The IMF in the New World Order

The IMF in the New World Order, or

Institutions never die, they simply find a new mission

Osvaldo Croci

Prepared for the Round Table The Asian Crisis and the IMF: What does it all mean? Laurentian University, Department of Economics, February 26, 1998.

In this presentation I will retrace the origins of the IMF and describe its main role until 1971. Then, I will examine the brief identity crisis faced by the IMF and its adoption of a new mission in the late 1970s. I will finish with some brief considerations on the role of international institutions in the new Global Economy.

The IMF was one of the products of the July 1944 Bretton Woods conference. At this conference the victors of World War II laid out the main features of the post-war international economy. These features were largely the result of the historical lesson provided by the Great Depression of 1929-1933, and of a compromise between the views held by the two most influential participants, namely the American Harry Dexter White and the British John Maynard Keynes. Regulation of what was still a system of international economic relations, as opposed to a global economy, was to be based on the following principles:

Promotion of an open trading environment. This objective was to be pursued primarily through the ITO. When the ratification of the relative treaty failed in the US, it was pursued through the GATT. The promotion of an open trading environment was, at the same time, to be favoured by:
The attainment of currency convertibility and the establishment of a system of fixed (but adjustable) exchange rates.
Acceptance of “the welfare state” or, if you prefer, the notion that the state had a legitimate role to play in the management of national economies and, more precisely, had a responsibility for the promotion and maintenance of a high level of employment and income. This meant that states had to be given the necessary fiscal and monetary levers to steer their economies towards these objectives. Given the fact that a choice had been made in favour of a system of fixed exchange rate, the necessity to grant states effective fiscal and, above all, monetary levers precluded the adoption of another principle that liberals at least would have very much liked to see in place, namely, free private capital mobility. This is due to what Benjamin Cohen has called the “unholy trinity” that is to say the fact that in a system of fixed exchange rates and free capital mobility any attempt to pursue autonomous monetary objectives would sooner or later provoke potentially destabilizing flows of speculative capital. Hence the fourth principle of Bretton Woods:
Acceptance of limitations on the free flow of capital.

It was within the context of the establishment of a system of fixed, albeit adjustable exchange rate that the IMF was conceived and set up. The basic structure of the IMF could be compared to that of a credit union. Its members were countries (39 at its inception, 182 today) that subscribed quotas proportional to the size of their economy and their wealth. At the same time countries could borrow from the IMF in case their national finances deteriorated, because of Balance of Payments problems or downward pressures on their currencies that made it difficult for them to maintain the rate of exchange agreed upon. Already at this time there were elements of “conditionality” especially if the credit demanded exceeded the so-called “reserve tranche” and even more if it went beyond the first “quota tranche.”

In terms of its original, stated objectives (achievement and maintenance of currency convertibility and exchange rate stability, and expansion of international trade), the performance of the IMF between 1945 and 1971 can be said to have been very positive, especially if one compares it with the situation of the international economy in the 20 years preceding the creation of the IMF. After a period of domestic economic recovery and stabilisation, all major currencies became convertible by 1958, apart from occasional readjustments, exchange rates were kept reasonably stable, and finally, international trade experienced a period of unprecedented growth.

There were complaints about the IMF already in these years. The poorer countries complained that the international monetary system was tilted in favour of the developed countries and some of the latter, e.g. France, complained that it was favouring the US as a result of the system’s use of the American dollar as its anchor and central currency. These complaints became louder towards the end of the 1960s when the amount of American dollars circulating in the system came to exceed by far the amount of gold into which they were allegedly convertible. In 1971 Nixon put an end to this precarious situation by declaring that the dollar was no longer convertible into gold. This effectively put an end to the system of fixed exchange rate since it was precisely the fixed parity between gold and US dollar that was at the centre of the whole system. The era of floating exchange rates began. On the one hand this created new opportunities for that interesting fauna made up of foreign exchange traders, arbitrageurs, financial gurus and casino capitalists (to use a fortunate term coined by Susan Strange) but created what could be defined as an “identity crisis” for the IMF which basically overnight was deprived of its main “raison d’être.” This was all the more so, since Western countries began to use new informal mechanisms to manage their monetary relationships, the G7 forum being the most important. Would the IMF fold?

Those of you who have studied bureaucratic institutions know that this would be unlikely. Has NATO been disbanded as a result of the end of the Cold War? Of course it has not. It has simply tried to find a new enemy and looked for new missions, e.g. becoming a military sub-contractor for the UN. The IMF survived the 1970s and then found a new mission in the early 1980s with the debt crisis. The debt crisis had the potential to cause the collapse of the whole international financial system and the IMF saw an opportunity for itself. It thrust into it, extending loans, offering advice and imposing austere and liberalising conditions to ensure repayment, especially since the loans offered by the IMF were short-term while the problems faced by these countries were not temporary cash shortages. When the debt crisis subsided a new opportunity came about in Eastern Europe and Central Asia where the formerly centrally planned economies were making their transition to a market economy. To make a long story short, the IMF (but this applies with some changes also to the World Bank) has become also a kind of “rating agency” in the sense that also other lenders, both private and public, are reluctant to lend to a debt-burdened country unless the country has negotiated a structural adjustment programme with the IMF.

At a more general level we could say that the IMF has become one of the key institutions of governance in the new global economy. Its task is no longer the narrow one of assuring that countries remain within a fixed exchange rate system, but the much larger one of teaching and enforcing the basic rules of a laissez-faire economy globally; this is basically how I would translate its three main areas of activity, namely surveillance, financial assistance and technical assistance. The opportunities of action meanwhile have become even greater because the increasing free flow of capital (something that was limited and controlled under the Bretton Woods system), that when coupled with renewed attempts to peg interest rates, creates what political scientists call “turbulence” and liberal economists “corrections.”

There is obviously a lack of symmetry in the IMF’s disciplinary procedures. What this means is that some countries can get away with ignoring its advice. Thus, for instance, the IMF urged the US for years to reduce its budget deficit because of the negative effects these deficits supposedly had on the global economy. But the US could ignore this advice because the negative mark received did not stop Japanese and other foreign capital from coming in. Things would obviously be very different in the case of say, Tanzania or even Russia. I think it is fair to denounce this lack of symmetry that goes against our understanding of justice. It must be remembered however, that the IMF, and the whole UN system in general, is very much a political institution. We might wish that politics, and political economy in particular, be based on morality and justice and not on power, but this is not the case, and this is even more transparent in international affairs. I would like to remind you of a passage from a text, which, although almost 2500 years old, still captures in my mind the essence of politics, and international politics in particular. It is the Melian dialogue from Thucydides’ History of the Peloponnesian War. The Melians are about to be attacked by the Athenians not because they are allies of Sparta but simply because refuse to go over to the Athenian side and prefer to remain neutral. So they plead with the Athenians in the name of justice. The answer of the Athenians is a brutally eloquent and simple one. Basically they tell them to dispense with “fine phrases” since “the standard of justice depends on the equality of power to compel and … the strong do what they have the power to do and the weak accept what they have to accept.” What I am suggesting is that it is very easy to denounce the IMF. But such a position implies a view of the IMF as an instrument of world economic development and of international justice rather than a political institution that reflects the current relationship of forces at the international level. The struggle to change such a relationship has little to do with the IMF and must begin closer to home. Let us not forget that very often it is the political leadership of the poorer countries that first embezzle and export capital arrived for productive purposes and the call the IMF in order to tie their hands domestically.