Will IMF emerge with imperial powers over South?

by Chakravarthi Raghavan

GENEVA: Every time there has been a financial crisis over the
last two decades or more, it has been a case of the
International Monetary Fund not having anticipated it, but
using it instead to get more money and managing to emerge with
more powers. An European diplomat made this remark recently
over a dinner conversation about the effects of the so-called
Asian financial crisis on the South and the North.

After the collapse of the Bretton Woods accord and its fixed
exchange rate system, and the Jamaica amendment to the IMF
Articles enabling floating exchange rates, volatility, and
monetary and financial instability have been endemic to the

Arusha Initiative

Meeting in Arusha (Tanzania) in 1980, a group of academics,
development economists and monetary and financial experts, in
a document titled the "Arusha Initiative", underlined that with
the collapse of the post-1945 monetary system, the monetary
disarray that followed did no credit to human rationality and
ingenuity, and inaction was increasingly costly and dangerous,
and that the monetary disorder is neither inevitable nor
accidental, but man-made and could be redressed by political
decisiveness and action.

Writing ten years later, a former President of the New York
Federal Reserve, Gerald Corrigan, noted that the 15 years after
the end of the Bretton Woods system and the move to flexible
exchange rates, had witnessed a "greater number of financial
disruptions with potential systemic implications" than was the
case over the post-war period prior to 1974, and more
disruptions in the 1980s than in the earlier period.

Everytime there has been a crisis which the IMF has not been
able to foretell, leave aside, take actions to prevent, changes
have been instituted in an ad hoc way to the point where the
IMF system has now become a patchwork quilt, with nothing of
the original architecture left to make further patches.

Whether the IMF will emerge again with more powers appears
slightly more problematic, because for the first time, the
IMF's policies and conditionalities in Asia have come under
some sustained criticisms from mainstream economists - who have
been critical of the IMF's deflationary policies in these
countries at a time when the world economy is facing a serious
danger of deflation.

G-24 calls for reforms

For the first time in more than a decade or so, the developing
countries in the Group of 24, after a special ministerial
meeting in Caracas early this February, called for major
reforms, and establishment of a Task Force of industrial and
developing countries for a wide-ranging review of the
International Monetary and Financial System and for increased
representation and participation of developing countries in the
decision-making organs.

But the communique of the G-7 Finance Ministers (after their
February meeting in London), contains not even an
acknowledgement of the G-24's existence or views.

Perhaps at the forthcoming meetings of the Interim and
Development committees in Washington in April, the G-24 will
assert themselves, and at least enter their reservations to the
communiques that the Fund and the Bank managements draft in
accord with the G-7 views. If they don't, they will continue to
be marginalized.

The G-7 communique does not also indicate awareness of the
major deflationary problems facing the world economy.

As Financial Times columnist, Martin Wolf, points out, while
there may be no deflation in the classic sense of a sustained
fall in prices of goods and services (except in Japan), the
world is experiencing stagnant output, rising unemployment and
flat prices.

And the only new element (for IMF work) indicated by the G-7
is for consideration of new mechanisms to ensure "an orderly
involvement of the private sector in the resolution of the
financial crises".

While no details are spelt out, this is seen by observers to
be a reference to some kind of international bankruptcy rules
that would enable the bankrupting of borrowers in the
developing countries, and the taking over of the firms by the
creditors - something that the IMF has already been attempting
in the Asian borrowers, forcing a fire-sale of productive

As of now not only is the G-24 being ignored, but the US
Treasury is going ahead and convening a meeting of selected
countries in Washington for another ad hoc consultation that
might well result in making the IMF a stronger instrument of
the US neo-liberal agenda and colonial-type expansion of its
corporations that even some mainstream economists are
cautioning would create considerable political backlash in

Attachment of conditions

Meanwhile, a coalition of lobby groups (from left, centre and
right) in the US have promoted a number of conditions to be
attached to the US legislation to fund the IMF - through quota
increases as well as through the General Agreement to Borrow.

A bill introduced by Republican Congressman, Jim Leach and
five others, and pending before the House Banking Committee of
which Leach is the chair, spells out several of the conditions
sought to be attached.

Some of these proposals and pleas of lobbyists - asking the
IMF to promote workers' rights and ensure environment
protection, trade reforms and investment liberalization, and
the efforts of some Republicans to use the funding to advance
their anti-abortion agenda have attracted media attention.

Given the legislative processes in the US Congress, some of
these like workers' rights and environmental conditionalities
will probably be watered down, but others aimed at advancing
the agenda of US corporations, some of which are already being
pushed by the IMF staff and management in South Korea, Thailand
and Indonesia, will advance further.

The US proposals

The proposals in the bill would ask the US Treasury to
instruct the US Executive Director to voice and vote in the IMF
Board to make the IMF promote (in countries borrowing from it)
among others, measures for:

* liberalizing pricing, trade, investments and exchange rate
regimes of countries, with a view to open countries to
competitive forces of the global economy;

* privatize industry, close loss-making enterprises and
reduce government control over factors of production;

* undertake economic deregulation;

* ensure IMF does not become lender of last resort for
private investors, including commercial banks;

* more effective surveillance of national economic policies
and financial market developments of countries, and fuller
disclosure of information to market participants;

* accelerating the strengthening of financial systems in
emerging economies;

* foster dialogue between sovereign debtors and private

* mechanisms to facilitate orderly work-out mechanisms for
countries experiencing debt or liquidity crisis;

* establish ad hoc of formal linkages between provision of
official financing to countries and willingness of market
participants to participate in any stabilization effort led by
the IMF;

* make the IMF a more effective mechanism for promoting good
governance principles through structural reforms that reduce
opportunities for corruption and bribery;

* ensure that governments drawing on IMF funds channel their
public funds away from excessive military spending and towards
investment in human and physical capital and social programmes
to protect the neediest;

* promote internationally recognized workers' rights, and
collaboration between IMF and ILO;

* encouraging recipients not to discriminate against guest

* structure IMF programs such as not to exacerbate ethnic

* work independently, and with multilateral development
banks, to encourage countries to correct market failures and
adopt appropriate environmental policies;

* facilitate greater IMF transparency, accountability and
self-evaluation through an operations evaluation department on
the lines of those at the World Bank; and

* coordinate with World Bank and other IFIs to extend credit
to small businesses and micro-enterprises.

But side-by-side with these proposals are those of US
corporations lobbying to ensure that competing corporations and
enterprises in the Asian countries be forced to close down and
not be rescued through IMF funding.

For example, Mr. Steven Appleton, Chief Executive Officer of
the Micron Technology Corporation has asked that the IMF
funding for South Korea be conditional on closing down excess
capacity in the semi-conductor industry, particularly in the
manufacture of Dynamic Random Access Memory (DRAM) chips.

Appleton made a similar effort before the IMF package of
lending to Korea was agreed upon.

In his testimony he noted that this proved impossible at
that time, but that Congress should ensure this through
conditions to increasing IMF quotas.

Any funding for the IMF, he argued, should be made
conditional on the funds not being used to help in any way the
Korean semi-conductor industry; to force reforms on Korean
conglomerates; and end any Korean program of 'special loans' to
encourage Korean exports.

Fire-sale FDI

Eminent US academic, Paul Krugman, in a recent analysis posted
on his website, 'Fire-Sale FDI', has referred to the
incongruity of a surge in FDI to the Asian countries in crisis
even as foreign capital is fleeing these countries.

As examples of fire-sale FDI, he cites anecdotal US
newspaper reports that:

* General Motors was reported in January of considering
buying stakes in South Korean manufacturers of automobiles and
parts, while Ford was reported as planning to increase its
stake in Kia Motors;

* reports that the Seoul Bank and the Korea First Bank were
likely to be auctioned off to foreign bidders;

* Proctor & Gamble purchasing a majority share of Syanyong
Paper Co. (which produces sanitary napkins, diapers and kitchen

* Royal Dutch Shell negotiating to buy Hanwha Group's oil
refinery; and

* Michael Jackson negotiating to acquire a ski resort from
its owner, a bankrupt Korean underwear maker.

Krugman notes that it is one thing for US financial-service
companies to buy up Asian counterparts, given the perceived US
technological and managerial advantages, but quite another for
US firms to claim comparable advantages across the board in
areas as diverse as auto-manufacture and paper products. This
suggests that the source of investment surge lies in a change
of conditions affecting all industries, namely the financial

While asset prices may have been overheated on the eve of
the crisis, a case could be made out that the crisis itself has
overshot and the market value of Asian firms seem
extraordinarily low.

And while much of the real slump in Asia may be due to
demand side effects of plunging asset values, and to effects of
high interest rates being used to defend currencies, there is
also considerable anecdotal evidence of a supply-side
disruption of activity due to the breakdown of the credit

Krugman poses the question: does the foreign purchase of
Asian assets represent the transfer of control to efficient
owners who were previously unable to buy at a reasonable price
or does it represent sales to inefficient owners who happen to
have cash?

"Alas, probably some of both. What we need is more research.
Luckily, the issue of fire-sale of FDI is not likely to go away
anytime soon; even if the Asian crisis eases, its legacy of
foreign ownership will be a contentious legacy for years to

Even the US-led efforts for the export credit insurance
agencies of the G-7 to extend special export credits to the
Asian countries in crisis seems likely to help the trade of the
G-7 with these countries, disrupting the growing mutual trade
within the region.

Unable to match the export credits of the G-7, other Asian
and Pacific countries exporting to the region would find
themselves at a disadvantage. Australia has already voiced such
complaints.- (Third World Economics No.179/180, 16 Feb-15 March 1998)

Chakravarthi Raghavan is the Chief Editor of SUNS.The above article first
appeared in the SUNS.