The IMF. Effects on strategies for development.
(notes by Róbinson Rojas Sandford)(1998)
_______________________________________________
Four main areas summarize criticisms of the International Monetary
Fund's activities in less developed countries:
1.- Fund programmes are inappropriate.- The criticism says that IMF's
approach to policy is preoccupied with the control of demand as a
unique tool for reducing inflation and levels of imports, and is too
little concerned with structural weaknesses in Balance of Payments,
which are the outcome of a "fractured" system of production ( see
R. Rojas, "Latin America: blockages to development"). The result
is that those programmes impose large costs on borrowing countries
through losses of output and employment, by further impoverishing
the poor, and through the politically destabilising effects of its
policy stipulations.
2.- Fund operations infringe the sovereignty of states.- It is argued
that the Fund's modes of operation and inflexibility in negotiations
infringe the sovereignty of states and alienate governments from the
measures they are supossed to implement; that there is an increasing
overlap with the World Bank; and between them that they are apt to
swamp governments with policy conditions. ( for the case of Chile in
1970-73, see R. Rojas, "The Murder of Allende and the end of the
Chilean way to Socialism" )
3.- The IMF credits and programmes are too small, expensive and
short-term, which is highly damaging. The programmes are criticised
as too short-term for economies whose Balance of Payments problems
are rooted in structural weaknesses and who often face secular
declines in their terms of trade. The credits are also criticised
for their short maturity periods and the near-commercial rates
of interest which they often bear; and as being too small relative
to financing needs.
4.- The IMF is dominated by a few major industrial countries, which
amounts to an extension of the economic and political world
domination by those major industrial countries. It is argued also
that because of the above, the IMF pay little heed to developing
countries views. The industrial countries, it is alleged, use
their control to promote their own interests -for example, in using
the IMF to impose a post-1982 approach to the debt problem which
shifted a disproportionate burden onto debtor countries- and to
reward 'favourites'.
HOW THE IMF WAS BORN
The International Monetary Fund was created in the 1940s to serve
as a lender and manager of last resort for the industrialized
countries. At that time, the world outside Soviet Union, was
roughly divided into "powerful" countries with colonies (Britain,
France, Germany, Italy, and Japan), plus a bunch of political
free states under economic domination by the United States (Latin
America). By 1947, when the IMF opened its door for business as
a lender, the "powerful" was only one (United States), plus "less
powerful" with colonies (Britain and France), and an "outsider"
with a new type of colonies that were going to be known as
"satellites".
The IMF was in business for the "powerful" and the "less powerful"
only.
During the process of creation of the institution, two well known
economists were considered the "authors" of the idea: John Maynard
Keynes, then an official of the UK Treasury, and Harry Dexter
White, an official of the US Treasury. Both had the idea that
an international fund could overcome the problems that faced the
capitalist countries in the 1930s.
The general idea was that this lender of last resort could help
countries, via providing them with money when they ran into
balance of payments difficulties, to:
1.- Attain full employment
2.- Have planned government intervention
in and regulation of the economy (and
social reforms to improve the lot of
the poor)
3.- Limit the power of bankers and owners
of international investments
It is well known that Harry Morgenthau, the boss in the US Treasury
at the time, was explicit about what were his purposes in helping
to create the IMF: creating democratic institutions to replace
the power of private bankers.
In one of his speeches, Morgenthau said that his aime was "to
erect new institutions which would be INSTRUMENTALITIES OF
SOVEREIGN GOVERNMENTS and NOT OF PRIVATE FINANCIAL INTERESTS",
and he added that we expected with this "driving the usurious
money lenders from the temple of international finance".
More emphatically, Harry White supported state intervention
arguing that "the assumption that capital serves a country best
by flowing to countries which offer most attractive terms is
valid only under circumstances that are not always present...
The theoretical bases for the belief still so widely held, that
interference with trade and with capital and gold movements, etc.,
are harmful, are hangovers from a nineteenth century economic
creed" (quoted in F. Block, "The Origins of International Economic
Disorder", University of California Press, 1977, pp. 45-46).
The above as corroborating Keynes idea that "we need a central
institution, of a purely technical and non political character,
to aid and support other international institutions concerned
with the planning and regulation of the world's economic life...
More generally, we need a means of reassurance to a troubled
world, by which any country whose own affairs are conducted
with due prudence is relieved of anxiety for causes which are
not of its own making, concerning its ability to meet its
international liabilities" (quoted in R. E. Harrod, "The Life
of John Maynard Keynes", Macmillan, 1951).
Contrary to the wishes of its creators (Keynes and White), since
the beginning of its activities, the IMF became more and more
a branch of U.S. transnational capital and less and less a "lender
of last resort". And its main role was related to the newly
freed nations (former colonies in Africa, Asia and the Caribbean),
and the old free nations (former colonies in Latin America and the
Caribbean). That role: impose capitalist relations of production
for the benefit of transnational capital.
SIX STEPS TOWARDS MANAGING THIRD WORLD ECONOMIES
STEP ONE: 1947. The Executive board agrees on that the IMF "may
postpone or reject a request for credit or accept it
subject to conditions".
STEP TWO: 1948. The United States of America concluded an
independent agreement, bypassing the IMF, to give
financial aid to several West European states for
post-war reconstruction from 1948 to 1952. This followed
Harry Truman's doctrine of "effacing communism from
the face of the Earth", which inaugurated the period
known as the "cold war". This was the Marshall Plan
(George Marshall was then the US Secretary of State).
The IMF then agreed to an American request to restrict
IMF loans so that European countries in receipt of
this Marshall Aid did not simultaneously receive IMF
loans. That made very clear that the IMF was yet another
financial institution managed by the U.S. corporate
capital.
STEP THREE: 1948. IMF's Annual Report made clear its role as a
a "manager". It said: "The Fund has emphasized to
members that the purpose of the use of its resoruces
is to give members time to make necessary adjustment
and not to avoid the necessity of such readjustments".
STEP FOUR: 1952. The IMF Executive Board agreed on the following
principles: 1) credit should be only for short periods
(3 to 5 years); 2) the borrowing country would agree
with the IMF on policies to ensure that it could repay
as soon as possible (maximum 5 years); 3) a country
requesting credit "will be expected to include in its
authenticated request a statement that it will comply
with the principles agreed"; 4) the Fund would monitor
the use of the credit to "determine whether the
borrower has used it in accordance with these agreed
principles".
STEP FIVE: 1959. The Annual Report summarized the principle adopted
in preceding years that more stringent conditions would
be required the greater the amount of credit.
STEP SIX: 1968. The Fund Executive Board approved the use of
"standby arrangements" to provide an assured line of
credit. By and large, the FUND reached the peak of
its role as a "manager" of the country requesting
credit, making official the principle of "conditionality".
From now onwards, less developed countries facing problems in
balance of payments (the case for all of them) could obtain
"financial help" from the IMF only if they embarked in a set
of reforms to abide by the following conditions asked by the
IMF:
1.- Abolition or liberalization of foreign exchange and import
controls.
2.- Devaluation of the exchange rate.
3.- Domestic anti-inflationary programmes, including:
a) control of bank credit; higher interest rates and
in some cases higher reserve requirements;
b) control of the government deficit: curbs on spending,
increase in taxes and in prices charged by public
enterprises; abolition of consumer subsidies;
c) control of wage rises, so far as within the
government's power;
d) dismantling of price controls;
4.- Greater hospitality to foreign investment.
( the above points are taken from C. Payer, "The Debt Trap: the
IMF and the Third World", Penguin Books, 1974).
From the 1950s until the 1970s in Latin America, the IMF had
been imposing some or all the above conditions on borrowing
governments, with the result of widespread popular unrest
sometime ending in bloody riots, i.e. in April 1957 the Chilean
workers in Santiago demonstrated against the IMF's policies
being imposed to fight inflation; the Chilean army intervened
(to protect the IMF team, of course) and murdered around 500
hundred civilians in around ten hours of riots in the center
of the capital city. In 1973, the IMF contributed to the
overthrowing of the legal Chilean government.)
THE ARUSHA REUNION
By the end of the 1970s, many Third World governments decide to
meet to discuss the dramatic social, political and economic
damages that the IMF's "conditionality" principles were creating
in their economies. They met in Arusha, Tanzania, 30 June-3 July
1980, to discuss about "The International Monetary System and
the New International Order".
In that South-North Conference, it was approved the "Arusha
Initiative", which described "the inadequacies and inequities
of IMF prescriptions" as follows:
1 The package of 'stabilization' measures prescribed by the IMF
for countries with balance of payments deficits required these
to accept a credit squeeze to reduce the money supply, reduced
public spending particularly on welfare services, reduced real
wages, liberalized price controls, the encouragement of private
foreign investment, and the substitution of devaluation for
tariffs and direct controls over trade.
2 The IMF claims to have a "scientific" basis for these policies
and to be an objective and neutral institution charged with
the "technical" function of "helping" countries to overcome
their financial difficulties. Available evidence, including
internal FUND documentation, point the other way. This
contradiction is particularly clear when the Fund addresses
Third World countries' balance of payments.
What does the record shows?
The IMF is not neutral because it systematically bases its
prescriptions on market ideology, giving the preponderant
role to local private enterprise and transnational investment.
It envisages the state in a restrained and subsidiary role,
promoting the free play of national and international market
forces.
The principle of state participation and intervention, involving
a significant presence of public enterprises, is anathema to it.
Alternative development patterns that reduce or control the
space for private market logic are labelled as inefficient in
economic terms and considered inadequate in political terms.
3 The IMF has proced to be a basically political institution. It
tends to reproduce colonial relationships by constraining
national efforts which promote basic structural transformations
in favour of the majorities. Its orientation is fundamentally
incompatible with an equitable conception of structural change,
self-reliance and endogeneous development.
The IMF medicine systematically favours the more conservative
sectors of society and traditional centres of power. Worse
still, when these sectors constitute real national power
alternatives, the Fund prescriptions and its manner of
dispensing them become an unabashed form of external political
intervention in their favour. The Fund's policies, conceived
to achieve "stabilization, have in fact contributed to
destabilization and to the limitation of democratic processes.
( from I-S Abdalla, et al, "The Arusha Initiative", in Development
Dialogue, 2, July 1980, The Dag Hammarskjold Centre, Uppsala,
Sweden)
By and large, in Arusha, the opinion was that the IMF's
conditionalities did ensure that sovereign governments create
deflation and unemployment when there is a balance of payments
problem; abolish controls to regulate the economy and limit
their social reforms; and give maximum freedom to the operations
of banks and international investors.
Three years before the Arusha Initiative, in August 1977, the
U.S. Senate Foreign Relations Committee discussed the situation
of countries with imminent debt problems ( mainly Brazil, Mexico,
Chile, Argentina, in Latin America) in relation to IMF's measures
to cope with it. Part of the records of that discussion
read as follows:
"The measures that the IMF and the private banks stimulate the
deficit countries to adopt usually include limitations to the
growth of the money supply, reductions in public spending and
devaluation. These measures are destined to maintain the level
of domestic consumption low and to reduce the demand for
imports. The growth of export industries are regarded as very
important to help equilibrate the balance of trade and to assure
that the country receives enough foreign exchange to service its
foreign debt. Countries may also be stimulated to create a
favorable climate for foreign investment and for private sector
in general"...
"...The problem with these measures is that, although they may
be the mos effective way quickly to compensate the balance of
payments deficit of a country, they can also lead to greater
unemployment, to the reduction in social welfare, and to a lower
standard of living for the people"...
"...In the poorest countries, in which the majority of the
population barely reaches a minimum level of subsistence, the
government decision to impose a program of strict economic
austerity can create social and political disturbances"...
"...Finally, and as we have shown, in many countries there seems
to be a direct correlation between economic difficulties and
political repression. The Carter Government, therefore, may see
itself obliged to chose between continuing its efforts in favor
of human rights or to support the creditor demands to implant
drastic economic austerity programs that could only be imposed
at the expense of civil liberties in the countries that adopt
them".
( quoted from R. Rojas, "Latin America: Blockages to development",
doctoral dissertation, 1985. Available in The Róbinson Rojas Archive)
There is no need of further description to recognize the concepts
of "deregulation", "globalization", "economic efficiency",
"monetarist theory" and "free-market dynamics", plus "the end
of history" as embedded in what the Fund policies have been
pushing in less developed societies since the 1940s.
There is no need of further description to recognize the Fund as
the right arm of U.S. transnational capital in its colonization
of less developed societies' industrialization.
And about foreign debt, we saw in our lecture last week the
structural origins of less developed societies external
indebtness. Let us revise those lecture notes...
----------------------------------------------rrojas/1997-----------
--------------------------------------------Bird/Killick starts-----
The Overseas Development Institute's point of view as written by
Graham Bird and Tony Killick in ODI Briefing Paper, April 1993,
London:
The core of the IMF approach to programme design is its 'financial
programming' model. This takes a broadly monetarist view, with a BoP
deficit seen as caused by a surplus in the supply of money over the
demand for it, emanating from excessive domestic credit expansion.
Hence, the essential task of an IMF team is to analyze the money
supply and demand situation an to restrict credit so as to restore
BoP viability. In consequence, programmes almost always try to reduce
budget deficits, to reduce governments' credit needs.
The Fund team does not confine itself to this task, however. For one
thing, it regards the exchange rate as an important influence on the
BoP, so that (except in currency union countries like the African
member-states of the Franc Zone -see ODI Briefing Paper, "Crisis in
the Franc Zone", July 1990) almost all its programmes involve
devaluation. In recent years the Fund has reduced its reliance on
quantified indicators of demand control, such as ceilings on credit
to the public and private sectors, observance of which determine
continued access to the negotiated line of credit. While such
'performance criteria' remain central to the Fund's modalities, it
now makes greates use of (usually half-yearly) Review Missions, to
take an overall view of programme execution and adjust programme
details in light of the most recent economic data.
The Fund is also moving away from concentration on simple budgetary
aggregates, such as total spending or the budget balance, in favour
of paying more attention to the 'quality' of fiscal adjustment. Since
the economic impact of its fiscal provisions will be much affected by
which expenditures are trimmed and what is done with taxes, the Fund
is becoming more insistent on knowing how a government proposes to
implement promised reductions in the budget deficit, increasingly
urging governments to install social safety-nets and asking awkard
questions about military spending.
In other respects too it is paying more attention to achieving a
better balance between demand-management and supply-side measures,
even in its short-term (typically 18-month) Stand-by programmes,
which now place greater weight on the goal of economic growth. In
many cases, the privatisation or reform of public enterprises is
stipulated -to reduce budgetary pressures but also to raise
productive efficiency. Price and subsidy reforms are also common
ingredients, e.g. raising petroleum prices or cutting food subsidies.
And while Stand-bys remain short-term there is now a greater
willingness to countenance a succession of such programmes, so that
some countries (Cote d'Ivoire, Jamaica, Morocco...) have enjoyed the
mixed pleasures of near-continuous support for a decade or more.
The extension of the Fund's conditionality into measures bearing
directly on the productive structure is taken a good deal further
in its Extended Fund Facility (EFF) -first instroduced in 1974, kept
in limbo during most of the 1980s but now reactivated as a major
lending vehicle - and furthest of all in the Structural Adjustment
Facilities (SAF and ESAF) initiated in recent years...By the end of
1992 these three facilities accounted for nearly three-quarters of
the total value of all lending.
-----------------------------------------------------------
STRUCTURE OF IMF COMMITMENTS, 1989 AND 1992
(percentages of total commitments, by value)
1989
Stand-bys EFFs SAFs/ESAFs Total
Low-income countries 11 3 27 41
Sub-Saharan Africa (8) (3) (10) (29)
Other developing 38 11 4 53
Total developing 49 14 31 94
Former COMECON 6 6
GRAND TOTAL 55 14 31 100
-----------------------------------------------------------
1992
Stand-bys EFFs SAFs/ESAFs Total
Low-income countries 9 10 19
Sub-Saharan Africa (-) (-) (6) (6)
Other developing 11 49 2 62
Total Developing 20 49 12 81
Former COMECON 8 11 19
GRAND TOTAL 28 60 12 100
------------------------------------------------------------
Source: IMF
------------------------------------------------------------
The EFF, SAF and ESAF have taken the Fund in the direction of
medium-term lending, with the EFF providing 3-4 year support
largely to middle-income and former Comecon countries, and SAF-
ESAF offering 3-5 year programmes to low-income countries,
chiefly in Africa.
Uniquely, SAF and ESAF programmes are based on a Policy Framework
Paper (PFP) setting out a three-year adjustment programme,
supposedly drafted jointly by borrowing governments, the IMF and the
World Bank. In the early days of this innovation the involvement of
governments in the drafting process was often minimal but they have
gradually acquired more influence.
Under the influence of pressures from UNICEF and others, the Fund's
Managing Director, Michel Camdessus, who took office in 1987, has
changed its stance on the social effects of its programmes. It
formerly insisted that it was for national governments to decide
whether to protect the poor from hardships resulting from programmes.
Now, its missions commonly discuss distributional aspects with
governments when preparing programmes. PFPs are required to include
measures to protect the well-being of vulnerable groups and programmes
increasingly contain safety-net provisions. However, the chief
examples of safety nets are in Eastern Europe, and there remain doubts
about how much difference these changes have made in practice.
The PFP has also provided a useful mechanism for coordination between
the Fund and the World Bank. There is plenty of scope for disagreement
between them, e.g. about the desirable levels of government investment,
bank credit, imports and the exchange rate, and these tensions were
heightened when the Bank increased its structural adjustment lending
during the 1980s. There were some fierce turf battles and some
celebrated rows over such countries as Argentina, Nigeria and Zambia,
but it appears that top-management agreements on the division of
labour and staff co-operation have substantially resolved these
difficulties. Borrowing governments are less likely to be bewildered
by conflicting 'advice' from the two institutions. INSTEAD, THEY ARE
MORE LIKELY TO FEEL CONFRONTED BY A WASHINGTON MONOLITH.
NEW CRITIQUES
The Fund, then. has sought to adapt but have its efforts been
sufficient? Some think not.
FIRST, critics point out that the Fund's use of more supply side
measures has been ADDITIONAL TO its traditional demand-control
policies, NOT IN SUBSTITUTION. THE FUND HAS THUS WIDENED THE RANGE
OF ITS CONDITIONALITY WITHOUT DILUTING ITS MONETARIST HARD CORE.
There has been particular criticism of the especially demanding
conditionality attached to ESAF credits, which frightened off
potential borrowers, causing a slow take-up rate.
The Fund's approach to the supply side is criticised as blinkered:
largely addressed to the reduction of price distortions and
privatisation, taking a negative view of the state and associated
with sharp reductions in public sector investment. Moreover, while
the EEF and SAF-ESAF facilities, and toleration of repeated stand-
bys, have taken the Fund into medium-term lending, these are not
substitute for programmes conceived as long term.
DOUBTS persist about the appropriateness of the financial programming
model. Its strength is that it confronts governments with the BoP
and inflationary consequences of their budget deficits but the model
remains open to a range of criticisms. FIRST, it is seen as RESTING
UPON ASSUMPTIONS THAT MAY OFTEN NOT BE VALID FOR DEVELOPING-COUNTRY
CONDITIONS. In particular, it assumes the demand for money is known
and stable - so that non-expansionary levels of money supply and
domestic credit can be estimated - a condition that does not always
hold. SECOND, it requires that governments are able to hold credit
within agreed ceilings, whereas their control is often highly
imperfect because of unreliable data, the difficulties of forecasting
and regulating budgetary outcomes, vulnerability to 'shocks', and
unpredictable responses by banks and other financial institutions
to governments' policy signals.
The model is criticised AS TOO STATIC, NOT WELL DESIGNED TO COPE
WITH TIME LAGS AND UNCERTAINTIES, OR TO TRACE THE EFFECTS OF THE
PRIVATE SECTOR'S REACTIONS TO STABILISATION MEASURES. The static
nature of the model has caused the Fund particular difficulties
since it was pushed in the later 1980s towards more 'growth-
oriented' programmes. The incorporation of a growth objective
alognside BoP viability generates a host of complications and
increases the difficulties of using the model for policy purposes.
Finally, the model is criticised for focusing on only a few economic
aggregates, diverting attention from important qualitative aspects
of policy. Programme negotiations are often preoccupied with fruitless
disputes about the merits of rival statistics and the exact numbers
that should be included as performance criteria.
Yet while the specifics of IMF financial programming remain
contentious, there is less controversy than formerly about the main
trust of the Fund's advice, about the importance of macroeconomic
stability and of fiscal-monetary discipline to that end. Further
criticisms have however arisen regarding the cost of IMF credit and
its overall direction of flow.
HOW EFFECTIVE ARE FUND PROGRAMMES?
Another approach to assessing the policies of the Fund in developing
countries is to examine how programmes work in practice and what
impact they have. There are major methodological problems here: the
difficulties of disentangling programme effects from other influences
on economic performance; of choosing adequate performance indicators
and the best period for analysis. Above all, skill is required to
construct a plausible assessment of what would have happened in the
absence of a programme.
Empirical research nevertheless makes it possible to offer some
apparently firm generalisations about programme effects ( for fuller
substantiation see articles by Killick et al in WORLD ECONOMY,
September 1992 ) :
* Fund programmes usually strengthen the BoP. Moreover, these results
are not typically achieved by means of swingeing import cuts; export
performance is usually improved. It takes time for these improvements
to show up but they are then usually sustained into the medium-term.
* About half of programmes break down before completion ( two-thirds
in recent years ). This does not seem to make much difference to
outcomes, however, which suggests that the BoP improvements are less
attributable to the programmes that to a greater concern with macro-
economic management among governments which sign Fund agreements.
* Overall, programmes do not make much difference to the inflation
rate. While demand-control measures may reduce inflationary pressures,
this tends to be offset by the price-raising effects of devaluations
and interest-rate liberalisations.
* Programmes have a muted impact on economic growth: neither the
crippling deflation which the Fund's critics complain of nor the
revived expansion which the Fund seeks to achieve. Programmes often
result in substantially reduced investment levels and sometimes in
shortages of imported inputs.
* There is little evidence that programmes typically impose large
socialcosts, although the urban labour force commonly suffers reduced
real earnings, and cuts in budget subsidies can have serious effects.
Programme effects on the distribution of income can be large but are
usually complex, with the overall effect on poverty depending on
country circumstances and policies. There is no systematic evidence
of political destabilisation, although there have been specific
instances of this.
* Many of the programmes that break down do so because of adverse
external developments. In the absence of adequate contingency
financing, countries get into difficulties because world prices turn
against them, and quite often because of natural disasters, such as
droughts and hurricanes.
* Programmes often fail to trigger additional inflows of capital from
the rest of the world, despite claims that the Fund's 'seal of
approval' has a catalytic effect on capital inflows. While some
countries have benefitted, research shows that the BoP capital
account does is not typically improve, even though debt relief and
development assistance are included. Indeed, a shortage of supporting
finance is a common reason for programme breakdown.
* Programmes often do not have a strong influence on fiscal and
monetary policies. This helps explain the Fund's imperfect ability
to achieve programme targets. However, the exchange rate is strongly
influenced: programmes are associated with substantial currency
depreciations, and these are sustained in real terms { RR note: this
amounts to state that the Fund's programmes strongly support
industrialised countries' interests in their trade with less
developed countries. }
* There has been a good deal of political interference in Fund
lending decisions. Successive American administrations have in
particular used their weight to favour (or oppose) friendly
(or hostile) developing countries. In some countries, this forced
the Fund into providing effectively unconditional finance to
governments with proven records of economic mismanagement (e.g. in
the Philippines under Marcos, Sudan under Nimeiri and Zaire under
Mobutu){ RR note: and Chile under Pinochet } swelling the number of
ineffective programmes. The end of the Cold War may diminish such
geo-politicking.
Fund programmes have often been surrounded by much sound and fury,
yet what do these findings show? GOVERNMENTS ARE BETTER ABLE TO
RESIST THE RIGOURS OF FUND STIPULATIONS THAN IS OFTEN ASSUMED; AND
THE FUND HAS ONLY LIMITED ABILITY TO ACHIEVE ITS OBJECTIVES, EXCEPT
WHEN GOVERNMENTS ARE GENUINELY CONVINCED OF THE NEED FOR FISCAL AND
MONETARY DISCIPLINE.
How might we explain such muted effects? It has long been suspected
that the extent of programme implementation is strongly influenced
by the extent to which the borrowing government regards the programme
as its own. A recent investigation by the World Bank of its own
adjustment programmes corroborated this, finding a strong correlation
between programme success and indicators of such government
'ownership'. Government 'ownership' was high in most programmes
obtaining strong results and low in ineffective programmes, and was
strongly predictive of programme success in three-quarters of all
cases, with most 'deviant' cases explained by the intervention of
external shocks.
There has been no equivalent research on Fund programmes but there
are good reasons for expecting similar considerations to apply, not
the least because many of the Bank programmes analyzed were
accompanied by Fund programmes. The Fund's own tendency to attribute
non-implementation to 'lack of political will' points to the same
direction. { The above underlines the truism that the Fund's role
has been to help ruling elites in developing countries to further the
working of the free market system and to support industrialised
nations trade, especially of the nations dominating the Fund }
THE SIZE AND COST OF CREDITS
What now of the complain that IMF credits are inadequate in value,
too short term and expensive? The table below provides summary
indicators of the financial terms attached to credits in 1991/92:
---------------------------------------------------------------------
THE TERMS OF IMF CREDITS, 1991/92
Repayment Interest
period (years) rate (%)
Stand-by credits 3.25-4 8.0 *
Extended facility 4.50-10 8.0 *
SAF and ESAF 5.50-10 0.5
* higher if from borrowed rather than 'ordinary resources'.
Source: IMF
---------------------------------------------------------------------
The above shows repayment periods of up to ten years. The AVERAGE
maturity period has increased in recent years due to the relative
rise of EFF, SAF and ESAF lending and by 1992 was probably about
eight years, against about five years in the mid-1980s, when stan-bys
predominated. The table also shows that, while SAF-ESAF credits bear
only a nominal interest rate (subsidised by special grants and loans
from industrial countries), stand-by and EFF credits are much more
expensive. Indeed, the average rate of 8% in 1991/92 was little
cheaper than commercial money - a considerable contrast with the
position during most of the 1980s, when the Fund's rate was well
below that offered by commercial banks.
Turning to the adequacy of the credits, the data below shows that
the annual average amount of credit to developing countries, net
of reurn flows from them, was actually negative during 1986-91,
i.e. service payments on past credits exceeded the value of new
lending. This was so in each of the regions shown, even though
Africa and Western Hemisphere had major current accounts deficits
in these years. In consequence, the Fund has greatly reduced its
proportional exposure in Africa (see the first table above). IN
THIS SENSE THE FUND COULD BE SEEN AS ADDING TO THE FINANCING
PROBLEMS OF THE DEVELOPING WORLD RATHER THAN REDUCING THEM.
---------------------------------------------------------------------
NET CREDIT FROM IMF AND BALANCE OF PAYMENT OUTTURNS, 1986-91*
(US$ billion)
Net Credit BoP**
All developing countries -2.2 -31.0
(of which)
Asia -1.2 +5.5
Sub-Saharan Africa -0.3 -6.9
Western Hemisphere -0.3 -12.4
* Annual average ** Balance on current account
Source: IMF
---------------------------------------------------------------------
However, the result is different if the test is confined to countries
which actually borrowed from the Fund. Calculations for a sample of
17 developing countries showed that, even on a net basis, Fund credits
covered nearly a third of their deficits. However, coverage was much
smaller -less than a fifth- for countries whose programmes
subsequently broke down, suggesting that under-funding contributed to
the failure rate.
FROM THE MIXED RESULTS PERHAPS THE SAFEST CONCLUSION IS THAT FUND
CREDITS can BE QUITE GENEROUS IN SIZE AND COST FOR COUNTRIES WHICH
QUALIFY FOR FAVOURABLE TREATMENT, BUT FOR OTHERS CREDITS MAY BE QUITE
INADEQUATE, and that the short maturities of credits can easily leave
a country having to make net transfers to the Fund despite continuing
BoP deficits.
Partly for this reason, the new phenomenon emerged during the 1980s
of countries falling into arrears in servicing their IMF debts. As at
April 1992 ten countries owed a total of US$ 4.8 billion -equivalent
to over an eighth of the Fund's total outstanding credits. Although
the Fund has devised a 'rights' scheme for helping countries work
off their arrears and so become eligible for new credits, only Peru
has so far successfully completed this process. The Fund's
insistence that its credits cannot be rescheduled, let alone
forgiven, prevents it from responding more adequately to the needs of
the poorer countries in arrears.
CONCLUSIONS
So does the IMF really help developing countries?...High failure
rates and a paucity of 'success stories' leave particular questions
about the Fund's ability to operate successfully in African and
other low-income countries. POLITICAL DETERMINATION OF COUNTRY
LENDING DECISIONS REMAINS A WEAKNESS. The Fund in recent years has
been associated with a net return flow of finance from debtor
developing countries and there is evidence of programme underfunding.
The effects of the Fund on capital inflows from other sources varies
greatly and its claims to exert a catalytic effect are exaggerated.
Shortages of supporting finance, and requirements upon countries
to undertake adjustment measures even in response to natural
disasters, are among the severest constraints on the ability of the
IMF offer more effective help...
Ultimately, it is the governments of the OECD countries which decide
the Fund's policies and which determine its stance towards developing
countries. Since the USA exerts particularly strong influence,
disproportionate to its importance in world trade, to say nothing of
its record as persistent producer of the world's largest budget
deficit, the policies of the Clinton administration will be crucial
in this regard.
---------------------------end of Bird and Killick, ODI, April 1993==
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