The world’s bankers look to a perilous future

Susan Riley September 13 1982

The world’s bankers look to a perilous future

Susan Riley September 13 1982

The world’s bankers look to a perilous future


Susan Riley

Britain’s legendary economist John Maynard Keynes warned the world in 1944 that it might live to regret the day it allowed the newly created International Monetary Fund and World Bank to set up head-quarters in Washington, D.C. Both international institutions, he said, would become captives of the nearby state department—buffeted by the ideological breezes that periodically blow through the U.S. capital. Seldom have his words seemed more prophetic. This week, as 146 finance ministers from around the world gather in Toronto for the annual meetings of the World Bank and the IMF, they are working largely from unofficial agendas written by the White House—and, to all outward appearances, written on the run.

Late last week, as manicured ministers and their sleek aides arrived at the glistening Sheraton Centre, they were met by an unexpected announcement from Washington: reversing the Reagan administration’s earlier stand, the United States now favors a “modest” increase in the funding of the IMF. At the same time, the Americans said they

would lobby for an emergency fund at the IMF to help Third World countries, such as Mexico, that are facing the serious prospect of bankruptcy as their loans from Western banks come due within the next year or so.

Critics were quick to point out that the emergency fund is partly an attempt to ward off demands this week for a more generous increase in the IMF’s overall lending ability. Others noted that the U.S. proposal falls far short of the demands of a majority of IMF members. But the initiative still marks a dramatic change on the part of an administration that, until last week, was opposed to any increase.

The proposal was touted as a victory for Treasury Secretary Donald Regan, who sees the Third World nations as a vast potential market for U.S. goods. Aligned against him are the Ronald Reagan ideologues, who prefer bilateral (country-to-country) aid rather than the multilateral approach of the IMF and the World Bank. They argue that in dealing with a country on a one-to-one basis, the United States can impose its own strict conditions, ensuring that its largess is rewarded with economic and

military support. The most famous recent example of Washington’s bilateral approach is the Caribbean Basin Initiative, a plan to pump $350 million in economic and military aid to friendly Caribbean countries. In the words of Reagan, bilateralism’s biggest promoter, such programs “tailor particular development strategies to specific needs and potentials of individual countries and regions.”

The latest target of that tilt is the World Bank’s International Development Association (IDA) account, which provides cheap loans to the world’s poorest countries with relatively few strings attached. Once again, whether they like the script or not, the 2,000 delegates meeting in Toronto are playing parts in a play written in Washington.

The drama began in 1981 when the new Reagan administration slashed $500 million from its contribution to IDA, claiming that easy credit is inefficient and does not give any individual donor leverage over the recipients. For the poorest of the poor countries—according to the World Bank’s latest report, they became poorer still in 1981 — the end of IDA would leave them with

virtually no access to credit. For Washington’s rich allies—and Canada, in particular—the U.S. move could start a hemorrhage of Western funds from IDA and the World Bank. As a result, Canada, France and a number of other countries will spend a good deal of time this week, with support from World Bank officials, trying to save IDA. Says Cranford Pratt, a professor of political science at the University of Toronto with an international reputation in development issues: “The tragedy is that, instead of addressing the serious need for reform, delegates will be wasting a lot of energy trying to counteract the effect of recent American foreign policy.”

It was a different world in 1945, when Keynes and U.S. negotiator Henry Dexter White met in the pastoral retreat at Bretton Woods, N.H., to discuss ways of rebuilding Europe after the war and avoiding the international financial chaos that reigned during the 1930s. After prolonged talks, the United States and Britain came up with two ideas: an international monetary fund, which would provide short-term loans to countries facing immediate balance-of-pay-

merits problems; and a world bank, which would offer loans for longer-term reconstruction projects. All the rich countries of the non-Communist world would make contributions, each according to its wealth, and receive an equivalent amount of voting power.

Since then, the world has changed dramatically, but the bank and fund have been slow to respond. For one thing, Britain still holds the secondlargest number of votes in the IMF (seven per cent), although its economic performance has long been eclipsed by

those of Japan, West Germany and France. And, while reform is on the agenda in Toronto, no one expects sudden agreement.

But perhaps the greatest shock to both the bank and the IMF over the past three decades has been the emergence of the Third World—the term was unknown in 1945. In the beginning some 30 countries joined the elite new financial clubs; now both institutions have more than 140 members. Because votes are allotted according to economic strength, rather than one per country,

the richest countries, and particularly the United States, continue to dominate both.

This situation led to intense conflict in the 1970s, as the rising aspirations of the Third World countries, particularly those with socialist ambitions, such as Jamaica and Tanzania, ran into the proWestern, pro-free market ideology of the IMF.

Now the kettle is set to boil again. Partly under pressure from the Reagan administration, the IMF in recent years has tightened the conditions it applies

to loans so that, by the end of 1981, some 80 per cent of IMF credit came with strings attached—“high conditionality,” in the jargon of the fund—compared to 20 per cent in 1975.

In return for an IMF loan, the critics note, embattled countries are encouraged to devalue their currencies (which leads to increased domestic costs); end food and energy subsidies (which hurt the urban poor); cut public spending (often for much-needed health and education programs); and open their doors to foreign investment.

Some experts argue that those remedies can help an ailing Western economy. But applying them to the more fragile structures of the Third World, where the IMF does the bulk of its lending, is, in the words of Michael Moffitt, “like throwing an anchor to a drowning man.”

Moffitt, an economist with the Institute for Policy Studies in Washington, argues that many of the problems in

poor countries are caused by external factors and are not, as IMF prescriptions suggest, solely the result of corruption or wild-eyed socialist excess.

When the IMF moves into a Third World country, the first to suffer are often the urban poor, followed swiftly by the governments they help to elect. The past decade has seen—in Egypt, Tanzania, Sudan, Morocco and across Latin America—a phenomenon known as the IMF riot, in which anti-Western feeling is intense. Says Michael Manley, whose socialist government in Jamaica

was defeated after a celebrated clash with the IMF: “The fund’s prescriptions are designed for and by developed capitalist economies and are inappropriate for developing countries of any kind.” Inappropriate they may be, but they are the only alternative for a growing number of southern countries facing the prospect of bankruptcy. All it takes is a sudden change in their export picture, such as the drop in the world price for oil that sandbagged Mexico’s once promising growth, to push them to the brink of ruin. In total, Third World na-

tions owe more than $400 billion to Western banks, including $5 billion to Canadian interests, and that debt hangs like a dark cloud over deliberations in Toronto this week.

AÍ Berry, an expert in development economics at the University of Toronto, argues that the looming crisis makes it vital for the IMF to seek more flexible lending conditions that will be closely attuned to the different cultural values and economic realities of the Third World. “They’re going to find a lot of countries that don’t much appreciate

being told what to do,” he says. Indeed, the first signs of rebellion may be coming from Mexico. Last week the government announced that it was nationalizing the country’s private banks. Reports of the move caught IMF officials by surprise. As a result, informed sources in Mexico City say, it may “complicate” Mexico’s current negotiations with the IMF for a $4.5-billion loan, although it is not expected to affect the outcome.

However, the unexpected backdown may be less a new show of openmindedness on the part of the IMF than a sober realization of the devastating impact on major Western banks if Mexico defaults on its $80-billion debt. Again, it was the sagacious Lord Keynes who once commented that if a man owes a bank £100, the man may have a problem; if a man owes a bank £1 million, it is the bank that has the problem.

There will be few outward signs of the world’s economic distress at the Sheraton Centre this week. Crab claws, caviar and champagne are in plentiful supply. And the annual meetings of the two august institutions represent the largest, richest commercial bazaar in the world. One oil sheik commandeered eight rooms in a downtown hotel for his own personal use. The Bank of Montreal has rented a cruise boat to woo wouldbe customers on a moonlight jaunt along Lake Ontario. And, when they are not listening to the droning, prere-

hearsed speeches (an estimated 65 in the course of the three-day conference), the 12,000 delegates, observers and guests have a choice of 85 lavish social functions to attend.

It all seems far removed from the arid North African plains of Chad, a World Bank member and one of the poorest of the poor countries, where average life expectancy is 41 years and the average annual income is $300. Indeed,

for some, the distance seems unbridgeable. Cheryl Payer, an American academic and author of a controversial new book, The World Bank: A Critical Analysis, argues that the World Bank and the IMF should be abolished. Payer, who was in Toronto for a simultaneous nongovernmental conference on the global impact of both institutions, claims that the bank’s drive to “improve” agricultural production in poor countries has the effect of destroying subsistence farming. Their industrial projects, she says, merely pave the way for U.S. multinational investment and enrich local elites. Their hydro dams and roadways only serve an export-oriented economy. Payer is amused when she is asked what she would put in place of the two financial giants: “If I proposed getting rid of the Mafia, no one would ask me what I propose to replace it with,” she says.

U of T’s Berry says it is too early to tell whether McNamara’s plans will succeed over the long term. But he believes the World Bank’s commitment to social justice in the 1970s was genuine and he would like to see it renewed. Both AÍ Berry and Cranford Pratt believe that dismemberment of both institutions would be extreme and unrealistic. An articulate critic of both institutions, Pratt nevertheless warns against overstating Washington’s admittedly sizable influence on both institutions by pointing out that a recent $5-billion bank loan to India was approved despite the strenuous opposition of the Reagan administration.

Bank and IMF officials strongly reject Payer’s interpretation. They point to Robert ^McNamara’s stint as president gof the World Bank in the 1970s jjand his attempt to meet the “ba£sic needs” of poor countries by encouraging small farms and production aimed at feeding the indigenous poor. In the last report of the World Bank, the new president, Tom Clausen, says, “The array of new programs for small farmers in the 1970s is already paying off.”

Whatever the merits of the various arguments, the strongest supporters of the World Bank and the IMF were the only people who will realize any immediate gain from the week’s gloomy proceedings—the hotel and restaurant owners of Toronto. However miserable business may be in the rest of the world, they expect to pull in $20 million from the financial potentates of the planet by the end of the week.