN 1528-9575)
Vol. 1, No. 11

Minneapolis, Minnesota

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Get the IMF and World Bank off the Back of the World's Poor

by Jerome F. Winzig

The International Monetary Fund (IMF) and the World Bank are major players in international finance for the developing nations of the world. There is a strong body of evidence indicating their influence has been profoundly negative. But many in the news media pay little heed. As a result, most Americans know little about either institution and are unaware of whose interests are truly served by these two institutions.

Given the powerful influence of the IMF and the World Bank, such ignorance of these issues on the part of the citizens of the world's wealthiest country is inexcusable. The Wall Street Journal says the World Bank and its affiliates "profess to help the world's poor, but mainly finance the non-poor" and calls the IMF's performance during the Asian currency crisis "abysmal".

Evidence against the IMF and the World Bank comes from many quarters. A 1995 study by the World Bank itself concluded that countries in Africa following IMF structural adjustment policies have had slower growth in agricultural production. In a 1996 article in the Multinational Monitor, Dom Manuel Vieira Pinto, Catholic bishop of Nampula, Mozambique, charged that "Mozambique is threatened politically, economically, and culturally. The main threat is the World Bank and the IMF." A 1997 report by Oxfam's International Advocacy Office reported that Zambian industries have been hurt by high interest rates mandated by the IMF, and Senegal and Tanzania have been hurt by IMF-mandated currency devaluation.

In March 2000, a major, bipartisan commission appointed by the U.S. Congress released a report strongly criticizing both institutions. According to the International Financial Institutions Advisory Commission, "The IMF has given too little attention to improving financial structures in developing countries and too much to expensive rescue operations. Its system of short-term crisis management is too costly, its responses too slow, its advice often incorrect, and its efforts to influence policy and practice too intrusive."

The commission goes on to recommend wide-reaching reforms. A key proposal is to write off all loans to the poorest, most heavily indebted nations if they implement effective economic and social policies. The commission also recommends scrapping 70 percent of the World Bank's current loan program and refocusing on the world's poorest countries that do not have access to private sector loans.

But American apathy means that these proposed reforms of the IMF and the World Bank may never happen. In spite of the fact that many believe the only real solution is to abolish the IMF and the World Bank, some leading members of Congress have already begun to trash the commission's recommendations, calling them a "slash and burn approach" to reform.

So what are these two institutions, and why should we care?

Both the IMF and the World Bank were founded at the end of World War II and grew out of the experiences with worldwide depression in the 1920s and 1930s. The IMF started as a kind of international credit union. It was supposed to help stabilize foreign currency exchange rates. Member nations were to contribute funds called "quotas." In return, so went the theory, they were entitled to borrow from the IMF if they temporarily ran out of foreign currencies needed to conduct trade.

However, some countries, such as Britain, began to abuse the system by printing money to finance excessive spending programs while depending on the IMF to bail them out. When the United States tried to finance both the Vietnam War and the War on Poverty simultaneously, this put additional strain on the IMF. As a result, in the 1970s most countries began to let their currencies float, thereby eliminating most of the original need for the IMF.

So the IMF, like many threatened bureaucracies, reinvented itself as an international poorhouse. The U.S., Japan, Germany, and a few other rich nations would provide most of the IMF's lendable funds. In return, the IMF would provide funds to poorer nations as a sort of lender of last resort.

In practice, however, the IMF has ended up focusing on massive loan bailouts. These bailouts are highly concentrated; the top five IMF borrowers account for an astounding 70 percent of its total credit. The cost of these bailouts has skyrocketed from $3.7 billion in 1968 to $40 billion in 1993, and $94 billion in 1999.

The main beneficiaries of these bailouts have been major banks and private lenders. Furthermore, the bailouts have made the problem worse. By removing the risk of default, the IMF has encouraged private lenders to continue making large, unreasonably risky loans.

At the same time, the IMF has forced countries receiving these bailouts to devalue their currencies and raise taxes. It dictates cuts in domestic government spending. It has also become subject to political influence, pouring money into Russia even though criminals were siphoning off much of the money, in the apparent hope that this would somehow moderate Russia's stance on Yugoslavia.

The World Bank's initial purpose was to provide loans for the reconstruction of Europe. When it was founded, the international flow of money was small by comparison to current standards, and it was felt a World Bank was needed to compensate for the absence of private-sector financing.

Today, however, direct foreign investment is the key driver of development finance all over the world. Yet seventy percent of the World Bank's regular loans are not made to the world's poorest countries. Instead, those loans go to just eleven countries -- including Argentina, Brazil, China, and Mexico -- that all have ample access to private capital.

Furthermore, the World Bank's loans are subject to the same kinds of misuse as those of the IMF. Allan Meltzer, the chairman of the Congressional commission that recommended sweeping reforms, has pointed out problems with World Bank loans to Russia: "$30 million of a World Bank loan was allocated to compensate victims of bank frauds and pyramid schemes. Audits showed that after several years, not a single victim had received payment."

Given the lousy record of the IMF and the World Bank in recent years, there is a strong moral imperative to carefully consider the following fundamental changes recommended by the congressional commission:

First, the IMF and the World Bank should write off all loans to the poorest, most heavily indebted countries, while requiring them to implement effective economic and social policies. Second, the IMF should specialize only in emergency, short-term lending to countries that lose access to private financial markets. Third, the World Bank should cease all financing for richer developing countries -- those that have investment-grade bond ratings or per-capita incomes exceeding $4,000 a year. Fourth, there should be limited financing for countries such as China, Thailand, Brazil, and Poland, which have per-capita annual incomes above $2,500.

Fifth, the World Bank should be renamed the World Development Agency and should focus more on grants instead of loans. However, grants should be provided only in return for actual delivery of services, not merely for promises. Further, payments should be made only upon successful performance verified by outside auditors. Sixth, this new agency should use more of its resources to promote research in areas such as malaria prevention and tropical food production, in partnership with private companies.

These and other reforms are essential if there is to be justice and fairness in the world economy. But these reforms will never come to pass if Americans continue to ignore the IMF and the World Bank. If that happens, the demagogues who oppose free trade and real economic opportunity for the rest of the world will carry the day, and the world's poor will lose out to the big money lenders.

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