The IMF: A Sandbox to Play In
Shortly after protests in Seattle nearly shut down a round of negotiations for the World Trade Organization (WTO), a group of academics, trade negotiators and business people met in Washington to figure out a way to reduce the hostility to their trade agenda. A former Clinton administration official suggested giving the critics "another sandbox to play in," so that they wouldn't continue to obstruct a new WTO agreement. Specifically, he suggested that those who were concerned about labor and environmental standards could focus their attention on the International Labor Organization (ILO). From the standpoint of the assembled honchos, the ILO was an appropriate "sandbox" because it has no enforcement powers.
As it turned out, the WTO critics weren't as stupid as the honchos wanted them to be. They have continued to protest plans for a new WTO agreement, as well as other trade agreements negotiated by the Clinton and Bush administrations. At the moment, the Bush administration's "fast track" authority, which allows for trade agreements to come to a vote in Congress without amendment, has expired. It is not likely to be renewed without some concessions on labor and/or environmental standards.
While the Washington insiders' plans for international trade have been at least partially sidetracked, their agenda for international finance is doing even worse. For the last three decades, the International Monetary Fund (IMF) has been the dominant institution of international finance. After the collapse of the fixed dollar exchange rate system in 1973, the IMF changed its role to become the enforcer of an international creditors' cartel.
Its job was to ensure that countries that fell behind on loans to Western banks made good on their debts. It imposed "structural adjustment" programs, which required developing countries to cut back spending on health care, education, food assistance and other areas of social spending. These structural adjustment programs frequently encountered mass popular resistance, sometimes taking the form of an "IMF riot."
Throughout the seventies, eighties and nineties, the IMF commanded fear, if not respect, throughout the developing world. However, this has changed radically in the last decade. The IMF has largely lost its role in international finance.
The basic story is that the IMF overplayed its hand. In a series of financial crises, beginning with the East Asian financial crisis in 1997, the IMF sought to impose excessively harsh conditions. The response of the affected nations has been progressively more determined resistance, culminating with the Argentine financial crisis in 2002.
Argentina had been an IMF poster child in the mid-nineties, receiving public praise from the IMF for its ambitious privatization programs, its low inflation rate and its progress in controlling its budget deficit. However, its economy took a turn for the worse in the late nineties. Its budget deficit grew because of higher interest rates on its debt, and its overvalued currency led to a rapidly rising trade deficit. Meanwhile, high interest rates were strangling its economy. The IMF prescription was to have ever-higher interest rates, eventually pushing real interest rates over 20 percent by late 2001.
Finally, facing an untenable situation, the Argentine government relented. It devalued its currency and temporarily stopped payments on its debt. The IMF came in to play its usual enforcer role and demanded that Argentina agree to a tough repayment schedule with its creditors. The IMF's harsh terms proved impossible for a democratically elected government to accept. They basically told the IMF to get lost. And, in spite of the IMF's best efforts to strangle Argentina's economy, it has grown by an extraordinary 45 percent in the last five years. Argentina no longer needs the IMF for anything.
Neither do most other middle-income countries. Recognizing the IMF's hardball tactics, countries throughout the developing world have built up enormous amounts of currency reserves, so that they will never be in a situation where they deal with the IMF again. For example, South Korea has more than $200 billion in reserves, Russia has more than $300 billion, and China has more than $1 trillion.
This massive buildup of reserves by developing countries is a testament to the failure of the international financial system. Capital is supposed to flow from rich countries to poor countries, but in the last decade it flowed in the opposite direction on an enormous scale. This reverse flow was very costly for developing countries, and it also had the incidental side effect of costing the jobs of millions of US factory workers.
But, one important outcome of this massive buildup of reserves is that the IMF has lost its role as the international enforcer. No one needs the IMF anymore: the reserves of developing countries, especially China, dwarf the funds that the IMF has to offer.
This week in Washington, the IMF will have its annual meetings, which draw finance ministers and central bankers from around the world. Undoubtedly they will conclude many important business deals. However, when it comes to the business of the IMF itself, they have a sandbox to play in.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.