SPECIAL REPORT

Falling into the safety net

CAROL KENNEDY,IAIN GUEST September 13 1982
SPECIAL REPORT

Falling into the safety net

CAROL KENNEDY,IAIN GUEST September 13 1982

Falling into the safety net

SPECIAL REPORT

In the 37 years of its existence, the IMF has come to the aid of more than 100 countries. It claims to have launched such suppliants as Indonesia on the road to prosperity. But struggling nations' problems are often too deeply rooted to respond to a single treatment. And the effect of the IMF's intervention—above all, its stringent austerity requirements for borrowers—has had unpredictable and drastic effects. Maclean’s correspondents last week filed two case histories, one from the industrial world, the second from the Third World. Their reports:

When the IMF’s sober-suited bankers arrived at London’s Heathrow airport in December, 1976, to scrutinize Britain’s balance-of-payments accounts, they unwittingly set in motion political shock waves that have yet to spend their energy. And the effects of their visit will be remembered long after the reason for it has been forgotten. The fund’s inspection was the sequel to a request for a $3.9-billion loan from Prime Minister James Callaghan’s Labour government. But the conditions imposed for the loan—drastic cuts in public spendingcaused a trauma within the Labour Party. Said Jack Straw, a back-bench MP who shared the humiliation of his leaders: “It was a defeat for socialist ideas.”

The resulting attempt by Labour’s outraged left wing to take control of the party has only recently been stemmed, while the results of that internecine struggle—the desertion of 22 rightwing Labour MPs to form the Social Democratic Party—are still to be tested.

The irony of the IMF’s intervention was that the then chancellor of the exchequer, Denis Healey, a tough Irish realist of bullying persuasive powers, had already been pursuing deflationary policies for a year. In November, 1975, he negotiated an IMF loan of about $2 billion to cover a situation in which,

he claimed, Britain was spending $2.16 abroad for every $2.05 earned. The reason was a fivefold increase in the price of oil and a consequent rise in import prices. As Healey bluntly spelled it out, the government either had to spend less or tax more.

By September of the following year, despite Healey’s attempt at good housekeeping, the run on the pound had become alarming. At one point it fell below $1.65, and there seemed to be a real danger of an outright collapse of the currency.

Later in the autumn Healey abruptly cancelled a planned trip to international financial conferences in Hong Kong and Manila and applied for the second loan.

The alternative, he told cabinet colleagues, would be “economic policies so savage they would lead to riots in the streets, an immediate fall in living standards and unemployment of three million.” (The jobless rate was then about 1.25 million.)

In spite of Healey’s skilful attempts to defuse the left’s ideological horror of the IMF, the cabinet split and the party was riven with fears of a sellout. But eventually the terms were swallowed.

However, in December the left’s fears of tougher demands were realized. There were further spending cuts of $4.3 billion over two years and higher indirect taxation. Defence, foreign aid, housing, food and education all felt the blast. Major capital projects were postponed. “We were hijacked by the IMF,” said Jack Straw bitterly. “We could have been bolder—after all, we had the oil coming on in the next few years. We weren’t going bust.”

That view was widely shared by La-

bour leftists. And the belief that the IMF’s tough recommendations could have been avoided damaged, perhaps irreparably, the party’s confidence in its leadership. The resulting cry for more “accountability” to grassroots feelings eventually gave Tony Benn the opportunity to push through party rules that have effectively excluded some of Labour’s most respected figures from party ranks.

Callaghan’s minority government was kept alive by a pact with the Liberals in Parliament—an alliance that was branded as another “sellout” by the left wing. But it finally collapsed when an agreement under which he hoped to keep the unions in line was torn up in 1978 in what has become known as Britain’s “winter of discontent.” A series of damaging public sector strikes against the government’s five-percent pay limit culminated in London’s streets being piled high with ungcollected garbage.

I In 1979 Margaret ¡^Thatcher came to power |on a full-blooded monetarist platform and IMF¿ style budgets became the Healey: run on the pound rule rather than an ex-

ception. But the irony is

that, more than three years into her term, the vision Healey used to frighten the cabinet into submission in 1976 has become reality: more than three million Britons are indeed now unemployed.

-CAROL KENNEDY in London.

Six months after his National Liberation Party won a landslide election victory, the face of President Luis Alberto Monge still beams down from election posters in San José, Costa Rica’s elegant capital. But in real life a savage economic crisis long ago wiped the smile from his face. In less than three years Costa Rica’s currency, the colon, has been devalued by 600 per

cent. The country owes $2.9 billion, on which it owes interest of $577 million. Inflation is running at about 80, unemployment at 10 per cent. Reserves have almost dried up.

Facing disaster and shunned by the private banks, there was only one place to turn: to the white stucco-and-glass building of the “world’s economic policeman,” the IMF. The result has been a cliff-hanging series of negotiations that vividly illustrate why the fund has a negative image in the Third World.

Costa Rica is only one of a number of Third World countries unable to meet its debts.

But its experience is exceptional both because of the gravity of its plight and because of the country’s strategic position: in the centre of troubled Central America. As long ago as 1948 Costa Ricans decided to abolish their army and, in view of the chaos in El Salvador and Guatemala, they have had no reason to regret the decision. It has allowed them to concentrate on promoting health, education and social security.

Those achievements are now threatened. In effect the IMF’s cureharsh cuts in public spending in exchange for a loan of about $300 million—threatens to have the same effect as the inflationary disease: severe erosion of Costa Rica’s welfare state. “We are between the devil and the deep blue sea,” said one government economist bitterly.

The IMF, too, has its problems. One of the reasons for the severity of the conditions it imposes in return for loans is the necessity to stretch its limited funds. To that end, last week’s announcement that the United States plans to reverse its current restraint policy and support a modest increase in the IMF’s working capital will be welcomed in San José. But the U.S.

proposal—for a 15-to-25-per-cent rise in the IMF’s loan funds—still falls far short of the doubling of funds that many other members would like to see. As a result, it will not likely provide much practical support for Monge’s rescue attempts.

So far, in order to meet the fund’s calls for a drastic reduction of the public sector debt, the cabinet has agreed to freeze public spending, remove subsidies on fish, bus travel and flour, increase taxes and raise prices on a wide range of goods and services. Those cuts will hurt the old, the sick and the unemployed in the same way that they would in an industrial state. But they also raise a more basic question: does such an assault on the public sector make economic sense?

Costa Rica’s difficulties are due to high interest rates and oil prices, imported inflation and a slump in exports, which cost it roughly $500 million last year—about half its expected foreign earnings, according to ^Rudolfo Silva, one of «Monge’s chief economic Sadvisers. But these facitors are largely outside the control of Costa Rica,

says Silva, and they will

not be affected by internal policies enforced by the IMF.

Not only may IMF cost-cutting be unhelpful to states in Costa Rica’s situation, but it may cause actual harm. Costa Rica’s state-aided schools and hospitals—which will be hurt by the cuts—are responsible for something that is in desperately short supply in Central America—a confidence in the civilizing influence of democracy.

“Costa Ricans are prepared for some belt-tightening,” says Silva. But he hopes the fund does not twist the screws too tight. Even in tranquil Costa Rica, protests over too much austerity can become ugly. IAIN GUEST in San José.