A Leak in the Global Economy Has Turned Into a Flood
Larry Elliott and
Alex Brummer Audit the Plumbers
By Larry Elliott and Alex Brummer
The Guardian, London
July 3, 1998
From the offices of the International Monetary Fund in downtown Washington DC, the ambush of the Thai baht by currency speculators a year ago this week looked like one of those brief but violent tropical storms. That great edifice, globalisation, had sprung a leak, but the problem was minor, mere running repairs. Twelve months later, things look rather different. No longer is it a case of damp in the attic; whole rooms are deep in rising flood waters.
Amid all the soul-searching, the IMF - one of the main architects of the new world order - has come under rigorous scrutiny. A crisis that started in Thailand has affected Malaysia, Indonesia, South Korea, Japan, India, Russia, South Africa, New Zealand and Australia. Nobody knows for sure which country will be next in the firing line.
The IMF has come under fire from economists of right, left and centre. Nobel laureate Milton Friedman led the charge from the right. He accused the IMF of being interventionist; its meddling with the invisible hand of the free market prevent economies from correcting themselves.
>From the economics mainstream came the charge that the IMF made a series of bad decisions. Reacting to its closure of Indonesian banks last autumn the Harvard economist Jeffrey Sachs said: 'Instead of dousing the fire, the IMF in effect screamed fire in the theatre'(1).
>From the left, two lines of attack. First, the IMF got it wrong about globalisation and, second, that it is in cahoots with the US Treasury to force Asian countries to adopt one-size-fits-all American capitalism. The big currency devaluations have made Asian assets cheap, while moves to secure complete liberalisation of capital will make it child's play for American companies to pick up viable companies at bargain basement prices.
Faced with these criticisms, the Fund fought back. In the Financial Times earlier this year, the IMF's managing director, Michel Camdessus was asked why it had imposed its same old belt-tightening adjustment programmes on Thailand, Indonesia and Korea - programmes that were quite inappropriate to their present needs(2).
'Mr Camdessus became indignant. The new agreements represented a marked departure from the IMF's traditional approach. They were built not on a set of austerity measures, but rather on far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and restore market confidence'. These are not universally held views, even within the IMF. Joseph Stilglitz, chief economist of the World Bank, has given voice to the misgivings of the dissidents. At the start of this year, he made his feelings about the IMF austerity packages plain enough when he argued that 'you don't want to push these countries into severe recession. One ought to focus on . . . things that caused the crisis, not on things that make it more difficult to deal with'(3). The IMF - not used to having its behaviour challenged - snapped back. Stiglitz would not be silenced (4). One by one, he laid into the sacred cows of the IMF. First, the cavalier way in which the emphasis on macro -economic stability ignored growth and jobs. Then there was the Camdessus argument that the need to restore confidence to the currency necessitated high interest rates. 'Are measures that weaken the economy, especially the financial system, likely to restore confidence?' There was more. Macro -economic policy needed to be expanded beyond 'a single-minded focus on inflation and budget deficits; the set of policies that underlay the Washington consensus are not sufficient for macroeconomic stability or long -term development.' The IMF is not used to such scorn. It has long enjoyed the reputation of a lean and focused bureaucracy with the world's best economic and financial staff. The Fund's view has been that the economy of one country is very much like any other and that by applying its rational, neo-liberal economic model, it could restore a measure of economic stability.
Created at the 1944 Bretton Woods Conference in New Hampshire the IMF's remit was at first a narrow one. It was the world's central bank, lender of the last resort to member countries. Most of its clients were advanced industrial countries such as Britain and the system worked reasonably well, fixed exchange rates making it relatively easy to police. All that changed in 1972 when President Nixon uncoupled the dollar from gold.
The new world was rather different, primarily because the end of fixed rates brought new opportunities for speculators to take on the weak links in the financial system. The fabled 'Gnomes of Zurich' who undid the Wilson government in 1967 were now joined by fellow spirits in financial markets from New York to Tokyo, with relatively large capital sums at their disposal. Forced British and American borrowings from the Fund in the late 1970s hurt; the richer industrial countries would at all costs avoid similar humiliation. The IMF would still supervise their economies, but capital shortages would be met by borrowing from the increasingly free and open private sector capital markets.
But just as there was talk that the IMF might have outlived its usefulness, the Mexican crisis broke. In 1982 the Mexican government reneged on its debts with private sector banks precipitating a crisis across Latin America, which threatened the Western banking system. The IMF stepped in as lender of the last resort and found itself a new role. No longer banker to the industrial countries it discovered a global clientele among the developing countries. Instead of making short-term bridging loans it was in for the long haul.
When the Berlin Wall came down and the former Soviet Union and its satellites aspired to capitalism the Fund acquired almost two dozen new clients. Despite its doctrine of fiscal austerity, it added hundreds of new economists to its staff, doubled the size of its Washington HQ and increased its budget to $ 507 million in the 1997-8 financial year.
But if it had grown in size its lending programmes and approach to member countries remained the same. Its operations were surrounded in secrecy, its advice to governments private, its focus fiscal deficits, monetary policy and inflation - fundamental macro-economic reform.
Even before the Fund started throwing its weight around in Asia, it was not short of critics. Robert Wade and Frank Veneroso argued that Asian economies were different from those the IMF usually deals with. They had high levels of saving re-cycled as loans to corporations; companies are closely linked with governments(5).
'Because of this difference, IMF 'austerity' and 'financial liberalisation' will have higher costs and smaller benefits in Asia than elsewhere. The slowdown of the IMF's packages for Thailand, Indonesia and Korea to revive confidence reflects both their imposition of impossibly far-reaching institutional liberalisation and their inappropriateness for Asian financial structures.' The Fund believes that, in the end, it will be vindicated. It points out - rightly - that the lack of a body like it deepened the global crash of the 1930s. Critics argue, however, that one result of the 1930s was the formation of a Keyenesian international system fortified with capital controls.
The Fund's recent actions have even given die-hard free-traders reason to question what it thinks it is doing. According to Jagdish Bhagwati 'it is a lot of ideological humbug to say that without free portfolio capital mobility, somehow the world cannot function and growth rates will collapse'.
Sources: (1) Jeffrey Sachs: the IMF and Asian Flu, American Prospect March
-April 1998
(2) FT: February 9, 1998
(3) Wall
Street Journal, January 8 1998
(4) Joseph Stiglitz: Moving Towards the
Post-Washington Consensus: Helsinki Lecture: January
1998
(5) Robert Wade and Frank Veneroso: The East Asia Crash and the Wall
Street-IMF complex; New Left Review number
Larry Elliott is our economics editor. Alex Brummer is our financial editor.
The Doctor's Prescription
Balance the Budget
Liberalise the financial sector and allow more banks to be created
Cut public spending
Remove all barriers to imports
Remove all restrictions on the movement of capital
Privatise state-owned enterprises
Remove all caps and controls on prices or (where markets are unavoidably
dominated by state monopolies for example in energy)
increase prices to reflect costs of production
Control the supply of money by imposing high real interest rates and
restrict credit creation
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