A Beginner's Guide to Multilateral Lending in the 1990s
Fichtl, Eric
In July 1944, as the war in Europe drew to a close, delegates from 44 nations met in Bretton Woods, New Hampshire to develop the framework for a postwar global financial order, presumably to...
...Meanwhile debts were transformed into eouity holdings (that is, creditors were given ownership shares to replace debts that would never be fully paid off), and bank debts were transformed into bonds (that is, instead of a bank holding a credit until it matured, the newly minted bond could be sold on world financial markets...
...Official finance-loans from governments and from public entities like the World Bankdwindled, and private finance took its place, and within the realm of private finance, loans from banks dwindled and were replaced by funds coming from bond and stock markets...
...10...
...Washington, D.C.: Institute for International Economics, 1990), pp...
...6. Drawn from U.S...
...and British savants, these systems are ossified and prone to "cronyism...
...are the International Finance Corporation (IFC), which seeks to attract private sector investment in World Bankendorsed projects, and the Multilateral Insurance Guarantee Agency (MIGA), which serves as a noncommercial risk-insurance provider for private sector investors operating in World Bank member countries...
...2. Drawn from IMF Website essay, "The IMF and the World Bank: How Do They Differ...
...Besides the volatility of capital flows in this privatized, Americanized world, there's another serious problem--concentration...
...Jubilee 2000 online education packets, <www.j2000usa.org/usa/resource.html...
...In particular, criticism has been directed toward the harsh conditions underlying repayment of the debts of the world's poorest nations...
...The foremost arm of the World Bank is the International Bank for Reconstruction and Development (IBRD), which is funded both by member-nation dues and by money borrowed in international markets, facilitated through the sale of World Bank bonds...
...In breaking down barriers to international trade and investment, the WTO serves the interests and enforces the trade policies of the richest nations, or the Group of Seven (G7).6 Likewise, through their demands for liberalization, the BWIs and other international financial institutions ease the path for investors in advanced economies to profit from new openings in developing countries, a relation some observers label the Wall Street-Treasury Complex...
...Thus far, 42 countries have been declared eligible to apply for HIPC benefits...
...and John Williamson, "What Washington Means By Policy Reform...
...4 To receive assistance from any of these organizations, a country must become a member state and agree to a regimen of policies, or a Structural-Adjustment Program (SAP), based on liberal economic theories...
...in the Asian case, real jobs (hardly dream jobs, for sure) were created and incomes rose...
...htm...
...Liberalization has been deeply discredited bv the Asian to invest in extremely long-term projects, but stock markets are notorious for tolerating only the surest, quickest pay-back investments...
...XXVI, No...
...But in order to attain HIPC status, countries will have to follow the same SAP prescriptions that many critics argue have protracted their debt crises in the first place...
...It originally included 19 Latin American and Caribbean nations and the United States, but has since expanded to include almost the entirety of Latin America and the Caribbean, along with Western Europe, Japan, Israel and Canada as lender countries-some 46 nations in total...
...Besides polarization, the Americanized system has shown a great propensity for destructive crises...
...privatization of state-owned industries...
...Financial markets are notoriously volatile, given to extremes of optimism and despair...
...The IMF's principal recommendations included the promotion of international monetary cooperation and exchange stability, the expansion of international trade, and the establishment of a multilateral system of payments...
...The condition for receiving either an IBRD or IDA loan is usually a series of structural adjustments...
...Jubilee 2000 online education packets, <www.j2000usa.org/usa/resource.html...
...As the world has been liberalized since the early 1980s, the worldwide income distribution has become more unequal...
...Continental Europe is a major nut to crack...
...there was relatively little real-world investment financed by the inflow...
...transnational corporations...
...4 (February 1993), pp...
...While FDI flows are relatively stable, purely financial flows are anything but stable...
...In the 1990s, with widely dispersed bondholders and stockholders as the principal source of foreign funds, a crisis can be precipitated practically overnight...
...What this means is that Asian corporations typically have intimate ties to each other, to banks, and to governments that are profoundly different from the system prevailing in the United States, where stockholdings are widely dispersed among thousands, even millions, of holders...
...Nearly 70% of the capital flows into the region were in the form of FDI, more than three times 1980's share...
...style to finance, it will not be an easy road, and political resistance to the social consequences of Americanization-instability, impoverishment, marginalization-is strong...
...The IDB raises funds from member governments' subscription dues, financial markets and other sources...
...NACLA Report on the Americas, Vol...
...John Kenneth Galbraith advertised the coming of "technocracy" and the obsolescence of profit maximization as the goal of corporate behavior...
...The IMF in particular has repeatedly blamed the Asian crisis on poor corporate governance practices, a complaint that goes hand in hand with complaints about the lack of transparency...
...In brief, SAP policies demand a drastic reduction of state involvement in the national economy in favor of liberalization, or "opening up" to "the markets...
...1 The IMF, headquartered in Washington, D.C., began its financial operations in March 1947...
...3. Drawn from the IMF Website essay, "The IMF and the World Bank: How Do They Differ...
...imf.org/external/pubs/ft/survey/sup0998/14...
...See Table 2.) In 1998, almost 45% of Latin and Caribbean debt was in the form of bonds, nearly ten times 1980's share...
...In this manner, the IMF could be compared to a credit union: Its financial resources are the sum total of its members' funds...
...The rows labeled "private debt" refer to private borrowers, wt sively private...
...But it is worth emphasizing again that financial flows are at least as much about arranging ownership as they are about providing funds for real economic activity...
...Whatever you think of that system in its homeland-my own evaluation is that it is deeply polarizing and profoundly unstable-it has little to recommend itself to "developing" countries...
...Portfolio flows are also highly concentrated, confined mainly to countries that provincial U.S.-based portfolio managers have heard of...
...See also, "Statement on the Heavily Indebted Poor Countries (HIPC) Debt Initiative," at the 50 Years is Enough Network Website, <www...
...The logic is that a purchase of a stake that large is not really a short-term trade, but part of a longerterm business strategy...
...Such premature recovery is causing worry on Wall Street and in Washington because liberalization thrives on crisis...
...And certainly there has been plenty of creation of new plants and production networks by multinationals all across Latin America and Asia...
...now, the bulk comes from Americanization the bond and stock markets and FDI by financial system...
...Official creditors include individual governments and multilateral bodies like th All percentages are of the totals...
...5. See the 50 Years is Enough Network online fact sheets, <www.50years.org/factsheets...
...Historically, countries aiming to catch up to richer rivals-Germany in the late nineteenth century, Japan in the mid-twentieth century, Korea a bit later than Japan-have tightly controlled finance, ceding a large hand to the state, with firms mainly owned and/or controlled by banks, not impatient, volatile shareholders...
...In a panic, of course, it is easier for metropolitan capital to force reforms on countries when they are desperate for a debt rollover...
...and increased openness to foreign trade and investment, often by lowering tariffs...
...These changing patterns have several important implications...
...Another arm of the Bank is the International Development Agency (IDA), which makes "soft" loans (loans with no interest fees) to very poor nations...
...Both portfolio and direct investment tends to be concentrated in a few countries, mainly the larger Latin ormer U.S...
...During the 1980s debt crisis, the fact that the prominent creditors were banks meant that things were worked out by a relatively small group of negotiators over the course of years...
...16-17...
...the 50 Years is Enough Network online fact sheet, "The World Bank's Financial Components," <www.50years.org/factsheets/structure.html...
...Treasury Department Undersecretary for International Affairs Lawrence Summers testified to BY ERIC FICHTL Congress in 1995, for every dollar the U.S...
...The Bank has since diversified into four somewhat autonomous financial arms (referred to as the World Bank Group), and has asserted its commitment to work toward "a world free of poverty...
...Drawn from the IMF Website's fact sheet, "The IMF at a Glance", March 1999...
...It may destroy itself one of these days, though the system's powers of recovery should never be written off...
...Trouble in Mexico can be bad news for Argentina...
...Treasury and the International Monetary Fund (IMF) take a leading role in acting on the creditors' behalf...
...But mass prosperity is probably the last thing to expect from Americanization...
...If a stock remains depressed, the firm is exposed to the risk of takeover...
...XXVI, No...
...anything that depresses it is bad...
...2 The World Bank, founded in 1946, is also based in Washington, D.C...
...Any corporate policy that raises the stock price is good...
...To put it bluntly, but not inaccurately, 20 years ago, the bulk of foreign finance for Latin America came from Robert Rubin, th commercial bank loans and official Secretary of Trea the main archite( institutions...
...American countries (Brazil, Mexico, ry, was one of Argentina, Chile, Venezuela), a few of the the global Asian ones (China, Malaysia, Thailand), and a few "transition" countries (Poland, Russia...
...A Market Solution for the Americas...
...The Americanized system has proved remarkably unreliable at promoting prosperity...
...That arrangement is no guarantee of success, of course, but it is a formula that has proved workable...
...government puts into the World Bank's funds, it receives $1.30 in procurement contracts for U.S...
...managers are guided by the stock market...
...A net debt inflow, for exi less the repayment of old loans...
...and "50 Years of World Bank Group Operation Highlights," at the World Bank Website, <www.worldbank.org/html/extdr/backgrdfibrd/history.htm...
...Debtor countries privatized state firms, often turning them over to foreign owners...
...3 The Inter-American Development Bank (IDB), created by a special committee of the Organization of American States in 1959, operates specifically in Latin America...
...Smaller and poorer countries, like those of the Caribbean, Africa or South Asia, are largely excluded from this circuit of private capital flows.14 he volatility of U.S.-style financial structures is pretty well known...
...Nationalist development policies, which had insulated countries from outside capital and trade flows, were dismantled wholesale...
...Latin American Adjustment: How Much Has Happened...
...Instead of listening to colleagues (or "cronies," in the pejorative voice), bankers and bureaucrats, U.S...
...A Beginner's Guide 1. See "The IMF and the World Bank: How Do They Differ...
...and John Williamson, "What Washington Means By Policy Reform," in John Williamson (ed...
...All figures in Table 2b are stocks-the total amount of pri labeled "publc debt" refer not to the lender but to the borrower-that is, governments eitt behalf of private borrowers...
...In the Asian case, a lot of the inflow did find its ef su cts of way into real investment, ranging from factories to office buildings, which turned out to be worthless when the bubble burst...
...7 As then-U.S...
...8 The IMF and the World Bank have drawn heavy critiIcism from various sides of the political spectrum for their continued insistence on draconian SAP measures in light of the damaging effects of such policies on borrowing societies...
...NACLA REPORT ON THE AMERICAS 18REPORT ON GLOBAL FINANCE ny by a foreign firm would count as FDI, even though no new physical assets are created in the process...
...While the creation of a single giant financial market with the evolution of the euro will almost certainly bring a more U.S...
...The Mexican boom-and-bust cycle of the early 1990s and the Asian boom-and-bust cycle of the mid-1990s are textbook examples of this contagious volatility...
...The results of the conference were the two Bretton Woods Institutions (BWis): the International Monetary Fund (IMF) and the World Bank...
...Source: World Bank, Global Development Finance 1999: Analysis and Summary Tables...
...In both cases, though, the consequences for Mexican and Asian workers when the bubble burst were savage, with jobs disappearing and incomes collapsing...
...Employment would become more volatile, the executive class would answer to a new set of masters-domestic and foreign financiers and foreign multinationals-and the country would be more subordinated to foreign economic and political power...
...HIPC would also emphasize the capacity of a country to pay as a principal concern in its debt-relief strategy, while seeking to reduce debts in the poorest nations to a "sustainable" level, meaning the ability to service debt while also funding economic development and social well-being...
...In the 1980s, the United States, with its savings-and-loan and junk-bond manias, was seen as dying of speculative short-termism, while patient Japan and Europe were on the rise...
...But by official definitions, FDI also includes the purchase of existing corporate assets-for example, the purchase of a Drivatized national teleDhone comoaTable 2a shows net flows of capital into the region in a given year...
...foreign multinationals...
...The ESAF is a low-interest loan with a five-year grace period on interest and a ten-year maturity, but in order to receive it, a borrower nation must accept a slew of structuraladjustment measures.10 In response to criticism, in September 1996 the World Bank and the IMF jointly examined the possibility of reducing or annulling parts of the poor nations' debts...
...Less obvious are the changes in so-called corporate governance that go along with a bigger role for stock markets...
...9. See the 50 Years is Enough Network online fact sheets, <www.50years.org/factsheets...
...In July 1944, as the war in Europe drew to a close, delegates from 44 nations met in Bretton Woods, New Hampshire to develop the framework for a postwar global financial order, presumably to avoid future financial crises like the Great Depression, seen by many as the cause of World War II...
...he "resolution" of the debt crisis contributed directly to the Americanization of global finance in several ways...
...Those ten countries accounted for 70% of the FDI flows into the "developing" world in 1998...
...The WTO includes and extends the GATT, functioning as the institutional framework for global trade...
...4 (February 1993), pp...
...At a time when the trend towards Americanization seems like the tide of history, it is worth emembering how wrong past extrapolations have been...
...In the 1930s, Adolph Berle and Gardiner Means argued in The Modem Corporation and Private Property that the shareholder had become vestigial, and that a new managerial capitalism was here...
...Poorer countries need VoL XXXIII, No 1 JuLY/AUGUST 1999 19REPORT ON GLOBAL FINANCE fully Americanized...
...by David C. Driscoll at the IMF Website, <www.imf.org/external/pubs/ft/exrp/differ/differ.htm...
...Japan and China have barely started...
...If capital were free to seek its highest, best purposes-defined, of course, by its maximum profit opportunities-efficiency would rule and growth would accelerate...
...Drawn from the 50 Years is Enough Network's online fact sheet, "Statement on the Heavily Indebted Poor Countries (HIPC) Debt Initiative," and the Jubilee 2000 online education pack, "HIPC: The Official Debt Relief Program," <www.j2000usa.org/usatedpac/dhipc...
...The only regional exception to downward mobility outside the poorer countries was East Asia, which crashed in part because of liberalization...
...html...
...Economists and bankers assured everyone that bringing the debtor countries into the international product and financial markets would be best for everyone over the long term...
...Specifically, liberalization entails massive cutbacks in the public sector and social programs...
...Its original membership of 29 nations has since expanded to a present total of 182...
...The system's fate depends on how long the people of the world can stand to live with it...
...Americanization" in Korea would certainly shake up the domestic social structure...
...In both cases, the foreign inflows created a speculative bubble followed by a dramatic bursting...
...No matter that Japan and Korea were once touted in the same circles as models of development...
...Countries can get punished in a financial panic merely for speaking the same language as-or being next door to--a country in crisis...
...Together, the BWls put forth the Highly Indebted Poor Countries Debt Initiative (HIPC...
...Clearly some of that is happening on the ground, but there is a lot to be done, and the apparent recovery of some major economies, particularly Korea's, has taken pressure off the process...
...8. Cited in 50 Years is Enough Network online fact sheet, "Destroying Orissa, Fueling Climate Change: A Joint Project of the World Bank, Transnational Corporations, and the G7 Governments," <www...
...Despite the liberalization of international markets, it will be a long time before many domestic systems are smashup, though not all that much in the United States, which strenuously objects to any attempts to re-regulate global finance...
...Critics have pointed to increased indebtedness, public-sector layoffs, cutbacks in subsidies for social programs, the displacement of domestic industry by transnational corporations, the cut-rate sale of state industries to foreign private investors, a fall in wages precipitated by labor-flexibility stipulations, and a general loss of economic sovereignty-the ability of a nation to dictate its own labor code, environmental legislation and trade policy...
...The other two arms of the Bank Eric Fichtl is NACLA's editorial assistant...
...These neoliberal policy guidelines have become known as the Washington Consensus because Washington-based international financial organizations and U.S...
...Minor shocks can get magnified into major disasters, and innocent bystanders may be punished by the so-called "contagion" effect...
...You would need a soccer stadium to house all the creditors-though of course the U.S...
...The International Monetary Fund has made it clear that it wants to dismantle Asian governance systems and replace them with U.S.-style stock market-centered systems...
...And, along with the growth of so-called portfolio investment (flows from stock and bond markets), foreign direct investment (FDI) played an increasing role...
...Asia has a long way to go...
...9 Since 1987, the poorest nations have been eligible for the IMF's Enhanced Structural Adjustment Facility (ESAF), a loan designed for developing countries with persistent macroeconomic problems like high inflation, poor balance of trade and heavy indebtedness...
...4. Drawn from Inter-American Development Bank Annual Report 1997 (Washington, D.C.: IDB, 1998...
...Just as protectionist trade policies were said to "distort" prices and other economic relationships, restrictions on capital movements were said to inhibit the optimal global allocation of capital...
...16-17...
...and the IMF Website fact sheets, "The IMF at a Glance," <www.imf.org/externaVnp/exr/facts/glance.htm> and "Chronology," <www...
...increased levels of labor flexibility...
...Countries signing the IMF Articles of Agreement, or Charter, agreed to sacrifice some degree of their national sovereignty in the hopes of alleviating the policies that were perceived to have brought on the Great Depression-primarily the lack of trust on the parts of governments to exchange their own national currencies for others...
...NACLA Report on the Americas, Vol...
...The IBRD makes loans to member governments at rates below those of commercial banks to finance infrastructuralimprovement projects (dams, transportation, power plants and so on), or to assist governments in meeting the requirements of a structural-adjustment program...
...To this end, the IMF sought funds from member nations which could then be lent to other member nations experiencing temporary balance-of-payments difficulties...
...Indeed, by U.S...
...Mexico and the rest of Latin America offer a precedent, though Korea's economic fundamentals are a lot stronger...
...Thus, bilateral creditors (governments), multilateral creditors (such as the BWis), and commercial creditors (such as private banks) would, for the first time, agree to reduce-not just refinance-debt payments...
...that was last decade's truth...
...HIPC proposes to coordinate and alter the debt repayment of eligible borrowers to all creditors...
...Its primary purpose was to finance economic development, at first in the war-ravaged European economies and later in developing nations...
...governmental bodies almost universally favor them.5 The tenets of liberalization and the Washington Consensus are also summed up in the agreements forming the World Trade Organization (WTO), which replaced the General Agreement on Tariffs and Trade (GATT) in 1995...
...In 1910, Rudolf Hilferding, the Austrian Marxist, wrote in Finance Capital that the AngloAmerican system was pass, and that German-style bank-dominated trusts and cartels were the wave of the future...
...To U.S...
...7-20...
...export-oriented, commodity-based development...
...A Market Solution for the Americas...
...50years.org/factsheetsWhipc.html...
...1 ' E VoL XXXIII, No 1 JuLY/AUGUST 1999 17REPORT ON GLOBAL FINANCE the solution to the crisis...
...The IMF has always defined its primary task as the maintenance of an orderly process of payments and receipts between nations...
...FDI--cross-border investment by multinational corporations-is usually thought of as "real," as opposed to purely financial investment...
...State Department Website, from a fact sheet prepared by the Bureau of Economic and Business Affairs and released by the Bureau of Public Affairs June 14, 1996, <http://www.state.gov/www/issues/economic/fswtopol.html...
...7. See, for example, Doug Henwood, "The Americanization of Global Finance" in this issue...
...50years.org/factsheets/orissa.html...
...pundits also trace Japan's troubles to similar faults...
...In the Mexican case, ordinary people felt little benefit during the inflow...
...it is a system designed to drive down costs and maximize the flow of profits to shareholders...
...definitions, the purchase of as little as 10% of the stock of an existing company by a foreign investor counts as direct investment, even though it resembles a portfolio transaction...
...It may surprise readers to learn that efficiency has ruled for the past 20 years, but that is the theory...
...In Mexico's case, the bubble was largely financial...
...It then lends money to member states to assist in financing a wide variety of economic and social-development projects...
...The HIPC initiative would also acknowledge that poverty reduction is equally as important for governments as fiscal or monetary performance...
Vol. 33 • July 1999 • No. 1
