Beyond the World Creditors’ Cartel

In Latin America and elsewhere, the IMF may be re–emerging—but in a changed landscape.

By Dariush Sokolov

This article is from the September/October 2009 issue of Dollars & Sense: Real World Economics available at http://www.dollarsandsense.org/archives/2009/0909sokolov.html


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This article is from the September/October 2009 issue of Dollars & Sense magazine.

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One group of financiers seems to be doing nicely out of the global recession: the International Monetary Fund and other international financial institutions (IFIs) are enjoying a return to relevance and lining up for increased funding.

The London G20 Summit in April was the IMF’s big comeback gig. In 2007 the fund’s loan book was down to just $20 billion; now its capital is set to triple to $750 billion, plus permission to issue $250 billion in “special drawing rights” (the fund’s quasi–currency which allows member countries to borrow from each others’ reserves). Since September 2008 a range of East European and ex–Soviet states have taken out new loans. So too have Pakistan, El Salvador, and Iceland—the fund’s first Western European client since Britain in 1976.

The World Bank and regional development banks are also getting in on the party. In Latin America, the World Bank’s regional vice president Pamela Cox says she expects lending to triple in 2009 to $14 billion. The Inter–American Development Bank (IDB), the most active IFI in the region, expects to lend $18 billion—its typical loan portfolio is under $8 billion. And the development banks are queuing up behind the IMF with their caps out for capital increases: the Asian Development Bank wants to triple its capital to $165 billion; the IDB is asking for an extra $50 to $80 billion on top of its current $101 billion.

Why now? The IFIs, says Vince McElhinny of the Bank Information Center, a group that monitors them, are opportunists at heart. Just like any private bank or corporation they fight for market share, and as the world economy and global capital markets grow they need to increase their lending apace or lose relevance. The freezing of world capital markets, particularly severe in emerging markets, has created a need which they can seize as opportunity. The Institute of International Finance predicts private net capital flows to emerging markets of $141 billion in 2009, down from $392 billion in 2008, after a record $890 billion in 2007. The IFIs see themselves helping to fill this gap.

But the issues at stake here go beyond the IFIs’ own agendas. On the one hand, their revival implies a reassertion of U.S. and global North dominance. They aren’t called “Washington–based” just as a matter of real estate: the United States has a 17% voting share on the IMF and World Bank, enough to give it a veto on some major changes; Europe and the United States control the top management positions.

On the other hand, the story underscores how parts of the global South are gaining in economic power. In the crises of the 1990s, or so the neoliberal story went, the IMF stepped in to clean up the messes made when fragile Third World economies exploded. This time around things are very different: the mess is in the North, and the likelihood is that the emerging economies of Asia and Latin America will emerge from it stronger and more independent. (It’s important to note, though, that large areas in the South, notably Africa, are not part of this story—nor is Eastern Europe.) The so–called BRIC nations in particular (Brazil, Russia, India, China) are getting the bargaining power to back up their claims on the global financial system. Will these claims be met within the existing institutions, or by creating a new financial architecture that bypasses Washington altogether? The future of the IFIs is a key arena in which global rebalancing of economic power is playing out.

New Financial Architecture?

In May 2007 finance ministers from Brazil, Argentina, Venezuela, Bolivia, and Ecuador signed the “Quito declaration” in the Ecuadorian capital. The plan includes a regional monetary fund and moves toward a South American single currency, but the first step is the creation of the Banco del Sur, a new regional development bank. While the bank’s launch is behind schedule, this March its constitution was agreed to, with an initial capitalization of $7 billion. Besides the original five, Paraguay and Uruguay are also members. (Even Colombia had announced its support before its late–2007 row with Venezuela over hostages.)

The aim of Banco del Sur is to replace the Washington–based lenders altogether with institutions run by and for South America. Maria Jose Romero, who researches the IFIs at the Third World Institute in Montevideo, encapsulates this spirit. “In responding to the crisis Latin American countries have two options,” she says. “We can return to the old institutions and the failed recipes of the 1990s, or we can move forward with alternatives.”

For many Latin American countries a return to the IMF is politically out of the question. According to Mark Weisbrot, co–director of the Center for Economic and Policy Research in Washington, the decline of the IMF started with the Asian financial crisis over a decade ago. After the fund’s failure to act as emergency lender of last resort to Asian banking systems in 1997, those states moved to build up sizeable currency reserves, determined not to be dependent on the fund again; others followed suit.

This turning away has been more dramatic in Latin America, where IMF policies are blamed for precipitating the 1998 crisis in Argentina which led to the collapse of its banking system and eventually to its 2002 default. Argentina and Bolivia both paid off the last of their debts to the fund in 2006; in April 2007 Ecuador announced it had paid off its IMF loans and requested the fund withdraw its country manager; the same month Venezuela announced itself debt–free, and a few weeks later said it would withdraw from fund membership altogether. When Daniel Ortega won the Nicaraguan presidential election in May 2007 he promised the country would be “free from the fund” within five years.

How has this freedom–from–Washington line held in the current crisis? U.S.–friendly Mexico was the first to sign up for the new Flexible Credit Lines the IMF is granting without conditions to “pre–approved” governments, followed by Colombia—though neither has yet drawn on them. So far only El Salvador and Costa Rica have taken out new loans. In sharp contrast to Eastern Europe, most Latin American states had healthy reserve cushions coming into the crunch. And with commodity prices now rising again, it may be that the region’s anti–IMF resolve is not going to face the test many had anticipated.

As for Banco del Sur, the arrival of crisis no doubt slowed the process: domestic firefighting comes before regional cooperation. But, according to Romero, in the medium term it will help push change:

“The crisis has focused attention to the failings of the existing financial system,” she says. “It is helping build the impetus for Banco del Sur, as well as for moves to settle bilateral trade in local currencies [rather than dollars], which is the first step towards monetary union, and for broader South–South cooperation initiatives.”

To be fair, Banco del Sur may not live up to proponents’ hopes. With just $7 billion in capital, the bank won’t be in the same league as the Washington–based IFIs. Nor is there any immediate plan to create an emergency monetary fund—an Ecuadorian proposal to that effect has been dropped. And the principle of one country one vote, perhaps the biggest rallying point of all, has been modified: equal votes will apply only on loans under $70m, above which approval is required from members with 2/3 of the capital contributions.

Finally, there is still no clarity on the focus of lending. Campaigners hope for a true emphasis on poverty reduction and projects to build regional cooperation, and have scored the provision of a socially focused “audit board.” But some fear that more conservative members (read: Brazil) could push Banco del Sur toward being just one more development bank.

Across Asia, there are parallel developments. A proposal by Japan to set up an Asian Monetary Fund met the same fate as an earlier Malaysian–backed scheme called the East Asian Economic Caucus—both were dropped after expressions of disapproval from the IMF and U.S. officials. But now the Chiang Mai Initiative, a longstanding plan for a system of swap arrangements between the central banks of the southeast Asian countries plus China, Japan, and South Korea is expected to come on line this year, and the proposed size of the scheme was upped to $120 billion in February. Chiang Mai is linked to the IMF (members need IMF agreements in place to withdraw more than 20% of the total), but some see it leading towards an eventual independent regional fund. For now, though, at least officially, the talk is usually of “complementing,” not supplanting, the IMF.

Rise of the BRICs

If the Quito project is the idealistic side of the regionalization movement, the BRIC bloc is global power shift as realpolitik. The BRICs together now account for 22% of world production (by purchasing power parity), up from 16% ten years ago and rising.

Even as they move ahead with building regional institutions independent of the IFIs, the BRICs are pushing for more power within the Washington–based institutions. Increased say at the IMF is one of the four governments’ main demands. In March 2008 China’s vote share was raised all the way up to 3.7%—putting the world’s most populous country on a par with Belgium plus the Netherlands, combined population 27 million. The BRICs jointly muster a 9.82% quota.

According to Vince McElhinny, the BRICs’ contributions to the fund’s current capital boost are aimed at bolstering their demands for more say in IFI governance. When, a week before the BRIC summit, Brazil’s President Lula announced a $10 billion contribution, he talked of thereby gaining “moral authority to keep pushing for changes needed at the IMF.”

The IMF’s desire to placate emerging powers such as the BRICs may explain the makeover it has displayed in its current comeback—dubbed “IMF 2.0” by Time magazine. Managing director Dominique Strauss–Kahn has called for the fund to spend against recession: less structural adjustment, more counter–cyclical stimulus. But the changes may be largely cosmetic. According to a study by the Third World Network, the actual conditions of recent IMF loans to Pakistan, Hungary, Ukraine, and other countries are familiar: the borrowers must reduce their fiscal deficits through public spending cuts, wage freezes, higher fuel tariffs, and interest rate hikes.

What real changes are the BRICs really likely to get? There’s plenty of gossip flying around: some are touting Lula as the next World Bank president; perhaps China will get to pick Strauss–Kahn’s successor.

Mark Weisbrot, however, does not see the U.S. government giving any ground on voting shares. “The U.S. would rather walk away from the IMF than give up control,” he says.

Beyond the Cartel

Weisbrot describes the IMF as “the most important instrument of influence the U.S. government has in developing countries—beyond the military, beyond the CIA. Or, at least, that’s the role it’s played for most of the last 30 years. A good part of that influence has been lost recently; now they’re trying to get it back.”

The IMF’s power has never really been about its own lending, however. Its influence over countries’ economic policies is far greater than would be suggested by its share in overall capital flows. The real issue is the fund’s role as “gatekeeper” of a global “creditors’ cartel.”

Multilateral loans from the World Bank and regional development banks and bilateral loans from the wealthy countries typically come with some form of “cross–conditionality” clause. You only get your loan if you first have an IMF agreement in place; installments only keep flowing so long as you stick to it. Similar conditions can also apply in private capital transactions. For instance, Venezuela’s 2007 threat to give up its IMF membership triggered a market sell–off because under covenants written into its sovereign bonds, a break with the fund would count as a “technical default.”

Now, though, recent shifts in Latin America have dealt what Weisbrot says could be “a final blow to the IMF creditors’ cartel in middle–income countries.”

This is a continental tale, but Argentina is a good place to begin. The country cut itself off from international capital markets with its 2002 default, and is still being chased by “hold–out” bond investors in the New York courts. Yet Argentina grew at almost 9% a year from 2003 through 2007—the country’s most rapid growth in 50 years, and some of the fastest growth rates on the continent. This expansion has been funded largely by selling bonds to another emerging regional power, Venezuela. These bond transfers are no subsidies—Argentina pays commercial interest rates—but they do come free of Washington conditions. For Weisbrot, “Venezuela’s offers of credit, without policy conditions, to Argentina, Bolivia, Ecuador, Nicaragua, and other countries has changed the equation.”

It’s true that easy Venezuelan credit dried up early on in the crisis as oil prices plummeted. It’s also true that Argentina is now allowing IMF staff in to monitor its economy and taking out new loans from the World Bank and the IDB. But it’s telling that Argentina got these loans without any IMF agreement in place: the cartel, at least in its old form, appears to be broken. And then there’s the other plank in Argentina’s current crisis management strategy: a $10.2 billion swap line direct with China.

In short, the IMF and allied institutions have regained some lost ground in the crisis, but forms of “South–South cooperation” that stand to weaken the Washington–based creditors’ cartel have kept on building too.

According to one very plausible interpretation, this crisis has been about the consequences of the rich countries’ capital piling into the financial services sphere to compensate for the loss of manufacturing production to the Third World. Control of the world’s financial capital flows was one last highly profitable channel where Northern capital still ruled unopposed. Increasingly, though, global–South states and corporations are cutting out the middle man to trade directly with each other. It’s against the background of these new possibilities that the next chapter in the story of the IFIs will play out.

Dariush Sokolov Dariush Sokolov is an activist and independent journalist based in Argentina. He writes about political philosophy, anarchist economics, and global finance, among other things, and sometimes updates his blog, La Parte Maldita.

SOURCES: “Special Drawing Rights (SDRs),” IMF fact sheet, Feb. 2009; “IMF 2.0,” Time, April 20, 2009; Third World Network, “The IMF’s Financial Crisis Loans: No change in conditionalities,” March 2009; Institute of International Finance, “Capital Flows to Emerging Markets,” June 10, 2009; “Latin America in the Midst of the Global Financial Meltdown: A Systemic Proposal,” Latin American Shadow Financial Regulatory Committee Statement No. 19, December 2008; Felix Salmon’s blog on Ecuador’s default; Mark Weisbrot, “Ten Years After: The Lasting Impact of the Asian Financial Crisis,” Center for Economic and Policy Research, August 2007; Tadahiro Asami, “Chiang Mai Initiative as the foundation of financial stability in East Asia,” ASEAN, March 2005; DominicWilson and Roopa Purushothaman, “DreamingWith BRICs: The Path to 2050,” Goldman Sachs Global Economics Paper No. 99, Oct. 2003; Eugenio Diaz–Bonilla, “Argentina’s recent growth episode,” RGE Monitor, Sept. 18, 2007; Graham Turner, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis, Pluto Press, 2008.
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