IV. Suggested activities for students:

1. The International Monetary Fund will never be a global central bank. But with more money, better governance and clearer rules, it could provide collective insurance for the prudent and conditional assistance for the profligate. Do you share this stance? Why or why not?

2. Prepare a report about the IMF. What role does it play nowadays? Have its activity and objectives changed in the era of globalization?

3. Critics of the IMF contend that in expanding its original mandate, the IMF has deviated from its charter which called for making lending decisions strictly on economic bases. Do you find such criticism objective? What changes in the structure and work of the IMF you would propose?

4. In 2001 Don Babai wrote: The IMF remains the preferred instrument for coping with financial crises. …The IMF will continue to occupy the position of primus inter pares in the hierarchy of international, financial institutions.” Has the situation changed since the global economic meltdown, that starter in 2007? Does the IMF remain the “preferred instrument for coping with financial crisis”? Does the IMF continue to occupy the position of primus inter pares? Have any alternatives emerged?

5. There is an opinion that now we live in the world in which globalization of financed institutions has increased the vulnerability of countries. Do you find this viewpoint persuasive?

Text 2 Controversy about the imf

As an IGO created to meet real shared global problems, the IMF has arguably served the goals for which it was created fairly well. However, the IMF has grown beyond its original mission, adapting policies to global transforma­tions and responsibilities. Although the IMF has played a valuable role and has many supporters, it has not been above criticism. Indeed, in recent years the IMF has been one focus of struggle over globalization. It is possible to divide the contro­versies regarding the IMF into two categories: voting and conditionality.

Voting

The first issue centers on the formula that determines voting on the IMF board of directors. Voting is based on the level of each member's contribution to the fund's resources. On this basis, the United States (17.2 percent), Japan (6.2 percent), Germany (6.0 percent), France (5.0 percent) and Great Britain (5.0 percent), which combine to make up 2.7 percent of the IMF membership, cast more than 39 percent of the votes on the board. By a slightly different grouping, the combined votes of the EU countries (30.1 percent), the United States, and Japan are enough to form a majority of 53.5 percent. This wealth-weighted system has two ramifications. One is that the formula gives the small percentage of the world's people who live in EDCs a solid majority of the votes. This apportionment has led to LDC charges that the fund is controlled by the North and is being used as a tool to dominate the LDCs.

Conditionality

The second criticism of the IMF is that it imposes unfair and unwise conditions on countries that use its financial resources. Most loans granted by the IMF to LDCs and CITs are subject to conditionality. This refers to require­ments that the borrowing country take steps to remedy the situations that, according to the IMF, have caused the recipient's financial problems.

Foreign banks and other sources of external funding also base their decisions on the degree to which an applicant country has met the IMF's terms. The IMF's conditions press the LDCs to move toward a capitalist economy by such steps as privatizing state-run enterprises, reducing barriers to trade and to the flow of capital (thus promoting foreign ownership of domestic businesses), reducing domestic pro­grams in order to cut government budget deficits, ending domestic subsidies or laws that artificially suppress prices, and devaluing currencies (which increase exports and make imports more expensive).

For example, Argentina's economy fell into turmoil that reached a crisis stage in December 2001. In the months that followed, the government in Buenos Aires sought a $9 billion credit line from the IMF to support the exchange rate of the Argentine peso, to help it meet the debt service on its immense foreign debt and to otherwise stem the economy's free fall. The IMF, which had long been extending credit to Argentina, offered to help, but only if the country took a number of steps, such as dras­tically reducing the spending of both the national and provincial governments, to correct the problems that the IMF saw as the cause of the economic difficulty. On the surface such conditions sound prudent, but in reality they have their drawbacks.

Violates sovereignty. First, LDCs charge that the IMF conditions violate sovereignty by interfering in the recipients' policy-making processes. In Argentina, most provincial governors resisted the demand by the IMF that they slash their budget deficits. The IMF "should go to hell," growled Alfredo Avelin, governor of San Juan province. "The only thing lacking is for us to pull down the Argentine flag and replace it with the IMF's," he continued. Taking a similar view after a top IMF official had visited the country to stress organization's conditions, Senator Rodolfo Terragno characterized the deference to the official as "like paying homage to a viceroy." It must be added that not everyone, including in Argentina, agreed with such complaints. Economist Marcelo Lascano of the University of Buenos Aires rejoined that the IMF official acted "as a viceroy" because Argentina needed outside direction. "The problem doesn't lie with [the IMF], but with the Argentine lead­ership," Lascano said.

Promotes neocolonialism. Second, some critics have contended that conditionality intentionally or unintentionally maintains the dependencia relationship. Reacting to the conditions laid down by the IMF in 1997 and 1998 to assist Asia's faltering economies, Matichon, a daily newspaper in Thailand, editorialized that the conditions amounted to "economic colonialism." Taking a similar view President Eduardo Duhalde of Argentina blamed part of his country's crisis on "domination" by the industrialized world. Other Argentines blame the IMF for pumping money into the country during the presidency of Carlos Menem (1989-1999), who, in the words of one critic, "sold off our valuable [state-owned] industries [to foreign investors] for nothing and then pocketed all the international loans he got for hugging up to the IMF." The critic also blamed the IMF for "lending money to Menem, a government that was so corrupt that any fool could see he was robbing the country."

Imposes harmful conditions. Third, critics charge that sometimes the IMF harms economies in LDCs and CITs rather than helps them by requiring "cookbook" plans of fiscal austerity and other stringent conditions and by not sufficiently tailoring plans to the circumstances of individual countries. Harvard economist Jeffrey Sachs has argued, "Even though Argentina is, in the last analysis, mainly responsible for its fate, the IMF is not helping." In Sachs's view, the IMF "continues to pound on one theme alone: that Argentina's economic crisis is the result of fiscal profligacy, the result of a government living beyond its means. So it emphasizes the need for Argentina to cut budget expenditures." The problem with this remedy, according to Sachs, is that the cuts in government spending increase unemployment and oth­erwise depress Argentina's economy. Yet, he continues, "as Argentina's crisis worsens, the IMF keeps asking for [still] deeper cuts." Sachs compares this approach to "the 18th-century medical practice in which doctors 'treated' feverish patients by drawing blood from them, weakening the patients further and frequently hastening their deaths." Finally, Sachs argues that "this IMF approach was abandoned in rich countries about 70 years ago during the Great Depression" in favor of deficit spending to stimulate the economy during economic downturns.

Destabilizes governments. Critics charge that while a stable government is a key factor during times of financial trouble, the reforms that the IMF demands are often so politically difficult to institute that they undermine the very government that the IMF needs to work with and that needs to remain viable in order to deal with the crisis. Reflecting that concern in Argentina, one observer commented, "The IMF has the wrong idea if they think Duhalde or any president can imme­diately make the kinds of reforms they are demanding and still be left standing in the morning."

Undermines social welfare. Yet another line of criticism aimed at the IMF contends that it pushes countries to adopt fiscal reforms that strengthen the economic elite of the recipient country while ignoring the welfare of workers and others. According to critics, this leads the IMF to demands that force recipient LDC governments to harm the quality of life of their citizens by reducing economic growth and by cutting social services in order to maintain a balanced budget. Often it is the poorest people that are hurt the most, and civil unrest is not uncommon.

Many Argentines blamed their financial plight on the Menem government's decisions taken in the 1990s at the behest of the IMF and on the general pressures of globalism to privatize state-owned industry, reduce protectionist trade barriers, and otherwise adopt capitalist free economic inter­change. During one of the numerous riots that have marked Argentina's time of turmoil, an unemployed textile worker who was looting a grocery store told a reporter that he was compelled to criminality; he had lost his job two years earlier when the shirt company where he worked closed because it could not compete with cheaper imports. "I can't feed my children and I can't find work—I will not watch my family go hungry at Christmas. It is time for all of this cruel madness to stop, and for the people to live in dignity," he exclaimed angrily. Waving a national flag, the displaced worker called for an "Argentine revolution" and shouted, "The free-market model is over; today is the beginning of the end."

The Defense of the IMF

Accusations are not equivalent to a guilty verdict, and it is important to understand the justifications for the ways in which the IMF operates. With respect to the voting formula, the reply to inequality is that since it is the EDCs that provide the funds, they should have a proportionate share of the say in how they are invested. Defenders say that a formula based, for example, on one vote for every member-country would mean that it would be the countries in financial diffi­culty, the borrowers, and not the countries supplying the loan money to the IMF, who would decide what the IMF's policies should be. That, IMF defenders say, would not work with domestic bank loans, and it would be an ill-advised policy for the IMF or any other financial institution

As for conditionality, the IMF acknowledges that its demands often cause hardship. But it argues that the required reforms are necessary to correct the problems that led the borrower country into financial difficulty in the first place. Without reform, IMF defenders contend, there would be an unsupportable con­tinuing cycle of crisis and loans, crisis and loans that would constitute "throwing good money after bad," as the phrase goes. Reflecting this view during Argentina's economic meltdown, Horst Kohler, then the head of the IMF, argued, "What Argentina needs now is growth and growth requires savings, investment, and a working banking system." As for the bitter side-effects of following the IMF's prescribed regimen, Kohler, stated, "One also must recognize that without pain, it won't get out of this crisis, and the crisis—at its root—is homemade." Others, including U.S. national security adviser Condoleezza Rice, agreed. "We [in the Bush adminis­tration] truly believe that if they [the Argentines] can just do the things that the IMF is requesting that they do, we believe that they can find a way back to sustainable growth," Rice said. She indicated that the U.S. position "is not an unwillingness to have international assistance go to Argentina. It is an understanding that the condi­tions have to be right so that those resources actually make a difference."

Before concluding the discussion of the IMF, it is important to note that there are several other monetary IGOs that make contributions. On a global scale, the oldest and largest is the Bank for International Settlements (BIS). The BIS has 45 members, including all the major EDCs and a number of economi­cally important LDCs such as China and Saudi Arabia. The BIS serves several func­tions. One is as a meeting ground where its members' central banks discuss global monetary issues. Second, the BIS provides expertise to assist the central banks of those LDCs and other countries that are struggling with fiscal stability. Third, the BIS has assets ($149 billion in 2001) deposited by the central banks of its members, and it uses these funds for purposes such as maintaining currency exchange sta­bility. Finally, there are a number of regional monetary policies and institutions, such as the European Central Bank and the Arab Monetary Fund, that are affiliated with larger regional organizations.

Comprehension