IMF needs urgent reform

As Rato will soon head the global financial institution, it seems appropriate to look into its performance during the last 60 years and its impact across the world, in particular in developing countries.

The institutional structure and voting power of the IMF has hardly changed during the last six decades. However, the philosophical underpinnings of the economic message of the IMF have gone through a fundamental transformation since the 1980s. Many observers believe that the IMF has become principally the mouthpiece of rich countries that espouse globalisation and free-market economics, irrespective of its dire consequences on poor countries.

In Iraq, the recently proposed IMF agenda of free-market economy and import of goods with no taxes was reportedly opposed by Iraq's trade unions. However, the occupying power has enforced the economic agenda in the country. The former chief economist of the World Bank and the Nobel-prize-winning economist, Joseph Stiglitz, has been highly critical of the IMF policies towards poor countries. Many believe that if the US is serious about Iraq becoming a stable country, then the massive unemployment and "economic vandalism" backed by the IMF must not be imposed on the country.

What was the purpose of the IMF?

The main purpose of the IMF is to ensure financial stability within the international monetary system through collaboration with central banks (eg Bangladesh Bank) of member-countries.

In 1944, the leaders at the conference publicly acknowledged the lessons of the severe depression of the 1930s. The near-collapse of global capitalism had taught the world that preaching austerity and balanced budgets at all costs led to mass employment and the World War II. Germany suffered hyperinflation to the extent that German Mark dropped to 5 million to a US dollar. As a result, Hitler's party was able to get into the German parliament in 1932 with increased numbers.

The leaders turned to the philosophy of British economist John Maynard Keynes, who argued that global capitalism needed periodic state intervention to stay afloat. The IMF was created to put his theory into practice. IMF was set up as a result of a conference at Bretton Woods, New Hampshire in July 1944 together with the International Bank for Reconstruction and Development (commonly called the World Bank).

Only 44 countries attended the conference, as most of the developing countries attained political independence after 1945. British India was partitioned, and India and Pakistan became two separate independent states in 1947. In Africa, Ghana was the first African country to achieve independence, in 1957.

IMF policies hijacked

The institution operated successfully until the 1980s. During the 1980s, the IMF was hijacked by a group of market fundamentalists. Economists associated with right-wing British Prime Minister Margaret Thatcher and President Ronald Reagan were convinced that the Keynesian vision had in fact been a "socialist" nightmare, so they declared that a return to the philosophy of the 1930s was required.

Their theory has turned the IMF's purpose inside out. Instead of promoting government intervention to turn around slowing economies, the IMF made its loans to poor countries conditional on governments' agreement to slash public spending and privatisation of key services. This process is euphemistically called "structural adjustment." These economists, assisted by the conservative world leaders, imposed on the poor countries a massive economic experiment. And the results are now visible between poor and rich countries

Poor countries hard hit by IMF policies

One result of privatization espoused by IMF is that the road to wealth -- the control of production, patents, and technology -- is increasingly dominated by a few countries and multi-national companies. In such a scenario, developing countries with their weak economies are left sidelined, resulting in increased poverty among their people. For example, in Sub-Saharan Africa the number of poor increased to 46 per cent from 41 per cent between 1981-2001.

The poor countries are unable to spend money on welfare of their people because of IMF loan conditions. The stark result is that 1.2 billion people live on less than a dollar a day. More than 2 billion people have no access to adequate sanitation. The top 20 per cent of the world's population consumes 85 per cent of the world's income. The bottom 20 per cent live on 1.3 per cent of the world's income.

The flawed policy of the IMF left many poor countries debt-ridden. There are 39 of the world's most indebted nations by the end of 2000, most of them are in Africa. In Asia countries include Loas, Myanmar, Vietnam and Yemen. Out of these countries, only 24 countries may be able to get debt-relief from donor countries.

The countries that have most closely followed the IMF agenda suffer low economic growth and social instability. Russia followed the IMF's prescription during the Yeltsin years and Russian GDP and life expectancy fell significantly below the levels of even the old Soviet Union. Countries with high growth rates today like Botswana booted the IMF out and pursued a sensible development policy on their own. In 1997, Malaysia under Dr. Mahathir Mohammad did the same thing. He did not listen to the IMF's advice to turn around the economic recession. And Malaysia did much better than those which followed the IMF's conditions for getting the loans.

Suggested reforms of the IMF

Many economists suggest that the so-called "structural adjustment" must have a human face. Their suggestions include (a) institutional reform of voting system to give greater voice to developing countries, (b) enhancing transparency and accountability, (c) radically downsizing or eliminating "conditionalities" for loans (d) decentralisation of research and the decision-making process.

Furthermore, changes in the roles and policies of the IMF should include contributing to strengthening national finance systems, encouraging measures to curb excessive inflows of short-term capital, co-ordinating macroeconomic policy and stabilizing exchange rates, discontinuing long-term lending and focusing on the lender of last resort function, and development of a mechanism for orderly debt relief.

Some economists believe that the US$250 billion lent by the IMF during the last seven years to rescue countries from a variety of financial crisis may have created a hazard, convincing borrowers and lenders alike that they always would be bailed out. The IMF is too doctrinaire and many accuse that its policy is being driven by Wall Street.

Clearly the policies of Keynes may not be appropriate today. But the IMF must return to the guiding philosophy of the founders that market can only thrive alongside a strong public sector and for welfare of the people government intervention and regulation may be necessary. The world's poor need desperately the IMF to distance itself from the market fundamentalists.

Professor Amartya Sen, a Noble-laureate in economics, reportedly is of the view that the IMF must also reform and find a way around to give relief to poor people. Although he is a believer in the principle of the free market, he has clear qualifications about the desirability of applying it fully in poor countries. He thinks it "rather remarkable that some market enthusiasts recommend to the developing countries that they should rely on the free market even for basic education -- thereby withholding from them the very process of education expansion that was crucial in rapidly spreading literacy in Europe, North America, Japan and East Asia."

The IMF is one of the global institutions that not only lacks equality among its members but also transparency and accountability of its decisions. The first reform should take place in voting procedures. Many observers believe that the basic voting rights of developing countries should be increased, irrespective of their shares. At present at the IMF board that selects the Managing Director and takes decisions, Europe controls more than a third of the votes on the board while non-European countries except Japan command only a third of the votes. The US has a 17.4 per cent voting share.

As per a post-World War II agreement between the US and Europe, Europe will fill the position of Managing Director of the IMF while Washington will do so with the World Bank. There is no reason to restrict the search to a particular country or region. Japan is the world's second largest economy but its candidate is left out from the IMF or World Bank.

Furthermore, there is no discussion on the merits of the candidacy of its Managing Director with other countries. Developing countries including Bangladesh have no role to play in the selection process. It seems that the medieval philosophy of Europe's "divine right" to head the organization is in place at the beginning of 21st century. In recent days, the outgoing Managing Director, Germany's Horst Koehler (who has been elected as President of Germany), came out against Europe's monopoly to lead the institution. He reportedly stated that he would "support an open and transparent process to select a Managing Director."

Conclusion

It seems that Rato is to acquire more power over the poorest people in the world than President Bush or any democratically elected leaders on earth. He has a responsibility to reach out to poor people so that the existing gross disparity between rich and poor countries is gradually eliminated through reforming of IMF policies. Poverty breeds hopelessness and desperation that in turn lead to social chaos, often poor youths are lured by undesirable elements to commit crimes or even terrorist attacks.

We all hope Rato in cooperation with the industrialized countries will give a dramatic shake-up of the institution having taking into account of the systematic failure of its policies in poor countries. Do we expect too much from a person who firmly believes in market economy and was a member of the right-wing government in Spain? Let us wait and watch.

Barrister Harun ur Rashid is a former Bangladesh Ambassador to the UN, Geneva.