also from the Guardian Interactive
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IMF in need of a new faith
Larry Elliott
Monday April 17, 2000
The timing could not have been better. Everybody, but everybody from the
global financial community was in town for the spring meetings of the World
Bank and the International Monetary Fund and what happens? Shares go crashing
on Wall Street.
For someone who has long argued that America has been dangerously gripped by
a stock-market mania, there was something utterly compelling about watching
the US TV channels that have been complicit in whipping up the frenzy trying
to explain to their viewers what had gone wrong.
Actually, it was quite simple. The technology sector - and to a lesser extent
the whole of the US stock market - was ludicrously over-valued and was
destined to fall. On Friday it did.
Eddie George appeared remarkably relaxed about the 25% weekly decline in the
Nasdaq when he spoke after Saturday's meeting of G7 finance ministers and
central bank governors. Privately, some of the foreign officials in
Washington considered the puncturing of the bubble a healthy development and
are keen for the market to fall still further.
Whether that will happen remains to be seen, but even if it doesn't, Wall
Street's tumble highlighted some of the vulnerabilities of the international
financial system and forced those charged with running it to explain exactly
what they are doing.
Gordon Brown said there should be no retreat into isolationism and
protectionism, and he's right about that. He also said that the world needs
international institutions like the Fund and the Bank, and he's right about
that too. Those who believe the Bretton Woods institutions are inherently
corrupt are not only wrong, but are giving succour to extremists on the right
who oppose all but minimalist government and despise internationalism.
Now, the Fund and the Bank need to re-think how to manage the global economy.
For years, they have operated rather like the mediaeval Vatican, insisting on
the one true faith. It should come as no surprise to find that they are now
faced with a group of unruly heretics who not only refuse to believe but are
prepared to resist.
Wounding attack
The heretics are not all eco-warriors and anarchists. Perhaps the most
wounding attack on the Fund last week came from Joseph Stiglitz, until
recently the chief economist of the Bank. The main thrust of Stiglitz's
article in the New Republic magazine was that the IMF had woefully mishandled
the financial crises of 1997-98, but he widened his argument with an attack
on the Fund for its secrecy, its arrogance and its wrong-headed policies,
describing it as full of "third-rank students from first rate universities".
Ouch.
"When the IMF decides to assist a country, it dispatches a 'mission' of
economists," he said. "These economists frequently lack experience in the
country; they are more likely to have knowledge of its five-star hotels than
the villages that dot its countryside." Ouch, ouch.
The second most compelling read of the week came from the Fund itself. In an
overview of the world economy's development in the 20th century, it said that
the past 100 years had been seen a stupendous increase in economic output,
with goods and services exceeding everything that had been churned out
between the dawn of time and 1900.
At the same time, however, inequality between the world's rich and poor
regions, measured by output per capita, has also increased dramatically. GDP
per capita in Africa is lower today than it was in the rich countries in
1900.
The Fund then divides the 20th century into four distinct periods - the Gold
Standard era, the two world wars and the great depression, the 1950-73 boom,
and the period of globalisation.
What the Fund believes is that "modern financial markets promote the mutually
beneficial exchange between net savers and users of capital for productive
purposes over increasing numbers of economic agents and ever larger
territories, thus contributing to the optimal use of capital and the
maximisation of world output."
Its figures, however, show that comfortably the most successful period of the
past 100 years was 1950-73, "characterised by exceptionally rapid output per
capita growth (2.9% per year on average) and the recovery of world trade
under the Bretton Woods system of fixed exchange rates and widespread capital
controls." The Fund says that pegged, but adjustable exchange rates and
control of capital movements gave governments room to address domestic
problems, while the IMF oversaw the international system, remarkably
successfully too.
"During the Bretton Woods period, the stability of the real economy and of
exchange rates reinforced each other. Wage pressures were moderate,
reflecting the impact on labour markets of memories of high unemployment in
the 1930s and rapid non-inflationary real wage growth, made possible by
unexpectedly high productivity growth. Finally, capital controls remained in
place, limiting the instability from disruptive international financial
flows."
Golden Age a fluke
It may have been that the Golden Age was a fluke, a period of catch-up, with
the world economy able to grow unusually rapidly due to the existence of a
global output gap caused by the devastation of war. Some might say that
growth would have been still faster, if trade and capital had been allowed to
cross borders more easily. The alternative way of looking at things, however,
is to say that the policies that worked so well once might work again.
Indeed, the experience of Malaysia is that the sky does not fall in if
countries re-impose capital controls. Malaysia's recovery has been as quick
as any in south-east Asia.
The Fund fully accepts that "a pegged exchange rate, independent national
monetary policy, and unrestricted international capital mobility cannot be
achieved simultaneously." So, if one of the three has to be sacrificed,
which? The argument in favour of liberalising capital flows is that more
efficient markets enable money to flow where it is needed, and to countries
without sufficient domestic savings to fund investment.
However, the tendency has been for removal of controls to be followed by a
surge of capital inflows, much of which has been for speculation rather than
long-term investment. The counterpart to a surplus on the capital account has
been a deficit on the current account, which has precipitated a crisis,
leading to capital flight and austerity programmes under the aegis of the
IMF.
This is the way the Fund describes what has happened. " Starting in the 80s,
controls on international capital movements were dismantled in many countries
in pursuit of efficiency gains from deregulation. The resulting large
increase in internationally-mobile capital flows combined with domestic
policy imbalances and volatile exchange rate expectations to generate
repeated international financial crises."
It seems a bit of a no-brainer. The Fund and the Bank agree that the priority
is to tackle poverty and global inequality. But governments find it harder to
pursue growth strategies and redistribution if they are in thrall to
capricious global markets. So the solution should be to maximise domestic
opportunity and provide the environment for countries to develop their own
domestic financial institutions and create a flourishing market economy.
One would have hoped some of the eggheads at the Fund would be proposing
this. But maybe Stiglitz is right and they're not so clever after all.
hkanteh
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