por Christopher Whalen (firstname.lastname@example.org) www.rcwhalen.com
Spending other peoples' money has been the defining principle of Washington politics since the New Deal, but today the emphasis increasingly is on saving - rather than increased disbursements. In 1995, driven by tough fiscal and grass roots political realities, a resurgent conservative majority in Congress is cutting welfare programs, medical benefits for old people, and other outlays as part of an effort to balance the perennially unbalanced accounts of Uncle Sam.
Within this atmosphere of fiscal sobriety, there is emerging a consensus in and around Washington that the International Monetary Fund (IMF) and the World Bank have outlived any useful purpose and should likewise be put to the budget ax. Policy analysts on the left and the right, new members of Congress, and even some veteran committee chairmen have concluded that for financial as well as practical reasons, the U.S. should scale-down involvement in or even withdraw entirely from the IMF and World Bank.
The growing bipartisan antagonism toward multilateral lending should come as no surprise. Viewed from a traditional American perspective, the IMF and World Bank are anathema to conservatives and liberals alike. Both bodies are prime examples of statist, top- down economic planning run amok. Like the Great Society programs now slated for extinction, the IMF and World Bank show not just the failure of central planning and managed development, but also how easily multilateral institutions are diverted from the original good purpose of helping poor nations to serving the political and financial interests of Washington and Wall Street.
"After providing advice, loans, and grants to the government's of the world's poorest countries for four decades," argue Doug Bandow and Ian Vasquez in their fine 1994 book, Perpetuating Poverty, "the multilateral can point to few, if any, cases in which their efforts have led to improved living standards and sustained economic prosperity. Instead of growth, the Third World has experienced social disintegration, economic stagnation, debt crises, and, in some regions, declines in agricultural production and incomes."
Even judged by the stated missions and policy goals of each agency, the World Bank and IMF are abject failures. Both agencies have lent hundreds of billions of dollars to developing nations since the 1950s, but these hard currency loans have actually damaged their clients in the developing world and reduced economic opportunities. Instead of promoting real commerce and stable economic growth, both the IMF and World Bank instead encourage financial profligacy and political corruption; speculation and monetary idiocy on a truly global scale. Loans from these and other multilateral institutions have left the citizens of borrower nations heavily burdened with hard currency debts and, as a result, deprived of meaningful economic opportunities.
"Who is really poor?" asks David Suzuki, a leading analyst of social and environmental issues. "How do we define improvement? What are the fundamental assumptions underlying the kind of economics the World Bank is forcing on the so-called 'developing world?'" Suzuki argues that the World Bank is unwilling to look at new ideas and that its "facile dismissal of scientific expertise and some 10 million deaths by starvation annually reveals why the World Bank mentality is so deadly."
Indeed, both the IMF and World Bank currently are in search of a new mission. The utopian illusion of "sustainable development" once advanced as the primary role of the multilateral agencies -- a positivist concept that only exists in the minds of liberal economists and bureaucrats -- has been replaced by a holding action to prevent defaults by the largest debtor nations.
"It is time to abolish the IMF," argues Shadow Open Market Committee member and conservative economist Allan Meltzer. "Set up to monitor a fixed exchange rate system that has long since disappeared, the IMF has become a government-to-government welfare agency that transfers wealth as its own discretion, yet fails to promote real market reform."
Instead of helping nations to build wealth and prosperity, the IMF, World Bank and other multilateral development agencies provide subsidies to corrupt, often brutal ruling elites in countries like Mexico, Russia, Argentina and Brazil. In many cases, multilateral institutions are involved in making loans to authoritarian nations, such as China, Malaysia, Indonesia and India; countries that aggressively compete with American workers and industry, and are often at odds with America's long-term geopolitical interests. The thuggish rulers of mainland China, for example, are among the largest recipients of credit from the World Bank.
Typically, the IMF and World Bank extend hard currency loans, which are labeled for one type of "project" or another, but which in actuality are used to finance imports of consumer goods or the retirement of corrupt government officials. Once the hard currency has disappeared, however, the local economy is left to shoulder the burden of a foreign debt.
Moreover, the extensions of financial support from the multilateral agencies play a primarily political rather than economic role in countries such as Russia, Argentina and Mexico. Credits from the IMF and World Bank prop up profligate governments and save these clients from the wrath of an unhappy citizenry. Does anyone really believe that either Ernesto Zedillo in Mexico or Carlos Menem in Argentina would be in office today but for the rescues provided, in part, by the IMF? Just as democracy is a natural and necessary compliment to "free market" economics, so too countries must be allowed to fail financially when a government follows bad economic policies, otherwise there is no accountability and no democracy.
Political issues aside, the fiscal reality is that both the IMF and World Bank are bankrupt and cannot continue without large subsidies from member nations. The outlays of both institutions, financed with debt and contributions by the member states, are de facto gifts that lack all of the important and reciprocal attributes of true loans. Indeed, since credits from the IMF and World Bank frequently do not result in the creation of productive, income-generating assets, multilateral credits appear to fit the classical definition of a fraud and should thus not be enforceable.
"The regular IMF practice of extending new loans to prevent defaults by debt ridden countries creates a moral hazard," argues James W. Coons, economist at Huntington National Bank in Ohio. "It underwrites irresponsible and destructive economic policies by removing the normal incentive for investors to police governments... The record of the World Bank is no better. Perverse incentives have compromised loan quality, exposing taxpayers in the industrialized countries -- the ultimate guarantors -- to a possible bailout with a price tag comparable to that of the U.S. S&L bailout."
World Bank credits are really not loans at all, but instead a peculiar form of foreign aid underwritten by private debt. The Bank's paid-in capital is a tiny fraction of the total loans and guarantees outstanding, normally about ten percent of total assets, with the difference being financed by private obligations issued in dollars and other currencies. The World Bank has only rarely had a positive net-cash flow from its clients, meaning that the loans are never really repaid in an economic, accounting sense. Consequently, the World Bank's balance sheet continues to expand as member nations are forced to pay in new capital and accept responsibility for much larger "callable" capital contributions in the future.
It appears that only so long as the World Bank makes new money loans and guarantees (which support off-balance sheet financing) will its clients maintain current interest payments, a financial pyramid scheme assisted by the fact that new World Bank credits carry grace periods free of interest payments. In this way, the Bank really is captive to its supposed "clients." The threat of default by one or more borrowers, particularly the larger debtors, will threaten the Bank's "AAA" rating and destroy the illusion of short-term profitability and positive cash flow.
Perhaps the most convincing example of the complete failure of the decidedly authoritarian, neoliberal world view represented by the IMF and World Bank is the recent experience of Mexico. In the wake of the extraordinary loans by both institutions following the December 1994 peso collapse, Mexico is now the largest client of both institutions and has a total foreign debt, public and private, that will exceed $170 billion by year-end 1995. With a net, ex-maquiladora trade surplus of $2-3 billion projected this year, Mexico must borrow over $25-30 billion simply to pay principal and interest on its existing foreign debt load. In such a situation, there obviously is no capital left over to finance private industry in Mexico, thus real interest rates there are in the 15-20 percent range, some of the highest in the world.
What has Mexico gained from the billions in loans by the IMF and World Bank? What income producing assets or new industries have been built? >From where will come the dollar income necessary to service and ultimately repay these loans, credits guaranteed in part by the U.S. Treasury? The sad answer is that the loans have financed virtually no productive assets, no factories, no sources of income to provide event the most remote possibility of repayment. The proceeds of the loans, that is, the dollars, are long gone and all that remains are a few inferior public sector infrastructure projects and mountains of debt. An April 1994 report by the Bank's operations evaluations department on loans to Mexico between 1948 and 1992 reveals that more than one third of the Bank's projects there were never completed and that the levels of poverty and economic dislocation are higher today than when the World Bank loans to Mexico first began almost half a century ago.
"This year, the IMF advanced $7.8 billion to Mexico and promised an additional $10 billion if that country achieves certain stabilization goals," argues Meltzer. "Has this money helped most Mexicans? I think not. The loan has been used to intervene in the foreign exchange market and to buy up government securities. The result is that Mexico has a larger debt, while foreign bond holders have been spared some losses."
Mexico's debt situation is so serious that Citicorp Chairman John Reed told an audience in Mexico City in early August that the country would eventually be forced into new restructuring talks on its foreign debt. It is no small irony that only a few weeks later, the IMF itself issued a report on the Mexico crisis that called into question the need for a bailout in the first place. It seems that Mexican investors fled the country and the sagging peso long before December 20 and, in any event, well in advance of investors from the U.S. and elsewhere. Once again it is proven that the average Mexican is a lot smarter than even the most apparently savvy gringos on Wall Street.
As the U.S. Congress gradually accepts the premise that the IMF, World Bank and related organizations are failed institutions that represent a financial and political threat, not a source of assistance, to the well-being of developing nations, the chief question to consider is how to handle an orderly liquidation. Here is a basic "how-to" checklist to be followed by a Republican Congress and, presumably, a GOP-controlled White House, but it is important to note that White House cooperation is not necessary to the task.
First, the U.S. Congress should pass a resolution expressing the sense of both bodies that Washington will no longer provide subsidies to the IMF and World Bank in the form of new quota subscriptions for the IMF or "capital contributions" for the Bank. Such a resolution should instruct the President to formally notify the IMF and World Bank of the U.S. intent to withdraw from both organizations, as provided in the Bretton Woods Agreement and the related legislation. In fact, the President has unilateral authority to withdraw from any of the Bretton Woods institutions, but he will need the authorization of Congress to "change" the U.S. quota in the IMF or the U.S. capital contribution to the World Bank.
According to a series of confidential memos prepared by the Congressional Research Service for the Senate Foreign Relations Committee, a drop in the capital contribution to the Bank and the IMF quota to zero would require congressional assent. Congress already has the unilateral power to cut-off funding to the organizations and only allowed U.S. participation through legislation, thus it seems clear that Congress can, of its own volition and initiative, effectively withdraw from the IMF and World Bank as an when it so chooses.
Once the U.S. has announced its intention to withdraw, the second major task will be to begin the orderly liquidation of the IMF and World Bank, assuming other member nations do not wish to continue without the support of U.S. There are, after all, other regional, multi-purpose institutions in existence that do not require U.S. participation. Eliminating the IMF would be a relatively simple matter and one that hopefully would result in a net-surplus of funds that could be applied to retiring the obligations of the World Bank.
At the moment, the IMF is not a cash drain on the U.S. and other member countries, but this situation could change dramatically if the Fund were to involve itself in a number of public sector bailouts such as Mexico. The almost $10 billion so far advanced to Mexico by the IMF, for example, represents a large part of the IMF's total hard currency liquidity, a number that is not publicly disclosed but which inside sources put at about $30-40 billion.
Since an important goal of this exercise is to relieve the financial burden on developing nations, debt forgiveness for debtor nations must take precedence over repayment of IMF quotas. The simple and explicit quid pro quo for the developing nations should and must be total debt forgiveness in return for a total end to all new multilateral lending. Like economically successful Chile and many other nations, the clients of the IMF and World Bank must simply learn to live on the money earned from exports, private portfolio flows and, most important, direct investment in new industrial capacity.
If one assumes that all loans outstanding from the IMF can be liquidated without any significant additional cost to the member countries, the main focus then becomes the World Bank and its various affiliates. As of June 30, 1995, the Bank has loans equal to $123 billion and borrowings of $111 billion. The World Bank has also begun to issue guarantees on private loans, swelling its total obligations to over $330 billion as of June 1994 (latest date available).
Simply to hold the Bank's balance sheet static will require a large annual subsidy as the existing portfolio of debt and swap agreements come due. But the cost of gradually unwinding the World Bank's bloated balance sheet will be as nothing compared to the cost of allowing the Bank to grow further by continuing to borrow and make new loans. Once a sinking fund is established to retire the Bank's bonds as they come due, the largest outlays for a single year to retire bonds would not exceed $11 billion in 2014 and in most years the outlays will be considerably less, but the cost of extinguishing guarantees and swap contracts also needs to be calculated to arrive at a complete total cost figure.
The benefits of managing an orderly liquidation of the IMF and World Bank are numerous. First and foremost, the end of multilateral lending would force the so-called developing world to rationalize its economic programs and re-emphasize business, that is, globally competitive domestic production of goods and services, above foreign borrowing. The grotesque class of international economists and bureaucrats who currently hold predominant sway among the political leadership of many nations and who are frequently subservient to Washington and other foreign creditors, gradually will be replaced by domestically-oriented business and commercial interests.
Second, by ending the flow of subsidies through the IMF and the World Bank to the developing world, U.S. leadership would accelerate dramatically the growth of new industries and therefore new consumer markets in these nations . The boom-to-bust, inflation then deflation cycles drive by financial market speculations, a phenomena painfully visible in nations like Mexico, would end and a more stable and, perhaps, boring regime based upon real economic activity would take its place. This basic and fundamental change in economic direction would also be reflected in
domestic politics since the leadership of a given nation would be forced to listen to the needs and grievances of internal constituencies rather than the mandarins who pad the halls of the multilateral agencies.
Third and most important, completing the difficult but straight-forward exercise of liquidating the IMF and World Bank will serve as a working model for a more difficult task: the eventual repayment of the $4 trillion U.S. national debt or at least its reduction to a level consistent with a market-driven economy. If Congress can but summon the toughness of mind and intellectual courage to say no to more money for the global bureaucrats at the World Bank and IMF, then there may yet be hope that the United States may one day begin to repay its own debts in kind.