The International Monetary Fund
Is Hurting You

The IMF - a chauffeur for giant banks

by Rep. Bernard Sanders (I-VT)

Z magazine, July / August 1998

This year, Congress is considering spending $18 billion to expand the International Monetary Fund (IMF). The IMF comes as close as any one organization to being the chief regulator of the global economy, yet the American people-and even most members of Congress-know little about it and, therefore, cannot fully appreciate the enormous impact it has on their lives.

The IMF was founded in the wake of World War II by the victorious allies, who feared an unregulated world market would mean a return to world depression, poverty, communism, and perhaps another world war. The IMF's original function was to ensure that temporary imbalances between the currencies of different countries did not lead to forced recessions, competitive devaluations, and other destructive practices.

Beginning in the 1970s, the IMF took on much of the management of the exploding international debt crisis, making loans to Third World countries and forcing them to restructure their economies through "structural adjustment programs." Recently, the IMF has hit the headlines with bailouts for troubled Asian economies.

Unfortunately, the IMF is less a vehicle to encourage sustainable development for the people of the world than it is a chauffeur for giant banks, global corporations, and wealthy investors. Its loans in Asia are bailing out international bankers and investors while imposing unemployment and mass misery on the people there. It has provided huge loans for brutal, corrupt dictators like the now-former Indonesian dictator, Gen. Suharto, who presided over the slaughter of hundreds of thousands of people while amassing what was estimated to be the world's sixth largest personal fortune, between $30 billion and $40 billion. It encourages global companies and national elites to exploit children, workers, and the environment in poor countries and then to export their products to the U.S. and other countries where workers are forced to compete with their counterparts who live in these degraded conditions.

What the IMF Does

The IMF makes loans to troubled countries, but insists they cut benefits for workers and the poor, fire government employees, and sell their assets to foreign investors. The stated purpose of these "structural adjustment programs" is to make a country attractive to foreign investors and to encourage cheaper exports. The result is generally to raise profits for international corporations while increasing poverty and unemployment for ordinary working people.

To understand what the IMF does, let's look at the country where IMF intervention is most familiar to Americans: Mexico. Under a series of IMF agreements in 1982, 1986, and 1989, the Mexican government implemented IMF plans for trade liberalization, privatization, and deregulation. Investment in education, research and development, and infrastructure plummeted. In the decade following 1982, infant deaths due to malnutrition tripled; the minimum wage (adjusted for inflation) declined by 60 percent; and the percentage of the population living in poverty increased from less than half to more than two-thirds. After a decade of IMF tutelage, the plunge in workers' conditions continued. Manufacturing workers' compensation decreased by 30 percent between 1993 and 1995. Hot money poured into the country, then fled, and by early 1995 the Mexican economy entered its worst depression in 60 years. As the Mexican patient sickened from this treatment, the IMF provided more of the same medicine. IMF supporters boast the new adjustment program imposed by the IMF and the U.S. Treasury in 1995 has worked, because Mexico has not defaulted on its loans, speculators have been repaid, investment has started to return, and the trade deficit has became a trade surplus. But what have been the results for the Mexican people? In the past three years, some 1.8 million people have left home in search of work, many of them coming to the United States. Over 20,000 small and medium-sized business-one-third of all Mexican businesses-went into bankruptcy. Two million jobs have been lost. One-third of Mexico's economically-active population is unemployed or in precarious jobs. The Mexican minimum wage now buys only one-third of what it did in 1981, just before IMF control of the Mexican economy began.

Ninety countries with more than half the world's people have lived directly under such IMF-imposed conditions. Far from being restored to health, they have only been plunged further into debt. From 1982 through 1990, debtor countries in the Southern Hemisphere paid their creditors in the North $6.5 billion dollars in interest and another $6 billion dollars in principal payments per month-as much as the entire Third World spends on education and health. Yet the debtor country debts were 60 percent greater in 1990 than in 1982. The IMF's own 1993 review of 19 countries with its structural adjustment plans" found that, in spite of the austerity imposed on their people, their trade deficits and debts continued to rise.

A study this year of 71 countries operating under IMF and World Bank conditions has found that, through 1995, the average increase in debt among these countries was 49 percent. IMF policies create loan junkies" who keep finding themselves "another day older and deeper in debt."

The IMF's Mexican "success" has been repeated in much of Latin America. A study for the Inter-American Development Bank found "the harsh structural adjustments of the 1980s have significantly worsened the poverty problem. Casual evidence from virtually every country confirms the widening inequality." A decade after their governments opened their doors to the global market, 40 percent of the people of Latin America are poor, and 1 in 4 survives on less than $1 per day. Since 1970, average Latin American per capita income has fallen from one-third of First World levels to one-quarter of those levels.

The New York Times called the IMF and its sister organization, the World Bank, "the overlords of Africa," supervising the economies of some 30 African countries. The results? Africa's GNP fell by an average of 2.2 percent per year in the 1980s. Meanwhile, in African countries with IMF-World Bank programs, spending on health decreased by 50 percent and on education by 25 percent during the 1980s. A United Nations advisory group reported that, throughout Africa, "health systems are collapsing for lack of medicines, schools have no books, and universities suffer from a debilitating lack of libraries and laboratory facilities." A December 1997 a study by a joint task force of the International Labor Organization and the United Nations Development Program charged that structural adjustment in Africa has been "purchased at the price of economic contraction, high unemployment and massive poverty."

Now the IMF is applying the same medicine to the troubled economies of South Korea, Indonesia, the Philippines, and Thailand. In Indonesia, the IMF demanded huge increases in the price of food-then backed off out of fear of food riots. Then it forced a 70 percent increase in prices for fuel and electricity, along with other so-called reforms. As the New York Times commented, "for Indonesia's citizens-who are already struggling with rampant unemployment, spiraling inflation and a devalued currency-economic reform seemed just another word for misery."

According to press accounts, much of the benefit of the IMF's Asian bailout will go to six banks with large amounts of bad loans in Southeast Asia: Citicorp, J.P. Morgan, Bankers Trust, Bank America, the Bank of New York, and Chase Manhattan. Under terms of the bailout deal, South Korea must allow its financial institutions to be purchased, even at greatly undervalued prices, by the very foreign banks that have already profited so much. According to Richard Medley, head of Medley Global Advisors, a New York-based consultant on risk management, "The only winners in Korea are the foreign banks, who will get their money back and then some." Jeff Uscher, editor of Grant's Asia Observer, confirms that lenders to South Korea's banks will get back 100 cents on the dollar."

The Race to the Bottom

Indonesia and Korea may seem far away, but when the IMF forces austerity policies on one country, it has an impact around the globe, including right here in the U.S. Each country is forced to reduce labor, social, and environmental costs below the others in order to be more competitive." When all countries do the same thing, the result is a disastrous race to the bottom" in which conditions for working people throughout the world tend to fall toward those of the poorest and most desperate.

As a result of the Asian economic crisis and the way the IMF has managed it, the U.S. trade deficit is projected to grow about $100 billion in 1998, resulting in the loss of approximately 1 million jobs or potential jobs, most in the better-paying manufacturing sector. The loss has already begun; in spite of its booming domestic economy, the U.S. lost 10,000 manufacturing jobs this April. It's not just the number of jobs. This kind of global competition drives down wages and conditions for U.S. workers. It helps explain why wages have remained low and inequality has soared even as has boomed.

In the past quarter century the gross domestic product of the United States has grown more than 40 percent, yet real median income has fallen for more than 60 percent of the American workforce. Over that time, American workers have seen a 15 percent reduction in real wages.

The paltry wage increases of the past year have not even brought workers back to where they were before the last recession, let alone made a significant dent in the losses of the past 25 years. Average hourly wages were $9 per hour in 1973; after the increases of 1997 they were still a dollar an hour lower, if you adjust for inflation. Over the past quarter century, there has been a nearly 30 percent reduction in the real incomes of young families. A recent Marist College poll found nearly two-thirds of Americans say they are having difficulty paying their monthly bills, and a quarter always worry that they will come up short. Household debt has reached 91 percent of disposable personal income, compared with 65 percent in 1980.

Conditions continue to deteriorate for those at the bottom of the bottom. More people are in poverty today than before the last recession. A study based on interviews with 28,000 people in soup kitchens, homeless shelters, and food pantries found that 26 million Americans visited charitable food programs in 1997-a 15 percent increase over the year before.

President Clinton, supported by Newt Gingrich and an array of corporate CEOs, says we need to give the International Monetary Fund $18 billion dollars to save the global economy from potential meltdown. A central goal of the IMF model of globalization has been to increase capital mobility by eliminating barriers to the international flow of capital. More than $1.5 trillion flow across borders every day. Private investment in developing nations around the world increased from $30 billion 7 years ago to approximately $245 billion today. Paul Krugman, professor of economics at MIT, describes the result: "We are back to a volatile, pre-depression world economy of financial booms and busts."

The IMF's original function was to stabilize currencies so countries wouldn't have to engage in the competitive devaluation that aggravated the Great Depression of the 1930s. For the past 15 years, the IMF has played the opposite role. Economist Jeffrey Sachs points out that current IMF policies in Asia are "relentlessly squeezing these economies so inappropriately that clearly they're not only not restoring market confidence, they're pushing those economies deeper into crisis." IMF policies are promoting, rather than preventing, competitive devaluation.

Fixing the IMF

have been working with a coalition that includes labor, progressive citizens groups, non-governmental organizations working in the Third World, and progressive Democrats in Congress to challenge expanded funding for the IMF. We have also been cooperating with conservative Republicans, who oppose the IMF for reasons of their own. Many on the right propose to abolish the IMF altogether. But that will hardly solve the problems of the global economy. Market economies, including the global economy, need non-market institutions to function well.

Without some kind of global regulation, global corporations will be able to run even more roughshod over the world's people and environment. Even more than when the IMF was established, the global economy needs alternatives to imposed recession, competitive devaluation, and uncontrolled deflation. The question Congress and the American people should be debating is, how can this be provided in ways that benefit poor and working people around the world, rather than a wealthy global elite?

Fortunately, labor, citizens groups, and NGOs around the world have been addressing that question for the past several years. They have come up with important proposals for how the IMF and other international institutions can help reduce third world poverty, discourage environmental destruction, reverse the race to the bottom, increase global economic stability, and contribute to a worldwide process of democratization. To counter poverty and the race to the bottom:

Protect internationally recognized labor rights. If the IMF made the right of workers to organize, bargain collectively, and strike a condition for its assistance, it would revolutionize conditions in much of the world. Workers would be able to resist the extremes of exploitation and gain a share of the benefits of economic development. Rising wages would expand local, national, and international markets and generate a virtuous circle of economic growth. Organized workers could provide a degree of accountability for governments, and it would be far harder to pit workers in different countries against each other.

Protect the environment. While the IMF gives lip service to the environment, its policies actually encourage the despoiling of natural resources for export. Instead, loan conditions should encourage sustainable development that enhances the environment as a long-term resource.

Encourage development, not austerity. IMF policies should aim to raise, not cut, wages. They should increase credit for small and medium-sized locally owned businesses and farms. They should pursue a progressive tax policy that places no undue burden on the poor. This will help reverse the destructive global competition that is promoted by current policies.

Promote long-term investment. Short-term foreign investment which just skims off speculative profits does little or nothing for economic development. Only long-term investment that builds economic capacity is likely to benefit poorer countries. IMF policy should aim to encourage investment that leads to genuine development, not just a quick buck for the investors.

Encourage an effective public sector. IMF policies should increase, not discourage, spending on primary health care, basic education, and other social services that improve people's lives and provide the basis for long-term economic growth.

End global debt slavery. Today poor countries are forced to run their economies to pay debts often promoted by foreign investors and taken on by corrupt governments that did not represent their people. Often those debts have continued to multiply by the rules of compound interest. Current IMF policies make repayment of such debts a country's top priority. Instead, the debt of the poorest countries should be written off and other countries should be encouraged to make sustainable development rather than debt repayment their first priority.

To reduce the threat of financial meltdown:

Control international hot money. Rather than forcing countries to deregulate their financial systems, the IMF should encourage them to use capital controls to limit the flows of short-term "hot money" which can so quickly destabilize their economies. (Chile, which has applied such techniques, has not had the kind of currency crisis that marked such countries as Mexico and Thailand.) The IMF should also begin research and testing for a global tax on short-term hot money transactions-known as a "Tobin tax"-to reduce global volatility and provide resources for world development and environmental protection.

Forestall competitive devaluations. The IMF's original function was to prevent a downward spiral of competitive devaluations, but now it often encourages countries in economic difficulty to devalue, and their competitors are then forced to follow suit. While a system of fixed exchange rates would be difficult to restore today, the IMF should aim to help countries adjust to changing conditions without drastic devaluations and massive increases in exports.

Support global demand. The Asian economic crisis is widely seen as threatening a global depression (or as economists now reassuringly put it, a global deflation). Currently the U.S. and Europe are pressuring Japan to expand its demand so that it will absorb more exports from other crisis-ridden Asian countries. But the maintenance of adequate demand worldwide requires cooperation of the major economic powers working in tandem. The IMF should take responsibility for developing that cooperation.

Make speculators pay for their losses. IMF bailouts have insulated large banks and investors from the consequences of their speculations. That only encourages more speculative ventures, leading to more international volatility. When the IMF provides assistance for economies in trouble, it should be sure the assistance doesn't end up in the pockets of international investors who lured them into that trouble.

To encourage democracy:

Support democracy and human rights. IMF should cease being a rescue vehicle for tyrants like Indonesia's Suharto. Make the IMF transparent. IMF procedures and decisions need to be open to public scrutiny. So must information on its programs. Let those affected by IMF policies participate in making them. Instead of closed negotiations with top officials, IMF agreements should involve participation by labor unions, environmental groups, women's organizations, development organizations, and other major sectors of civil society in each country.

These proposals are based on the common interests of working people around the world. Unlike some proposals, they don't pit one nation against another, or people in the North against those in the South, or environmental concerns against those of workers. They should be on the top of the agenda for discussion by Congress and the American people.

IMF, World Bank, Structural Adjustment