Tuesday, July 22, 2008
How could this happen? Well, consider this summary of the criticisms by former chief World Bank economist Joseph Stiglitz from a 2002 New York Review of Books review of his famous book, Globalization and Its Discontents:
Our results show that IMF economic reform programs are strongly associated with rises in tuberculosis mortality rates in post-communist Eastern European and FSU [former Soviet Union] countries, even after correcting for potential selection bias, tuberculosis surveillance infrastructure, levels of economic development, urbanization, and HIV/AIDS. We estimated an increase in tuberculosis mortality rates when countries participate in an IMF program, which was much greater than the reduction that would have been expected had the countries not participated in an IMF program. On the other hand, we estimated a decrease in tuberculosis mortality rates associated with exiting an IMF program. Both the duration and amount of IMF lending have an estimated dose-response relationship with tuberculosis mortality rates: each additional year of participation in an IMF program was associated with increases in tuberculosis mortality rates by 4.1%, and each 1% increase in IMF lending was associated with increases in tuberculosis mortality rates by 0.9%. Debt to non-IMF lenders was found to have a slightly favorable association with tuberculosis mortality rates.
Or, to put it more simply, to get a IMF loan, countries are required to cut public services, like health care, that would reduce the incidence of serious diseases like tuberculosis, while, simultaneously, adopting trade, investment and privatization policies that reduce the income (and, in some instances, even the jobs) of many in the workforce. Can't get health care from the government any more, can't afford to pay for it from private sector providers. Given the collapse of our economy, with a spiralling, out of control rate of home foreclosures, increased unemployment, decreased consumption, a declining currency and an unaccountable financial system addicted to government subsidized speculation, are we about to experience something equally draconian here in the US?
Most of the specific policies that Stiglitz criticizes will be familiar to anyone who has paid even modest attention to the recent economic turmoil in the developing world (which for this purpose includes the former Soviet Union and the former Soviet satellite countries that are now unwinding their decades of Communist misrule):
Fiscal austerity. The most traditional and perhaps best-known IMF policy recommendation is for a country to cut government spending or raise taxes, or both, to balance its budget and eliminate the need for government borrowing. The usual underlying presumption is that much government spending is wasteful anyway. Stiglitz charges that the IMF has reverted to Herbert Hoover's economics in imposing these policies on countries during deep recessions, when the deficit is mostly the result of an induced decline in revenues; he argues that cuts in spending or tax hikes only make the downturn worse. He also emphasizes the social cost of cutting back on various kinds of government programs—for example, eliminating food subsidies for the poor, which Indonesia did at the IMF's behest in 1998, only to be engulfed by food riots.
High interest rates. Many countries come to the IMF because they are having trouble maintaining the exchange value of their currencies. A standard IMF recommendation is high interest rates, which make deposits and other assets denominated in the currency more attractive to hold. Rapidly increasing prices—sometimes at the hyperinflation level—are also a familiar problem in the developing world, and tight monetary policy, implemented mostly through high interest rates, is again the standard corrective. Stiglitz argues that the high interest rates imposed on many countries by the IMF have worsened their economic downturns. They are intended to fight inflation that was not a serious problem to begin with; and they have forced the bankruptcy of countless otherwise productive companies that could not meet the suddenly increased cost of servicing their debts.
Trade liberalization. Everyone favors free trade—except many of the people who make things and sell them. Eliminating tariffs, quotas, subsidies, and other barriers to free trade usually has little to do directly with what has driven a country to seek an IMF loan; but the IMF usually recommends (in effect, requires) eliminating such barriers as a condition for receiving credit. The argument is the usual one, that in the long run free trade practiced by everyone benefits everyone: each country will arrive at the mixture of products that it can sell competitively by using its resources and skills efficiently. Stiglitz points out that today's industrialized countries did not practice free trade when they were first developing, and that even today they do so highly imperfectly. (Witness this year's increase in agricultural subsidies and new barriers to steel imports in the US.) He argues that forcing today's developing countries to liberalize their trade before they are ready mostly wipes out their domestic industry, which is not yet ready to compete.
Liberalizing Capital Markets. Many developing countries have weak banking systems and few opportunities for their citizens to save in other ways. As one of the conditions for extending a loan, the IMF often requires that the country's financial markets be open to participation by foreign-owned institutions. The rationale is that foreign banks are sounder, and that they and other foreign investment firms will do a better job of mobilizing and allocating the country's savings. Stiglitz argues that the larger and more efficient foreign banks drive the local banks out of business; that the foreign institutions are much less interested in lending to the country's domestically owned businesses (except to the very largest of them); and that mobilizing savings is not a problem because many developing countries have the highest savings rates in the world anyway.
Privatization. Selling off government- owned enterprises—telephone companies, railroads, steel producers, and many more—has been a major initiative of the last two decades both in industrialized countries and in some parts of the developing world. One reason for doing so is the expectation that private management will do a better job of running these activities. Another is that many of these public companies should not be running at all, and only the government's desire to provide welfare disguised as jobs, or worse yet the opportunity for graft, keeps them going. Especially when countries that come to the IMF have a budget deficit, a standard recommendation nowadays is to sell public-sector companies to private investors.
Stiglitz argues that many of these countries do not yet have financial systems capable of handling such transactions, or regulatory systems capable of preventing harmful behavior once the firms are privatized, or systems of corporate governance capable of monitoring the new managements. Especially in Russia and other parts of the former Soviet Union, he says, the result of premature privatization has been to give away the nation's assets to what amounts to a new criminal class.
Fear of default. A top priority of IMF policy, from the very beginning, has been to maintain wherever possible the fiction that countries do not default on their debts. As a formal matter, the IMF always gets repaid. And when banks can't collect what they're owed, they typically accept a "voluntary" restructuring of the country's debt. The problem with all this, Stiglitz argues, is that the new credit that the IMF extends, in order to avoid the appearance of default, often serves only to take off the hook the banks and other private lenders that have accepted high risk in exchange for a high return for lending to these countries in the first place. They want, he writes, to be rescued from the consequences of their own reckless credit policies. Stiglitz also argues that the end result is to saddle a developing country's taxpayers with the permanent burden of paying interest and principal on the new debts that pay off yesterday's mistakes.