Play It Again, Sam

Just in case anyone thought the IMF and the World Bank had gotten the message in Seattle, Washington, DC and Prague, all he or she has to do is read the December 5 edition of the Washington Post to find out otherwise. Looming disasters in Chad and Turkey are proof positive that nothing besides a tactical adjustment of rhetoric has changed.

Douglas Farah and David Ottaway inform us: “In June, when the World Bank agreed to back a controversial 650-mile oil pipeline from this impoverished desert nation [where more than two-thirds of the population lives on an average of less than $250 a year] to Africa's Atlantic coast, it declared that it had found a way to prevent corrupt officials from stealing the country's new wealth. Criticized for years over projects in developing nations that failed to return benefits to their populations, bank officials knew that the $3.7 billion pipeline—the most expensive infrastructure project now underway in Africa —would be closely scrutinized. So they imposed strict accounting standards and insisted on guarantees from the Chadian government to ensure that its oil profits would be spent to improve public health, education and vital infrastructure here, rather than disappearing into secret bank accounts or funding weapons purchases by those in power. World Bank officials said that their ‘Chadian model' would prove they could overcome the African nation's endemic corruption and that it might be applied to other corruption-prone oil-producing lands. In a press release after it approved the project, the bank called the agreement with the Chad government an ‘unprecedented framework to transform oil wealth into direct benefits for the poor, the vulnerable and the environment.' So when Chadian President Idriss Deby, a general who seized power in a 1990 coup, declared last week that he had used $4.5 million of the government's first oil receipts to buy weapons instead of bolstering social programs, saying ‘it is patently obvious that without security there can be no development programs,' he sent a jolt through the bank.”

The demonstrators in Seattle, Washington DC, and Prague were not the only ones who warned the World Bank that this is exactly what would happen. Human rights activists in Chad fought the project for years, claiming it would “only escalate armed power struggles and be diverted by authoritarian rulers to buy guns or to fatten their bank accounts.”

But the diversion of profits to purchase arms is only one problem. The main objections critics have voiced to this and similar World Bank projects elsewhere are that too much of the profits go to foreign companies and banks, leaving too little to make a significant dent in unpayable international debts that should be forgiven. Chad is only projected to receive $2 to $3 billion over 25 years from the pipeline, the rest going to the consortium of international oil companies led by Exxon Mobil Corporation, to the international banks financing the project, and to the World Bank for brokering the deal and putting up 3 percent of the initial financing.

In the same edition of the Washington Post, Molly Moore informs us from Istanbul that “Turkey's stock market plunged today and some interest rates soared to more than 1,200 percent in a financial crisis that analysts fear could spread to Russia and other struggling economies. Turkish officials began emergency talks with the International Monetary Fund in Ankara, the capital, urgently asking for a $5 billion loan to help counter a rush to sell Turkish lira that threatens to undermine the country's precarious economy. Officials fear that if it is not contained, the financial crisis could send Turkey's economy into a downward spiral of unemployment and company closures. Investors, both foreign and Turkish, are moving their money out of markets here as they lose confidence in the country's future and worry about the effect a devaluation of the lira could have on their holdings. Turkey's stock market has lost nearly 40 percent of its value in the last two weeks, including today's plunge of 8 percent.”

How is this possible? Reporting from Washington in the same story Steven Pearlstein tells us: “The first 10 months of this year marked one of the most stable economic periods in recent Turkish history.” And: “In the past year, Turkey has won praise from the IMF and international financial analysts for streamlining its financial policies, reining in government spending and making other economic policy changes suggested by the IMF.” In other words, Turkey was a paragon of neoliberal economic virtue according to the IMF, and therefore one would think the last place a crisis should break out. But of course that was what the IMF and World Bank had said about the East Asian economies only a year before their crises. In that case as well, East Asian economies who succumbed to pressure from the U.S. Treasury Department and the IMF to open themselves completely to international financial investment, including short-run, speculative capital flows, were praised by the U.S. and the Fund as neoliberal success stories. But as soon as the hot money took fright and fled, as soon as the IMF imposed its draconian conditionality agreements—calculated to protect international investors—in exchange for a bail out, and as soon as all this left the East Asian economies in ruins, Fund managers hastened to tell us the East Asian governments had been less virtuous than heretofore presumed.

Once again we will be told the Turkish fall from grace is due to their “crony capitalism,” “lack of transparency,” and “insufficient prudential regulation.” We are already being told “the crisis was set off by almost daily disclosures of banking scandals and related criminal investigations”—as if this were not what triggers most financial crises. The real question is why disclosure of some bad loans triggered a crisis in this situation whereas it usually does not? The reason we are not reminded of the real question is the answer points to the magnitude and conditions under which international speculative capital poured into Turkey over the past few years, i.e., the “financial streamlining” orchestrated and praised by the IMF. We are also told “astronomically high interest rates have taken hold in loans between banks because lending banks fear that borrowing banks may default”—small wonder. The real question is who decided to subordinate the interest of financing productive Turkish investments, which will be brought to a standstill by astronomical interest rates, to the interests of international wealth management in the first place?

Again, international investment banks taking part in an IMF sponsored program in Turkey come to mind. Moore informs us: “Banks in Germany—which have invested heavily in Turkey's efforts to sell off state-owned companies and its economy in general—have suffered drops in their own share prices because of the Turkish crisis.” Finally, we are also being warned that Turkish government reluctance to shut down troubled banks and assume their liabilities may deepen the crisis. “The government has already placed 10 troubled banks in receivership. According to sources familiar with the talks, the IMF is pressing officials in Ankara to take over and close more of the country's 81 banks, a politically difficult step that would cause powerful owners to lose their investments. In return, the government would guarantee all or most of the depositors' funds.” Notice whose cronyism is subject to criticism and whose is not. For the Turkish government to worry about Turkish business losses is irresponsible cronyism. But when the IMF urges the government of a developing country to guarantee the funds of wealthy international depositors—in this case German banks financing the IMF privatization program in Turkey—it is only sound crisis management.

One question is whether the IMF bailout will work in Turkey in even the most narrow terms. We are informed: “The flow of investment funds out of the country has led the central bank to spend at least $6 billion of its $18 billion foreign exchange reserves in the last two weeks shoring up the lira— buying the currency to offset the downward pressure on its value caused by investors selling it to buy dollars and leave the country. Analysts fear that if the IMF does not quickly give Turkey its requested $5 billion emergency loan, the government could soon run out of foreign reserves and be unable to support the lira. In that case, the currency's value would likely plummet.” Whereas the IMF pulled off a successful bailout in Mexico in 1995, they failed to do so in East Asia in 1997 where it was predominantly Japanese banks and multinational companies who stood to lose, as opposed to U.S. banks and companies in Mexico. Technical “success” in Mexico was due to the speed and size of the bailout package. In Asia the IMF was slow and cheap, concentrating instead on forcing internal “reforms” in the stricken economies. The U.S. Treasury Department even dispatched then deputy secretary Larry Summers to tell the Japanese in no uncertain terms that their offer to put up $100 billion for bailouts without conditions was unacceptable. Turkey has already spent a third of its foreign exchange reserves in just two weeks to prop up the lira. Whether $5 billion from the IMF will prove enough and arrive quickly enough to ward off the speculative attack on the Turkish lira remains to be seen. Whether Larry Summers proves more interested in using the crisis to force further debilitating “reforms” on Turkey, or more interested in staving off an international financial crisis and any possible contagion, remains to be seen.

But whether the IMF bail out is a technical success, as it was in Mexico, or a failure, as it was in East Asia, is not the most important issue. Technical success means international investors will not suffer and the stricken economy will recover more quickly. Technical failure means greater investor losses, extending to taxpayers, contagion effects in other emerging markets, and a much deeper and longer depression in the afflicted economy. But in either case IMF policies are detrimental to the interests of developing economies as they tie them more tightly to the torture rack of highly leveraged international wealth management. At a minimum, the crisis in Turkey proves once again that playing the IMF game—reducing government spending, privatizing public services, opening completely to international investment, and accumulating what used to be more than sufficient foreign exchange reserves to adequately protect your currency ($18 billion in the case of Turkey)—is no protection at all from economic ruin in the brave new world of unchecked neoliberalism.                                            Z

Robin Hahnel teaches economics at American University in Washington, DC and is author and co-author of numerous books on economics and politics. His latest book, on globalization, is Panic Rules! (South End Press).