Reforming the international institutional framework – Part 3

As I noted in the first two parts of this little mini-series (can a mini-series be anything other than little), multilateral institutions such as the World Bank and the IMF have outlived their usefulness, given changes in economic conditions and a need to abandon the neo-liberal Groupthink that has infested both structures. In the final two parts (today and tomorrow) I will discuss the necessary issues that have to be addressed in reforming these institutions (or replacing them) and what a new international architecture that serves a truly progressive interest rather than the interests of financial capital in the US might look like.

The first two parts in this series are:

1. Reforming the international institutional framework – Part 1.

2. Reforming the international institutional framework – Part 2.

The IMF was described in a letter to Forbes Magazine (May 19, 2011) as a “misfit outfit” (Source).

Recall that the IMF was created as part of the Bretton Woods fixed exchange rate framework and its function was to provide nations who were short of foreign exchange reserves with sufficient resources to maintain the agreed currency parities. Its resources were provided by all participating nations.

While these loans were subject to certain conditions, the so-called ‘conditionality’ that the IMF has forced onto nations, especially the poorer countries, was not part of their original operational practice.

Indeed, in advocating the establishment of the IMF at the Bretton Woods Conference, John Maynard Keynes has explicity rejected the idea of ‘conditionality’ in return for access to the IMF funding pool to allow nations to stabilise their currency positions.

If you consult the original 1944 Articles of Agreement that established the IMF you will find no mention of conditionality as part of the IMF operational design.

The IMF first started to invoke conditionality under pressure from the US in the 1960s, particularly in relation to Stand-by arrangements with Latin American nations (De Vries, 1987).

[Reference: De Vries, M.G. (1987) Balance of Payments Adjustment, 1945 to 1986: The IMF Experience, Washington, International Monetary Fund.]

Requirements that governments achieve particular fiscal deficit outcomes became prominent in the Stand-by arrangements. However, it was not until the debt crises of the early 1980s that the IMF really ramped up its use of conditionality to achieve major structural changes within nations and tilt the playing field firmly in favour of international (US) capital.

The idea that a poor nation should cut public spending, especially in health and education, and privatise essential public assets is an artefact of the neo-liberal phase of the IMF, which began after the Bretton Woods system collapsed in August 1971.

The neo-liberal phase has been described by Susanne Soederberg (2005: 328) as being:

… premised on steadfast belief that political and social problems should be solved primarily through market-based mechanisms as opposed to state intervention. Neoliberalism quickly became the dominant policy of the international financial institutions such as the IMF and World Bank, congealing into what many authors have referred to as the Washington Consensus.

[Reference: Soederberg, S. (2005) ‘Recasting Neoliberal Dominance in the Global South? a Critique of the Monterrey Consensus’, Alternatives: Global, Local, Political, 30(3), 325-364.]

As the harshness of the IMF conditionality increased in the 1980s, the organisation would regularly breach established notions of democracy and national sovereignty, which required government policies to reflect the will of the people rather than to be imposed from outside by an unelected and unaccountable institution located in Washington.

It also became clear that the IMF had become a vehicle for imposing neo-liberal ideology onto nations throughout the world – to aid the spread of the so-called ‘Washington Consensus’.

The same sort of criticisms are made of the World Bank, which was also created as part of the Bretton Woods system, in its case, to fund the development of public infrastructure to help the Post World War 2 reconstruction and then to reduce poverty.

The World Bank almost exclusively provided loans to build large scale projects in poorer nations – such as water utilities, dams, schools, roads and transport infrastructure.

In the 1980s, this focus shifted towards what became known as the structural adjustment lending. The so-called ‘structural adjustment lending facility” was introduced by the World Bank in 1980s and soon became a vehicle whereby the Bank would impose what was referred to as ‘market liberalisation’ (free trade deals, privatisation, cuts to public sector etc) in return for loans to stabilise the balance of payments.

This was not ‘project-based’ lending. Rather, nations could access funds if they dismantled public institutions, withdrew labour market protections, cut consumer safeguards, and withdrew funding from schools and hospitals.

By 1985, the IMF was also pursuing ‘structural adjustment’ loans to force nations to adopt neo-liberal policies and dismantle regulation and safety nets.

Together, the IMF and the World Bank forced nations to sign, so-called “Policy Framework Papers”, which meant that to access funds from either, nations had to fulfill the conditions of both. It was a draconian framework, designed to enforce a neo-liberal compliance.

Jessica Einhorn wrote that the World Bank had “added new tasks to its mandate” over time, which had strained “credulity to portray the bank as a manageable organization”.

She argued that:

To counter these problems, the countries that own the bank — its shareholders — need to elaborate a worthwhile and suitably modest agenda.

[Reference: Einhorn, J. (2001) ‘The World Bank’s Mission Creep’, Foreign Affairs, September/October issue. LINK]

The term “mission creep” where the mandate is continually explanded applies to the IMF as well. I use the term to include the addition of an ideological element to the operations of the institution.

The problem that became clear is that (Soederberg, 2005: 335):

Almost two decades since the expansion of IMF conditionality … the gap between rich and poor countries has never been wider: the world’s twenty-five richest people possess income and assets now worth $474 billion, which exceeds the entire gross national product (GNP) of sub-Saharan Africa. For many transnational capitalists and key international policymakers, rampant poverty in the South, if left unchecked and unmanaged, could breed discontent, which in turn could threaten not merely neoliberal domination but, more importantly, the global capitalist system from which they, the minority of the world’s population, continue to benefit. The preoccupation with the anticapitalist backlash has become even more pressing in the post-9/11 world.

The ‘War on Terror’ also had to come to terms with the increased threat from world poverty that had been exacerbated by the interventions of the key Washington Consensus institutions.

Further, there was a growing chorus that saw the Mexican peso crisis in 1994-1995 and then the Asian financial crisis in 1997 as evidence that the global financial infrastructure, of which the World Bank and the IMF were core institutions, that the increased speculative cross-border financial flows were not aiding poor nations but enriching small sectional interests in wealthy nations.

The Washington Consensus looked to be a failure.

While it is more accepted today to advocate the use of capital controls to stem cross-border financial flows that undermine the prosperity of nations, the IMF was implacably opposed to such policies because they offended their neo-liberal sensibilities.

In the wake of the Asian crisis, Benjamin Cohen (2003) argued that “limits on capital mobility could soon become the wave of the future” but would be deeply opposed by the US as “the still dominant power in international finance.”

He argued that “Washington, both directly and through the IMF, has brought its considerable power to bear to resist any significant revival of controls” (p.95).

[Reference: Cohen, B. (2004) ‘Capital controls: the neglected option’, in Underhill, G.R.D. and Zhang, Z. (eds.) International Financial Governance under Stress, Cambridge, Cambridge University Press, 60-76.]

The University of Chicago claims that financial markets were efficient and would ensure optimum saving and investment decisions were taken that maximised wealth (individually and at a national level) were beginning to be questioned.

Susanne Soederberg (2005: 350) concluded that:

While it is difficult to see how open capital accounts and the flow of hot money serve to alleviate poverty in developing nations … it is clear that the imperative of free capital mobility works in the interests of the United States as flows from the South help to feed its growing current account deficit caused by the crisis of capitalism, whilst allowing large institutional investors, most of whom are based in the United States, to profit from arbitration, that is, exploiting interest and/or currency rate differentials across national spaces.

A progressive agenda for the reconstruction of these multilateral institutions has to thus address these issues.

Further, the poor report card for these multi-lateral institutions provides a guide to the issues that a new international institutional framework has to address.

In summary:

1. These unelected institutions (such as the World Bank and the IMF) had become increasingly complex and unaccountable organisations that were entrenched in dysfunctional Groupthink.

2. They were doing the US bidding on a global scale, serving the dominant US neo-liberal ideology that formed into a coherent strategy in the early 1970s (with the release of the Powell Manifesto). Their decision-making and interventions were thus serving the interests of financial capital in the US rather than advancing the needs and aspirations of the citizens in the nations where the interventions and operations were centred.

3. They tied the poorest nations into debt that was unpayable and funded so-called export-led restructuring that not only destroyed the sustainable subsistence systems already in place, but, also led to large-scale environmental destruction (for example, the deforestation in Mali), agricultural supply gluts on world markets which pushed prices below the levels required to pay back the debt, and forced nations to underspend on essential services (including education and health).

4. They created incentives for corruption and cronyism among politicians and business interests.

5. They imposed harsh conditionality that manifest as fiscal austerity, privatisation of common wealth, and increased poverty rates. They became front-line neo-liberal attack dogs transferring public wealth to private elites and failing to develop sustainable indigenous governance structures.

6. Taken together, they failed in their mission to advance prosperity and self-reliance.

One response to the ‘mission creep’ and the obvious failure of the IMF and World Bank’s central operational strategies (for example, structural adjustment lending) was the creation in 1998, by the Joint Economic Committee of the US Congress of the International Financial Institution Advisory Commission (aka the ‘Meltzer Commission). This short-lived enquiry was chaired by economics professor Allan Meltzer.

Its task was “to recommend future US policy toward several multilateral institutions”, including the IMF and the World Bank, given there was concern. The US were a major contributor to the funding of these institutions and wanted more sway over what they did.

It was clear that the US was seeking more close control over the way the IMF and World Bank operated (Soederberg, 2005: 354).

The Meltzer Committee issued its Final Report (which saw 3 members of the 11 person Commission dissent) in March 2000.

Meltzer, himself, had in June 1998, at a Brookings Institution, argued that the IMF should be abolished because the provision of hard currency loans by the IMF enhances the ‘moral hazard’ whereby nations have an incentive to overborrow and private banks are encouraged to overlend.

Apart from the ‘mission creep’ issue after the initial mission of the IMF became redundant in 1971, the Commission noted that “private financial institutions, corporations, and individuals in the developed countries now supply the largest part of the capital flow. The IFI’s share is now less than 5% of the total. The percentage varies across countries, how- ever. Many of the poorest countries remain depen- dent on the IFI’s.” (Meltzer, 2000: 10).

[Reference: Meltzer, A. (2000) ‘The Report of the International Financial Institution Advisory Commission: Comments on the Critics’, CESifo Forum 1(4), Ifo Institute for Economic Research, Munich, 9-17. LINK]

It recommended, among other things, that the IMF narrow its focus in terms of lending and concentrate on so-called ‘performance-based grants’, whereby funds are granted not to implement an agreed set of actions but after certain outcomes are achieved.

While alleging to be working in the interests of the global community, the “debate involved only US nationals” (Soederberg, 2005: 349).

In a follow-up article in 2002, Adam Lerrick and Allan Melzter expand on this theme and argue that (2002: 1):

Performance-based grants would cost the same as traditional loans but they would deliver more benefits to the global poor. Grants would make programs effective, monitor output, pay only for results, prevent accumulation of unpayable debt, forestall diversion of funds for unproductive ends and protect donor nation contributions from risk of loss. The same taxpayer dollars can be spent to far greater effect.

[Reference: Lerrick, A. and Meltzer, A. (2002) ‘Grants: A Better Way to Deliver Aid’, Quarterly International Economics Report, Carnegie Mellon: Gailliot Center for Public Policy.]

Their argument was that project-linked funding agreements would “pay for output … No results: no funds expended. No funds diverted to off-shore bank accounts, vanity projects or private jets” (p.1).

The other advantage they saw in a shift away from traditional, conditional loans was (p.2):

Because there are no loans, there cannot be unsustainable debt” and “Under pay-as-you-go grants, subject to performance audit, there can be no outlay without benefits and no continuing financial liability if projects fail. Performance risk would be transferred to the private sector.

Certainly, a grant process is superior to tying a poor nation in debt, which was the mainstream IMF and World Bank approach.

The World Bank had historically opposed using grants to aid poor nations claiming that they were more ‘expensive’ in terms of resource outlays.

Lerrick and Meltzer argued that World Bank’s analysis was “misleading” (p.4) and “In order to discredit the grant concept, confuse the G7 members and justify increased resources, the World Bank has exchange apples for oranges” (p.4).

They preferred a system of aid where the private sector could compete for grants on an outcomes basis.

The Meltzer Committee also concluded that IMF lending should only go to what they referred to as “well-managed” nations.

The grant versus loan debate was hotly contested. Susanne Soederberg (2005: 342) points out that far from addressing ‘mission creep’ the provision of grants by the World Bank would give it more power and allow it to squeeze out “smaller UN agencies”.

But more worrying for Soederberg was the likelihood that (p.342):

… the performance-based grants would be based upon highly subjective criteria, most of which would be designed in the interests of the United States. In addition, the goals of these grants will undoubtedly be shaped by the requirements of the US “War on Terror.”

Further, the conditionality that the IMF and the World Bank has imposed on poor nations goes well beyond securing conditions whereby the loans are repaid according to the original agreements.

The IMF and the World Bank have insisted nations establish very broad key performance indicators that span fiscal outcomes, interest rates, monetary growth etc.

The IMF claim they are just ensuring there is currency stability but, in fact, these conditionality requirements are deliberately designed to ensure private capital in advanced nations are privileged at the expense of the citizens of the nations concerned.

Democratic oversight becomes compromised and we get the indecency of IMF technicians walking into government departments demanding sensitive documents and conducting invasive interrogations of staff members.

Conclusion

I will complete Part 4 tomorrow.

The series so far

This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.

The series so far:

1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?

2. European Left face a Dystopia of their own making

3. The Eurozone Groupthink and Denial continues …

4. Mitterrand’s turn to austerity was an ideological choice not an inevitability

5. The origins of the ‘leftist’ failure to oppose austerity

6. The European Project is dead

7. The Italian left should hang their heads in shame

8. On the trail of inflation and the fears of the same ….

9. Globalisation and currency arrangements

10. The co-option of government by transnational organisations

11. The Modigliani controversy – the break with Keynesian thinking

12. The capacity of the state and the open economy – Part 1

13. Is exchange rate depreciation inflationary?

14. Balance of payments constraints

15. Ultimately, real resource availability constrains prosperity

16. The impossibility theorem that beguiles the Left.

17. The British Monetarist infestation.

18. The Monetarism Trap snares the second Wilson Labour Government.

19. The Heath government was not Monetarist – that was left to the Labour Party.

20. Britain and the 1970s oil shocks – the failure of Monetarism.

21. The right-wing counter attack – 1971.

22. British trade unions in the early 1970s.

23. Distributional conflict and inflation – Britain in the early 1970s.

24. Rising urban inequality and segregation and the role of the state.

25. The British Labour Party path to Monetarism.

26. Britain approaches the 1976 currency crisis.

27. The 1976 currency crisis.

28. The Left confuses globalisation with neo-liberalism and gets lost.

29. The metamorphosis of the IMF as a neo-liberal attack dog.

30. The Wall Street-US Treasury Complex.

31. The Bacon-Eltis intervention – Britain 1976.

32. British Left reject fiscal strategy – speculation mounts, March 1976.

33. The US government view of the 1976 sterling crisis.

34. Iceland proves the nation state is alive and well.

35. The British Cabinet divides over the IMF negotiations in 1976.

36. The conspiracy to bring British Labour to heel 1976.

37. The 1976 British austerity shift – a triumph of perception over reality.

38. The British Left is usurped and IMF austerity begins 1976.

39. Why capital controls should be part of a progressive policy.

40. Brexit signals that a new policy paradigm is required including re-nationalisation.

41. Towards a progressive concept of efficiency – Part 1.

42. Towards a progressive concept of efficiency – Part 2.

43. The case for re-nationalisation – Part 2.

44. Brainbelts – only a part of a progressive future.

45. Reforming the international institutional framework – Part 1.

46. Reforming the international institutional framework – Part 2.

47. Reducing income inequality.

48. The struggle to establish a coherent progressive position continues.

49. Work is important for human well-being.

50. Is there a case for a basic income guarantee – Part 1.

51. Is there a case for a basic income guarantee – Part 2.

52. Is there a case for a basic income guarantee – Part 3.

53. Is there a case for a basic income guarantee – Part 4 – robot edition.

54. Is there a case for a basic income guarantee – Part 5.

55. An optimistic view of worker power.

56. Reforming the international institutional framework – Part 3.

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

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    4 Responses to Reforming the international institutional framework – Part 3

    1. GLH says:

      “The World Bank almost exclusively provided loans to build large scale projects in poorer nations – such as water utilities, dams, schools, roads and transport infrastructure.”
      Could you tell us if most of those loans turned out to be to build facilities to extract raw materials from a country and the highways, railways, and ports to ship those raw materials to the US?
      “Recall that the IMF was created as part of the Bretton Woods fixed exchange rate framework and its function was to provide nations who were short of foreign exchange reserves with sufficient resources to maintain the agreed currency parities”
      In other words, even in the beginning all the IMF was designed to do was to facilitate free trade. I am sorry to be facetious but I just can’t help but believing that the IMF and World Bank were designed from the beginning to contribute to the US drawing the raw materials from other nations for the benefit of Wall Street and the City.

    2. Neil Wilson says:

      “(can a mini-series be anything other than little)”

      Probably. Just define it as a shock to a standard General Equilibrium model. That seems to be the usual way of declaring black to be white in economics.

      ;-)

    3. Roger Erickson says:

      This brings us back to the issue of the 0.1% owning too much of current social infrastructure, and therefore slipping inevitably into mal-adaptatively narrow Central Planning by other means

      the whole issue is surprisingly analogous to adipose cells taking over and dominating Personal Policy in morbidly obese individuals

    4. “Further, there was a growing chorus that saw the Mexican peso crisis in 1994-1995 and then the Asian financial crisis in 1997 as evidence that the global financial infrastructure, of which the World Bank and the IMF were core institutions, that the increased speculative cross-border financial flows were not aiding poor nations but enriching small sectional interests in wealthy nations.”

      These examples were somewhat apart from the main theme of ‘funding development’ etc.
      They were about setting up an arbitrage opportunity, perhaps innocently in the belief that a
      fixed exchange rate had macro benefits, or perhaps to allow
      undisclosed insiders to exit the local currency by offering the ‘bait’ of higher rates, etc.

      What happened was the exchange rate was fixed and CB set rates in local currency higher than in $US.
      So the local treasury, which had it’s own agenda, borrowed in $US to ‘save interest expense.”
      And at the same time, foreign ‘investors’ would buy the local currency with $US to profit from the
      spread, assuming they could exit before the peg broke.

      Back to the main theme, development, what happened was the lending was judged by whether or not it was repaid as agreed, rather than by the real economic benefits. Consequently conditionality was meant to further ensure repayment, and ‘the problem’ of the consequences was, from the lender’s point of view, that the conditionality didn’t seem to work to improve the ability to pay.

      So the way I see it ‘international assistance’ can be viewed at the extremes as either financial ‘charity’ or ‘investing’.
      And in this case ‘charity’ falls into the realm of government policy while ‘investment’ can include the private sector, should it serve public purpose.
      And until this type of distinction is made upfront the policies and analysis will continue to be confused and the outcomes problematic.

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