International Monetary Fund and the Inter-American Development Bank: A History of Limited Choices and Broken Promises – Part II

Yesterday, COHA published Part I of COHA Research Associate Will Petrik’s article on the relationship between international finance institutions and Latin America. Part II examines whether recent modifications to IMF and IDB’s lending policies will actually facilitate substantive change in the region and rectify the oft-expressed grievances against the western-dominated lending agencies.

  • The IMF and IDB loosen the terms of loan agreements, but will this really signify change?
  • Increased volume of loan requests by Latin American countries being made
  • Remnants of old policies litter the fiscal landscape

  • IMF and IDB’s New Influence
    This all changed when the economic crisis began to descend upon Latin America as foreign capital started to evaporate. According to the Economic Commission for Latin America and the Caribbean, foreign investment in Latin America crashed from $184 billion in 2007 to $89 billion last year. Estimates predict that foreign investment in the region may be as low as $43 billion for the 2009 fiscal year. The response from the G20 and the IDB annual meeting is similar to Washington’s response to Wall Street’s credit freeze—pump more money into the major banks. In this respect, the IDB and the IMF were the major beneficiaries of recapitalization. As the IMF Managing Director Dominique Strauss-Kahn asserted, “Today is the proof that the IMF is back.” The IMF Western Hemisphere director Nicolas Eyzaguirre agreed, saying, “I wouldn’t be exaggerating if by the end of the year we have double or triple the number of programs.”

    Since the crisis hit, a number of Latin American countries already have boosted their borrowing capacity from the IDB and the IMF, among other regional and international financial institutions, according to the CIP. For example, Costa Rica ($500 million with another pending $850 million), El Salvador ($400 million), Jamaica ($600 million), Dominican Republic ($300 million), Uruguay ($285 million), Ecuador ($1.5 billion), Colombia ($1 billion), Argentina ($1.5 billion) and Mexico ($2.5 – $3.5 billion) have all made agreements with the IDB to secure financing for export, liquidity, infrastructure, government efficiency initiatives, or other private sector investments. The IMF approved stand-by credit lines with El Salvador ($800 million) and Guatemala ($950 million) and is in the process of negotiation with President Arias of Costa Rica for a potential stand-by agreement.

    Mexico is also seeking out the help of the IFIs to respond to the credit crisis. In 2008 alone, the country received $6 billion from the IDB for low-income housing, public works, transportation, and anti-poverty programs. According to Reuters, Mexico was forced to sign a $47 billion IMF Flexible Credit Line (FCL), because the peso has taken a large hit due to Mexico’s increasingly costly and extensive drug war. Additionally, the peso is also declining because of Mexico’s proximity and volume of trade with the U.S. After Mexico and Poland, Colombia recently requested $10.4 billion from the IMF under its new FCL facility. Interestingly, a number of these nations initially running to the IDB and the IMF for help already have close economic ties with the U.S. through NAFTA and CAFTA. Thus, it is evident that the IMF and the IDB will have more influence in the region as the financial crisis rages on, especially in countries that are dependent on trade with the U.S. But, looking back at the lending agencies’ history in the region, the big question on everyone’s mind is, “Have they reformed their failed policies?”

    IMF Terms and Conditions—Change in Policy?
    The G20 leaders called for changes in the IMF policies, focusing on the harsh conditions that the latter places on recipient nations. They told the Fund to make a bridging loan that is more flexible and to give low-income countries more autonomy in disbursing their borrowed money, but the Fund was one step ahead of the Summit leaders. According to the Washington Post, the IMF reformed its lending policies just weeks before the summit to “make it easier for countries with strong economic policies to borrow more, faster and with fewer strings attached.” Thus, only countries deemed to have weak economic policies will be subject to conditionalities. The new IMF program, the Flexible Credit Line (FCL), which Mexico recently agreed to, replaces the Short-Term Liquidity Facility introduced last October, which was criticized for offering too little money and having terms that were too rigid. Alejandro Werner, Mexico’s deputy finance minister, was cited in a recent Economist article as supporting the new program for its flexibility, size, and the IMF’s willingness to consult emerging economies while designing the new program, in order to better meet their needs. The new FCL acts as a preventative insurance measure rather than a “shock” reaction to crisis.

    However, there are critics who suggest these antics are just more of the same. Mark Weisbrot of the CEPR is skeptical of recent reforms, because nine IMF agreements negotiated since September 2008, including with El Salvador, have contained some of the old elements of tough terms and conditions. Weisbrot asserts that as part of the nine agreements the IMF has imposed conditions, such as “fiscal (budget) tightening, interest rate increases, wage freezes for public employees, and other measures that will reduce aggregate demand or prevent economic stimulus programs in the current downturn.” However, it is unclear if any of the nine agreements can be properly kept under the new FCL program.

    In a Democracy Now interview last week, Noam Chomsky exposed the inherent contradictions of the IMF’s ideologically-driven stipulations. As the IMF instructs poor countries to pay off debts, raise interest rates, and privatize its companies, it stands silent as the U.S. ignores its debt explosion, lowers interest rates to stimulate the economy, and nationalizes banks and other sectors. The IMF essentially lectures poor nations on the benefits of free trade and free markets, while the U.S. practices extreme protectionism by propping up and subsidizing the rich, “too big to fail” institutions. With the IMF’s main source of funding coming from the U.S. and the E.U., it is “excessively hesitant in talking to rich countries about faults in their policies,” as Raghuram Rajan, a former chief economist of the IMF, observes.

    IMF’s Managing Director Strauss-Kahn recently implied that the IMF’s advice will become less ideological and more pragmatic to keep with the times: “If the fund is considering a country and is technically convinced that privatization of any enterprise is needed to fix the country today, let’s privatize. But if it’s a general idea of privatization that has nothing to do with the problem, let’s forget it. At the same time, if nationalization will help, let’s do it.” This rhetoric represents a radical shift from old policies, but only time will reveal whether the Fund’s new practices harmonize with such bold statements.

    Change in IDB Development Policy?
    Any number of IDB policies have been embroiled in contradictions in recent years. In 2006, the IDB adopted a new policy known as the Sustainable Energy and Climate Change Initiative. However, the “50 Years of Financing Inequality” coalition argued that since the policy was initiated, only 12 percent of new projects actually implemented the original goals of focusing on renewable energy. Most of the loans maintained support of fossil fuel-based energy projects, according to IPS. To refute these claims, the IDB recently published a “2008 Sustainability Review.”

    Disappointingly, the recent IDB meeting in Medellín, Colombia continued to ignore civil society’s call for policy reforms. Instead, the agenda focused on recapitalizing the bank and enhancing loan capacity. Colombian economist, Héctor Moncayo, of the Colombia-based Latin American Institute for Alternative Legal Services (ILSA), told IPS that the IDB should conduct a critical analysis of its 50 year history. Moncayo argued that this would allow the IDB to modify its approach to development, promote greater transparency, and enhance civil society participation in its activities. Former U.S. president Bill Clinton, whose “trade not aid” strategy never strayed far from orthodoxy in such matters, participated in the IDB meeting, also called for mechanisms to increase civil society participation. If a more effective mechanism to empower the voice of the communities existed within the bank, there may be an opportunity for the people to prohibit or regulate the more destructive infrastructural projects. However, as long as the IDB sits in Washington with power concentrated in the hands of a few wealthy dominant nations, it is doubtful that Latin American citizens and civic groups will have much influence on the type of projects the IDB funds.

    The Global Financial Architecture — Are Emerging Voices Being Heard?
    From the perspective of the developing nation, a major flaw of the IMF has been a lack of power that is afforded to emerging market economies within the organizational structure of the Fund. The U.S. and Europe created the IMF, imbedded its policies with their free market ideology, and have had the resources necessary to maintain the power to govern and refuel it (with the help of China this time), as recently was seen at the G20. The legacy of the global distribution of wealth during the time of the Bretton Woods conference is continuing to silence innovative ideas and bold new policies from the Global South.

    To address the issue, the G20 called for modest reforms in the shareholdings of the IMF’s corporate governance structure to be implemented by October of this year. The percentage of shares determines each country’s voting power and its level of contribution to the Fund. As of October, Brazil will have 1.72 percent of the vote and India will have 2.34 percent, compared to Belgium’s 1.86 percent and the United States’ 16.73 percent, according to the Economist. Although the shift will give China and India a modest greater say in how the IMF functions, the minor changes do not reflect the shift in the global financial architecture that developing nations desire. Another round of quota changes is scheduled for January 2011, at which point the U.S. could finally lose its veto power over bank decisions.

    The G20 also agreed to ensure that “the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process,” according to the Economist. This differs from choosing a managing director “irrespective of nationality,” as called for by finance ministers from emerging economies. An “appointment” also differs from a democratic process where each country has an equal voice in the selection. However, such a shift could potentially end the tradition of an American president of the World Bank and the chief officer of the IMF. The G20 also established a new Financial Stability Board (FSB), which incorporates all members of the group for the first time in its young history, according to the BBC. It will replace the Financial Stability Forum, which was made up of central banks and finance ministries from the U.S. and the EU. This will allow developing economies to have some voice in financial regulatory policy. The FSB also reflects a symbolic inference of a changing world order.

    Implications For Alternative Finance and the Future of the IMF
    The new power of the IMF and the IDB may equip the neo-liberal ideology that has dominated the developing world with a stronger voice, or it may transcend ideology as the IMF’s director suggested would be the case. The recapitalization coupled with the credit freeze will also generate a new wave of debt and dependency throughout the developing world, as it potentially undercuts as well as threatens the growth of alternative financing mechanisms, such as the Bank of the South and the ALBA Bank. The current crisis should precipitate a global debate regarding the old global financial order, but the G20 and the IDB meeting seem to conclude that more money is the solution rather than innovative planning. The meetings sadly inhibited debate regarding innovation and radical alternatives.

    The G7 and G20 finance ministers will meet in Washington, D.C. this weekend to discuss recapitalization of the IMF. We should begin to see a clearer picture of the true changes within the IMF, regarding its organizational structure and its authority to act as a global banker, economic manager, insurance provider, as well as a global financial regulator. The mainstream media is already calling the IMF recapitalization a “radical” transformation. Yet, history may just be repeating itself. The Washington Consensus already has allowed the U.S. and the IMF to manage much of the developing world’s economic policies. True change will only occur when voices from the developing world have equitable power to create, impose, and enforce global financial policies as much as anyone else. However, world leaders and finance ministers could be empowering a global economic machine that by its nature is not entirely democratic. In the past, this far-removed system of global governance has made it nearly impossible for individuals, communities, and even nations to hold the IMF fully accountable. There is no guarantee that this status quo will not be altered.