The Failing of the International Financial Architecture
Green, Duncan
The global financial system is not working. Above all it is not working for the poor. Any sincere attempt to end world poverty must begin with a thorough overhaul of the...
...This "complex"-exemplified by Greenspan and recently retired Treasury Secretary Robert Rubin, both former successful Wall Street financiers-involves a "revolving door" exchange of key personnel that helps ensure that Treasury policies are dominated by Wall Street's business agenda...
...At a national level, elites have seen that debts can be socialized-passed on in turn to their own taxpayers and workers...
...The second major set of criticisms focuses on the Fund is a true believer r question of whether the Fund should be trying to carry Asia crash provides am out structural adjustment and currency stabilization capital-account liberali simultaneously...
...There is no consideration of whether institutions other than the IMF might have been more effective at different parts of the job, or of what organizational defects might have prevented the IMF from getting it right...
...a country's reserves and forcing local governments to devalue and/or raise interest rates to try to keep capital from leaving...
...Any sincere attempt to end world poverty must begin with a thorough overhaul of the international financial architecturebeginning with the IMF...
...The U.S...
...Numerous reform proposals are currently being discussed both to the international financial system and to the IMF itself.21 They were barely visible, however, at "emains a highly that deters public on in designing nic policies...
...All along, see currencies through balance-of-payments crises, are seeing that they hav Global capital markets are growing at an astonishing decisions...
...government exercises enormous influence over the IMF...
...1 5 More generally, the Fund continues to assume that Western business practices are inherently superior to anyone else's...
...This is the challenge that faces world leaders during the last year of the millennium and against which their actions will be judged both by history and the world's poor...
...Third, increased uncertainty has deterred private-sector investment...
...Jeffrey Sachs, "Global Capitalism: Making it Work," The Economist, September 12, 1998, p. 24...
...1 9 Paul Krugman, an M.I.T...
...Yilmaz AkyOz, "East Asian Financial Crisis: Back to the Future," in Jomo KS (ed...
...Instead, poor, in the form of recesublic spending cuts, job losside the simple but important ric distribution of pain and ome important moral hazard both lenders and borrowers e nothing to fear from rash onal level, foreign investors be bailed out by the internaNACIA REPORT ON THE AMERICAS 34REPORT ON GLOBAL FINANCE IMF Managing Director Michel Camdessus holding the IMF's Articles of Agreement...
...Second, market volatility and the greatly increased dangers of contagion have led governments to pursue "sound money" policies to avoid antagonizing the markets...
...First, as governments )w on the road scrapped regulations on capi- tal flows, they were left with 'for the poor in little more than interest rates unequal society to manage the economy, forcing interest rates up and makworse...
...March 1998, <web.mit.edu/krugman/ww/suisse.html...
...It has undermined political legitimacy in dozens of countries...
...Tigers in Trouble, p. 37...
...Making the IMF work for (or at least not against) the poor requires institutional changes, but also a deep change in the institutional culture of the Fund...
...Instead, the IMF continues to dogma over experience insist on shopping lists of "conditionalities," setting Institute of International out detailed economic reforms covering everything opportunities and reduce from changing the bankruptcy laws to privatizing state must head towards a wo companies, which must be achieved before each new capital markets...
...In the words of Belgian academic and financier Bernard Lietaer, "What had been the frosting has become the cake...
...This is money that cannot be spent on health, education or any social need...
...7. Quoted in Jomo KS, "Introduction," in Jomo KS (ed...
...In all the Group of Seven economies, growth has slowed to around two-thirds of the 1960s rate, while unemployment has risen...
...Also missing was a discussion on rolling back the IMF's seemingly endless encroachment on national sovereignty...
...Their reform agendas for Third World economies are almost identical...
...The most recent and ferocious round of criticisms have focused on the Fund's insistence on government Sthe poverty line...
...and European experience it intends to introduce in crisis countries...
...According to IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment, which was published last January, anything that went wrong was either unforeseeable or the fault of the governments concerned and has since been rectified...
...Industrialized countries account for over 60% of the voting strength at the IMF and World Bank, compared with just 17% in various UN bodies (roughly proportional to their share of the world's population...
...The Fund's own assessment of its performance in Asia is probably the best single argument for establishing an independent evaluation unit...
...The Fund's unwillingness to listen to criticism is exacerbated by its reluctance to have its performance independently evaluated, as the World Bank now does with its programs...
...Higher interest rates and lower government spending resulting from currency volatility have obvious negative impacts on the ability of national governments to invest in their people and to pursue policies that encourage economic growth...
...the mission team goes to the client country to convey Washington's conclusions...
...tional financial institutions-i.e...
...9. Aurelio Vianna Jr., "Social Expenditures and the Payment of External Debt Service," Rede Brasil sobre Institucoes Financeiras Multilaterais, Mimeograph, 1999...
...Along with other measures such as the privatization of state-owned industries, this helped create a boom in capital inflows...
...They are making it up as they go along...
...22 (November 1998), p. 651...
...5 Walden Bello, a Filipino economist and one of the strongest critics of the West's handling of the East Asian crisis, has assailed what has become known as the "Wall Street-Treasury complex" that directs the U.S...
...4 Often these surges have more to do with the "herd behavior" of investors who copy (and try to anticipate) each other's investment decisions than with the real economy...
...1 2 Despite its recent injection of funds from member countries, the IMF will continue to fight a losing battle against the tidal waves of finance hurtling around the global economy...
...asked Korean economist Ha-joon Chang in a recent issue of the Cambridge Journal of Economics...
...The Economist (London), January 30, 1999, p. 6. 5. As cited in Bernard Lietaer, "Global Currency Speculation and its Implications," p. 15...
...volatility and lower growth...
...In Mexico, the much-vaunted post-1995 recovery has failed to "trickle down" to the poor...
...to recovery, but lif The past 20 years have the world's most seen more than 90 serious banking crises is getting around the world, each of which resulted in bank losses that, in proportion to gross domestic product (GDP), exceeded the costs of the U.S...
...Until the Asia regulations should be i crisis, financial-sector reform was the mandate of the occurs...
...The IMF has spearheaded this effort, ceaselessly pressing governments to reduce or liberalize regulations on foreign direct investment and other capital flows such as mutual funds and stock and bond markets, as well as on foreign borrowing by both governments and local businesses...
...It means acting fast and providing large Michel Camdessus de sums of money up front...
...through a combination of rescheduling a country's that many staff still see debt and providing a bridging loan with few strings thing to original sin...
...The environment is not mentioned at all...
...They would also enable governments to channel investment towards priority areas of VoL XXXIII, No 1 JULY/AUGUST 1999 35REPORT ON GLOBAL FINANCE the economy, as Korea did for decades during its high growth period prior to the liberalization The IMF r of the 1990s...
...If the governments of the rich nations are sincere in their desire to end world poverty and provide a decent life to all the world's people, they must start with a thorough overhaul of the international financial architecture, including the IMF...
...In 1993 it was reported that the typical stock was held for an average of just over two years, compared to over four years ten years ago, and seven years in 1960.3 31REPORT ON GLOBAL FINANCE Volatility has created a world of sudden capi- After Brazil's ecor tal surges that can be enough to overwhelm earlier this year, tl even a large Third a $41.5 billion "r World economy...
...The Fund is simply not gain is unjust, there are s equipped to provide the volume of money needed to implications...
...Even within its Anglo-Saxonizing mission, the IMF stands accused of double standards over which parts of the U.S...
...Thereafter, it was left to the IMF to coordinate the West's response...
...Capital controls, they argue, allow governments to defend small, vulnerable economies against the kind of surges that overwhelmed the Mexican and Brazilian currencies...
...The issue of how to ensure that creditors assume some of the risk in debt rescheduling-which means, inherently, some of the cost if things go awry-is unlikely to go away, despite its unpopularity on Wall Street...
...14 "tranche" of the loan is handed over...
...9 The structural-adjustment package accompanying the IMF's "rescue" of the Brazilian real was intended to prevent devaluation, but the currency crashed anyway...
...The extraordinary rise of global finance has been the single most outstanding economic development in the last quarter of this century...
...ing them more variable...
...UN Conference on Trade and Development (UNCTAD) economist Yilmaz Akyiiz has pointed out that economic recovery in the United States in the 1980s was driven by a debtfinanced consumer boom and government deficit spending...
...Here, a austerity and high interest rates during the initial period of adjustment, which have had a deeply deflationary impact...
...the financial markets wait breathlessly to see whether the countries will comply...
...The real economy has become just a small percentage of total financial currency activity...
...But with the growing criticism of its handling of the Asian crisis, the notoriously impervious Fund has acknowledged that its demands for spending cuts have made matters worse and revised its approach...
...The Fed swiftly responded by lowering interest rates almost to negative levels in real terms, leading to a strong recovery by the end of 1993...
...Governments must be made accountable to their own people, not to IMF officials, and should be able to design economic policies according to their national needs...
...In Brazil, for example, which was running a large fiscal deficit prior to its $41.5 billion IMF "rescue" package in November 1998, the Fund has continued to insist on savage cuts, amounting to 20% of the total government budget...
...With much-praised "bolsa escola" program, aimed statements such as this one from at encouraging child workers back to school, former IMF supporter Jeffrey was cut in half...
...Are we witnessing the decline of the various Asian models, their end hastened by the Asian crisis...
...When it comes to the role of states and markets, the ather than an empiricist...
...Volatility also spread to the stock market...
...Eatwell believes the result has been to undermine the global economy...
...Critics charge that the organization's conditions for approving credits to debtor nations exceeds the mandate laid out in the Articles...
...This has meant cutting public spending in favor of less expansionary policies...
...12...
...The Korean rescue package, for example, included a series of conditions, such as opening up the economy to imported auto parts, which had precious little to do with the country's balance-of-payments problems, but had been persistent U.S...
...In response to what Bill Clinton has called "the biggest financial challenge facing the world in a halfcentury," the Fund came up with little more than minor tinkering...
...In Korea, Thailand and Indonesia, it has become an advocate of deficit spending, urging governments to spend more on health, education and social safety net schemes such as emergency job creation...
...Fund staff in fact concede ors and local elites enjoyed recrisis period, they have had costs of the crash...
...Duncan Green is a Policy Analyst at the British aid agency CAFOD and a member of NACLA's editorial board...
...Some question whether it should be concedes that solid dome involved in structural adjustment at all...
...This in spite of the clear evidence that East Asia has outperformed the rest of the world for much of the last 40 years, and has done so in a relatively inclusive and equitable fashion which has clearly eluded Latin America (or indeed the United States...
...the American government repeats the mantra 'obey the IMF...
...6. Walden Bello, "Strategies and Alliances for Effective Action," Paper presented at the Economic Sovereignty in a Globalizing World Conference, Bangkok, March 24-26, 1999...
...And the behaved with stunning arrogance budget of Brazil's in developing countries...
...Finally, in order to defend their currencies against raiders, governments are forced to assemble large war chests of hard-currency reserves...
...1 8 The industrialized countries scrapped their own capital controls only very recently, with Britain leading the way in 1979...
...8. Comisi6n Econ6mica para America Latina y el Caribe (CEPAL), Preliminary Overview of the Economies of Latin America and the Caribbean (Santiago: CEPAL, 1998), p. 97...
...4. Zanny Minton Beddoes, "Global Finance: Time for a Redesign...
...This constituency, Bello argues, is likely to be a formidable obstacle to any attempt to reduce volatility by reforming the international financial system...
...Stabilization, especially when the problem is one ful in filtering out shortof liquidity, requires rapidly restoring confidence longer-term investment...
...Jeffrey Sachs has been with th particularly vehement in this respect: "The IMF and the World Bank have behaved with stunning arrogance in developing countries...
...Western taxpayers-when the going gets rough...
...it must listen, not lecture...
...By 1998, only 2.5% of such transactions were real, while pure financial flows accounted for fully 97.5% of all transactions...
...Bes A third major criticism of the IMF focuses on the point that this asymmet question of resources...
...Author interview, IMF, April 27, 1999...
...Structural-adjustment packages, on the other hand, ther questions hav can only work when there is a sense of local owner- ing in the wake ship of their contents, something that can only be "moral hazard," achieved through time-consuming dialogue and nego- likely to take undue risk tiation...
...Michael Bailey, "The Brazilian Economic Crisis...
...attached...
...But reforms must go further, to a new economic model based on inclusion, justice and democracy...
...economy is unlikely to have enjoyed one of the longest postwar recoveries,"Akytiz concludes, "if the kind of policies advocated in East Asia had been pursued in the early 1990s in response to debt deflation...
...1 0 In February, for example, the government cut the amount allocated for food rations from $48 million in 1998 to $23 million in 1999...
...Treasury Department and other major trading partners, numerous governments, especially in Asia and Latin America, introduced capital-account liberalization measures-the deregulation of capital flows-from the late 1980s onwards...
...A first step to improve the IMF's representativity should be to overhaul the Fund's power structure to give a fairer voice to developing countries, especially those most affected by its operations...
...occupation and occupation-led institutional and legal reforms bore little resemblance to those of the United States...
...When referring to cuts, there is a vague, one-line commitment "to spare as much as possible spending on health, education and social protection...
...In essence, the IMF is now pursuing a policy of Keynesian reflation-a dramatic departure from its hard-line policies in Latin America...
...Often such measures have been included as part of the structural-adjustment packages signed by the Fund and local governments...
...Social policy is contained in a short paragraph promising targeted and efficient spending, with priority for primary education and basic health...
...and it must learn from its mistakes...
...This activity goes well beyond the IMF's own Articles of Agreement, which limit its mandate to working on current account NACIA REPORT ON THE AMERICAS 32REPORT ON GLOBAL FINANCE issues such as trade and services...
...Although such problems are dwarfed by the impact of the currency crises that have afflicted Asia in the past two years, the important point is that liberalization and volatility are detrimental to human development, even when spectacular crashes do not occur...
...Will Anglo-Saxon governance practices come to prevail throughout East Asia, either because they are perceived as the most rational, or because they are forced on the countries which accept IMF assistance...
...6 According to Cambridge University economist John Eatwell, the regulatory system for this new paradigm is a "patched together" combination of measures which has not proved up to the job...
...demands in bilateral trade negotiations for much of the 1990s...
...Ha-joon Chang, J. Gabriel Palma, and D_ Hugh Whittaker, "The Asian Crisis: Introduction," Cambridge Journal of Economics, No...
...aspirations...
...7 Rather it has been the result of a combination of financial and technical innovation, on the one hand, and intense political pressure on developing countries to open up their economies to international financial flows, especially since the early 1990s, on the other...
...Banking crises have become a The economy is n feature of the new globalized finance markets...
...The IMF has also been criticized for its dogmatic attachment to liberalization...
...2 The increase in financial flows has destabilized financial markets and made them much more volatile...
...After the bubble burst with the 1987 stock market crash, the Federal Reserve raised interest rates, sparking one of America's deepest postwar recessions...
...In developing countries taken as a whole, the average rate h e u U of growth has also slowed by )mic meltdown roughly the same extent...
...The biggest concern today," notes Greenspan's predecessor, Paul Volcker, "is the growing constituency for instability...
...economist who works closely with the Fund, maintains that the brittleness in the way it deals with criticism stems from the simple fact that "even as they lay down the law to their clients, they are groping frantically for models and metaphors to make sense of this thing...
...Democratization should start with the Fund itself...
...Irrational exuberance," in U.S...
...es and falling wages...
...Ever since Thailand, the IMF's actions have prompted a chorus of criticism, both from the left and from former allies such as George Soros, the hedge-fund wizard, and Harvard economist Jeffrey Sachs...
...In 1998, for example, real manufacturing wages were still 22% below their precrash levels.16 The IMF recipe now being prescribed in Asia makes no effort to learn from the region's past successes, but merely seeks to introduce a number of "Anglo-Saxon" business practices through conditionalities on IMF loans...
...The breakdown in the early 1970s of the global system of fixed exchange rates established at the Bretton Woods conference has unleashed a series of booms-foreign exchange markets in the 1970s, bond markets in the 1980s, and global equity markets in the 1990s.' Each boom has been encouraged by technological innovation, especially in information and communications technology and deregulation to remove barriers to capital flows...
...Remarks to the Council on Foreign Relations, New York, September 14, 1998, as cited in Robert Blecker, Taming Global Finance, p. 2...
...VOL XXXIII, No 1 JuLY/AUGUST 1999 In 1975, about 80% of foreign-exchange transactions were connected to the real economy of trade and direct investment in the production of goods and services...
...As the Sachs, pressure to reform these Brazilian economy "recovers," life for the institutions is rising...
...The ple evidence of the perils of nation, but the Fund merely stic financial institutions and n place before liberalization epts that countries should in fly follow the Chilean model capital inflows to discourage ut it does not positively advothough the Chilean system, widely discussed in the afterppears to have been successterm speculation in favor of One Fund insider commented capital controls as "the next 3 IMF Managing Director monstrated the triumph of last March when he told the Bankers: "To optimize the the risks of globalization, we rld with open and integrated e emerged over burden sharof structural adjustment and the idea that investors are s when they know that they ut...
...1 7 A similar effort at "Anglo-Saxonization" took place after World War II, but as the author points out, the Japanese and German models that emerged from a period of direct U.S...
...Furthermore, the Fund should narrow its field of operation by returning to its original mandate and confining its attention to issues concerning markets for goods and services, rather than capital markets, of member countries...
...The subsidy on school lunches was cut by 35...
...And so it should be, because Fund-style cate such a step, even stabilization and long-term adjustment work at a com- introduced in 1991 and pletely different rhythm, as the Fund has learned to its math of the Asia crash, a cost...
...In any historical sense it has certainly not been "integral to global trade in goods and services," as Rubin and others have claimed...
...Many people in the Third World reasonably ask why this level of economic sovereignty is being denied them as they in turn struggle for development...
...Brazil's letter of intent to the IMF contains nine dense pages of analysis...
...He is author of Silent Revolution: The Rise of Market Economics in Latin America (Monthly Review Press, 1995...
...87/88 (November/December 1997), p. 15...
...Federal Reserve Chairman Alan Greenspan's words, is the order of the day...
...In the hyper-liberalized global economy of the 1990s, the first country to experience this sudden reversal was Mexico, which had to be bailed out by Washington and the IMF after a massive run on the peso in 1994...
...There are several causal links e IMF mounted between financial market scue" package...
...CEPAL, Preliminary Overview, p. 87...
...His article, "Child Workers of the Americas" appeared in the January/February 1999 issue of NACLA Report...
...exclusive bod) The Fund also stands accused of excessive arro- participati gance in its certainty that its econor policies alone are the solution Democratiz to crises in diverse parts of the world...
...The real fragility of the new financial system was only fully exposed, however, when currency crises hit Thailand in 1997, swiftly followed by Indonesia and Korea...
...In Mexico, Washington led the rescue effort for its newly anointed partner in NAFTA...
...Economic Sovereignty in a Globalizing World Conference, Bangkok, March 24-26,1999...
...The Failings of the International Financial Architecture 1. John Eatwell and Lance Taylor, The Performance of Liberalized Capital Markets, Center For Economic Policy Analysis, New School For Social Research, Working Paper (September 1998), p. 4. 2. Bernard Lietaer, "Global Currency Speculation and its Implications," Third World Resurgence, No...
...ition should start e Fund itself...
...banking collapse during the Great Depression...
...3. Franklin Edwards, "Financial Markets in Transition--or the Decline of Commercial Banking," Federal Reserve Bank of Kansas Symposium, 1993...
...In January the govVoL XXXIII, No 1 JULY/AUGUST 1999 33REPORT ON GLOBAL FINANCE ernment reduced the 1999 land reform budget "The IMF and the World Bank have by 43% in relation to the 1998 budget...
...the IMF's spring meeting in Washington last April...
...One negotiator reportedly told economist Robert Wade that the U.S...
...B was too slow...
...About eight million people rely on these supplies of rice, beans, sugar and oil...
...In Latin America, income from bond issues alone rose from $7.2 billion in 1991 to $54.4 billion in 1997.8 But in such a deregulated system, inflows can rapidly turn into outflows, leading to a Sixty million Brazilians live below catastrophic emptying of family from a Sio Luis slum...
...The doubt surround- to bear very little of the ing whether the country will qualify for the next round these have fallen on the is exactly the opposite of what is required to restore sions, accompanied by pi confidence in the short term...
...Russia and Brazil followed suit in 1998...
...He points out that the fall-off in global growth figures in the 1970s coincides almost exactly with the end of the Bretton Woods system...
...For a fuller version of these proposals see Duncan Green, "Human Development and the Asia Crisis," <http://www.cafod.org.uk/human development crisis.htm...
...and journalists assess the 'seriousness' of reforms according to whether countries bite the bullet to carry out the IMF dictates, whatever they are...
...Financial institutions increased their risky lending on real estate and mergers and acquisitions...
...pluralist and open-minded, not dogmatic...
...See the IMF Website at <www.imf.org/external/np/speeches/1i 999/030199.htm...
...Tigers in Trouble: Financial Governance, Liberalization and Crises in East Asia (London: Zed Books, 1998...
...Michael Bailey, "The Brazilian Economic Crisis," Oxfam, Mimeograph, March 1999...
...Speech by Manfred Bienefeld, "Can Finance Be Controlled...
...he globalization of finance is often presented as both inevitable and beneficial, but it has been a comparatively recent event...
...It should minimize its use of policy conditionality in favor of a process of participation and dialogue with all stakeholders in program countries...
...At an internati rate-some $1.5 trillion changes hands in foreign- have found that they will exchange transactions daily, and the amount is rising constantly...
...Indeed, the IMF has insisted on such policies even in financially strapped countries which were running fiscal surpluses...
...government had achieved more in six months of crisis bailout talks than in ten years of bilateral trade negotiations...
...But the Asia crash may mark a new low in the Fund's reputation as a vehicle for U.S...
...Paradoxically, what may be "irrational" for the market as a whole makes a lot of sense for individual traders in derivative, foreign-exchange, equity or bond markets who can stay ahead of the curve-there are profits and promotions to be made out of volatility...
...poor in the world's most unequal society is getting even harder...
...2 2 Some of the broader proposals largely missing from the official debate include crucial issues of participation-the IMF remains a highly exclusive body that deters public participation in designing economic policies...
...Another major critique is that the Fund is not an impartial body...
...It grudgingly acc World Bank, but the IMF used the crisis as an oppor- some circumstances brie tunity to assume a major role in pushing through of placing restrictions on financial reforms, arguing that the Bank's response short-term investment...
...This process is out of hand...
...Bank for International Settlements, 1998," quoted in Robert Blecker, Taming Global Finance: A Better Architecture for Growth and Equity (Washington, D.C.: Economic Policy Institute, 1999), p. 2. 13...
...The sequence is familiar: the IMF's negotiating positions are settled in Washington...
...Critics have raised a number of issues that fundamentally challenge the way the IMF has handled the current wave of crises, and called for substantial changes in the way the organization is structured and how it operates on the ground...
...By then, the Brazilian government had already made a number of commitments with a potentially devastating effect on the 60 million Brazilians living below the poverty line...
...It must become open to the public, not closed...
...Under pressure from the IMF, backed by the U.S...
...Since the threat of suspending loan disburse- are likely to get bailed o ments is the Fund's way of exerting leverage on gov- that while foreign invest ernments, loans are handed over in small amounts most of the gains of the p over prolonged periods of time...
...There is little doubt that the U.S...
...2 0 This is a truly alarming picture-IMF economists pretending a certainty that they do not in fact possess, forcing ill-considered policies on numerous governments whose populations are already caught in the middle of an economic crisis...
...Paul Krugman, "Will Asia Bounce Back...
Vol. 33 • July 1999 • No. 1
