How To Fix the IMF
First, do no harm
By David Moberg
Government - as an institution and even as an idea - hasn't fared well in this era of corporate globalization. The prevailing view, especially in elite circles, is either that government has become irrelevant and powerless, swept away in the swirl of the global market, or that it is an odious obstacle to the market and its bounty. Yet it is growing increasingly clear that the world doesn't need more rapid marketization. Instead, it needs more effective, democratic government and a stronger popular political voice, from local communities to global financial institutions.
Ironically, the view that government is bad is often imposed on developing countries by two institutions created by governments, the International Monetary Fund and the World Bank, the latest targets of popular protest against globalization. When countries get into economic difficulties, often as a result of financial market instability (currency swings, short-term capital flight, commodity price plunges or interest rate spurts), the IMF typically has demanded that governments privatize operations, cut budgets (with education and health care the usual victims), eliminate subsidies, open and deregulate all markets and make labor "flexible" (that is, make it easy to fire workers and cut their pay). Everything must be sacrificed to protect government's sacred bond - not with its own citizens, but with international bond holders.
In many developing countries where the IMF prescribes its harsh medicine, governments have been particularly bad - corrupt, ill-managed, inefficient, undemocratic, inequitable and ineffective in their basic tasks. But as the 1997 Asian crisis demonstrated, the IMF prescribed the same treatment for governments that had been doing many things well, especially on issues that typically matter to the IMF - balancing budgets, promoting growth, opening markets. As Russia shows, even a functioning government that doesn't do much well can be economically preferable to virtually no functioning government. Joseph Stiglitz, who recently resigned as the World Bank's chief economist, has argued in criticism of the IMF that markets don't work well without appropriate governmental institutions. In their absence, it can be disastrous to push rapidly for more exposure to global market forces.
The developing world certainly has suffered from corrupt despots, and IMF critics often downplay the extent to which economic and political elites in poor countries have been responsible for poverty and squalor. But from Indonesia to Guatemala, the responsibility for many bad governments also rests with outside forces, both the United States and international financial institutions. No matter how much the powerhouses of global capitalism may criticize corruption in these countries, they have preferred it over even moderately left-wing popular governments.
With the end of the Cold War, there is no longer the "strategic" justification for propping up such governments, concluded a recent congressional advisory commission on international financial institutions chaired by conservative economist Alan Meltzer. But it was not just a Cold War strategy: The United States, often acting through the IMF and World Bank, was clearly setting policies that were designed foremost to protect the interests of Wall Street, turning governments into handmaidens of global corporations and financiers. Now the United States may support limited democratization in countries like Haiti, Korea or Indonesia - but only to gain popular legitimacy for a set of policies that still favors the global money elite.
The overall record of countries under IMF structural adjustment programs - the policies imposed as a condition for loans - has ranged from unimpressive to disastrous, despite some successes in dampening inflation and increasing exports. Even by its own account, roughly 60 percent of World Bank projects have been failures.
One of the biggest problems has been the horrendous burden of debts on many poor countries. Many of these debts are odious - especially when contracted by undemocratic, corrupt rulers - and could legally be repudiated under a precedent established a century ago by the United States, when it canceled Cuba's debt to Spain after the Spanish-American War. The Jubilee 2000 campaign finally has forced the rich nations to acknowledge the need for debt relief. Yet the plans for writing off some of the debt still leave most poor countries saddled with unsustainable debt service charges and untenable conditions.
Governments have been turned into debt collectors for global capital. But the money and its repayment are not as important as enforcing the iron law that capital always come first. Moreover, collecting the debt by dismantling public services and turning everything over to private business is very rarely the best solution to the failures of government.
The key to correcting government failures and creating the conditions for solid development is less a matter of technical economics - like "getting prices right" - than a matter of politics - giving people a voice. In its most recent Poverty Report, the U.N. Development Program argues that "effective governance is often the 'missing link' " in strategies to reduce poverty; countries need help in improving governance, not more economic conditions imposed from outside. Most important, the report states, "The foundation of poverty reduction is self-organization of the poor at the community level. Such self-organization is the best antidote to powerlessness, a central source of poverty." Poverty programs are unlikely to work, the report continues, if the poor are not empowered, or if macro-economic policies are anti-poor. Yet the IMF not only imposes anti-poor policies, but also undermines democracy. IMF strategy disempowers the poor, whether it's secretly setting national policies, dismantling the few programs that serve the poor, or undermining unions.
Stiglitz argues development must be viewed as a transformation of society, not just an increase in GDP, and it must spring from within the society. Economic democracy is essential, he said in a January speech in Boston, and "democratic and participatory processes involving labor unions and other social organizations" are needed both to deal with the legitimate interests and anxieties of working people and to make possible a participatory "high road" to economic development.
Pushing for a flexible labor market, Stiglitz said, may be tantamount to telling workers to give up hard won advances in labor standards without any overall public benefit. "By becoming advocates of stronger workers rights and representation at every level - from the workplace ... to the international level - I believe that we can achieve much more than improvements in efficiency," he said. "Labor unions and other genuine forms of popular self-organization are key to democratic economic development."
While IMF officials disdain promoting labor rights as illegitimately "political," they regularly encourage policies that undermine labor rights as simply "economic." The IMF pays no attention to the distribution of income and wealth. Yet several studies show a link between lower levels of income inequality and higher levels of growth in nations around the world. Harvard economist Dani Rodrik has shown a strong correlation between democratic institutions and rates of growth as well. Stiglitz also argues that economic problems increase as inequality of wealth grows, possibly reducing productivity, and union organization can help correct some of those problems. Clearly, the political arguments for democracy, workers rights and effective government form the basis for sound economic policy.
The most important thing that the international financial institutions could do to strengthen government and democratic participation is to stop doing harm: stop acting as enforcers for global capital and stop interfering in the organization of workers, peasants and other citizens in unions, non-governmental organizations and political parties.
Although it is unlikely that the World Bank or IMF will be eliminated, as some protesters demanded at the spring meetings in Washington, there is growing clamor - some of it from conservatives - to drastically scale back the IMF to focus on its original mission of managing short-term currency problems. There is a need, however, for both increased foreign aid and long-term loans to poor countries. That could come from a new organization, possibly funded by receipts from a small tax on currency and other financial transactions, or even a reformed World Bank. The conditions for such assistance should not be privatization and austerity, but recognition of core labor and human rights. Although rich countries can provide poor countries technical assistance in developing effective governmental institutions and a professional corps of civil servants, the real political transformation must come from within the countries themselves. For that to happen, ordinary people must be able to organize.
The creation of strong forms of economic and political democracy can become the basis for real, sustainable development. This would not preclude foreign investment, but it would mean that when countries bargain with international investors and institutions, workers, poor people, environmentalists and other citizens will have a voice in setting the terms of the new global market. This model of development is likely to produce a more egalitarian society - one that measures wealth, as recent Nobel Prize-winning economist Amartya Sen proposes, not just in dollars but in the growth of human capacities of the greatest number of people throughout the world.
David Moberg is a senior editor of In These Times.