NationStates Jolt Archive

The IMF got a new boss the other day, a former French finance minister and member of the Socialist Party.

His big challenge will be to try and get the IMF to be useful again. In recent years countries in Asia and Latin America have started their own funds, and if that's not working for them, countries in need of cash can get it with other governments or on world financial markets, usually cheaper than IMF loans and with much fewer strings attached.

The IMF was originally started as a watchdog over the Bretton-Woods System, in which the US Dollar was pegged against gold and everyone else was pegged against the US Dollar. That was a pretty good deal for the US, but nonetheless it collapsed when Nixon got rid of the peg.

After that the IMF stuck around trying to help countries when they got into trouble with their own currency pegs. Pegs are maintained by buying and selling your own currency at the pegged price in the market at such quantities as are required to keep the price at the desired level. But that means you need to have big reserves of other currencies so you have something to sell. So when your currency is really, really overvalued by your peg, and everyone comes to you wanting to sell your currency to the government in return for, say, US Dollars, your country might just run out of reserves. As a result the peg collapses, and the consequences are generally quite unpleasant.

There are of course other reasons too why countries desperately need money, and the IMF can help there too.

To make sure that the problems don't reoccur, and that the loans can be repaid, the European countries and the US (the main players in the IMF) decided to tie any loans to a set of reforms, called the "Washington Consensus". They call for a general liberalisation of the economy, so lots of privatisation, free flow of currency in and out of the country, no barriers to investment, some free trade elements and so on.

Turns out that these reforms don't work out the same everywhere in the world. In many countries the pains caused by the transition was so significant that the reforms never got implemented properly. People lose their jobs, tax revenues can fall significantly, people can try to get their money out of the country (or into it, just in the wrong places) and so on.

So for many years now many economists (and even more opinionated people without economics degrees) have been calling for the Washington Consensus to either be scrapped or changed significantly. People like Krugman and Stiglitz say that the free flow of capital in and out of the country in particular can be very damaging because the movements are usually fairly unpredictable and very violent in developing countries. Indeed, several countries have gotten the situation back under control only after imposing some form of capital controls.

So what do you think about the IMF? Should it be scrapped completely, or does it still have a role to play in the world? What about the Washington Consensus?

Well if he actually runs it based on socialist ideals, it'll be fine.

Well if he actually runs it based on socialist ideals, it'll be fine.
http://en.wikipedia.org/wiki/Dominique_Strauss-Kahn

Well, he was member of a Socialist government, but that doesn't necessarily mean he implemented socialist policies. He's an educated economist, so there is only so much utopianism he can tolerate. And later on he quit the party, I think, because Hollande can't tolerate dissent, but that may not be the full story.

Ooops, and he wasn't a foreign minister at all. He was the finance and economics minister.

http://en.wikipedia.org/wiki/Dominique_Strauss-Kahn

Well, he was member of a Socialist government, but that doesn't necessarily mean he implemented socialist policies. He's an educated economist, so there is only so much utopianism he can tolerate. And later on he quit the party, I think, because Hollande can't tolerate dissent, but that may not be the full story.

Ooops, and he wasn't a foreign minister at all. He was the finance and economics minister.

Well I think his challenge is two-hold, both symbol and substantive. Firstly he must try and reverse the almost global public view (quite rightly) that the IMF is a brutal capitalist behemoth bent on enforcing US neoliberal policies on the world, especially in Latin America. Seeing as the last guy who ran it was a neocon and that the IMF practically destroyed the Argentine peso a few years ago, it will be an uphill battle. The second is substantive, which is linked to the first, the IMF will have to deliver massive social and economic benefits to the mass of the poor people, and it can no longer advocate privatization and neoliberalism, it must give that up because the effects of it in Latin American and the corrupt elite it spawned is very obvious.

The IMF is a relic of a different economic time and either needs to seriously reform or be dismantled. The concept of large loans to nations for economic development makes little sense; prosperity starts at the bottom with the work of entrepreneurs, small farmers, and other individuals and moves up from there.

This is why microfinance has been able to succeed where the IMF and other major lenders have failed; truth be told, governments suck at properly managing the economy and end up mismanaging the funds either to enrich themselves or buy off their people long enough for those in power to loot their share from the country. The end result is zero economic improvement in exchange for debt and economic instability. Another fundamental problem is that they apply a single group of economic theories to every economy when that makes little or no sense. What works in China isn't going to work in the Middle East, Latin America or Africa, and vice versa.

I think the basic ideas of capitalism, a free market, and trade liberalization have been proven to be the best route of economic development, but there's a huge difference between gradual liberalization and opening up (like in China or India, which has stoked one of the biggest economic booms in history and slashed poverty by the hundreds of millions of people) and the free market free-for-all inflicted by the shock policies of the IMF and other organizations that do nothing but replace failing socialist systems with equally terrible bad crony capitalist systems, with highly negative effects on short and long-term economic potential.

the imf is one of the scourages of today's world. the sooner it dries up and blows away the better off every living thing on this planet is going to be.

along with everything else that prevents, or aids and abets everything that prevents, people for surviving off of and making creative use of their local resources.

all of that economic hitman kind of stuff.

=^^=
.../\...

Well Chavez's alternate Latin American Bank is sure to all but replace the IMF in SA if the IMF doesn't give up it's traditional pro-US neoliberal stance, it's simple too hated in the region. The best hope for the Latin American people is a regionally integrated socialist Bolivarian grassroots model.

Impossible Missions Force? (http://www.moviewavs.com/php/sounds/?id=bst&media=WAVS&type=Movies&movie=Mission_Impossible&quote=theme1.txt&file=theme1.wav) :confused:

:)

Impossible Missions Force? (http://www.moviewavs.com/php/sounds/?id=bst&media=WAVS&type=Movies&movie=Mission_Impossible&quote=theme1.txt&file=theme1.wav) :confused:

:)

Inigo Montoya Force.

http://seattlepi.nwsource.com/dayart/movies/1906/1906_ab.jpg

Inigo Montoya Force.

http://seattlepi.nwsource.com/dayart/movies/1906/1906_ab.jpg

Hello. My name is Inigo Montoya. You killed my father prepare to die.

Yawn.

The IMF was originally created towards the end of world war 2, in 1944. It had a very simple, laudable remit - to lend hard currency to nations with temporary balance of payments deficits. This was vitally needed at the time - many countries far outspent their budget on defence and military during the war.
Closely related to the IMF is the World Bank, which was created at about the same time. The World Bank mandate was to fund postwar reconstruction and development projects. Also a laudable intention.

Until the early 1980's, both of these institutions stuck to their remits, and on the whole, succeeded very well. The one example of postwar reconstruction that most Americans remember is the Marshall Plan - which was funded in part by the IMF / World Bank. But there were many other similar (if smaller scale) plans.

By the 1980's, most developing countries economies were haemorrhaging money. This was in some cases due to fraud, financial mismanagement or corruption. But what certainly didn't help was the massive jump in oil prices in the 1970's, which put many countries in debt. At the same time, dollar interest payments also shot up - and as many countries had borrowed in dollars (which seemed a good idea at the time since the US dollar was the most stable and reliable currency), this intensified their economic problems.

So at this time, a lot of developing countries brought their begging bowls to the IMF and World Bank. But instead of straightforward assistance or loans, (as had been the policy up until then), they received a twisted and ultimately devastating set of conditions in order to receive loans. Most had no choice but to accept, as their economies were about to implode anyway.

The conditions followed four main steps:

1. Privatise everything. This was done in a very corrupt manner - state officials were often paid under the table a percentage of the sale price of any given utility to be privatised, provided that they cut said sale price. Basically, foreign operators picked up utilities in developing countries for peanuts - being able to effectively dictate the price they were going to pay for them.
Another result of this is that civil service workforces are slashed, and what few people are left in employment have their wages slashed as well. While this might be a good idea in principle in developed countries (where civil services are admittedly too large, and people let go can find other jobs), it's not good at all for developing countries. The potential gains by cutting civil service expenditure are far outweighed by the increase in unemployment and decrease in spending power for those who still have jobs.

2. Capital market liberalisation. Basically, any law or tax restricting the flow of capital across international borders was removed. The theory was that without capital controls, foreign money would flow in. And it did - briefly. But the net effect was to allow stripping of national assets, and the money all flowed out - draining the economy dry. In order to encourage investment back, many South American and Asian economies raised their interest rates to between 30 and 80 percent.

3. Market based pricing. Any local subsidies on food, water, fuel, electricity etc were scrapped. Prices of consumables rise, often by several hundred percent. The result is predictable - massive rioting (dubbed the IMF riots by some economists), with all the nasty consequences that go with it. By this stage, the economy is panicked, and investors flee - taking their money with them, which is made possible by step 2.

4. Free trade (not to be confused with fair trade) - any tariffs or other restrictions on imports or other cross-border trade are removed. Whatever local industry is left is subject to competition from cheap imports. Local industry promptly keels over and dies.

So the economy is basically destroyed - and the only winners are foreign banks and investors who now own the countries infrastructure, and who can (and do) squeeze it for all it's worth.

For examples of how economies react to this treatment, see Argentina, Ecuador and Chile.

On the flip side of all this, there is one country that is doing very well economically, by studiously following the reverse of IMF policies - that country is China. For all it's faults (such as human rights abuses and a positively feudal income distribution), China is a massive economic success story.

So do we still need the IMF / World Bank? In my opinion - no, not any more.