Dominique Strauss-Kahn
The Economist recently asked,
Has the IMF Changed? Or has the World? David Harvey has always argued that one of the basic tenets of neoliberalism is that the welfare of financial institutions far outweighs the welfare of the people, or a democracy for that matter. Here, in his opening speech at the Urban Reform Tent, January 29, 2009, World Social Forum, Belem, he
restates this principle in the context of the prevailing global economic crisis:
One of the basic principles that was set up in the 1970s is that state power should protect financial institutions at all costs. And there is a conflict between the well being of financial institutions and the well being of people you chose the well being of the financial institutions. This is the principle that was worked out in New York City in the mid 1970s, and was first defined internationally in Mexico it threatened to go bankrupt in 1982. If Mexico had gone bankrupt it would have destroyed the New York investment banks. So the United States Treasury and the International Monetary Fund combined to help Mexico not go bankrupt. In other words they lent the money to Mexico to pay off the New York bankers. But in so doing they mandated austerity for the Mexican population. In other words they protected the banks and destroyed the people. This has been the standard practice in the International Monetary Fund ever since.
Africans and many other Third World countries who borrowed money from the IMFalso went through, like Mexico, similar punishingly belt tightening "
Structural Adjustment Programs" recommended/imposed by the IMF, but which were implicitly designed not so much to incentivise investment and reduce poverty, but rather to, in the Economist's words, "bludgeon speculators and impress creditors."
The idea being that the use of IMF conditionalities --i.e.
cutting social expenditures, also known as austerity; focusing economic output on direct export and resource extraction; devaluation of currencies; trade liberalization, or lifting import and export restrictions; increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets); balancing budgets and not overspending; removing price controls and state subsidies; privatization, or divestiture of all or part of state-owned enterprises--to create in the borrower country an environment that could assure creditors/financial institutions the favorable fiscal parameters to guarantee the extraction, in one way or another, the high interest payments that went with high risk loans to weak economies.
Going by Harvey, those structural adjustment programs were, in retrospect, a direct to a problem capitalism has to contend with which is
an increasing difficulty in finding profitable outlets for its surplus capital. Lending it to Africa, Latin America and other Third World countries, but under conditions that turn such loans into ruthless milking machines capable of extracting milk from a dead cow, presented financial institutions, via the IMF, with profitable outlets for surplus capital.
But now the Economist, continuing its underhanded critique of the IMF, drives the knife even deeper as it wonders why the bank has changed its tune all of a sudden from one of punishing fiscal discipline to advocating fiscal stimulus for well-run African countries and a general Keynesian loosening of the belt overall:
The IMF is notorious for favouring hard money and tight budgets. The new fund (“IMF 2.0” as Time magazine called it) believes in casual Fridays and Keynesian policies. Since January 2008, Mr Strauss-Kahn has urged the world’s biggest economies to loosen their belts. And fiscal stimulus is not just for rich countries, he said at the spring meetings last week. Poor, well-run countries like Tanzania should also try it.
He also referred to a new position note by Atish Ghosh and four other IMF economists, laying out the options for emerging markets in the global crisis. Those include monetary easing as well as fiscal stimulus and “heterodox” debt workouts.
.... the high-rate defence has little appeal today. The benefits of tight monetary policy are more doubtful, and the damaging side-effects of depreciation less severe. This is because today’s crisis originates with rich-world lenders, not emerging-market borrowers, as Mr Ghosh and his co-authors point out.
What does the IMF now think of fiscal stimuli?
In December 1997 the IMF asked South Korea to tighten its belt a notch (a fiscal improvement of 0.4% of GDP). That is now widely seen as a mistake. However, the fund learnt that lesson within a month, urging the Koreans to ignore the fund’s own fiscal conditions. As Jonathan Ostry, one of the paper’s authors, points out, the fund now appreciates that fiscal retrenchment does little to restore confidence unless there is an underlying fiscal problem.
Where a country has fiscal room for manoeuvre, it should by all means use it, the IMF argues. Mr Strauss-Kahn has welcomed the pronounced fiscal easing undertaken by the world’s biggest emerging markets.
Why this sudden Keynesian180 degree shift one might ask? Has the IMF seen the folly of its ways? Has it come to grips with the economic destruction it wrecked on many African countries in the eighties and nineties? I doubt it.
The only way to know is to ask the IMF a simple question: if this U.S. $700 billion bail out package (amongst others) wasn't going to bail out the banks but was going directly to create an urban redevelopment bank to save all of those neighborhoods that were being destroyed and reconstruct cities more out of popular demand, will the IMF still be all for fiscal stimuli? My guess is no!
