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IG Metall
A measure of IG Metall's clout is the persistent rumor that the ECB has held off on sorely needed interest rates cuts on account of the German trade union's wage demands. Moreover, though, with 2.7 million members, it is only the second largest, IG Metall serves as the benchmark and the trendsetter to less veteran or less sonorous unions in Germany. Ver.di, the service sector's behemoth, with 3 million members, waited for IG Metall's regional wage boards to pronounce their sentence before plunging into its own negotiations with employers. Miraculously, it - and many other unions - ended up demanding the very same pay rise as did the metal-bashers. IG Metall's standing reflects the historical reverence accorded in Germany to the engineering and scientific professions. IG Metall justified the outlandish wage increases it insists on (4-5 percent) - and the impending strike in Baden-Württemberg by 50,000 (out of 3.6 million) metalworkers on May 6 - by saying that the raises will boost domestic consumption and revive the flagging economy. Some of the extra money will be used to modernize the pay framework agreements and equate the status and the remuneration of blue collar and white collar workers doing "similar" jobs. Warning strikes have already erupted over the last few weeks. The main employers' federation, Gesamtmetall, threatened the striking employees with lockouts. The strike may yet be averted. Employers are offering an across the board hike of 3.3 percent over the next 15 months and a one time cash handout of $170 per worker. This is imperceptibly lower than IG Metall's target of 4 percent. IG Metall is likely to buckle down and agree to arbitration or mediation, perhaps by the embattled Schroeder, though he is reluctant to gamble his political future on the outcome as he has done two years ago. A compromise of 3.6 percent is likely, though. As IG Metall knows, many an invincible union perished through bungled strikes. Moreover, IG Metall's previous strike was in 1995 and it cannot afford to alienate a socialist Chancellor who is in the throes of a re-election campaign. Still, it is implausibly threatening to spread the unrest from its stronghold, the southern state of Baden-Württemberg, to Berlin and Brandenburg. Ominous mutterings of a repeat of the mythical six weeks strike in the spring of 1984 abound. This reads like a repeat of the wage negotiations in 2000. Then, as now, IG Metall demanded an increase of 5.5 percent as well as a reduction in retirement age to 60 and in the working week to 32 hours. Warning strikes petered out and the union capitulated by accepting a two year contract with modest pay rises (3 percent in 2000 and 2.1 percent in 2001). The two previous annual wage settlements trailed inflation, expected to reach 2 percent this year. They reflected only a part of the handsome productivity gains throughout German industry. Net profits in IG Metall's sectors climbed from 1 billion DM in 1993 (a recession year) to 55 billion DM in 2000. Real unit labour costs tumbled - but mainly due to massive layoffs. More than 1.5 million workers out of a total of 5 million in 1991 were sacked. IG Metall wants its members to recoup some of their past generosity. In a typical German euphemism, this grab is called a "redistribution component". Admittedly, German employers abused the union's relative wage restraint during the 1990's. They did not create additional employment, nor did they invest in the retraining and re-qualification of workers made redundant. The union justly claims that wage moderation only fostered the transfer of wealth from labour to capital (i.e., from employees to shareholders). Whatever the outcome of this industrial action, the employers will foot the bill. "Frankfurter Allgemeine" estimates that every day of the strike would translate to a whopping $2.3 billion in lost net output. Each 0.1 percent in wage increases costs the metal and electric industries c. $140 million a year. This in an industry mired in declining orders and falling production. IG Metall's Web site is a militant affair. "Right to Strike - Away with the anti-strike paragraphs!" -it thunders. "Strike is a civil right - lockout is a misuse of power" - it preaches. It even provides practical "how-to-strike" guides, tips for strikers, and promotes a new model of "flexi-strike". IG Metal is strict about the universal implementation of the collective agreements it painstakingly negotiates with employers. Such agreements typically tackle not only wage levels but issues like training, reduction in working time, safeguarding jobs, and equating eastern pay with western standards. The comprehensiveness and all-pervasiveness of the collective bargains is Procrustean. "The Economist" reports the case of Viessmann, a German engineering firm. To avoid shifting the production of a new boiler to the Czech Republic, it negotiated with its workers an increase in the working week without a commensurate pay rise. IG Metall blocked the deal, though it later compromised. This is a typical story. The collective agreements in 2000 and 2001 were an aberration and a political concession to a socialist regime in trouble. In contrast, wages rose 4.1 percent in workplaces covered by the 1999 settlement with IG Metall - most of them multinationals who exploited the agreement's egregious terms to squeeze their indigenous Mittelstand suppliers. IG Metall is notoriously intransigent. Unlike its brethren in other industries, it refuses to link pay rises (or even annual bonuses) to profitability, for instance. It rejects the idea of implementing, by mutual consent of employees and employers, wage reductions or overtime to prevent lay-offs. It abhors profit sharing schemes, either regional, or sectoral, or even confined to the single plant level. It would not sign two-year pay agreements based on "bad experience" in the past. Many exasperated firms resort to the profligate exercise of "opening (escape) clauses". They renege on the collective agreements without being seen to flout the rules. Employers ask employees to continue the working day at home after hours. Some workers clock out but continue to work all the same. Other firms - especially in the east - opt out of the employers' associations altogether, thus exempting themselves from onerous collective pay agreements. Many attribute IG Metall's irrational exuberance to its rational fears of becoming marginalized and irrelevant. Wage increases - the union's only political leverage - are hard to negotiate in an environment of stable and low inflation, high unemployment, and ever more flexible labour markets. The unions hitherto refrained from tackling the most pressing issues: flexible time, part time work, retirement, low wage jobs, social security reform, illegal immigrants. IG Metall spent the last 15 years negotiating an agreement to apply uniform wage criteria to blue-collar and white-collar workers. The "Alliance for Work" pact between unions, employees, and government, proposed by its Chairman, Klaus Zwickel, in its 18th convention in 1995, went nowhere effective, though it was signed by all three parties. It included revolutionary ideas like linking pay to productivity - in return for job creation by the private sector and unemployment subsidies by the state. This was also the fate of a 1997 initiative to reduce working hours in parallel with wages in order to boost job formation. Paradoxically, the higher the pay of its members - the less strike-prone is the union. Lay-off and strike pay doled out by the union is a function of the striking member's base wage. Add to this current expenditures - IG Metall employs more than 2000 people in its headquarters alone - and the limits of its postured belligerence become discernible. In a major survey conducted last year in the framework of the unions' "Debate on the Future" initiative, 78 percent of German workers - union members and non-members alike - professed to being more interested in job security than in higher pay. Nine out of 10 respondents expected the unions to support secure jobs and fight unemployment. Some workers begin to fathom the union's role in destroying employment by foisting a non-competitive wage structure upon reluctant employers. Eighty percent of employees surveyed expected IG Metall to do much more for the unemployed. Regrettably, the vast majority of the membership of IG Metall are still pugnacious and under the sway of populist activists. Even so, IG Metall is past its heyday. It is the anachronistic outcome of numerous mergers with other fading unions in the plastics, textile, and wood industries. Despite these acquisitions and the influx of East German laborers, its membership hasn't budged since the early 1980's. In the 1990's alone it has declined by more than a million members - almost one third of the total - despite acquiring a million new members from the east. One third of the members are retired. Less than 7 percent are under the age of 25. Women are deserting the union in droves. IG Metall represents less than 30 percent of actively employed workers in its industrial sectors. In its "Debate on the Future" survey only 5 percent of all respondents said they would "definitely" join IG Metall. Only 3 percent imagined a long-term membership. Two thirds of the unorganized employees surveyed said they have no interest whatsoever in becoming union members. The surges in membership that followed previous confrontations with employers seem to have abated. And 1 percent of gross wages in membership dues is a lot to pay for ill-defined and uncertain benefits. The average wage in industry - among the highest in the world - amounts to $37,000 a year, including social security contributions. To make matters worse, in the last few significant rounds of wage negotiations, IG Metal lost its traditional bellwether role to IG BCE, the more nimble union of workers in the chemical and energy sectors. This much smaller new union signed the first collective agreements each time, thus weakening IG Metall's hand in its own negotiations. There are cracks in IG Metall's hitherto uniform ideological facade. On March 1998 it signed an agreement with Debis - a group of car makers and metal bashing firms represented by Daimler-Benz. It agreed to let the employers decide how to flexibly implement a reduced working week of 35 hours. Five thousand companies had individual contracts with unions by the end of 1997. Last August, bowing to political pressures by the SDP and the public outcry of its own members, IG Metall signed a plant level agreement with Volkswagen. This vitiated its insistence on exclusive industry-wide agreements. Moreover, the VW deal includes flexible work rules and pay. Five thousand workers are each to be paid 5000 DM a month to produce Volkswagen's 5000 model. The convergence of the manufacturing and services sectors leads to mergers or collaborative efforts among competing unions. Fields like Information Technology (IT), telecommunications, pharmaceutics, and biotechnology blur the lines between knowledge and production. Last year, for instance, IG Metall created a joint bargaining committee with the new umbrella services union, Ver.di. The committee - the indirect outcome of arbitration involving the two unions - will represent all of IBM's 26,000 workers in its German subsidiaries. Ver.di includes as one of its components one of IG Metall's most bitter rival unions, DAG. But it would take a determined - and somewhat Thatcherite - government to face the unions down. Many German luminaries advocate a sea change in the laws pertaining to strikes, labour relations, and wage bargaining. Strikes should be allowed only after mediation fails. Employers and employees should negotiate plant-level arrangements. These seismic shifts will not transpire without a bloodied fight. Unions are monopolies and they act as cartels. Their interests are overwhelmingly vested in the status quo. Yet, such a showdown is long overdue - and victory is within reach. Only one in five working age Germans - less than 8 million - belong to a union. Overall membership deflated by almost two fifths since unification. Even the awesome industry wide agreements cover a mere one fourth of German firms in the east - and a one half of all businesses in the western Lander. No wonder that IG Metall has in its sights targets in east Germany and in Germany's "sphere of influence". The union owns the Otto Brenner Foundation. It is named after IG Metall's first boss and was established in 1972 "to promote the metalworkers trade union". In 1997, its dismal finances were boosted by the serendipitous liquidation of IG Metall's assets in the former East Germany. Though claiming to engage in impartial "scientific" research, the Foundation aims to spread the union gospel among the heathen of central and eastern Europe and, especially, the eastern German Lander. The Foundation's Administrative Board is appointed by IG Metall. Perhaps in an effort to improve its public image, IG Metall issued, in January 1999, a press release in support of compensation for forced laborers in the metal industry. It notes that the 10 million slaves that toiled and perished in German factories during the Nazi occupation of Europe constituted 40 percent of Germany's industrial workforce. More than 1000 concentration camps were "directly near or on" company property. It took IG Metall - an ostensibly leftist organization - almost 50 years to condemn the crimes of German business and industry during the Nazi era. It is a measure of the glacial tempo of its decision making processes. Nothing seems to shake it from its well rehearsed torpor. It, therefore, is probably doomed to share the fate of other unions - gradual but assured dissipation. IMF (International Monetary Fund) “IMF Kill or Cure” was the title of the cover page of the prestigious magazine, "The Economist" in its issue of 10/1/98. The more involved the IMF gets in the world economy - the more controversy surrounds it. Economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are not too happy with it, all are loudly complaining. Some economists regard this as a sign of the proper functioning of the International Monetary Fund (IMF) - others spot some justice in some of the complaints. The IMF was established in 1944 as part of the Bretton Woods agreement. Originally, it was conceived as the monetary arm of the UN, an agency. It encompassed 29 countries but excluded the losers in World War II, Germany and Japan. The exclusion of the losers in the Cold war from the WTO is reminiscent of what happened then: in both cases, the USA called the shots and dictated the composition of the membership of international organization in accordance with its predilections. Today, the IMF numbers 182 member-countries and boasts "equity" (own financial means) of 200 billion USD (measured by Special Drawing Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110 countries. It is truly international. The IMF has a few statutory purposes. They are splashed across its Statute and its official publications. The criticism relates to the implementation - not to the noble goals. It also relates to turf occupied by the IMF without any mandate to do so. The IMF is supposed to:
The IMF tries to juggle all these goals in the thinning air of the global capital markets. It does so through three types of activities: Surveillance The IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "(with the countries' monetary and fiscal authorities). The famed (and dreaded) World consultation" Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance. Sometimes, countries which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country - or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings. The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored. Financial Assistance Where surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair. Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later. Technical Assistance The last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data - where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions - no policy will succeed, no matter how right. From the narrow point of view of its financial mechanisms (as distinct from its policies) - the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal. A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction. A country can draw no more than 25% of its quota in the first tranche of a loan that it receives from the IMF. The first tranche is available to any country which demonstrates efforts to overcome its BOP problems. The language of this requirement is so vague that it renders virtually all the members eligible to receive the first instalment. Other tranches are more difficult to obtain (as Russia and Zimbabwe can testify): the country must show successful compliance with agreed economic plans and meet performance criteria regarding its budget deficit and monetary gauges (for instance credit ceilings in the economy as a whole). The tranches that follow the first one are also phased. All this (welcome and indispensable) disciplining is waived in case of Emergency Assistance - BOP needs which arise due to natural disasters or as the result of an armed conflict. In such cases, the country can immediately draw up to 25% of its quota subject only to "cooperation" with the IMF - but not subject to meeting performance criteria. The IMF also does not shy away from helping countries meet their debt service obligations. Countries can draw money to retire and reduce burdening old debts or merely to service it. It is not easy to find a path in the jungle of acronyms which sprouted in the wake of the formation of the IMF. It imposes tough guidelines on those unfortunate enough to require its help: a drastic reduction in inflation, cutting back imports and enhancing exports. The IMF is funded by the rich industrialized countries: the USA alone contributes close to 18% to its resources annually. Following the 1994-5 crisis in Mexico (in which the IMF a crucial healing role) - the USA led a round of increases in the contributions of the well-to-do members (G7) to its coffers. This became known as the Halifax-I round. Halifax-II looks all but inevitable, following the costly turmoil in Southeast Asia. The latter dilapidated the IMF's resources more than all the previous crises combined. At first, the Stand By Arrangement (SBA) was set up. It still operates as a short term BOP assistance financing facility designed to offset temporary or cyclical BOP deficits. It is typically available for periods of between 12 to 18 months and released gradually, on a quarterly basis to the recipient member. Its availability depends heavily on the fulfilment of performance conditions and on periodic program reviews. The country must pay back (=repurchase its own currency and pay for it with hard currencies) in 3.25 to 5 years after each original purchase. This was followed by the General Agreement to Borrow (GAB) - a framework reference for all future facilities and by the CFF (Compensatory Financing Facility). The latter was augmented by loans available to countries to defray the rising costs of basic edibles and foodstuffs (cereals). The two merged to become CCFF (Compensatory and Contingency Financing Facility) - intended to compensate members with shortfalls in export earnings attributable to circumstances beyond their control and to help them to maintain adjustment programs in the face of external shocks. It also helps them to meet the rising costs of cereal imports and other external contingencies (some of them arising from previous IMF lending!). This credit is also available for a period of 3.25 to 5 years. 1971 was an important year in the history of the world's financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF - it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility) which provided, for the first time, MEDIUM term assistance to members with BOP difficulties which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years. The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account) which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established. During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes - the contributions did not meet its expanding roles. It got involved in the Latin American Debt Crisis - namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening - the monetary police of the global economic scene. The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low income members which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth - providing that they are enduring protracted BOP problems. ESAF loans finance 3 year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds. In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility - also used by Macedonia). It was a temporary outfit which expired in April 1995. It provided financial assistance to countries which faced BOP difficulties which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years. In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund's approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia. Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank. The Board of Governors oversees the operation of a Board of Executive Directors which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System. The members' voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK. There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers - many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully). This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment - the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful - the credit goes to the politicians, if failing - the IMF is always to blame. Rage and other negative feeling which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have - the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) - the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result - from donor countries, as well) - the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded. Despite these shortcomings, the IMF assumed two roles which were not historically identified with it. It became a country credit risk rating agency. The absence of an IMF seal of approval could - and usually does - mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) is shifted - so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler - the losses to the IMF. This does not encourage prudence or discipline. The IMF is too restricted both in its ability to operate and in its ability to conceptualize and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin - a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalization is dubious (to use a gross understatement - the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic) and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico and not Bulgaria - is it because it shares no border with the USA), politicization (South Korean officials complained that the IMF officials were trying to smuggle trade concessions to the USA in an otherwise totally financial package of measures) and too much red tape. But this was to be expected of an organization this size and with so much power. The medicine is no better than the doctor or, for that matter, than the disease that it is intended to cure. The IMF forces governments to restrict flows of capital and goods. Reducing budget deficits belongs to the former - reducing balance of payments deficits, to the latter. Consequently, government find themselves between the hard rock of not complying with the IMF performance demands (and criteria) - and the hammer of needing its assistance more and more often, getting hooked on it. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". With all due respect (Chossudowski conducted research in 100 countries regarding this issue), this looks a trifle overblown. Overall, the IMF has beneficial accounts which cannot be discounted so off-handedly. But the process that he describes is, to some extent, true: Devaluation (forced on the country by the IMF in order to encourage its exports and to stabilize its currency) leads to an increase in the general price level (also known as inflation). In other words: immediately after a devaluation, the prices go up (this happened in Macedonia and led to a doubling of the inflation which persisted before the 16% devaluation in July 1997). High prices burden businesses and increase their default rates. The banks increase their interest rates to compensate for the higher risk (=higher default rate) and to claw back part of the inflation (=to maintain the same REAL interest rates as before the increase in inflation). Wages are never fully indexed. The salaries lag after the cost of living and the purchasing power of households is eroded. Taxes fall as a result of a decrease in wages and the collapse of many businesses and either the budget is cruelly cut (austerity and scaling back of social services) or the budget deficit increases (because the government spends more than it collects in taxes). Another bad option (though rarely used) is to raise taxes or improve the collection mechanisms. Rising manufacturing costs (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) lead to pricing out of many of the local firms (their prices become too high for the local markets to afford). A flood of cheaper imports ensues and the comparative advantages of the country suffer. Finally, the creditors take over the national economic policy (which is reminiscent of darker, colonial times). And if this sounds familiar it is because this is exactly what is happening in Macedonia today. Communism to some extent was replaced by IMF-ism. In an age of the death of ideologies, this is a poor - and dangerous - choice. The country spends 500 million USD annually on totally unnecessary consumption (cars, jam, detergents). It gets this money from the IMF and from donor countries but an awful price: the loss of its hard earned autonomy and freedom. No country is independent if the strings of its purse are held by others. I. The Organization A typical week at the IMF. Franek Rozwadowki, the new Chief of Mission for Macedonia implored the government to "implement prudent fiscal and monetary policies, particularly on wages (which impact) the budget, employment, and growth." The government - facing elections in September - and the IMF failed to conclude a standby agreement for 2002-2003. In another fragile corner of the globe, the Senate of Argentina, at the behest of the IMF, scrapped the 1974 Law of Economic Subversion often applied to foreign investors by the military junta and, more recently, by the courts. It was one of numerous conditions posed by the IMF in its negotiations with the embattled government. The Malawian authorities accused the IMF of "encouraging" the country to sell its strategic maize reserves at a 50 percent loss on the eve of crippling and famine-inducing crop shortages. The proceeds were to be used to pay off foreign commercial debts - claimed the Minister of Agriculture. The IMF denied any involvement and pointed the finger at both a food expert of the European Union - and the Malawi government. In Uruguay - the hapless victim of Argentina's meltdown - the Fund supported a tripling of an existing loan to $2.2 billion. The IMF praised the government's unpopular hiking of taxes on salaries and pensions in the midst of a severe recession. It was the only way Uruguay could comply with its fiscal targets, it said. The IMF was founded in 1944 by the nearly victorious allies. It reflects the lessons derived from the global depression that preceded and precipitated the conflagration. Its limited and crystal clear charter reads: "The IMF was created to promote international monetary co-operation ; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members." Like other Cold War structures - the IMF is an organization in search of a mission. It is more powerful, more controversial, more intrusive, more paternal, more coercive, more ubiquitous and more integrated with the US administration and other multilateral agencies and institutions than it has ever been. It has "invaded" the turf of other agencies and NGO's and appropriated some private sector functions as well. In the process, it has exceeded its charter and its mandate by far and has transformed itself into a combination gigantic research institute, consultancy house, technical training facility, university, rating agency, supervisory authority, development bank, investment bank, and executive with sharply increased powers. Many resent this mission creep or feel threatened by it. Others question the wisdom of such functional imperialism and its impact on the IMF and on its "clients" and shareholders - the nation-states. Doubts are voiced: is the IMF, this Byzantine bureaucracy, truly necessary? Can't the private sector take over many of its roles? The IMF's lack of transparency and accountability do not help. It had to pass a special "transparency decision" in January 2001, calling for more thorough disclosure of its deliberations with member countries. Responding to the indignant outcry of NGO's and the private sector - the IMF has recently formed an Internal Evaluation Unit. Yet, its inner processes, its finances, the inflated wages, perks and perquisites of its much feted and bloated bureaucracy - all remain alarmingly opaque. As an example of the IMF's unexpected mutation, consider, for instance, its growing role in the regulation and surveillance of capital and financial markets throughout the world. Last week, at the First Annual Forum of APEC's Finance and Development Program held in Beijing, the IMF's affable Deputy Managing Director, Shigemitsu Sugisaki, summed up the current philosophy of the lending agency: "Our main priorities at the IMF have been on strengthening surveillance and crisis prevention. We cannot expect to eliminate all future crises, nor can we expect to be able to fully anticipate them. However, we can do a better job of reducing the risks of crises by promoting sound policies and the development of strong institutions by our member countries, as well as better risk assessments and investment decisions by market participants." A new International Capital Markets Department keeps track of private capital flows, collaborates with other departments on assessment of vulnerabilities, on the monitoring of markets, forecasting, and the development of early warning systems. Sugisaki is unabashed about the IMF's role in providing investors with "a stronger basis to make judgments about the allocation of private capital" - hitherto the reserve of private sector rating agencies and global investment banks. The IMF regularly issues Reports on the Observance of Standards and Codes (ROSC's) which cover "institutional issues, in particular on data dissemination, fiscal transparency, monetary and financial policy transparency, and financial sector issues". The IMF is collaborating with the OECD's FATF (Financial Action Task Force) on an anti-money laundering module. This is only one of the Fund's institutional reform initiatives - hitherto tackled by the World Bank, NGO's, multilateral organizations (such as the UN), and bilaterally, between governments. The Fund - jointly with the World Bank and other multilateral institutions - provides its members with a "Financial Sector Assessment Program" (FSAP) - a review of financial institutions, legislation, regulation, and supervision coupled with prescriptive measures to counter detected vulnerabilities. This review process covers also off shore money centers. But the IMF is now competing head on not only with rating agencies and investment bankers - but also with regional development lenders and with its Bretton-Woods twin, the World Bank. IMF officials, rendered cynical by decades of friction with crime gangs thinly disguised as governments - consistently disparaged and mocked the feely-touchy, less than rigorous approach to lending of their World Bank counterparts. To the citizens of many impoverished countries, who bear the brunt of its dogmatic austerity measures, the IMF is a repository of privileged and confidential information about their countries. It is unelected, unsupervised, misunderstood - yet, seemingly omnipotent and forever encroaching on often hard-earned sovereignty, like some sinister Medieval order. In a dialog with Tom Rodwell, an Australian journalist, I wrote: "The IMF has yet to adopt the "client-orientated" approach. It harbors deep (and oft-justified) distrust of the willingness of governments to blindly follow its dictates. It is a paranoid organization, based on authoritarian techniques of 'negotiations' and 'agreement'. Euphemisms rule. Normally, the IMF holds 'consultations' with the host governments. These are rather one-sided affairs. The governments are needy and impoverished ones. They lack the cadre of educated people needed in order to truly engage the IMF in constructive discourse. They are intimidated by the bullying tactics of the IMF and of its emissaries. The tone is imperial and impatient." I was, therefore, startled to learn that the IMF's hallowed Executive Board has approved, on May 10, the Africa Capacity Building Initiative "in response to the urgent call by African leaders ... to strengthen economic governance and domestic capacity ... to carry out sound economic poverty-reducing policies." Though presented as part of the IMF's ongoing technical assistance program - it is clearly and closely linked to political initiatives in Africa by the American administration - and to the New Partnership for Africa's Development, South Africa's pet project. The World Bank and assorted donors - as well as the atrociously run African Development Bank - are supposed to act as equal partners. Still, the Initiative is clearly "owned" by the IMF. Its resident experts are slated to do the bulk of the arduous work. The IMF has, thus, firmly established itself in the hitherto excluded bureaucratic turf of development financing. The argument against the IMF often revolves around two axes: That it is a neo-colonialist institution, out to perpetuate the hegemony of rich countries over poorer ones - and that it is an impregnable fortress of outdated, inappropriate, even detrimental economic policies, collectively known as "The Washington Consensus". The IMF is undoubtedly under undue political influence by the USA - which underwrites a quarter of its budget and hosts its headquarters. The recent spate of lending to Turkey and past excesses in Yeltsin's venal and mismanaged Russia are attributable to such American arm-twisting. It is also true that the IMF is greatly concerned with its members' ability to service their external debt and, therefore, with the debt's size, sustainability, and sensitivity to fiscal and monetary policies. In this sense, the IMF is, indeed, the guardian of foreign creditors and their representative and enforcer. It so happens that most creditors are rich countries or banks and investors from the West. But it would be nothing short of paranoid to postulate some kind of conspiracy, or colonial-mercantilist designs, or to claim, as the Canadian Prof. Michel Chussodowski does, that the IMF is a willing and cognizant instrument in the destruction of certain nations (e.g., Yugoslavia), or, generally, accuse it of other geopolitical machinations. Few of the IMF's vocal anti-globalization opponents know that it deals as regularly and as strictly with its richer members - even those which do not require its assistance, advice, or intervention. On May 8 it concluded the mandatory Article IV consultation with Denmark. The IMF explains Article IV thus: "Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities." The IMF sounded these cautionary notes about Denmark's generally much-praised economic policies: "It will be important to avoid public spending overruns while allowing for the operation of automatic stabilizers ... Some wage moderation is needed to stem losses in market shares in continental Europe ... Improving public expenditure discipline, particularly at the lower levels of the government, should be a priority ... (We) encourage the authorities to pursue intentions to strengthen public management and outsource services where appropriate ... recommend that the long-term viability of the present welfare system should be kept under close review by the Danish authorities." And so on. While the conspiracy theories can be safely and off-handedly discarded - it is a lot more difficult to defend the IMF's policies. These consist of a universally-applied prescription of fiscal and monetary discipline, balanced budgets, a sustainable public debt, avoidance of moral hazard, restrained wage and expenditure policies, preference for the private sector, enhancement of the financial sector, structural reform, and exchange rate stability. The IMF still sticks to the doctrine of a "nominal anchor": if not the exchange rate - than inflation targeting. The IMF concedes that the consensus is shifting towards more flexible exchange rate regimes in countries exposed to the global capital markets - but this is not supported by its policy advice. The IMF's Deputy Managing Director, Shigemitsu Sugisaki hastened to stamp out this heresy in his address to the First Annual Forum of APEC's Finance and Development Program held in Beijing on May 26: "Of course, this is not to say that, for certain economies, a pegged exchange rate regime, buttressed by the requisite supporting policies and institutions, cannot be a viable alternative. For such economies, in general, the harder and more rigid the peg, the better ... (Floating exchange rate regimes) do not imply a policy of benign neglect toward the exchange rate." "For emerging market countries, with their high degree of involvement with global trade and finance, movements in exchange rates have important economic consequences, and economic policies, including monetary policy and exchange market intervention, need to take account of these movements." This is the oxymoron of "managed float". The principles are commendable - their blind and doctrinarian implementation in the form of micromanaged conditionality - are not. The IMF - aware of its fast eroding public and political support, especially in the USA - has recently conjured up "country ownership" of agreed economic programs and "poverty reduction and growth facilities" - both intended to soothe jangling nerves. But these public relations exercises are auxiliary to its main thrust: fiscal rectitude, solvency, debt repayments. Alas, many of these policies are ill-suited to the needs of failed or mismanaged states and the kleptocracies that rule them - the IMF's main clientele. While in "normal" countries macroeconomic stability is the prerequisite to long-term economic growth - this is not necessarily the case in the developing, emerging, and transition economies of sub-Saharan Africa, the Middle East, South Asia, East Europe, Central Asia, Latin America, or the Balkan. Actually, too much stability may, in these benighted corners of the Earth, spell stagnation. Stability cannot translate to growth in the absence of functioning institutions, the rule of law, and properly rights. A dysfunctional banking system and rusted or clogged monetary transmission mechanisms render any monetary policy impotent. A venal bureaucracy and graft-prone political class are likely to squander and misappropriate loans and grants - no matter how well intentioned and closely supervised. Finally, in the absence of a formal, entrepreneurial, and thriving private sector - only the state can provide a counter-cyclical impetus and the sole engine of growth is development-related and consumption-enhancing public spending. Public expenditures are the only functioning automatic stabilizer. In this context, the classic argument of "public borrowing crowding out the private sector" is misplaced. Most of the private sector in these countries is informal. It does not compete in the credit markets with public borrowing - simply because there are no credit or capital markets to speak of. Interest rates are onerously high due to outlandish default rates - so, businesses borrow from each other, barter, and work in cash. Banks refuse to lend to businesses or households and thrive on arbitrage. Investment horizons are limited. The IMF is obsessed with "exchange rate (and other nominal) anchors". It erroneously believes that - where all else is ominously fluid - only a predictable exchange rate (or inflation target) can guarantee stability. But this forces the government to adhere to constant policies of Procrustean fiscal contraction and thus exacerbate the anyhow depressed state of the economy. The alternative - fiscal expansion - would lead to pressure on the exchange rate peg and result in devaluation. Yet, a pegged exchange rate in inflation-prone economies is tantamount to appreciation of the domestic currency - another form of instability. An overvalued currency coupled with deficient structural reforms and low productivity - adversely affect the country's terms of trade (i.e., its competitiveness in export markets). This declining competitiveness, in turn, leads to trade deficits and a deteriorating balance of payment. Hence another IMF-inspired source of instability. Thus, a regime of pegged exchange rates exacerbates both the duration and the degree of disequilibrium in the international balance of payments of the IMF's members. The current account of a country that runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency - is only likely to deteriorate. Often, to protect the currency, the whole system is drained of liquidity (demonetized), interest rates are kept debilitatingly high, and the balance of payments deficit skyrockets, until the inevitable collapse. Moreover, exchange (rate) stability inhibits the expansion and balanced growth of international trade - an explicit role of the IMF. Trade is based on dynamic exchange rate disparities which reflect the relative advantages of the countries involved. In a world of artificially fixed exchange rates - trade stagnates and price signals are distorted. The IMF was never mandated to rate the creditworthiness of its members and shareholders. In providing clean or soiled bills of financial health it is manifestly acting ultra vires. Its ability to strangle a country financially if it does not comply with its programs - no matter what the social or economic costs are - is very worrying. The IMF refuses to acknowledge that, far from being an exact science, economics is a branch of mass psychology and a form of social engineering. Not unlike previous central planning agencies, it neglects the social, political, and environmental costs of its policies. Yet, these sometimes outweigh the purely economic outcomes. High interest rates stifle growth. An unrealistic exchange rate dampens exports. These effects are accounted for in the IMF's models. But there are other pernicious policy outcomes which the IMF consistently ignores - at the peril of the member countries: Persistent unemployment breeds crime. Poverty results in civil strife. Taxes drive a growing part of the economy underground. Low wages in the public sector lead to venality and graft. Growing income inequalities foster discontent and brain drain. Different cultures possess different priorities, preferences, and values. The IMF is indispensable. It imposes monetary and fiscal discipline on unruly governments, forces them to plan ahead, and introduces painful adjustments and reforms as well as better governance. It serves as a convenient scapegoat: politicians blame it for their own shortcomings and misguided policies and claim that negotiations with the IMF and follow-up consume the bulk of their management time to little effect. Finally, there is the Damocles sword of moral hazard. IMF lending of last resort is a safety net made available to countries "too big or too important to fail". It encourages politicians, creditors, and investors to assume risks they would not have otherwise, convinced of an ultimate bailout in case of failure. This certainty has been dented when the IMF refused to salvage Russia in 1998 and Argentina this year - but it is still largely intact. But there is a second type of moral hazard. When IMF-mandated policies succeed, local politicians hasten to take credit. When they fail - the IMF is universally derided. Thus, stakeholders - decision makers, reckless lenders, loss-prone investors, friendly governments, the citizenry - conveniently shift to Washington the blame for their own misdeeds and misbehavior. This kind of buck passing is known in psychology as "alloplastic defenses" and is considered an integral part of some pathologies. Here, too, increased transparency and accessibility can help. The IMF needs to assertively point the finger and allocate blame when wrongly accused. The IMF is lucky to be attacked either by anti-market fundamentalists, or by anti-IMF fanatics. Passionate emotions frequently produce ill-thought and unfounded arguments. Consider this exchange: In a press briefing on May 16, Thomas Dawson, the Fund's Director of External Relations Department was asked by one of the journalists: "I'd like to get your reaction to a prominent Nobel prize- winning economist (Joseph Stiglitz), who laid out an opinion last weekend, saying that the IMF's insistence on fiscal tightening in Argentina made things worse, and that the high rates of interest in Argentina were largely a function of external factors, such as the Asian financial crisis, and that the IMF's approach and the approach of others have amounted to blaming the victim." He responded, thrashing the poor arguments of the distinguished - but biased - critic: "With regard to the fiscal tightening point ... in the course of the year 2001 when the authorities, without consulting with us, instituted the zero-deficit law ... We indicated to them that we thought this was excessive fiscal tightening ... He (Stiglitz) ... focuses on federal spending levels, barely mentioning provincial levels. As the authorities themselves indicate in the April 24th 14-point agreement, having an arrangement on the provincial level is very, very important ..." "He also indicates that corruption is not much of a problem. The authorities ... indicate that corruption issues are very important. He also, I think, fails to understand or recognize the sovereignty of the Argentine people. The Currency Board was adopted by the Argentine Government in the early 1990s, enjoyed for a number of years a great deal of popular support, and it seems as if Professor Stiglitz is trying to say that what we should have done is gone to the Argentines and dictate to them to change their currency regime. That's what we are usually accused of by Professor Stiglitz, but he seems to be taking that sort of approach himself. So, I have to say I am rather under whelmed with his arguments."
Indonesia's Minister of Development Planning called last week on his country to sever its ties with the "colonial power", the IMF, come November, when its agreement with the lending agency expires. He blamed its coercive policies for the country's alleged near insolvency and civil disorder. Local bigwigs hastened to concur. Lenders and donors often condition credits, debt reduction, and aid upon the IMF's seal of approval, in the form of a standby arrangement. Despite protestations to the contrary, cross-conditionality - including World Bank conditions in IMF programs and vice versa - is still rife. Thus, inadvertently, the IMF has assumed in the last two decades the dual - and intimately related - roles of a sovereign credit risk rating agency and a lender of last resort - hitherto not among its core few and well-defined competencies. Because other, non-IMF, financing is premised on its endorsement, the IMF carries disproportionate weight with governments and often leverages this stature to non-economic ends. From Moldova to Russia, the IMF has not been above meddling in domestic politics, though in the guise of "impartial advice" or "loan conditions to be met". The IMF lends funds to countries in distress - e.g., to ameliorate a balance of payment or a capital account crisis (for instance, in Thailand in 1997), or a meltdown of the financial system (in Turkey last year). Such lending is predicated on a program ostensibly negotiated with the authorities - but, in practice, dictated by the IMF. The program provides detailed policy guidelines and performance evaluation benchmarks. Yet, how reliable and realistic are these programs? Often produced in the throes of civil strife (Macedonia), currency collapse (Brazil), implosion of the banking system (Argentina), or natural and man-made disasters (Africa) - they tend to reflect mere wishful thinking and bureaucratic wrangles. They are based on partial or fake figures provided by the kleptocracies that rule many of the IMF's most needy clients. Though mainly forward-looking (prospective) - IMF programs imply a modicum of certainty where there is none and are, thus, grossly misleading documents. Rarely does the IMF admit that it is as much at a loss as its client government. Last year - as Albanians fought Macedonians in the outskirts of the capital, Skopje - The IMF suspended a previous program and placed Macedonia on "staff monitoring" - a euphemism for "let's wait and see how things turn out". But these criticisms aside - the IMF is an important global center of scholarship and policy advice. It has made some contributions to the overhaul of the international financial architecture in train since 1998 - and is advocating controversial innovations such as national bankruptcy proceedings. Yet, is its advice sound and are its policies efficacious? The IMF's prescriptive - and universally applied - policy mix displayed remarkable resilience in the face of global financial crises in the past decade. It includes: austerity measures, fiscal and monetary discipline, decreased inflation, balanced budgets, a sustainable public debt, avoidance of moral hazard, restrained wage and expenditure policies, preference for the private sector, the strengthening of the financial system, and structural reform. In its recent past, the IMF advocated crippling competitive devaluations. This policy "recommendation" has now been replaced by either a pegged exchange rate - or a free floating rate coupled with an inflation target. These are known as "nominal anchors" and are supposed to guarantee economic stability and its inevitable outcome: economic growth. The World Bank summarized the ten commandments of the Washington Consensus in its year 2000 Poverty Report thus:
The IMF is fairly dogmatic and ideological. It never praises - or learns from - countries - no matter how economically successful - if they diverged from its doctrines. Two prime examples are: Malaysia which introduced capital controls following the 1998 Asian crisis - and Ireland which pursued expansionary fiscal policies despite a decade of searing-hot economy. Both acted contrary to every vestige of IMF wisdom - and both prospered. The IMF deviates from its catechism only when instructed to do so by its paymaster, the USA. Thus, Stratfor, the American strategic forecasting firm, noted the recent schizophrenic behaviour of the IMF. Under fairly similar circumstances, it chose to lend to Turkey, a crucial US ally - but not to Argentina. The IMF's new African poverty reduction initiative carries the fingerprints of the American administration as well. Most strikingly, in line with the much proclaimed US positions, and contrary to everything the IMF has ever preached, it encourages Japan to slash its taxes even further while increasing its public spending, and, by implication, its crushing and unsustainable public debt and gaping budget deficit. But these are aberrations. Moreover, even the orthodoxy of the "Washington Consensus" is not all wrong. The faults of the IMF's policies run deeper and can be traced to its modus operandi and raison d'etre. First, though much reduced, some IMF "crisis" lending is concessionary - soft loans, at subsidized interest rates, with sizable grace periods. This fosters moral hazard and encourages imprudent behavior. Walter Bagehot, the legendary 19th editor of "The Economist", advised lenders of last resort to lend freely but at a penalty rate and against collateral. Charles Calomiris and Allan Meltzer follow this sound advice in their Summer 1999 article published in "National Affairs" and titled "Fixing the IMF": "A penalty rate encourages the borrower to negotiate with private creditors to seek (lower) market rates. The IMF would lend only when there is a liquidity crisis-that is, when private lenders are unwilling to lend. That is precisely the responsibility that a lender of last resort should fulfill." The second fundamental problem is that IMF programs exclusively tackle national "balance sheets" - budget deficits, inflation, and public debt. The implicit assumption is that the smaller and more thrifty the state - the better off its citizenry. This principle invariably holds true in rich and well-governed countries. Not so in developing, emerging, and transition economies. Here, the better the national accounts - the worst off the inhabitants. Unemployment, social tensions, and poverty grow as macroeconomic parameters "improve". Income and wealth inequalities soar and the middle class evaporates to the detriment of the country's political stability. This inversion is due to arthritic monetary transmission mechanisms - and to the absence of a private sector. The economic engine in such destitute countries is the state. Public spending takes the place of capital formation and generates consumption. The savings level is largely immaterial because financial intermediaries fail to transform it into investments. Thus, the curbing of the state's involvement in the economy has an adverse and prolonged recessionary impact. The third perverse trend is the crowding-out of private sector or bilateral capital flows by multilateral debt. The share of IMF and World Bank lending in the total public debt of developing countries has quintupled in the last two decades. The money is mostly used to repay creditors - multilateral, bilateral, and private sector (i.e., banks). Thus, the increase in the total indebtedness of borrowing countries serves to bail out stranded lenders - but does little to foster economic growth and development. The IMF's biggest problem by far may be that it strayed way out of its - ostensible - competency. It is reasonably qualified to deal with fiscal matters, the financial system, and monetary issues with emphasis on the exchange rate regime. It is an absolute dilettante when it comes to reform - structural or otherwise. "The Reality of Aid 2002", a report produced by a coalition of NGO's, charges that: "Far from abandoning aid conditionality, international financial institutions and bilateral donors are collaborating in an unprecedented consensus to retool the aid regime under the rubric of 'ownership' and aid effectiveness." The IMF itself admits, in its February 2001 report, "Structural Adjustment Conditionality in Fund-Supported Programs", to an average of 41 conditions per agreement concluded between 1995-2000. Independent scholars, such as Nancy Alexander, found 114 conditions in a typical program in sub-Saharan Africa in 1999. The International Confederation of Free Trade Unions (ICFTU) cites the example of Romania's November 2001 standby arrangement with the IMF. It included conditions pertaining to the liberalization of domestic energy prices, privatization, and the restructuring of state-owned enterprises. Macedonia was required by the IMF to sell or shut down its loss-making state enterprises as a condition for any agreement with the Fund. This control freakery coupled with micromanagement of the minutest details of both the economic and social policies of recipient-countries is counter-productive. The IMF personnel are poorly qualified to dole out policy advice on these issues. They compensate for insecurity with haughtiness. As a result, the IMF's clients are alienated and angered by its conduct. They regard the Fund's programs as external and sinister impositions and at best ignore parts of it. The dual concepts of "ownership" and "aid effectiveness" are rendered shams by this overweening attitude. What could have been a partnership between indigenous reformists and well-meaning, knowledgeable, foreigners - is frequently transformed into a xenophobic tug of war. The tenets of the Washington Consensus are no longer confined to arcane provisos in IMF and World Bank programs. They are now the pillars of a new regime of international law. They are embedded in the charter of the World Trade Organization, for instance - a quasi-judiciary body as well as a regulator of international trade and much more besides. In many respects, therefore, the IMF survived the 1997-8 crisis to prosper and become more potent than ever. Hence, perhaps, the backlash by well-meaning but often ignorant and impractical anti-globalizers and assorted self-appointed NGO's. To its credit, the IMF is not ignoring them. It is trying to maintain a meaningful dialog. But its survival is not premised on the success of such a discourse - as it was once thought to be.
The IMF is, in a way, a lender of last resort. When a country seeks IMF financing, its balance of payments is already ominously stretched, its debt shunned by investors, and its currency under pressure. Put differently, the IMF's active clients are effectively illiquid (though never insolvent in the strict sense of the word). Anne Krueger's November 2001 proposal to allow countries to go bankrupt makes, therefore, eminent sense. Today, sovereign debt defaults result in years of haggling among bankers and bondholders. It is a costly process, injurious to the distressed country's future ability to borrow. The terms agreed are often onerous and, in many cases, lead to a second event of default. The experiences of Ukraine and Ecuador are instructive. Russia - another serial debt restructurer - would have been in a far worse pickle were it not for the serendipitous surge in oil prices. A carefully thought-out international sovereign bankruptcy procedure is likely to yield two important results:
By streamlining and clarifying the outcomes of financial crises, an international bankruptcy court, or arbitration mechanism, will, probably, enhance the willingness of veteran creditors to lend to developing countries and even attract new funding. It is the murkiness and arm-twisting of the current non-system that deter capital flows to emerging economies. Still, the analogy is partly misleading. What if a developing country abuses the bankruptcy procedures? As "The Economist" noted correctly "an international arbiter can hardly threaten to strip a country of its assets, or forcibly change its 'management'". Yet, this is precisely where market discipline comes in. A rogue debtor can get away with legal shenanigans once - but it is likely to be shunned by lenders henceforth. Good macroeconomic policies are bound to be part and parcel of any package of debt rescheduling and restructuring in the framework of a sovereign bankruptcy process. Immigration (and Labor) Jean-Marie Le Pen - France's dark horse presidential contender - is clearly emotional about the issue of immigration and, according to him, its correlates, crime and unemployment. His logic is dodgy at best and his paranoid xenophobia ill-disguised. But Le Pen and his ilk - from Carinthia to Copenhagen - succeeded to force upon European mainstream discourse topics considered hitherto taboos. For decades, the European far right has been asking all the right questions and proffering all the far answers. Consider the sacred cow of immigration and its emaciated twin, labour scarcity, or labour shortage. Immigrants can't be choosy. They do the dirty and dangerous menial chores spurned by the native population. At the other extreme, highly skilled and richly educated foreigners substitute for the dwindling, unmotivated, and incompetent output of crumbling indigenous education systems in the West. As sated and effete white populations decline and age, immigrants gush forth like invigorated blood into a sclerotic system. According to the United Nations Population Division, the EU would need to import 1.6 million migrant workers annually to maintain its current level of working age population. But it would need to absorb almost 14 million new, working age, immigrants per year just to preserve a stable ratio of workers to pensioners. Similarly hysterical predictions of labour shortages and worker scarcity abounded in each of the previous three historic economic revolutions. As agriculture developed and required increasingly more advanced skills, the extended family was brutally thrust from self-sufficiency to insufficiency. Many of its functions - from shoemaking to education - were farmed out to specialists. But such experts were in very short supply. To overcome the perceived workforce deficiency, slave labour was introduced and wars were fought to maintain precious sources of "hands", skilled and unskilled alike. Labour panics engulfed Britain - and later other industrialized nations such as Germany - during the 19th century and the beginning of the twentieth. At first, industrialization seemed to be undermining the livelihood of the people and the production of "real" (read: agricultural) goods. There was fear of over-population and colonial immigration coupled with mercantilism was considered to be the solution. Yet, skill shortages erupted in the metropolitan areas, even as villages were deserted in an accelerated process of mass urbanization and overseas migration. A nascent education system tried to upgrade the skills of the newcomers and to match labour supply with demand. Later, automation usurped the place of the more expensive and fickle laborer. But for a short while scarce labour was so strong as to be able to unionize and dictate employment terms to employers the world over. The services and knowledge revolutions seemed to demonstrate the indispensability of immigration as an efficient market-orientated answer to shortages of skilled labour. Foreign scientists were lured and imported to form the backbone of the computer and Internet industries in countries such as the USA. Desperate German politicians cried "Kinder, not Inder" (children, not Indians) when chancellor Schroeder allowed a miserly 20,000 foreigners to emigrate to Germany on computer-related work visas. Sporadic, skill-specific scarcities notwithstanding - all previous apocalyptic Jeremiads regarding the economic implosion of rich countries brought on by their own demographic erosion - have proven spectacularly false. Some prophets of doom fell prey to Malthusian fallacies. According to these scenarios of ruination, state pension and health obligations grow exponentially as the population grays. The number of active taxpayers - those who underwrite these obligations - declines as more people retire and others migrate. At a certain point in time, the graphs diverge, leaving in their wake disgruntled and cheated pensioners and rebellious workers who refuse to shoulder the inane burden much longer. The only fix is to import taxable workers from the outside. Other doomsayers gorge on "lumping fallacies". These postulate that the quantities of all economic goods are fixed and conserved. There are immutable amounts of labour (known as the "lump of labour fallacy"), of pension benefits, and of taxpayers who support the increasingly insupportable and tenuous system. Thus, any deviation from an infinitesimally fine equilibrium threatens the very foundations of the economy. To maintain this equilibrium, certain replacement ratios are crucial. The ratio of active workers to pensioners, for instance, must not fall below 2 to 1. To maintain this ratio, many European countries (and Japan) need to import millions of fresh tax-paying (i.e., legal) immigrants per year. Either way, according to these sages, immigration is both inevitable and desirable. This squares nicely with politically correct - yet vague - liberal ideals and so everyone in academe is content. A conventional wisdom was born. Yet, both ideas are wrong. These are fallacies because economics deals in non-deterministic and open systems. At least nine forces countermand the gloomy prognoses aforementioned and vitiate the alleged need for immigration: I. Labour Replacement Labour is constantly being replaced by technology and automation. Even very high skilled jobs are partially supplanted by artificial intelligence, expert systems, smart agents, software authoring applications, remotely manipulated devices, and the like. The need for labour inputs is not constant. It decreases as technological sophistication and penetration increases. Technology also influences the composition of the work force and the profile of skills in demand. As productivity grows, fewer workers produce more. American agriculture is a fine example. Less than 3 percent of the population are now engaged in agriculture in the USA. Yet, they produce many times the output produced a century ago by 30 percent of the population. Per capita the rise in productivity is even more impressive. II. Chaotic Behaviour All the Malthusian and Lumping models assume that pension and health benefits adhere to some linear function with a few well-known, actuarial, variables. This is not so. The actual benefits payable are very sensitive to the assumptions and threshold conditions incorporated in the predictive mathematical models used. Even a tiny change in one of the assumptions can yield a huge difference in the quantitative forecasts. III. Incentive Structure The doomsayers often assume a static and entropic social and economic environment. That is rarely true, if ever. Governments invariably influence economic outcomes by providing incentives and disincentives and thus distorting the "ideal" and "efficient" market. The size of unemployment benefits influences the size of the workforce. A higher or lower pension age coupled with specific tax incentives or disincentives can render the most rigorous mathematical model obsolete. IV. Labour Force Participation At a labour force participation rate of merely 60% (compared to the USA's 70%) - Europe still has an enormous reservoir of manpower to draw on. Add the unemployed - another 8% of the workforce - to these gargantuan numbers - and Europe has no shortage of labour to talk of. These workers are reluctant to work because the incentive structure is titled against low-skilled, low-pay, work. But this is a matter of policy. It can be changed. When push comes to shove, Europe will respond by adapting, not by perishing, or by flooding itself with 150 million foreigners. V. International Trade The role of international trade - now a pervasive phenomenon - is oft-neglected. Trade allows rich countries to purchase the fruits of foreign labour - without importing the laborers themselves. Moreover, according to economic theory, trade is preferable to immigration because it embodies the comparative advantages of the trading parties. These reflect local endowments. VI. Virtual Space Modern economies are comprised 70% of services and are sustained by vast networks of telecommunications and transport. Advances in computing allow to incorporate skilled foreign workers in local economic activities - from afar. Distributed manufacturing, virtual teams (e.g., of designers or engineers or lawyers or medical doctors), multinationals - are all part of this growing trend. Many Indian programmers are employed by American firms without ever having crossed the ocean or making it into the immigration statistics. VII. Punctuated Demographic Equilibria Demographic trends are not linear. They resemble the pattern, borrowed from evolutionary biology, and known as "punctuated equilibrium". It is a fits and starts affair. Baby booms follow wars or baby busts. Demographic tendencies interact with economic realities, political developments, and the environment. VIII. Emergent Social Trends Social trends are even more important than demographic ones. Yet, because they are hard to identify, let alone quantify, they are scarcely to be found in the models used by the assorted Cassandras and pundits of international development agencies. Arguably, the emergence of second and third careers, second families, part time work, flextime, work-from-home, telecommuting, and unisex professions have had a more decisive effect on our economic landscape than any single demographic shift, however pronounced. IX. The Dismal Science Immigration may contribute to growing mutual tolerance, pluralism, multiculturalism, and peace. But there is no definitive body of evidence that links it to economic growth. It is easy to point at immigration-free periods of unparalleled prosperity in the history of nations - or, conversely, at recessionary times coupled with a flood of immigrants. So, is Le Pen right? Only in stating the obvious: Europe can survive and thrive without mass immigration. The EU may cope with its labour shortages by simply increasing labour force participation. Or it may coerce its unemployed (and women) into low-paid and 3-d (dirty, dangerous, and difficult) jobs. Or it may prolong working life by postponing retirement. Or it may do all the above - or none. But surely to present immigration as a panacea to Europe's economic ills is as grotesque a caricature as Le Pen has ever conjured. Indices The quality of Wall Street research has suffered grievous blows these last two years. Yet, publishers of political and economic indices largely escaped unscathed. Though their indicators often influence the pecuniary fate of developing countries, they are open to little scrutiny and criticism. The Heritage Foundation and the Wall Street Journal are the joint publishers of the 2002 edition of the much-vaunted "Index of Economic Freedom". The annual publication purports to measure and compare the level of economic freedoms in 155 countries. According to its Web site, the Index takes into account these factors:
The Heritage Foundation's boasts of using the "most recent data" available on September 2001. I downloaded the chapter about Macedonia and studied it at length, starting with the most basic, numerical, "facts". I then compared them to figures released by the Macedonian Bureau of Statistics, the IMF, the World Bank, the European Bank for Reconstruction and Development, the United Nations Development agency, and the European Investment Bank. Macedonia's GDP is $3.4 billion and not $2.7 billion as the report states. Macedonia's GDP exceeded $3 billion in the last 4 years. Nor has GDP grown by 2.7 percent last year or the year before. In 2001, it has actually declined by 4.3 percent and is likely to decline again or rise a little this year. As a result, GDP per capita is wrongly computed. The trade deficit is not $300 million - but double that. It has been above $500 for the last few years. Net foreign direct investment has been closer to $100 million for two years now - rather than the paltry $29 million the report misreports. The report makes "rice" one of Macedonia's "major" agricultural products. It is, actually, first on its list. Alas, little rice is grown in Macedonia nowadays, though it did use to be a weighty European rice grower decades ago. Nor does the country produce noticeable quantities of citrus, or grains, as the report would have us believe. The authoritative-sounding introduction to the chapter informs us that Macedonia maintains a budget surplus "from the sale of state-owned telecommunications". In its decade of existence, Macedonia enjoyed a budget surplus only in 2000 and it had nothing to do with the sale of its telecom to the German-Hungarian MATAV. The proceeds of this privatization were kept in a separate bank account. Only a small part was used for budgetary and balance of payment purposes. The outgoing prime minister would be pleasantly astounded to learn that he "privatized approximately 90 percent of (the country's) state-owned firms". These were actually privatized by the opposition when it was in power until 1998. It is true that ma |
