MELTZER REPORT ON BRETTON WOODS TWINS BUILDS CASE FOR ABOLITION BUT HESITATESBy
During the heated debate on whether
or not to raise the US quota in the IMF in 1998, the US Congress voted for the
quota increase but attached several conditions, including the creation of an
independent body to look at the missions and performance of the World Bank and
the International Monetary Fund.
The report of the International
Financial Institution Advisory Commission, better known as the "Meltzer
Report" after its chairman Alan Meltzer, serves as a striking confirmation
from the mainstream of what progressive critics of the Bretton Woods
Institutions have been saying for the last 25 years. Among the most important
claims in the corpus of critical literature that the report supports are the
instead of promoting economic growth, the International Monetary Fund institutionalises economic stagnation;
the World Bank is irrelevant rather than central to the goal of eliminating global poverty;
both institutions are to a great extent driven by the interests of key political and economic institutions in the G-7 countries-particularly, in the case of the IMF, the US government and US financial interests;
the dynamics of both institutions derive not so much from the external demands of poverty alleviation or promoting growth but to the internal imperative of bureaucratic expansionism or empire-building.
There is little in the report that
was not earlier documented in such works as Cheryl Payer's The Debt Trap, Bruce
Rich's Mortgaging the Future, Susan George's Faith and Credit, and the Food
First trilogy Aid as Obstacle, Development Debacle: The World Bank in the
Philippines, and Dark Victory: The US, Structural Adjustment, and Global
Poverty. But then the importance of the document lies not only in its critique
but in the fact that a significant part of the establishment has embraced much
of the progressive analysis, and, even more significantly, has made fairly
radical proposals for the future of the Bretton Woods twins.
Criticisms of the IMF have found a
very receptive global audience recently owing to the devastating performance of
the Fund during the Asian financial crisis. To the credit of its authors, the
Meltzer Report was not taken in by the World Bank's propaganda that, in contrast
to the IMF, it has turned a new leaf. The report shows that the much vaunted
Poverty Reduction Strategy or Comprehensive Development Framework articulated by
ideological entrepreneur James Wolfensohn is largely a public relations effort
to save the Bank and that, although it is billed as a new development paradigm,
it is largely devoid of substance.
The IMF: No Redeeming Value
While diplomatic in its language when
discussing the IMF, the report finds little of redeeming value in the
institution. It shows that the Fund's foray into macroeconomic reform via
structural adjustment institutionalized economic stagnation, poverty, and
inequality in Africa and Latin America in the 1980's and 1990's-precisely what
we had documented in detail in our 1994 book Dark Victory: the US, Structural
Adjustment, and Global Poverty.
It confirms that the Fund's duty of
ensuring a stable global financial order was derailed by its prescription of
indiscriminate capital account liberalization for developing countries, its
habit of assembling financial rescue packages that simply encouraged moral
hazard or irresponsible lending and speculative investment, and its prescribing
tight fiscal and monetary policies that merely worsened the situation in the
crisis countries instead of reversing it.
The report is on the right track when
it recommends the closure of the structural and extended structural adjustment
programs, now renamed the "Poverty and Growth Facility." And it is
correct in recommending downsizing the IMF in both size and its scope of
responsibilities, though as we shall argue below, it would do better to
recommend an outright abolition of the Fund.
The report is, however, wrong in its
recommendation that the IMF should serve as a "quasi-lender of last
resort" to countries suffering a liquidity crisis. The IMF, by the
Commission's own account, has handled this function badly in the past. Moreover,
the Commission's recommending of strict conditions under which the IMF may
extend credit contradicts its own criticism of "the use of IMF resources
and conditionality to control the economies of developing nations."
Particularly objectionable is the
Commission's proposal that the Fund provide liquidity assistance only to those
countries that "permit freedom of entry and operation for foreign financial
institutions" on the ground that these entities would, among other things,
"stabilize and develop the local financial system." This
recommendation is problematic for two reasons. First, foreign financial
institutions such as hedge funds, which have taken full advantage of "free
entry and operation," have helped precipitate one financial crisis after
another. Second, forcing countries to adopt western-style free market norms
governing ownership of foreign financial subsidiaries and their local operations
violates the first core principle it proposes for IMF reform - that is,
"sovereignty - the desire to ensure that democratic processes and sovereign
authority are respected in both borrowing and lending countries.
This contradiction between the logic
of the analysis and the prescription reminds us that the Commission is, after
all, a US government-appointed body, many of whose members come from the banking
sector, conservative think tanks, and establishment universities who are very
wary about placing significant restrictions on the free flow of finance capital
globally, even when the evidence they are staring at underline the
destructiveness of unchecked capital mobility.
The World Bank: Hype versus
When it comes to the World Bank, the
report is equally devastating. The rhetoric about focusing on poverty
alleviation, it says, is contradicted by the reality that 70 per cent of the
Bank's non-aid lending is concentrated in 11 countries, while the Bank's 145
other member countries are left to divide the remaining 30 per cent. Moreover,
80 per cent of World Bank resources have gone, not to poor countries with poor
credit ratings and investment ratings, but to countries that could have raised
the money in international private capital markets owing to their having
investment grade or high yield ratings.
In terms of achieving a positive
development impact, the Bank's own evaluation of its projects shows an
outstanding 55-60 per cent failure rate. The failure rate is particularly high
in the poorest countries, where it ranges from 65 per cent to 70 per cent. And
these are the very countries that are supposed to be the main targets of the
Bank's anti-poverty approach.
The picture that is drawn of the World Bank is that of a massive institution that is driven to lend more by institutional imperatives than actual need in the recipient countries, that is burdened by high failure rates both in its project lending and its program (adjustment) lending, that has poor monitoring capabilities of the sustainability of its projects, that competes with rather than supplements the regional development banks (Asian Development Bank, Inter-American Development Bank, and African Development Bank). The stark reality is that of a dinosaur that is slowly sinking in a bog of its own making but which flags a "new approach" of "Poverty Reduction" or "Comprehensive Development" to mask a fundamental crisis of identity and direction.
Reform or Abolition?
The Meltzer Report's basic conclusion
is that the IMF and the Bank are monolithic institutions that have outlived
their usefulness. Now, institutions should be saved and reformed if their
functioning, while defective, nevertheless broadly achieves their basic
objectives. They should be abolished if they have become fundamentally
dysfunctional in achieving their basic objectives. The IMF, in the Report's
view, has become part of the problem rather than part of the solution in global
development and financial governance. The World Bank likewise has become
irrelevant rather than central to the alleviation of poverty. Despite
adjustments here and there, the two institutions are imprisoned within paradigms
and structures that cannot handle the multiple problems confronting the world
economy during this phase of globalisation.
To borrow the language of Thomas
Kuhn's classic Structure of Scientific Revolutions, both institutions are like
paradigms in crisis, and the solution when a paradigm is in fundamental crisis
is not to try to reform it with endless minute adjustments that merely prolong
its inevitable demise, but to cut cleanly from it in favour of a simpler, more
relevant, and more useful paradigm - in a manner similar to the way the founders
of early modern science simply junked the old, hopelessly complex Ptolemaic
paradigm for explaining the cosmos (the sun and other celestial bodies moving
around the earth) in favour of the simpler Copernican paradigm (the earth moving
around the sun).
In other words, rather trying to find
a function for the Fund and assigning to it the role of being a lender of last
resort, we would do better to scrap it totally and create a new institution that
does not have the baggage of institutional failure and an obsolete institutional
mindset and is thus better positioned to manage financial crises in this era.
Rather than expect the highly paid World Bank technocrats who live in the
affluent suburbs of Northern Virginia to do the impossible - designing
anti-poverty programs for folks from another planet: poor people in the Sahel -
it would be more effective to abolish an institution that has made a big
business out of "ending poverty," and completely devolve the work to
local, national and regional institutions better equipped to attack the causes
of poverty. And this task should not fall to the regional development banks so
long as they are imprisoned by World Bank-type structures.
The Meltzer Report does not go far
enough. It does not follow the logic of its analysis to its inevitable
conclusion: the abolition of the Jurassic Bretton Woods institutions. It is up
to the masses of people gathering in Washington, DC, on the occasion of the
IMF-World Bank spring meetings in mid-April, to uncompromisingly deliver that
message to the powers that be
Walden Bello is executive director of Focus on the Global South and professor of sociology and public administration at the University of the Philippines.
Focus on the Global South (FOCUS) c/o CUSRI, Chulalongkorn University Bangkok 10330 THAILAND Tel: 662 218 7363/7364/7365 Fax: 662 255 9976 E-mail: email@example.com Web Page http://www.focusweb.org