Reining in the IMF

by Marijke Torfs

Multinational Monitor magazine, January / February 1998

After decades of operating in relative obscurity, the IMF is taking center stage of public debate in the United States and throughout the world. Frantically running to the rescue of the recently beleaguered Asian economies, the IMF is throwing around unprecedented amounts of public money, bailing out rich country banks and imposing its traditional austerity programs upon 350 million people in Indonesia, Thailand, the Philippines and South Korea.

Coming on the heels of the Mexican bailout of 1995, the IMF's central role in the Asian financial drama represents a substantial expansion of the Fund's mandate and power. Originally conceived as an entity to provide temporary financing assistance to Western countries having trouble sticking to the fixed exchange rates of the post-World War II era (currencies then had a set value relative to the U.S. dollar, which was redeemable for a set amount of gold), the IMF redefined itself in the 1970s. It began providing short-term balance of payment assistance (aid when money is flowing out of a country at unsustainable rates compared to the incoming rate) to developing countries, in exchange for their imposition of strict "structural adjustment"-budgetary and monetary programs of austerity, combined with economic deregulation. Now the Fund is carving for itself an additional role as guarantor of the private international financial system, a de facto insurer of loans and foreign investment to industrializing countries. The insurance comes free for lenders, but the traditional high payment of austerity measures is exacted from debtor countries having trouble repaying loans.

To fill this new function, the IMF needs more resources. During its last annual meeting, the IMF's board of governors agreed upon a 45 percent quota increase, adding $90 billion to its $200 billion budget. The U.S. share of the $90 billion is $14.5 billion.

But even as the IMF and its U.S. allies misleadingly claim that the Asian crisis makes it urgent that the Fund quickly receive an infusion of new capital, U.S. lawmakers are raising serious questions about the IMF's lack of clear purpose, its counterproductive adjustment programs, its penchant for bailing out big international banks and its excessive secrecy. (The urgency claim is misleading because the IMF already has allocated monies to Asia from existing resources, because the IMF has plenty of capital on hand and can raise more, and because the money from quota increases would go for purposes other than financial bailouts.

The increasing volume of criticism from Congress, the mainstream media and establishment economists follows almost two decades of condemnation of IMF austerity from labor organizations, environmentalists, poverty groups, church organizations and sustainable development advocates, as well as more recent criticism from right-wing groups which denounce financial bailouts as an improper interference in the market economy. Rising criticism of the IMF is leading some IMF backers to offer to "condition', U.S. money for the Fund, and some opponents seem satisfied that :conditions can satisfactorily reform the IMF. There is a decade of experience that suggests otherwise, however.

Muted voices, Neglected vote

Since 1989, Congressional approval of funding for the IMF has been linked to legislative language requiring the U.S. executive director to the IMF to use "voice and vote" in order to promote specific policy and procedural changes at the institution. In 1989, the Congress urged the U.S. executive director to promote: 1) the addition to the Fund's staff of natural resource experts and development economists trained in analyzing the linkages between macroeconomic conditions and the short- and long-term impacts on sustainable management of natural resources; 2) the establishment of a systematic process to review in advance, and take into account in policy formation, projected impacts of each IMF lending agreement on the long-term sustainable management of natural resources, the environment, public health and poverty; and 3) the creation of criteria to consider concessional and favorable lending terms to promote sustainable management of natural resources. This last requirement specifically refers to the reduction of the debt burden of developing countries in recognition of domestic investments in conservation and environmental management.

In 1992, the U.S. Congress passed even more comprehensive legislation demanding the U.S. executive director regularly and vigorously in program discussions and quota increase negotiations promote the following:

* Programs to alleviate poverty and reduce barriers to economic and social progress, and to incorporate environmentally sound policies into Fund-promoted government programs;

* Policy audits;

* Policy options that increase the productive participation of the poor; and

* Procedures for public access to information.

In order to prevent any ambiguity about the interpretation of these overall objectives, the 1992 legislation provides a detailed list of specific policy recommendations. Among the policy changes were:

* All IMF programs should consider poverty alleviation and the reduction of barriers to economic and social progress;

* All Policy Framework Papers (PFPs) should articulate the principal poverty, economic, and social measures that borrowing nations need to address;

* The IMF should incorporate environmental considerations in all of its programs;

* The IMF should encourage nations to implement systems of natural resource accounting in their national income accounts;

* The IMF should assist and cooperate fully with the statistical research being undertaken by the Organization of Economic Cooperation and Development and the UN in order to facilitate development and adoption of a generally applicable system for taking account of the depletion or degradation of natural resources in national income accounts;

* The IMF should conduct periodic audits of all its programs, on a country-by-country basis, to determine whether the IMF's objectives were met and to evaluate social and environmental impacts; and

* PFPs and the supporting documents prepared by the IMF's mission to a country, among other documents, should be made public at an appropriate time and in appropriate ways.

While both laws were very specific in their policy recommendations and reporting requirements, this important congressional action did not lead to any real changes of IMF operations or policies. The only noticeable shift was reflected in the IMF's managing director's rhetoric, emphasizing the importance of achieving high quality growth without hurting people or the environment in all IMF programs. The IMF also changed the job description of one of its senior economists, Ved Ghandi, to include environmental issues.

Having an environmental expert at the Fund did not benefit the environment in any discernible way, either. In fact, Ghandi's main tasks seem to focus on writing papers explaining why the IMF should not be concerned about or engaged in environmental issues. After two years of analysis, Gandhi concluded that macroeconomic stability would lead to environmental stability but that sustainable environmental management was not critical for macroeconomic stability. In other words, in a well-managed economy, the environment will take care of itself; and taking care of the environment is irrelevant to economic well-being. While Gandhi has shifted from this position, the IMF continues to support the notion that microeconomic policies, such as environmental resource management policies, do not affect the macroeconomic outlook of a country.

Two years later, the experience was replicated in the area of labor rights. In 1994, the U.S. Congress attached the Sanders-Frank Amendment to the Foreign Operations Appropriation Bill, requiring U.S. executive directors to use voice and vote to urge international financial institutions, including the IMF, to:

* Adopt policies to encourage borrowing countries to guarantee internationally recognized worker rights;

* Promote compliance with key International Labor Organization (ILO) conventions, including those guaranteeing the right of association, the right to organize and bargain collectively, prohibitions against forced labor, a minimum wage, maximum hours of work and occupational safety and health protections; and

* Establish formal procedures to screen projects and programs funded by the institutions for any negative impacts on key labor rights.

The Treasury Department was supposed to report on its progress in promoting these reforms at the international financial institutions after one year. It took almost three years for the Treasury to send its report to the Congress. Instead of explaining why the U.S. executive directors had failed to promote any of the legislative requirements, the report offered ideas on how to begin the process of implementing the Sanders-Frank amendment. For example, the report provided an outline of what a possible screening process could look like. It also cited general steps the international financial institutions have undertaken to reform labor markets as evidence of efforts to guarantee internationally recognized labor rights.

It is hard to imagine a more cynical response from the Treasury Department. "Not all labor market reforms have to do with improved labor rights," notes Terry Collingsworth, general counsel of the Washington, D.C.-based International Labor Rights Fund. "Instead, many of these reforms contribute to the denial of labor rights."

Collingsworth summarizes the report as "lacking in any real, substantive action or assessment that address the express requirements of the law."

Money Talks

Something fundamentally different took place in 1994, the same year the Sanders-Frank amendment was passed, however. Frustrated with the lack of IMF responsiveness, the U.S. Congress cut the proposed $100 million U.S. contribution to the Enhanced Structural Adjustment Facility (ESAF) by $75 million.

In a conference report attached to the bill, members of Congress expressed their hope that the IMF and its member countries would work with the U.S. government to open up the IMF to more public scrutiny. Congress urged the U.S. Treasury Department to push for reform of the IMF's disclosure policies. Congress asked for the release of several IMF documents to the public including the Recent Economic Developments and program documents. Other IMF documents are owned by the countries themselves, and their publication depends on the willingness of the national government. But since most of these documents are prepared by IMF staff and are critical for understanding of Fund programs, the legislation required the IMF to strongly encourage governments to make these documents available to the public. These documents include: Article IV Consultations, Letters of Intent and Policy Framework Papers.

But the conference report did more than just urge these reforms. It strongly suggested that future funding for ESAF would be withheld until the IMF made the desired reforms. "To determine when and whether to recommend the remainder of the $100 million requested by the Administration for ESAF, consideration will be given to the progress made on the disclosure of the above information.

In contrast to all previous legislative efforts, the 1994 legislation did result in identifiable reforms. The IMF made the REDs publicly available and began posting summaries of the Article IV consultations on the Internet. IMF management also agreed, in 1997, to an independent review of ESAF programs to be conducted parallel to the IMF's own ESAF review. While the independent review has not yet been published, early statements of the reviewers have been critical and IMF management has promised to release an uncensored version of the reviewers' report.

The disclosure reforms have been progress, but not a panacea. While these documents provide a flavor of the nature of the program, even economists such as Jeffrey Sachs are unsatisfied with the progress. In one of the many editorials written by Sachs related to the Asia crisis, he states that the IMF is only paying lip service to "transparency." Sachs complains that the IMF provides virtually no substantive documentation of its decisions as the documents are shorn of the technical details needed for serious professional evaluation of the programs.

Curbing the cash

Many, not least those in IMF managerial positions, have criticized the legislative strategy to change the IMF. Opponents argue that the IMF is a multilateral institution which has to reflect the priorities of all of its member countries. It is not appropriate, the argument runs, to use the U.S. legislative process to open up the IMF to public scrutiny or to force it to deal with social and environmental issues.

Unfortunately, the IMF has not given the public any other choice. People in borrowing countries do not have the same opportunity to influence the Fund, and neither do their elected governments.

Meaningful public participation in shaping borrowing country programs is currently not possible. The IMF's Articles of Agreement state that IMF mission people shall only interact with representatives from finance ministries or central banks. Even if finance ministries allow public consultation, crucial details of IMF programs remain confidential. With limited knowledge of the program details, the population in borrower countries-the ones to affected by IMF-imposed policies-cannot seriously participate in policy formation. In most cases, even national parliaments have little choice but to "endorse" an IMF agreement without serious discussion, input or understanding of the programs.

The enormous leverage of the IMF over democratic institutions in borrowing countries was made plain in South Korea's presidential elections late last year, as the Fund insisted that all presidential candidates endorse the IMF bailout agreement.

In the United States, but also in a growing number of other industrialized countries, the public does have a voice in and can affect policy decisions of their governments. The United States is one of the few countries that offers public hearings on the operations of all multilateral institutions financed by the public. During these hearings, non-governmental organizations (NGOs) from around the world have testified about the devastating impact of IMF programs. At the request of U.S. members of Congress, NGOs have provided input in the development of IMF reform language. These IMF reform initiatives reflect the concerns of people around the world.

If the IMF would provide serious avenues of communication with the public, perhaps advocacy groups would not have to resort to the legislative strategy of denying the Fund money. Until then, curbing the cash is the only way the public can be heard.

Marijke Torfs is director of the international department at Friends of the Earth, U.S.

IMF, World Bank, Structural Adjustment