IMF’s internal and global incoherence

Geneva, 22 Dec (Chakravarthi Raghavan) - The increasing incoherence in the international systems - of money and finance and trade and the United Nations and its systems and agencies - as a result of the policies and activities of the Washington-based International Monetary Fund and the World Bank have again been illustrated in two recent cases.

They relate to Korea (a high-income OECD member) and Uganda and Mozambique (two of the poor least developed nations in Southern Africa), and the policies they have had to undertake as part of the IMF loans and rescue packages, and the conditionalities involved.

In the case of Korea when the IMF provided an ‘emergency rescue package’ during the 1997 Asian financial crisis, the government was asked to restructure its financial sector (in particular consolidate the banking institutions and enhance their soundness) as part of the IMF conditionalities.

In the case of Uganda, as part of its Poverty Reduction Strategy Programmes (PRSPs) and other conditionality programmes of the IMF and the World Bank to qualify for the HPIC eligibility for writing off debts, Uganda is required to observe ceilings on the government expenditures (including health).

According to Gorik Ooms, a Mozambique-based health activist in Southern Africa, while the President of Uganda on 11 December was challenging the developed nations to make available anti-retroviral drugs available to enable Africa (and Uganda) to fight AIDS, the conditionalities imposed by the IMF and World Bank’s Poverty Reduction Strategy Programmes, and the ceilings on government expenditures, made it impossible for Uganda’s Health Ministry to accept a $52 million grant from the Global Fund to fight AIDS, TB and Malaria. The Global Fund grants are conditional as ‘additional’ expenditure in the Health Sector, while under the IMF conditionality, to the extent of the grant, the Health Ministry of Uganda would have to reduce other parts of its contribution/expenditure on the health sector.

Mozambique, according to Gorik Ooms, is facing a similar situation.

In the case of Korea, a statement at the WTO’s Working Group on Trade, Debt and Finance (WGTDF) on 16 December by the representative of Korea, and the IMF’s response at that meeting, shows there is incoherence not only between the WTO multilateral trading system and its rules and obligations on the one hand and of the IMF-based international monetary system on the other, but incoherence within the IMF itself.

The material relating to Uganda are on public record, Musaveni’s challenge in the ‘New Vision’ of 11 December, and the problem of the Health Ministry in the Lancet of 7 December. Ooms article has been on the internet, and relayed over a list-server (‘stop-the IMF’) run by US-based civil society groups closely monitoring the activities of the Bretton Woods institutions.

The Korea case, as others at the WTO, is behind closed doors, but a copy of the statement of Korea and of the IMF response was obtained by the SUNS from participants.

At the WGTDF meeting, Korea was complaining of the incoherence between the IMF and the WTO and said that while it was pursing policies in close cooperation with the IMF and the international financial institutions, these policies had become the basis for legal challenge at the World Trade Organization, where a dispute was being raised (about Korea illegally subsidising its banks and the banking services).

No details were available immediately about who was raising the dispute, and whether it was in relation to the GATT 1994 and other agreements of the WTO in the goods sector or in relation to the GATS (the General Agreement on Trade in Services) or, as disputes in the WTO go under its DSU, a catch-all residuary complaint to enable bundling of obligations.

Trade diplomats from other delegations said that in the Committee on Subsidies (under the GATT 1994), Korea has been accused by other industrialized countries of providing illegal subsidies to its major corporations in their operations abroad and references in that connection to the loans provided by its banks.

In its statement at the WGTDF, Korea raised the issue of greater coherence between WTO and IMF/World Bank in global economic policy making as an important function of the WTO (in terms of Art. 3.8 of the Marrakesh Agreement), and said “If a policy pursued by a WTO member in close cooperation with the IMF and other international financial organizations were to serve as the basis for legal challenge in the WTO, the policy objectives of greater coherence between the two international institutions would be seriously undermined.”

“During the Asian financial crisis which started in late 1997,” explained Korea at the WGTDF, “the IMF and the World Bank provided Korea with emergency bailout loans, and the Korean government pursued policies, as part of IMF conditionality, that were designed to overcome its economic problems. The Korean government, in particular, restructured its financial sector in line with the recommendations of the IMF. The important elements of the measures were discussed between the government of Korea and the IMF, and were reflected in the Letters of Intent by the Korean government to the IMF. Actually the disbursements of IMF loans were contingent upon these Letters of Intent. The goal was first and foremost to consolidate the banking institutions and to enhance their soundness.”

As other countries, in the initial stages of financial restructuring, “public funds which eventually totalled 157 trillion won ($125 billion) were injected by the Korean government into the financial sector to clean up non-performing loans and replenish capital.”

This resulted in a “temporary increase” in government equities in the financial institutions.

“However,” continued the Korean representative, “as was indicated in the Letters of Intent to the IMF dated 10 March 1999 concerning sale of government’s shares in commercial banks, such increase was temporary in nature as plans were prepared for re-privatization of the commercial banks. Furthermore, the Korean Government has faithfully abided by the principle that even under government ownership, the financial institutions shall operate on a fully commercial basis without government intervention in the day-to-day management in this process, as indicated in its Letter of Intent to the IMF dated 24 November 1999.

“As a result of these efforts, the financial sector evolved into an industry driven by market principles, returning to profitability starting from early 2001 period and Korea succeeded in overcoming financial crisis, repaying the full amounts of emergency loan of $19.5 billion from the IMF in August 2001 - two years and eight months ahead of schedule.

“As of July 2002, the average BIS capital adequacy ratio for the banks has risen to 11.4% from 6.7% in 1998 - way above the IMF benchmark of 8 percent. Up until now, the Korean government has recovered about 1/3 of the public fund and expect to achieve the redemption ratio over 50% in the near future.”

“However,” complained Korea, “the implementation of financial reforms by the Korean Government as recommended by the IMF has become the basis for a legal challenge as inconsistent with Korea’s WTO obligations by some members. They claimed that the measures taken by Korea during the financial crisis constitute actionable subsidies under the Subsidies and Countervailing Measures (SCM) Agreement.

“This claim stemmed from the lack of understanding of the joint efforts made by the IMF and the Korean government, aimed at financial restructuring. In accordance with the understanding it reached with the IMF, the Korean government set up a mechanism through which debtors and creditors could make use of the out-of-court workout debt restructuring programme whereby they could agree on the conditions for the rescue of the ailing companies. These restructuring measures were taken strictly on a fully commercial basis.”

The corporate restructuring packages were not specific to a company nor a specific industrial sector. “Under the workout programme, debt forgiveness, equity infusion and interest relief were provided on commercial grounds by financial institutions, which acted in accordance with the market principles.”

Korea was concerned that allowing measures taken under the IMF guidance to be challenged in the WTO would have the “perverse effect” of penalizing Members who embark on necessary financial reforms as recommended by IFIs, since “this would go against the goal of achieving greater policy coherence between the WTO and the IMF.”

It is difficult to judge Korea’s complaint until the dispute, if any, and the claims unfold.

However, the IMF representative, according to participants, in some preliminary remarks insisted that the IMF policy advices and conditionalities were on macro-economic policy, and not individual or sectoral policies.

It is not clear whether any developing countries intervened or spoke. Few developing countries are keen to rush to support Korea these days, as that country has become such an egregious example of what an eminent Korean economist has called “Kicking away the ladder” - policies that countries adopt to climb up the ladder of industrialization and then prevent others from following their example.

The latest instance of Korea’s stance was in the discussions in the same week over the TRIPS and Public Health debates and the ‘green room’ discussions where Korea joined the WTO head in pressurizing developing countries to accommodate the US.

The stance or comment of the IMF, if correctly reported by participants on non-attributive basis (the minutes and records of the WTO meetings are not often public, and even in private for members only, they come out after a time and the participants always can whet or revise what is attributed to them), would however be running in the face of facts.

At least in relation to the financial sector and the WTO services talks, and specifically the financial services agreement and scheduling of the commitments, when the talks were concluded - when the Asian crisis was in full swing and Korea, Thailand and Indonesia among others were having IMF accords or negotiating them - the then Director-General of the WTO is on record as thanking the IMF for helping the conclusion of the pact.

In the case of Indonesia, the subsequent publication of the letters of intent, showed how far the IMF went in laying down sectoral conditions - one of the conditions related to Indonesia accepting the WTO panel ruling and implementing them in relation to the dispute against it over the automobile sector - and this was cited by Indonesia as among the reasons why it did not even go in appeal against a palpably wrong panel decision.

In all the countries affected, the governments announced in the media (in response to public complaints about ‘foreigners’ taking over banks and other institutions for a song, that the governments were being forced to adopt the policies as part of IMF loan conditionalities.

Reports to the UN Human Rights Bodies, from the High Commissioner as well as special rapporteurs have similarly catalogued and complained about the micromanagement that the IMF and the Bank were doing in sub-Saharan Africa under the PRSPs. - SUNS5260

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