Problems with Conditionality

This selection was excerpted from “The IMF: A Record of Addiction and Failure,” published in Perpetuating Poverty: The World Bank, the IMF, and the Developing World, edited by Doug Bandow and Ian Vasquez (1994). Bandow is a senior fellow at the Cato Institute in Washington, D.C., and a former special assistant to President Ronald Reagan.

There are several problems with IMF lending, though the organization makes it hard to judge its activities. Jeffrey Sachs, director of the Harvard Institute for International Development, for instance, has complained about IMF secrecy that “makes it extremely difficult for outside observers to prepare a serious quantitative appraisal of IMF policies.” The details of IMF standby agreements are not reported, and the organization refuses to release audits of its loans. Ultimately, however, the best test of the IMF’s achievements is whether borrowers seem to be making progress as a result of the fund’s activities. Alas, the fund appears to flunk that test, for several reasons.

Inappropriate Conditions

The IMF has often focused on narrow accounting data, causing its advice to have perverse consequences. As a condition for a loan the IMF will, for instance, demand that a nation reduce its current account deficit–so the borrower restricts imports. Insistence that a country cut its budget deficit may cause the government to raise taxes, slowing growth. In fact, the IMF has explicitly lobbied for higher levies, pushing the administration of Argentina’s president Carlos Menem to increase the value-added tax, for instance, and advocating that Mauritius adopt “a series of new taxes.” Even where the budget deficit does not actually grow as the economy shrinks, the fund has succeeded in reducing the budget deficit only by reinforcing the very borrower policies, such as high taxes, that block growth.

There are obviously some cases in which the IMF does push for sensible reform. However, the “toughness” of the fund’s conditionality has varied over time. Economist John Williamson reported that analysis showed “enormous variation between one program and another.” Among the factors causing the fund to vary its conditions was, admitted Williamson, pressure “to lend money in order to justify having it.”

Moreover, even setting some useful conditions may have little impact if other policies still cause serious distortions in the borrowing country. Observed Raymond Mikesell, who in 1983 estimated that more than half of the less-developed countries were following self-destructive interventionist economic policies, “The continued existence of these conditions [such as price controls] in a substantial proportion of the [less-developed countries] suggests that not enough attention is being given to policy reform in the negotiation and implementation of the IMF conditionality programs.”

Lack Of Enforcement

Moreover, the IMF, like the World Bank, does not do enough to enforce its conditions. If a country violates its agreement with the IMF, the organization may simply grant a waiver, modifying the offending conditions. Or the fund may suspend the loan, only to later negotiate a new agreement. Money will start to flow again, the borrower will violate the new conditions, the IMF will hold up payments, the loan will be renegotiated, and the process will begin anew. How else can one explain seventeen different arrangements with Peru between 1971 and 1977, eight separate standby programs for Brazil between 1965 and 1972, decades’ worth of credit for Zaire, and so on? In fact, the largest Third World borrowers between 1947 and 1987 were India, Brazil, Argentina, Mexico, and Yugoslavia, all of which maintained state-managed economies throughout the period despite the fund’s loan conditions.

The IMF seems to measure success by making loans. The assumption is that financial input into poor countries automatically translates into growth output; thus, to not extend credit is to fail. Members of President George Bush’s administration obviously had a similar view; Treasury secretary Nicholas Brady, for instance, proposed a new World Bank fund supported by the IMF. President Bill Clinton, a fervent backer of increased aid for Moscow, appears to share the same credit-equals-growth assumption. Yet shoveling more money into essentially insolvent states that have squandered billions in prior loans makes no sense. IMF conditionality would likely be more effective if the fund’s refusal to make new loans were based on factors other than a country’s inability or unwillingness to repay past IMF loans.

Statist Subsidies

As noted earlier, however sensible the IMF’s conditions, they mean little when a nation’s overall policy climate is badly askew. In general, the fund asks countries to take too few of the steps necessary to promote growth; nevertheless, the left still regularly attacks the fund for allegedly advocating capitalism. But John Williamson [senior fellow at the Institute for International Economics] has defended the IMF against the criticism that it is too market oriented.

It has also been charged that the Fund is biased against socialism. That the Fund welcomes those governments that are willing to work with market forces cannot be doubted. At the same time, the Fund clearly does not have an evangelical zeal for spreading “the magic of the market” parallel to that of, say, the Reagan administration. Its attitude, it would claim, is nonideological: it seeks to promote economic rationality, and it just happens that under a wide range of circumstances the readiest means to that end involves harnessing, instead of fighting, market forces.

What is surely true is that the Fund does not refuse to provide financial assistance to members with left-wing governments. On the contrary. [In 1982] some 16.5 percent of IMF credit was directed to the six communist member countries (China, Kampuchea, Laos, Romania, Vietnam, and Yugoslavia . . .) and Michael Manley’s Jamaica was at one stage the heaviest per capita borrower from the Fund. . . . Moreover, the Fund continued to give the Allende government [of Chile] the benefit of the doubt in drawing from the Compensatory Financing Facility.

The IMF similarly disclaims a bias against collectivist systems: “The fund has had programs in all types of economies and has worked with their authorities, identifying the best way to achieve external balance or exercising its function of surveillance over the payments and exchange system. . . . In many instances, fund-supported programs have accommodated such nonmarket devices as production controls, administered prices, and subsidies.” Yet how is a country with such policies going to achieve self-sustaining economic growth? It is hard to take seriously an organization’s claim to be “prodevelopment” when it regularly pours large sums of money into the worst economic systems on earth. One friend of the fund has argued “that to the extent that programs succeed in their objective of establishing macroeconomic stability in the economy, they can be expected to have a positive impact on growth in the longer run.” But how often has the IMF been able to transform dirigiste policies that are bad in almost every way?

In an assessment of lending to communist states, for example, Valerie Assetto wrote that “Romania’s economic reforms were superficial and actually worked to increase the power of the state. The ensuing economic crisis quickly eclipsed the `reform’ movement, and it quietly expired. Fund and [World] Bank support of the Romanian development effort continued throughout this period.” Similarly, she found that the “Yugoslav authorities actually retreated slightly from the market orientation of the 1960s” despite generous assistance in following years. As late as 1990 Michel Camdessus, managing director of the IMF, lauded the fact that the IMF remained engaged in Yugoslavia, supporting “a comprehensive and bold program to stop inflation in its tracks and to reform the economy over the medium term.” Yet economists Jeffrey Sachs and David Lipton blamed the fund’s conditions–particularly its commitment to continued devaluations–for helping to “cause Yugoslavia to drift from high inflation to hyperinflation.”

At times it would appear that the more perverse the policies, the more generous the IMF. The problem is not just the former Soviet bloc, but the many Third World regimes that followed statist economic policies for decades. For instance, India collected more money than any other developing state from the IMF, which acted more as a lender of first rather than last resort, during its first forty years. Yet while India was borrowing prodigiously from the IMF (and other multilateral institutions), it was pursuing a Soviet-style industrialization program. Catherine Gwin of the Carnegie Endowment for International Peace observed the country’s economic orientation:

India’s economy is continental in scope; highly industrialized and extremely poor; centrally planned–some would say overly planned; administratively encumbered and rampant with corruption; caste-bound and socialist-inspired; determinedly self-reliant; and, though guided by principles of social democracy, protective of the interests of politically powerful, propertied groups.

India has also devoted a large portion of its budget, well supplemented by foreign aid, to its military. In the fall of 1981, for instance, India was simultaneously negotiating with France for a $2 billion Mirage jet deal and with the IMF for a $3.6 billion loan.

In the 1970s, the Mexican government was destroying its economy even as it was a regular IMF customer. When Mexico’s threatened default on its vast international obligations essentially set off the debt crisis in 1982, the IMF came to the rescue, a role extolled by the fund. Yet the loans did little to improve Mexico’s economic performance; that nation did not begin making major market-oriented reforms until the end of the decade after squandering billions more of foreign money on counterproductive state-led development schemes.

The IMF has some thirty-two programs operating in Africa, yet nowhere have national economic policies been worse or past lending more misguided. In 1974, for instance, the IMF negotiated a loan to Tanzania, which agreed to adopt a package “of compromises that might be called socialist realism,” in the words of one observer. But the government, which had ruined the economy through such policies as forced agricultural collectivization (the ujaama program), refused to cut spending, and the IMF terminated the program, having done no more than subsidize the leading example of “African socialism.” In 1983, Reginald Herbold Green, of the Institute of Development Studies, concluded that “IMF influence on Tanzanian action has, to date, been fairly modest. Direct impact since 1976 has, arguably, been negative. Indirect effects are hard to assess.”

Kenya, which borrowed roughly $130 million in 1988 and owed more than $380 million total at the end of 1989, was then building a sixty-story, $200 million office building–complete with a larger-than-life statue of President Daniel arap Moi–in Nairobi. Earlier lending programs to Kenya also proved disappointing. In his analysis of IMF lending to these two African states, Stanley Please of the World Bank was particularly critical of Tanzania’s failure to review programs that were not working. In his view, Kenya suffered from some of the same difficulties, and, he concluded, “the problem of the inadequate use of pricing and the overextension of the public sector” was “a pervasive one in Africa.”

Only after its Marxist revolution did Ethiopia begin borrowing from the IMF, yet it was the government’s collectivization of agriculture that dramatically worsened the famine during the mid-1980s. The loans to Ethiopia exhibited another damning aspect of IMF lending. The fund underwrites any government, however venal and brutal. Naturally, the loans are not earmarked for repression. But the IMF extends credit directly to governments, and money is fungible. Whether Ethiopia took its IMF cash and directly bought bombs for use against Eritrean rebels or shifted its accounts around in Addis Ababa first made no real difference; in either case, the fund (as well as other lenders, such as the World Bank) was an accomplice to murder. Another good IMF customer was Nicolae Ceausescu’s Romania, which, in contrast to so many other poor nations, regularly paid its debts. China owed the fund $600 million as of the end of 1989; in January 1990, just a few months after the blood had dried in Beijing’s Tianamen Square, the IMF held a seminar on monetary policy in the city. Other clients include or have included Burma, Pinochet’s Chile, Laos, Nicaragua under Somoza and the Sandinistas, Syria, Vietnam, Zaire, and so on–the IMF has rarely met a dictatorship that it didn’t like.

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