The International Monetary Fund was founded in
1944 at Bretton Woods, New Hampshire
as a result of the financial turmoil of the 1930s. The aim was to create an
institution that would help rebuild - along with the World Bank - the world
economy. The IMF is neither a world
central bank nor a development bank. It acts as a monitor of the world's
currencies by helping to maintain an orderly system of payments between all
countries. It is also a kind of international credit union. Member countries
contribute money to the Fund, which in turn lends money to members who face
severe balance of payment problems. Critics of the IMF complain that its
short-term loans are accompanied by stringent conditions that often end up
doing more harm than good.
In the aftermath of
World War II a number of international organizations were created. Besides the
United Nations, the important international economic organizations created at
the conference held at Bretton Woods were the International Monetary Fund (IMF)
and the International Bank for Reconstruction and Development, now known as the
World Bank. The IBRD-World Bank was established to help finance the
reconstruction of war-torn Europe and the development of
the poorer countries of the world. The IMF mandate was to regulate an
international monetary system based on convertible currencies so as to
facilitate global trade while leaving sovereign governments in charge of their
own monetary, fiscal, and international investment policies. Significantly, the
effort to establish the International Trade Organization (ITO) ended in
failure, leaving the “minimalist” General Agreement on Tariffs and Trade (GATT)
as its surviving remnant. But all that was more than 50 years ago. The IMF has
now become the “point person” for efforts to “liberalize,” or deregulate the
international economic system.
The IMF is usually
thought of as the “manager” of the international credit system. But one could
question whether the newly transformed international credit system has a
manger. One could debate whether “manager” would be an accurate label in any
case. The IMF would have us believe it is more like a “social worker” for
international “credit addicts.” Polite IMF critics would use the word
“policeman” rather than “manager” to describe the IMF's role. And angry critics
see the IMF as nothing more than an “enforcer” or “rent-a-cop” in the employ of
the international creditor syndicate. Here, we are concerned with what the IMF
does and with the predictable effects of its policies, so readers can choose
their own label when we are done.
The IMF has prescribed
the same medicine for troubled third world economies for two decades now: (1)
Monetary austerity: Tighten up the money supply to raise internal interest
rates to whatever heights needed to stabilize the value of the local currency.
(2) Fiscal austerity: Increase tax collections and reduce government spending
dramatically. (3) Privatization: Sell off public enterprises to the private
sector. And (4) Financial liberalization: Remove
restrictions on the inflow and outflow of international capital as well as
restrictions on what foreign businesses and banks are allowed to buy, own, and
operate. Only when governments sign this “structural adjustment agreement” does
the IMF agree to: (5) Lend enough itself to prevent default on international
loans that are about to come due and otherwise would be unpayable. And (6)
arrange a restructuring of the country's debt among private international
lenders that includes a pledge of new loans.
Since the alternative to
signing an “IMF conditionality agreement” is no new international loans--even
to finance export sales and essential imports--combined with threats of asset
seizures abroad by international creditors; since there is no longer a Soviet
bloc that might decide to “scab” on an international creditor boycott and
embrace a defaulting pariah to her bosom; and since an international lending
boycott would bring most third world economies to their knees within months,
there have been few troubled countries in the past decade willing to stare down
the IMF and say “nyet” to its “devil's deal.” The only countries able to put up
any fight at all have been those who could play the “too big to fail” card. In
the 1980s when Brazil owed more than 100
billion and Peru owned a little more
than 10 billion, the saying in Latin America was: “If I owe you 10
billion dollars I'm in trouble. But if I owe you 100 billion dollars you're in
trouble.”
In the Latin American
debt crisis of the 1980s the IMF backed down in face of Brazilian threats to
default and agreed to a much more lenient program--effectively allowing the
Brazilian economy to continue growing. On the other hand when social democratic
President Alan Garcia refused in 1985 to dedicate more than 10 percent of the
value of Peruvian exports to debt repayment on grounds that paying any more
would make economic development impossible, the IMF excommunicated Peru from the international
economic community. Peru was denied new loans even to finance exports, and the
World Bank shut down not only its development projects, but also its research
projects in Peru, in solidarity with IMF policy. The greater the “exposure” of
international creditors--and in particular U.S. creditors--the better the deal
debtor countries have been able to extract from the IMF and the creditors it
represents, because the larger the debt the more negative the consequences of
default for the entire club of international creditors as well as for the
country that defaults.
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