Tuesday, December 25, 2001

Argentina is drifting into darkness, under the shadow of the IMF. It's difficult to see how they'll make payments on their loans. In response, the IMF is likely to impose one of its austerity plans, designed as usual to divert every last cent of available revenue towards the creditors, in the hope that if they just squeeze hard enough, cash will appear to make things right for the banks. Steven den Beste argues that when a country has a mountain of debt and an anthill of revenue, the only ethical course of action would be to let it declare bankruptcy, and Ginger Stampley muses out loud that Argentina may wind up descending into anarchy if abolishing the government entirely is the only way to get out from under IMF austerity plans.

If that seems a little extreme, consider Ghana, once called the IMF's "model pupil", where everything is rigged to make money for the IMF pencil-pushers:

Mary Agyekum ... breaks stones for a living. Small flint hammer in hand, she sits on the parched ground under the sun, 12 hours a day, chipping away at boulders. ...

She can only send two of her children to school now, but they are chased home by the teachers if she hasn't paid the fees on time.

Mary begins each day with a trip to the public toilet. If she's run out of money, she begs the woman at the booth to let her children in for free. Then she walks to the nearest borehole where she pays for a bucket of water.

This is what the World Bank calls 'full cost recovery'.

The Agyekum family used to live well. They owned a farm. Then one day a mining company forced them off their farming land and took away their livelihood.

It's a familiar story here. Two thirds of the land in this region has been sold off to multinationals. Compensation is minmal.

These policies surely would be imposed only after careful thought, you'd think. This wouldn't be the work of petrified bureaucrats employing some cookie-cutter formula because the alternative --- considering what was actually right for the country, and taking a stand --- involved too much personal risk for the bureaucrats. You'd think.

So here's what happened, when Joseph Stiglitz, then chief economist for the World Bank, became convinced that the IMF's austerity plans for East Asia risked turning a bad situation into a full-bore calamity:

Convincing people at the World Bank of my analysis proved easy; changing minds at the IMF was virtually impossible. When I talked to senior officials at the IMF--explaining, for instance, how high interest rates might increase bankruptcies, thus making it even harder to restore confidence in East Asian economies--they would at first resist. Then, after failing to come up with an effective counterargument, they would retreat to another response: if only I understood the pressure coming from the IMF board of executive directors--the body, appointed by finance ministers from the advanced industrial countries, that approves all the IMF's loans. Their meaning was clear. The board's inclination was to be even more severe; these people were actually a moderating influence. My friends who were executive directors said they were the ones getting pressured. It was maddening, not just because the IMF's inertia was so hard to stop but because, with everything going on behind closed doors, it was impossible to know who was the real obstacle to change. Was the staff pushing the executive directors, or were the executive directors pushing the staff? I still do not know for certain.

Of course, everybody at the IMF assured me they would be flexible: if their policies really turned out to be overly contractionary, forcing the East Asian economies into deeper recession than necessary, then they would reverse them. This sent shudders down my spine. One of the first lessons economists teach their graduate students is the importance of lags: it takes twelve to 18 months before a change in monetary policy (raising or lowering interest rates) shows its full effects. When I worked in the White House as chairman of the Council of Economic Advisers, we focused all our energy on forecasting where the economy would be in the future, so we could know what policies to recommend today. To play catch-up was the height of folly. And that was precisely what the IMF officials were proposing to do.

In the event, Stiglitz' fears proved absolutely justified; the IMF plans were a disaster, plunging the economies affected into deep depression. And there were other fiascoes, like the time the IMF cut off funds because Ethiopia was following the "unsound" policy of actually spending its foreign aid money on schools and hospitals.

Stiglitz, who has since won the Nobel prize in economics for his studies of market imperfections, seems to basically have his head screwed on. I wish I could say the same for his erstwhile colleagues.


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