The Neighborhood Bank
LAST JANUARY 15, Michael Manley, socialist Prime Minister of Jamaica, went to Washington to find out whether his government would stand or fall. He went not to Congress, nor to the White House, but to 700 19th Street, N.W., the headquarters of the International Monetary Fund (IMF). Manley came to plead for a desperately needed loan for his country, and the IMF, "lender of last resort" to many Third World countries, was his last hope.
The IMF has not always been such a busy place. It was set up in 1944 to oversee the planned Bretton Woods monetary system, and is still nominally part of the United Nations. When Bretton Woods collapsed in the early 1970s, however, the IMF adopted the role of general overseer of the international credit system.
As such, it has been handy for the "oil shocks" of the 1970s. When OPEC raised the price of oil in 1973, the result was economic stagnation for the developed Western countries. But Third World nations faced a crueler world. They, too, were dependent on petroleum. Not only did their economic infrastructure depend on it, but many of their people had begun using refined products--like kerosene--for cooking and heating. When the price of oil rose, therefore, the Third World could not cut down on its consumption. At the same time, it lacked the money to pay the higher prices. Poor nations had no choice: they had to borrow oil money from Western banks.
As the price of oil kept going up, however, many poor nations could not pay back their loans and faced national bankruptcy. That caused the IMF to step in. The IMF began to work to protect the international banking system; provide emergency loans to the insolvent Third World countries; and use the leverage thus gained to gain control over the debtor nations' economic policy and insure that all the loans will eventually be repaid.
This strategy dramatically increased the IMF's power in the international economic system. Banks began referring underdeveloped nations wanting loans to the IMF for its "stamp of approval." The IMF virtually began to run the Zairean economy, and control the economies of other Third World states, including Turkey, Peru and Jamaica. Even European countries, like Portugal, became dependent on the IMF.
The IMF makes its emergency loans conditional on the receiving nations' adopting a policy of "austerity." The assumption behind this philosophy is simple: Third World governments have lived beyond their means. Their governments are spending resources which the nations do not possess--handing out pieces of a pie which do not exist. The only answer, the IMF believes, is to cut the government budget, raise taxes, and devalue the currency.
THESE TACTICS have not been particularly successful for Third World nations. Devaluation has traditionally been used to stimulate exports; but the light industry of most Third World nations finds little export opportunity open to it. Developed economies are shut off to a potential exporter by tariff and other trade barriers, and other undeveloped economies are facing austerity measures of their own and can buy no more.
Raising taxes and cutting the budget bring with them high costs in the domestic economy. There is little cash to raise in most underdeveloped economies and cutting the budget means laying off government workers and removing some of the few people in the economy with regular sources of income. The strategy often leads nations like Turkey to take actions which appear, in traditional economic terms, to be suicidal. In January 1980, Turkey promised to cut its budget by $2.2 billion, despite the fact that its industry at the time was running at 40 per cent of capacity.
The IMF's austerity policy effectively conserves what little cash there is in a nation to pay interest on the debt. But it makes growth for a poor nation difficult, any prospect of a better life for its citizens impossible, and makes the possibility that the loans themselves will be eventually paid back more unlikely than ever.
Even more serious is the IMF policy of forcing nations dependent on it to cut economic subsidies of staples. After the sharp rise in commodity prices of the '70s, many nations began artificially holding down the prices of goods like food and fuel. These subsidies take up much of the free cash of a nation, and eliminating them is an easy way to raise money. However, the strategy ignores the human cost in such a move. Without the subsidies, or some other help, the poorest citizens will freeze or starve.
This tactic, too, has backfired. Egypt ended its subsidies of key staples in 1977 under IMF orders. Within days riots erupted. Desperate people took to the streets and forced the government to turn back the moves. In Peru, an IMF-ordered 20-per-cent hike in gasoline costs on January 3, 1979, led to a general strike and an attendant repressive response. Hundreds were arrested for leading the strike; seven magazines were closed down; police were ordered to shoot troublemakers on sight; the Constitution was suspended.
Seeing this, Jamaica defied the IMF. Prime Minister Manley had agreed in 1978 to follow the IMF conditions for a loan. But by 1979 the economy had not improved under mild austerity procedures. So in January, Manley went back to the IMF to ask for another loan. The IMF told him to lay off 11,000 workers and cut his budget by $85 million. Manley refused. There was nothing left to do but resign and call for new elections later in the year.
AT THE SAME TIME as its "austerity" dogma disrupts the lives of underdeveloped nations, it furthers the spread of multinational corporate power. Turkey was pressured this January (in the same 'package' of concessions as the $2.2 billion cut in spending) into rescinding its rules prohibiting foreign banks from opening offices in Turkey, and allowing foreign oil drilling concessions.
Simultaneously, the IMF has not hesitated to use its resources in the political sphere. In June 1979, the IMF granted a $34 million loan to Anastasio Somoza's government in Nicaragua to aid his resistence to Sandinistan insurgents. The U.S. voted in favor of the loan. Somoza fled Nicaragua seven weeks later, looting the treasury as he left. At last report the IMF was trying to collect the loan--from the Sandinista government.
The United States must reconsider the direction it wishes to support for a body that wields such extragovernmental power in such a fashion. The IMF is following policy which hurts Third World nations, damages their stability, makes their people desperate, and makes eventual repudiation of the debt likely. The policy does not even seem to be well adapted to do what it sets out to do, which is to protect the loans of Western banks. In a larger sense, of course, the IMF exemplifies a policy which allows major banks to put their interests above other nations' economic autonomy, political stability, and the lives of their people.