What is the role of the IMF in the world imperialist system?
In 1998, on the demonstrations in South Korea protesting against price rises and job cuts many in the crowd carried placards with the words: IMF = I’M Fired.
Being on the receiving end of International Monetary Fund (IMF) help has boiled down to just that for millions of workers in “emerging markets” during the 1990s. In order to “stabilise” the economy and “restore investor confidence” the IMF has insisted that each government implement its now all too familiar package. Austerity measures are the IMF’s number one condition for any financial help to deal with capital flight, problems with debt servicing and the haemorrhaging of foreign exchange reserves.
The IMF claims political neutrality and portrays itself as a sort of benevolent, but sensible, banker. It merely expresses the wishes of its member countries. It exists only to sponsor the development and growth of international trade. Its financial assistance is to allow member countries to overcome temporary balance of payments difficulties (i.e. not having enough money to pay for exports) while allowing them to make the necessary structural changes to their economic policies that will allow them to export more. It preaches the neo-liberal doctrine that all countries can specialise in something and that exporting this product or service will maximise the well-being of citizens.
The truth is very different from this glossy self-portrait. The IMF acts as an International Ministry of Finance supervising interventions into the “Third World” – the numerous semi-colonies of Asia Latin America and Africa – on behalf of the small number of powerful imperialist countries, the USA, Britain, Germany, Japan, France etc. who dominate the world economy. The IMF’s scale of intervention is beyond the scope of any one government or the many private commercial banks. The goals of its intervention are:
* Guaranteeing the ability of a country to meet its debt servicing obligations to private banks. Any surpluses generated from increased export earnings or privatisation revenues are earmarked for paying interest on foreign held debts;
* Opening up restricted national markets to investment and ownership by the major imperialist countries of the G8.
* Within the IMF itself some members – namely, the developed imperialist powers – are more equal than others. And in pursuing its agenda of no restrictions on the free movement of goods, services and capital it proves it is a weapon for the rich and powerful.
Why was it set up?
In the Great Depression that ravaged the world economy in the 1930s banks failed by the thousands, land values plummeted, factories stood idle, and tens of millions of workers were unemployed. The world of international finance and monetary exchange was wrecked. A widespread lack of confidence in paper money led to a demand for gold beyond that which national treasuries could supply.
A number of nations, led by the United Kingdom, were consequently forced to abandon the gold standard, which, by defining the value of each currency in terms of a given amount of gold, had for years given money a known and stable value.
In the 1930s, when the value of money was uncertain, nations hoarded gold. This further contracted the amount and frequency of monetary transactions and intensified the depression.
Some governments, desperate to find foreign buyers for domestic agricultural products, sold their national currency below its real value to undercut the trade of other nations selling the same products. This practice, known as competitive devaluation, provoked retaliation through similar devaluation by trading rivals, in turn adding to monetary uncertainty and undermining trade.
The relation between money and the value of goods became confused, as did the relation between the value of one national currency and another. World capitalism was pinned to the floor, trapped in a spiral of deflation and recession. Between 1929 and 1932 prices of goods fell by 48 percent worldwide, and the value of international trade fell by 63 percent.
The Second World War created the conditions for economic revival and in these conditions the victorious imperialist powers set about the construction of a monetary system designed to prevent a recurrence of the 1930s disaster.
Harry Dexter White in the United States and John Maynard Keynes in the UK put forward similar schemes in the early 1940s. They wanted a system that would encourage the unrestricted conversion of one currency into another, establish a clear and unequivocal value for each currency, and eliminate restrictions and practices, such as competitive devaluations, that had brought investment and trade to a virtual standstill during the 1930s.
The system was to be monitored by a new international institution, and in 1944, at the Bretton Woods conference in the USA, the IMF was founded. It began its work in 1946. Underpinning it was US imperialism, which had emerged from the war as the undisputed victor. The IMF was based in the US, staffed mainly by its economists. It regularly exchanged personnel with the US Treasury. As the biggest donor to IMF funds it had the most votes, enough to veto all changes to the IMF Charter. As one US Treasury Secretary, Donald Regan, said in 1983:
“The IMF is essentially a non-political institution . . . But this does not mean that United States’ political and security interests are not served by the IMF.”
For most of its first 25 years the IMF was not very visible. The international monetary system was stable. Bretton Woods had established an exchange rate of 1oz of gold to $35 US dollars. The US agreed to buy and sell at these rates on demand. So long as US economic dominance was absolute and it had enough gold in its vaults to honour this commitment, there was little need for IMF intervention.
But during the course of the post-war boom US dominance lessened as other countries grew in wealth (Japan and Europe). By the early 1970s the US Treasury no longer had sufficient reserves of gold to exchange with the mass of dollars held abroad. In 1971 the US unilaterally abandoned the commitment to fixed exchange rates and the era of managed and floating exchange rates opened up. But how to prevent a return to the competitive devaluations of the 1930s? Now the IMF came into its own.
As an official historian of the IMF put it: “In changing over to the current system, the membership has asked the IMF to penetrate beyond the exchange value, which, after all, is the final result of a range of economic policies, to examine all aspects of the member’s economy that cause the exchange value to be what it is and to evaluate the economy’s performance candidly for the entire membership. In short, the current system demands greater transparency of members’ policies and permits more scope for the IMF to monitor these policies. The IMF calls this activity ‘surveillance’, or supervision, over members’ exchange policies.
Supervision is based on the conviction that strong and consistent domestic economic policies will lead to stable exchange rates and a growing and prosperous world economy.” (David Driscoll, What is the IMF?)
In other words, the IMF is an imperialist financial gendarme. It exists to ensure that all domestic economic policies promote openness of trade and capital movement to the benefit of the imperialist countries. Inevitably such a system of openness can only serve to enhance the wealth and power of the imperialists whose economic productivity, capital resources and technological dominance allow them to sweep all competition aside where their are no protective barriers to the movement of capital or goods. The IMF exists to ensure that countries, invariably the poorer semi-colonies, which enter into financial crisis and are forced to seek its help pay by removing such barriers.
The IMF and the debt crisis of the 1980s
It was with the debt default of 1982 in Latin America that the IMF came to prominence. In August of that year Mexico faced bankruptcy. For the previous ten years it had been pumped full of loans from the major international private banks. These banks had more money than they knew what to do with. After the 1973 oil price rises the OPEC oil-producing cartel had massively enriched them with deposits of “petro-dollars”.
Until the early 1970s most semi-colonial countries had seen their exports grow at rates which meant that they had not run up great balance of payment deficits. The deficits that did exist were financed by trade credits, public loans from governments, or international agencies. Private bank loans accounted for under a third of all foreign-held debt in the Third World in 1971.
By the end of 1982 this had all changed. The 1970s was a decade of crisis and two world recessions in which the demand for the traditional exports of Africa, Asia and Latin America collapsed. By the end of the global slump of 1980-82 countries like Brazil, Mexico, Argentina and Venezuela were effectively bankrupt. They were unable to meet the increasingly onerous debt service payments to the private banks that had stepped in during the 1970s to offer loans to finance their deficits.
In 1970, Third World debt totalled $75 billion. By the end of 1985, this figure had mushroomed to $900 billion. Most of the loans taken on in the 1970s by the semi-colonial ruling classes were not aimed at enhancing the living standards of the people. Many were specifically tied to military contracts which would simultaneously strengthen the repressive military regimes in Latin America (e.g. Chile, Argentina, Paraguay, Brazil) and Africa against their people and boost the profits of the military-industrial Multinational Corporations (MNCs) in Europe and the USA.
Other loans went into useless and inefficient “prestige projects” whose purpose was to boost the reputation of the regime in the eyes of its people and the world. In addition, billions upon billions of dollars received in loans were never used for their intended purpose but were merely recycled back out of the country by the Mobutos or Suhartos of this world into their own private bank accounts.
During the 1980-82 recession the debts became unbearably large. The slump in demand for the exports of Latin America was bad enough; but the US hiked up interest rates from 7 per cent to 17 per cent in the years 1979-82 to dampen down inflation. As a result interest payments consumed a growing share of a declining export income. The ratio of debt servicing to export earnings went from 15% in 1977 to over 25% in 1982. During the same period all Third World countries’ debt payments went from $40 billion to $121 billion. The ruling class of one semi-colonial country after another held up its hands.
The banks demanded the IMF step in to act on their behalf in ensuring bankruptcy was avoided and that economic measures would be taken by these countries to guarantee that they could meet their debt obligations.
Each country had to go cap in hand to the IMF. In 1944 the US had demanded and won a condition that all semi-colonies who wanted to be eligible for development loans from the World Bank had to be a member of the IMF and thereby submit to its conditions. In 1978 the US demanded and got an amendment to the IMF charter which expressly included the clause that loans would be subjected to meeting IMF designed conditions on economic reform.
This measure formalised a practice already applied selectively.
In the 1950s and 1960s on the rare occasion that an imperialist country had to turn to the IMF for a loan to overcome temporary balance of payments difficulties no conditions were attached, such as Britain in 1960. Meanwhile semi-colonies were treated differently. In 1954 Peru was the first Latin American country to turn for help to the IMF and had to agree to economic reforms to get its money; the same was true for Chile in 1956.
The debt crisis of the early 1980s saw a rush to the doors of the IMF. By the end of 1984 nearly 40 semi-colonies (plus Hungary and Romania) had signed agreements with the IMF. The way agreements are designed to avoid any democratic control. The IMF formulates a Letter of Intent, setting out the conditions, which the government signs and the funds are then granted. The agreement does not have to be published, nor does it have the status of an international treaty, which ensures that it does not have to be overseen or approved by parliament.
Nor does the IMF help come free. First, a country has to pay interest of 0.25% on the loan to cover the IMF agents’ fees; then it has to pay 4.5% on the loan, which goes to the member countries whose currencies are being borrowed from within the IMF pool, usually US dollars, sterling, yen or D-marks. All this represents a transfer of wealth from the semi-colonies to the imperialist countries.
For the privilege of handing over money to the US, UK, Japan or Germany via the IMF the debtor country has to subject itself to a structural adjustment plan, without which it will effectively be shut out of international capital markets and starved of investment. The effect of the plans are to secure bank profits and transfer national assets to the west.
The traditional IMF package of measures insists upon: devaluation of the national currency; raising interest rates; cutting back on government spending -p especially social spending; the elimination of food and other subsidies; an increase in prices charged by state enterprises (for energy, water etc.) or their privatisation; a cap on wages; and a restriction of credit.
All these “adjustment” measures have the same aim: to restrict domestic demand and deter imports while boosting exports through lowering their price. Any increased export income is then earmarked for debt repayment.
By restoring a balance of payments equilibrium or surplus in the short-term the IMF ensures that the country will be able to attract foreign capital back into the country. When it does so it will find that as a result of devaluation, assets are much cheaper than before.
These measures are only concerned with creating, or recreating, the conditions for imperialist super profits.
In Latin America the IMF’s policies led to a “lost decade” for the masses in the 1980s. Brazil is a typical example. In January 1983 Brazil signed an IMF Letter of Intent which set out a three year “stabilisation” programme. After the cruzeiro was devalued by 30 per cent the IMF approved a $4.5 billion loan in February. The measures included halving the balance of payments deficit in 1983 (to 2 per cent of GDP) and to 1 per cent by 1985.
Likewise the budget deficit was to be halved to 8% of GDP in 1983. Inflation, running at 100 per cent per annum was to be cut to around 85 per cent by the end of 1983. Interest rates were raised, state spending on services slashed and subsidies to nationalised industries cut. Export duties and import controls were slashed and the IMF insisted that the government pass legislation to facilitate profit transfers by foreign owned MNCs. It also demanded the abandonment of wage indexation to allow wages to fall.
Given that devaluation ensured that prices went up twice as fast as wages many people were impoverished. Exports increased but working class resistance ensured that wages did not fall as much as the IMF wanted; as a result they withheld the second tranche of money in 1983 and made the government sign up to increases in the price of petrol by 45 per cent and electricity by 90 per cent. In July the government passed a wages decree which held indexation of wages to 80% of the inflation rate.
More working class resistance led to the resignation of the Central Bank Governor in September 1983 and the IMF held back its loan. Brazil ran out of foreign exchange reserves and pleaded for debt rescheduling. Using brutal repression the government pushed through IMF measures and in November 1983 the IMF and the banks agreed a package of assistance to Brazil of $11 billion which in the words of one analyst “were used exclusively to meet foreign debt repayment commitments.”
Meltdown in South East Asia
The IMF used Latin American debtor countries to bench-test its neo-liberal orthodoxies in the 1980s. One by one each country adopted the export-driven model of growth, which involved an extensive programme of privatisation of state assets into the hands of western-owned MNCs, and a slash and burn attitude to welfare programmes.
But the meltdown in South East Asia in 1997 has delivered an enormous blow to the IMF’s neo-liberal theories of capitalist development.
Here were countries that were praised by the IMF as role models of Third World growth; export-driven economies with fixed stable exchange rates, open to foreign capital investment. The massive influx of private capital into these countries between 1990-96 by international banks was applauded by the IMF as the path to follow for all semi-colonies, something to be emulated by Africa and Latin America.
Last year these policies led to over-production, profit collapse, unserviceable debts and capital flight in Indonesia, Thailand, Malaysia, South Korea and the Philippines. These countries found they could not defend their currencies; one by one they collapsed. Given they had been following the prescribed IMF development path one might have imagined that the IMF would have reacted by providing unconditional funds to stabilise the exchange rate while devaluation worked its way through into an export led revival.
It did nothing of the kind. It demanded the traditional measures to cut deficits, depress demand and raise interest rates. It added a raft of measures to further deregulate the movement of capital, something that had contributed to the crisis in the first place.
The liberal critics of the IMF have been outraged by its intervention. But the IMF is not listening to them. Its real agenda is to use the crisis to lever open these countries and allow western banks and MNCs to take over the best parts of the economies. That is why the IMF agreement with South Korea, dated December 1997, requires far-reaching structural reform, the closing down financial institutions, letting foreign banks buy up domestic ones and an end to government directed lending. The IMF goal is clear:
“There is no doubt that Western and Japanese corporations are the big winners. The transfer to foreign owners has begun in the spirit of euphoria captured in the remark of the head of a UK-based investment bank, ‘If something was worth $1 billion yesterday, and now it’s only worth £50 million, it’s quite exciting.’ The combination of massive devaluations, IMF-pushed financial liberalisation, and IMF-facilitated recovery may even precipitate the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world, dwarfing the transfers from domestic to US owners that occurred in Latin America in the 1980s.” (R Wade and F Veneroso, New Left Review 228)
The future of the IMF
The pro-imperialist character of the IMF’s prescriptions and conditions has never been so clear. The scale of its intervention is so broad that the social consequences cannot be hidden from view. But the IMF is unrepentant. After all, that is why it was set up in the first place.
Its future can be resolved in one of two directions. The number and depth of member country economic crises in the 1990s have stretched the IMF resources to breaking point, raising fears that the next big crisis may be one too many. The IMF needs more money from the US, Europe and Japan to deal with the crisis now unfolding.
Yet the Republican Congress in the US only released a long overdue $18 billion subscription to IMF funds last month. The IMF needs much more. It may simply be overwhelmed by the scale of this crisis or the next one. In that case we could see a collapse of the global trading and payments system and a rerun the 1930s chaos. This is the reactionary path.
Alternatively, the struggles of the world’s poor and exploited against IMF-inspired austerity can wreck its plans and overthrow the bourgeois governments that try to implement them. This is the revolutionary path. Only along such a path can the banks and the factories of the world be taken out of the ownership and control of the capitalists and placed in the hands of those who toil in them.
Workers’ governments in a number of the most developed states in the world could begin to construct an alternative monetary order to that of the IMF. It would be an order based on a global system of socialist planning, a system dedicated to raising the standard of living of the world’s poorest.
The expropriation of the banks would abolish national debts. No longer would export earnings feed the profit lust of the world’s financiers or oversee the transfer of a poor nation’s wealth to a handful of multinationals.
A democratically controlled international monetary institution would oversee a system of payments at stable rates of exchange between members of a socialist federation while different national currencies continued to exist. But a socialist transition, in which each country was integrated into a international plan of production and distribution, would increasingly eliminate the need for several competing currencies. Abolishing the transaction costs associated with a system of currency exchange would release further resources for productive use.
Monetary policy would be directed at measuring improvements in labour productivity in and between different countries and thereby signal to other planning institutions how to spread the benefits within the system as a whole.
None of this was on the agenda at Bretton Woods in 1944 at the conference that set up the IMF. Nor will it be if the world’s bankers ever get around to holding the much talked about “new Bretton Woods” conference. What we need is those same placards worn by Seoul’s protesters to be tied onto the backs of the economists and financiers holed up at the HQ in Washington: IMF = I’M Fired.
Notes: IMF Structure
* The IMF has 182 member countries. At the start of 1998 member countries had paid in $193 billion. Its base is in Washington DC; it employs 2600 staff.
* Broad policy is set by an annual meeting of a Board of Governors, with one from each member country. The Executive Board, with 24 full time members in Washington, oversees day to day policy. Michael Camdessus is the IMF Managing Director.
* Voting rights in the IMF are proportional to the amount of money paid in. The USA has 18% of votes for its $35 billion payment. This allows it to veto any changes to the IMF Charter, which requires 85% approval. The G8 countries have more than 50% of the votes; 174 countries share the rest.