International Monetary Fund

by JASON | 6:34 AM in |

Paper I wrote in 2002...

The Devil in Robin Hood Guise:
The Pilfering of Third World Nations by the International Monetary Fund

Recently, reports of financial crisis in Argentina have blitzed across the national news making headlines with stories of riots and social disorder following the government of Argentina’s command to limit customers to withdrawal of only 250 ($US) per week. Argentines, fearing that their savings would be frozen, emptied cash machines and pounded on bank doors demanding their money. Bank customers lined up to apply for credit and debit cards needed to pay bills and buy food. The central bank chief resigned under the increased pressure of the unpopular banking limits. Argentina’s president Fernando de la Rua relinquished his office during a short period of financial chaos and rioting that left 27 dead. Eduardo Duhalde stepped in to become Argentina’s fifth president in two weeks. President Bush offered support to Argentina via international financial institutions based upon implementation of recommended economic plans while blaming Argentina’s current financial situation on shortcuts to reform. Suffering from a three-year-long recession that has pushed unemployment above fifteen percent, Argentina is struggling to pay back billions of dollars of public debt. The reported numbers vary from one news wire to the next but fall between $123 billion to $150 billion for Argentina’s total public debt. Last year’s Nobel-winning economist, Joseph Stiglitz, said Argentina was paying the price for fatal mistakes by the International Monetary Fund.

Emerging from the shadows to the news headlines of the economic chaos in Argentina is the International Monetary Fund (IMF). Plagued with controversy and criticism, the IMF organization has world nations begging for handouts. Reports of billions of dollars in bailouts and financial assistance stir up questions such as: What is the IMF? What function does the IMF play in the world financial arena? Where does the IMF get the lending money? Who makes the decisions regarding the lending? What are the lending stipulations? What organizations help or are in cohesion with the IMF?

The IMF is a result of a conference at Bretton Woods, New Hampshire, of the worlds leading economic nations held in December 1945. Held in response to the World War II postwar financial architecture, the nations met to resolve the collapse of international trade in the 1930’s and the war in the 1940’s. The IMF is a stabilization fund created to prevent a balance of payments deficit by keeping currencies at the same rate and providing temporary loans. The establishment of a stable trading environment, would be useless without nations to trade with, hence, the creation of the International Bank of Reconstruction and Development (World Bank) to provide loans to rebuild the European nations demolished by World War II. Also, a need for reduction in tariffs to enhance trade brought about the establishment of the International Trade Organization that evolved into the General Agreement on Tariffs and Trade (GATT).

The International Monetary Fund came into official existence on December 27, 1945, when 29 countries signed the Articles of Agreement (its Charter). The organization currently consists of 2500 staff members from 133 countries and has a 183-country membership. The IMF’s stated function and purpose, per Articles of Agreement, is to promote international monetary cooperation, to facilitate the expansion and balanced growth of international trade, to promote exchange stability, to assist in the establishment of a multilateral system of payments, and to help members experiencing balance of payment difficulties with adequate safeguards (Articles of Agreement).

The IMF accomplishes its purpose through financial assistance consisting of credits and loans to member countries. To receive financial assistance the members must comply with stipulated policies of adjustment and reform. The IMF receives its money from quotas and interest payments from loans. Quotas (capital subscriptions) are the primary source of IMF resources. Each member of the IMF is assigned a quota, which is expressed in Special Drawing Rights (SDRs). “The SDR is a complicated valuation of the U.S. dollar, Euro, Japanese yen, and Pound sterling that changes every year but is based upon the market values of fixed amounts of each currency” (IMF Determines New Currency Amounts). The current ratio is 1.24602 U.S. dollars per SDR (IMF Financial Activities 2). A member's quota determines its maximum financial commitment to the IMF, its voting power, and is the basis for determining access to IMF financing. The current total quotas or financial obligation to the IMF by members is SDR 212 billion (about $269 billion US). The quota is determined by a variety of economic factors that include members' Gross Domestic Product, current account transactions, and official reserves in relation to other members. The largest member of the IMF is the United States, with a quota of SDR 37,149.3 million ($US 46.29 billion), and the smallest member is Palau, with a quota of SDR 3.1 million ($US 3.86 million). The quota is a capital subscription so the money does not show up on the member’s budgets. The quota is basically a guarantee of payment, with 25 percent in reserve assets specified by IMF and the rest in member’s currency, to private investors. Quotas also determine the amount of financing a member can obtain from the IMF unless under special arrangement. In layman’s terms, the IMF is guaranteed money from its member countries per quota amount if a default in payments occurs by a member nation. The actual money that is handed out to poor nations is from private purchasers of bonds. So no matter what, the private lenders are covered in the event of a default. The loans are on condition of structural reform while requiring repayment with interest in an allotted time span. “As of December 30, 2001 the IMF had credit and loans outstanding to 88 countries for a total of US$ 65 billion” (Fund Credit Outstanding).

The Executive Board, consisting of 24 directors, is voted into office by the 183 member countries of the IMF. The Executive Board makes the decisions and approves all financing arrangements. Each IMF member has 250 basic votes plus a vote for each SDR 100,000 of quota. The United States has over 17 percent of the votes with Palau at .013 percent. Basically, the wealthiest economic nations control the vote, thereby, controlling the Executive Board. Historically, the IMF has a European director and the World Bank has an American director. Financing is based on economic programs formulated by countries in consultation with the IMF, and then released in phased installments as the programs are carried out. A variety of loan programs are available with varying interest rates and repayment schedules. All loans except for the PRGF are subject to the IMF’s market-related interest rate that is currently, in 2002, about 4 percent.

An IMF partner, the World Bank Group (WBG) consists of the Inter-American Development Bank (IADB), the Asian Development Bank (ADB), the African Development Bank (AFDB), the International Finance Corporation (IFC), the International Development Association (IDA), and the Multilateral Investment Guarantee Agency (MIGA). The WBG’s primary objective is reducing world poverty. The development banks (AFDB, ADB, and IADB) have over $500 billion in capital from countries, hold a loan portfolio of $300 billion, and each year extend $50 billion in loans. The $500 billion in capital from countries is in capital subscriptions, basically just a guarantee against default. “Currently, most of the capital for the development banks is obtained from the sale of bonds on the world market, while capital subscribed [by governments] to the development banks guarantee default to private holders (Mikesell 5). The development banks mainly finance infrastructure such as energy utilities and dam construction. The IFC and IDA garner and finance private companies while MIGA guarantees the loans. To “qualify for the program [World Bank loan], an issuing nation must be in full compliance with existing International Monetary Fund programs” (Keegan 2).

The second IMF partner, the World Trade Organization (WTO), previously called GATT (General Agreement on Tariffs and Trade), is primarily responsible for promoting freedom of exchange transactions and free trade in goods and services. The WTO also handles disputes with member countries. After the GATS (General Agreement on Trade in Services) in 1995, the WTO included banking, insurance, telemarketing, tourism, and financial services. The opening of financial markets to foreign investors is one of the WTO commission’s preconditions for IMF assistance to members in crisis, allowing the WTO to assist in implementing trade practices and policies.
Trying to absorb the previously mentioned barrage of information is like trying to wade through a typhoon. Each international economic organization consists of myriad programs interwoven with each other. The question arises: Are all the institutions necessary and are they effective? The proponents like, E. J. Dionne Jr., compare them to the fire department, saving the world from economic catastrophe by vastly increasing loans in the past ten years with the Korean crisis, Asian crisis, Russian crisis, Mexican crisis, Brazilian crisis, and lately, with the Argentina crisis. The institutions are given credit for the economic success of the last forty years since World War II (Dionne). The development banks are highly regarded because of their emphasis on construction of dams and highways to help build the infrastructure of developing countries. Though supporters of the International Economic Institutions admit imperfection, they generally call for reform in making provisions for education, water supply, and health care.

The IMF, in conjunction with the WBG and WTO, fail to enhance long term economic growth in third world nations while profiting themselves and multinational companies. Purporting to act as Robin Hood, taking from the rich and giving to the poor, the international economic institutions (WBG, IMF, WTO) are in actuality pilfering third world nations. The WBG, through the development banks and IFC, owns a large percentage of the multinational corporations who take advantage of the conditions implemented by the IMF. To participate in world trade a nation must belong to the World Trade Organization and comply with trade regulations imposed by the IMF.

In order to receive financial assistance from the IMF or the development banks, the third world nations must adhere to policies established by the IMF. Without IMF certification and guarantee, the world’s public and private lenders refuse to extend loans. The certification essentially guarantees repayment of loans made by the lenders. The policies basically integrate the third world nations into the global market allowing access to cheaper labor markets and natural resources by multinational corporations. The policies consist of: Removal of trade restrictions, promotion of exports, devaluation of national currency, privatization of state companies and services, reduction of public expenditure, balancing of national budget, raising of interest rates, and deregulation of labor markets. Desperate for financing and under massive debt, most developing countries feel they have little choice but to implement these policies. The regulations imposed upon third world nations are designed to boost their economies by increasing domestic growth and living standards. In the short term, the introduced measures may temporarily boost an economy but, over the long haul, the third world nations suffer from increased unemployment, decreased health care and education, decline of local food production, and unregulated destruction of environment.

The IMF drastically effects employment. The changes in labor laws are designed to make countries more competitive and attractive to foreign investment. One requirement is that countries privatize public companies and services. Government agencies provide a great deal of employment in many third world nations. With the downsizing of government, the private businesses are unable to keep up the demand for employment leaving thousands out of jobs. Due to the removed barriers to foreign investment and trade, private local producers cannot compete against the better-equipped, well-funded foreign producers, leading to the closure of private businesses.

With the heavy emphasis the IMF places on exports, the third world nations are crippled. Most developing countries produce and export almost identical agricultural products and mineral resources to the industrialized nations. The result is a glut leading to the collapse of staple export prices. Plus, devaluation of national currency makes imports like energy resources and machinery, more expensive, shutting down local industries that are unable to compete. The raising of interest rates prevents small businesses from obtaining the capital needed to stay in business. Most third world nations lower minimum wages and/or freeze wages to attract foreign investment under IMF direction. “A quarter of the world’s population earns less than $1 a day” (Abbasi).

IMF programs dramatically impact health care and education. The third world nations must balance their budgets and are not allowed deficit spending, a practice commonly employed by the United States. The governments cut or decrease public spending, as this does not generate income for the federal government. Fees for medical services are often invoked or increased. Government spending on health programs are cut or significantly decreased. Schools are privatized to help reduce the size of state, an IMF mandate. School fees are introduced and government spending on education is slashed to balance budgets. The decline in school attendance from the increased cost results in a heavy decline in literacy rates. “In Ghana, the Living Standards Survey for 1992-93 found that 77 percent of street children in the capital city Accra dropped out of school because of an inability to pay fees” (Cavanagh 4).

The heavy emphasis the IMF places on exports reduces local food production by forcing farmers to shift from food production to export oriented products. To compound the problem, reduction in government spending leads to the removal of price supports for essential items such as fertilizer, significantly raising the prices. With currency devaluations, the imports of food and fertilizer increase in cost. Higher interest rates prevent farmers from obtaining essential operating capital. Joseph Stiglitz commented on Russia saying, “While only two percent of the population had lived in poverty even at the end of the dismal Soviet period, ‘reform’ saw poverty rates soar to almost 50 percent, with more than half of Russia’s children living below the poverty line” (The Insider 4).

Another casualty of IMF policy is the environment. Governments cut environmental protection funding and reduce staff leading to a downward spiral of environmental management and protection. To attract foreign investment, governments lower environmental standards to be competitive with other nations exporting similar natural resources. Natural resources are extracted at unsustainable rates leading to destruction of local ecosystems, polluted waterways, destruction of forests, and ruined soil.

The WBG and multinational companies profit from the policies thrust upon third world nations. “The European Bank for Reconstruction and Development (EBRD) has taken a 31.2 percent stake in Polish steel conglomerate Stalexport SA. Stalexport’s 1197 operating profit rose from 35 percent to 53.4 percent (Smosarskl). Once allowed into the third world nations, the multinational companies run unchecked with the removal of all import/export controls. “The International Finance Corporation, the private lending arm of the World Bank, has a 7.5 percent interest in Konkola” (World Bank Refuses). The WBG also makes loans to the national governments and large energy monopolies through its development banks. The development banks extend loans to the newly privatized companies that control the power, dam, and road construction, thereby, controlling the national infrastructure. In fact, “concerned citizens are often not even able to access information about projects and policies affecting them due to proclaimed prohibitive costs of translating documents to local languages (The Right To Understand). The World Bank Group, through its IFC institution, heavily invests in the multinational companies that move into the third world nations. When a default of payment occurs then the private lenders are bailed out by taxpayer dollars. “At present, the Asian financial crisis-is over, but sooner or later, there will be another, requiring billions more taxpayer dollars” (Bartlett). The loans come with a price and over time the recipient governments lose all control, for without IMF and WBG support, they will collapse.

The third world nations are chained down to an increasing debt burden and are pilfered of their valuable resources. The foremost example is Argentina, which has gone from “the tenth wealthiest nation in the world in 1913 to the thirty-sixth wealthiest in 1998” (Eiras and Schaefer). Over the past 10 to 15 years third world nations have steadily increased their debt burdens. Argentina has steadily increased from $1.1 billion SDR to the current $11.1 billion SDR in debt to the IMF in the last 16 years (Argentina: IMF Credit Outstanding). Turkey is another prime illustrator with a vast increase in debt load during the last 10 years and currently the most indebted to the IMF at $13.6 billion SDR (IMF Financial Activities 5). The U.S. Treasury secretary, Paul O’Neill, stated, “The World Bank Group alone has lent $470 billion since its inception, and $225 billion in just the last decade. Visit some of the poorest nations in the world and you’ll see we have little to show for it” (Fidler 7).

According to one critic of the world economic institutions, Ellen Frank, the third world nations, with a complete cancellation of all their debts, would be in the same shape within five years. She states, “Even the most tightly managed economy is only an earthquake or crop failure away from a foreign currency debt”(Frank 1). Ellen presents an idea to switch from the IMF to an international central bank that is publicly controlled. The international central bank would act as a lender to third world nations allowing them to settle balance of payments without reliance on foreign currency as the IMF operates. The problem she mentions is the resultant shift in power that would be fiercely opposed by those profiting from the current international debt trap (2). Her idea is splendid, however, to instigate this kind of change would take the power and control of the vary institutions that are causing and profiting from the problems. The predicament increases dramatically every year. With billions of dollars to buyout, blackmail, or neutralize government opponents and to cause world wide financial collapse, the international economic institutions cannot be taken lightly.

No poor man has ever given a rich man a job. In a world dominated by the Microsoft’s and AT&T’s, how do you accomplish the task of helping the poor progress? When greed becomes the primary objective how can it be obstructed? What can one person do against the mighty power of international organizations with billions of dollars at their fingertips? Frustration flows uncontrolled as demonstrated by the protests against the IMF in Seattle, Washington, last year that turned into a small-scale riot. Some people from other nations might perceive the attack on the United States on September 11th 2001 as an attack against the world economic institutions of which the United States is the controlling leader. The terrorist did hit the World Trade Center rather than a football stadium filled with people. The U.S. media attacks the terrorist and paint them as evil despicable creatures for attacking civilians. Americans should look back at past history when the nuclear bombs were dropped in Hiroshima and Nagahashi killing thousands of civilians, without annihilation of any important military targets. On a local television station news report several weeks back, jokes were made humorously depicting new firebombs being used in Afghanistan. The bombs suck all the oxygen out of the air suffocating the Taliban soldiers hiding in their caves. The next topic on the report turned to the outraged citizens of a small town in Utah who complained of the inhumane exhaust gassing of cats at a local animal shelter. I mention these statements to present another side. I love the United States and have served my country faithfully in the military. I only suggest that different views exist and that Americans tend to view the world through rose colored glasses. We believe what we see on television. I hope, that some day, a higher power will intervene in behalf of the afflicted.

Works Cited:
Abbasi, Kamran. “Healthcare strategy.” British Medical Journal 3 Apr. 1999. Online. 27 Feb. 2002:1-6.

Argentina IMF Credit Outstanding: Information on the Internet. 31 Dec. 2001. International Monetary Fund. Online. 18 Feb. 2002:1.

Articles of Agreement of the International Monetary Fund. International Monetary Fund. Online. 18 Feb. 2002:1.

Bartlett, Bruce. “IMF Exacerbates The Problems It Tries To Fix.” Human Events 16 July 1999:14. Academic Search Elite. Online. EBSCOhost. 31 Jan. 2002:1-2.

Cavanagh, John. “The IMF Formula: Generating Poverty.” The Ecologist Sept. 2002. Online. 5 Feb. 2002:1-7.

Dionne, E.J. “The IMF & Its Critics.” Commonweal 16 Jan. 1998. Online. 7 Feb. 2002:1-3.

Eiras, Ana and Brett D. Schaefer. “Argentina’s Economic Crisis: An Absence of Capitalism.” Backgrounder. 19 Apr. 2001. Online. The Heritage Foundation. 22 Jan. 2002:1-4.

Fidler, Stephen. “Who’s Minding the Bank?” Foreign Policy Sept. 2001. Online. 29 Feb. 2002:1-14.

Frank, Ellen. “Disarming the Debt Trap.” Dollar & Sense Mar. 2001. Online. 1 Mar 2002:1-3.

Fund Credit Outstanding: Information on the Internet. 31 Dec. 2001. International Monetary Fund. Online. 18 Feb. 2002:1-3.

IMF Determines New Currency Amounts for SDR Valuation Basket: Information on the Internet. 29 Dec. 2000. International Monetary Fund. Online. 18 Feb. 2002:1.

IMF Financial Activities Update: Information on the Internet. 15 Feb. 2002. International Monetary Fund. Online. 18 Feb. 2002:1-8.

Keegan, Jeffrey. “World Bank gets into guarantee game in Argentina.” Investment Dealers’ Digest 11 Oct. 1999. Online. 24 Jan. 2002:1-2.

Mikesell, Raymond F. “Review Article: The Meltzer Commission Report on International Institutions.” The University of Chicago 2001. Online. EBSCOhost. 18 Mar. 2002:1-12.

Smosarskl, Grog. “EBRD buys 31% stake in Poland’s Stalexport.” American Metal Market 18 Feb. 1998. Online. 19 Feb. 2002:1-2.

“The Insider: Joseph Stiglitz, Ex-World Bank Chief Economist, Speaks Out Against the IMF.” The Ecologist Sept. 2002. Online. 5 Mar. 2002:1-4.

“The Right To Understand.” The Ecologist Apr. 2001. Online. 5 Mar. 2002:1.

“World Bank Refuses to Finance Konkola but offers Assistance.” American Metal Market 5 Feb. 2002. Online. 28 Feb. 2002:1-2.

Basically the IMF and other similar global organizations like the World Bank are tools to facilitate wealth transfer. Globalization is a fancy world for wealth transfer from one area of the world to another.

Read the book, "Confessions of an Economic Hitman" for greater insights...

For some current insights into Argentina see FerFal's insightful may learn a thing or two that could save your life one day since the United States is headed down that road...


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