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Broken Promises (Chapter 2): Globalization and Its Discontents
Katherine Walker
The IMF was established to promote international monetary cooperation and to ensure that the economic and financial policies of its member countries do not have negative consequences on a global scale ("About the IMF"). The IMF has not changed in this purpose, but it has adopted an ideology which dictates many of its day-to-day operations. The adoption of a market fundamentalist policy has resulted in the aggravation of financial problems in the developing countries that have turned to the IMF for help.
IMF Ideology
MARKET FUNDAMENTALISM: The belief that free markets are always the best way to resolve economic problems. (Mohandas 54). For example, opening up banking systems to private firms and foreign competition.
Stiglitz argues that the main problem with the adoption of this ideology is the way in which it manifests itself in the policies and general operations of the IMF.
Flawed IMF Policies and Operations
CONDITIONALITY: the conditions a country must meet in order to receive a loan.
Power Imbalance: The IMF always has a great deal of power over the countries they lend to because these countries are so desperate for money they have no choice but to accept IMF loan conditions. Therefore, the IMF can impose whatever conditions it thinks are appropriate, and the desperate country has no choice but to accept it.
Wrong Conditions: The conditions that the IMF force on member countries for loan agreements are often improper for that country, and they therefore cause damage to the economic systems of that country. For example, imposing financial market liberalization in countries whose banking systems do not have regulations and safety nets to effectively run such a system. Financial market liberalization can result in corruption, bank closures, and the inability of small local banks to compete. Leads to economic chaos and unemployment.
Resentment: The IMF's requirements for loan agreements seem like a new form of colonization to many of the developing countries. For example, IMF insists that all economic transactions be reported and approved in countries that are supposed to be sovereign!
"ONE-SIZE-FITS-ALL" APPROACH: Because the IMF believes that market fundamentalism is effective in every country, they have no need for separate plans of action for each country they deal with. This is, of course, highly flawed for every country is different financially, politically, and socially.
LACK OF PERMANENT STAFF IN MEMBER COUNTRIES: Because the IMF believes that market fundamentalism is effective in every country, they have no need for permanent staff in their member countries. They only send their employees on week-long trips to study the country's economic systems. This is a flawed policy:
The systems (economic, political, social) in every country are highly complex and interdependent; you can't even to begin to understand the complex workings of these systems in only a week.
How can you understand the suffering of the poor when you're only there for a week, are only speaking to high ranking politicians and economic advisors, and staying in a 5-star hotel?
LACK OF PROPERLY TRAINED STAFF: Market fundamentalism operates on the standard competitive model: demand always equals supply. This means that demand for labour always equals supply. The IMF regularly hires staff from universities in which the core curricula uses this model. This means that these staff members are not trained to deal with unemployment in their economic strategies. Unemployment is a huge problem in developing countries, and they are not unemployed by choice. Therefore, the staff are improperly trained because they are not versed in a model that involves unemployment.
NO PUBLIC INVOLVEMENT IN ECONOMIC PLANS: Because the IMF believes that market fundamentalism is always the best approach, they have little need to listen to the needs of the poor in the countries that they lend to. When they visit a member country, they only pay attention to the figures and numbers of financial statements (IMF Surveillance), never to the needs of the public. The IMF operates on a "need to know" basis, and does not believe in transparency (allowing the public to view their numbers, their operations, and the conditions they insist upon). Therefore, the public has no involvement or input in the IMF's operations in a developing country.
Because they have adopted a market fundamentalist ideology, the IMF believes that the economic systems of all countries function identically. Therefore, they have adopted such practices as the 'one-size-fits-all' approach, a lack of permanent staff in member countries (leading to erroneous or incomplete data), lack of properly trained staff, no public involvement, and conditionality of loan agreements. These policies are often very harmful to the developing nations who are so desperate for funds that they have no choice but to accept the IMF policies. The only alternatives for these countries is to pull through an economic crisis on their own, which is often very difficult.
Stiglitz states that the IMF is an institution answerable to the public that it is supposed to be working for. In Chapter 2, he calls for a "grading" of the IMF to evaluate the institution's performance. The public can and must participate in the reformatting of the IMF in order to ensure that the changes are beneficial for all.
Example: Zambia and the IMF
Zambia was directly under British rule from 1924 until 1963. This rule included heavy taxes which drained all sectors of Zambia. By the time the British rule ended, this "drain continued to plague the country" ("History of Zambia"). Mismanagement and corruption of Zambia's first president added to the economic woes of the country. Finally, Zambia was forced to seek help from the IMF in the 1980s. Of course, the IMF loan contract came with certain conditions. These included withdrawing basic food subsidies (to save the government money) and floating the currency ("History"). These conditions were obviously the wrong ones for Zambia, for they only exacerbated the country's problems; inflation skyrocketed and the poor couldn't even afford the meagre amounts of food they had previously been able to acquire. The IMF again lent money in 1995 to help Zambia pay off its debts, but this was impossible due to the crippling amount that Zambia owed.
By 1999, Zambia's debt was over six billion dollars. 70% of the population was living in dire poverty on less than $1 a day. The problems that Zambia faced had only increased since the first time they had approached the IMF: "droughts, a drop in the price of copper, a drop in copper production, recent oil price increase, ripple effect of Asian currency crisis, and debt burden" (Jere) forced the country to approach the IMF for another loan. This time, the condition required for the loan was reflective of IMF market fundamentalist ideology - they required privatization of mines, banks, and other public firms. This also seems to have been the wrong condition, for several years later things are no better for Zambia. According to Emily Sikazwe of the Women for Change movement in Zambia, "IMF policies are killing us, especially women and children" (qtd. in Jere). The IMF and it's "one-size-fits-all" approach believed that privatization of many sectors in Zambia would be beneficial, but many claim that this privatization was premature since corruption in Zambia is rampant. The privatization of Zambia's banks has resulted in ten bank closures due to corruption, "mismanagement, and, to some extent, bad loan books" (Baker). In fact, it is estimated that petty theft by tellers and cheque fraud "eats away up to $1m a year" (Baker). One has to wonder why the IMF insists that governments should be kept out of banking systems when there are countless examples of banking systems that are just as corrupt, if not more so, than the government officials. Corruption and bank closures are not the only problems that bank privatization has brought to Zambia; there are claims that these foreign banks do not deal "fairly with black Zambians" (Patel).
This control by the IMF (and seemingly the World Bank) must feel to most Zambians like a new form of colonization, for they speak of the IMF and the World Bank as "the new colonial masters of this country" (Patel) and hope that they will "break away from IMF chains" before the extreme poverty, hunger, and disease gets any worse. Currently, Zambia is fighting against the privatization of its last state-run bank under the threat of disqualification from the "Highly Indebted Poor Countries (HIPC) initiative" ("Zambia: IMF urged to understand privatization concerns")
The conditions imposed by the IMF have caused Zambia to suffer from poverty, hunger, disease, illiteracy, unemployment, child labour, prostitution, trafficking, and unclean conditions in levels that are unprecedented in Zambian history. Therefore, the IMF and its market fundamentalist ideology has not helped Zambia - they have only exacerbated an already dire situation in yet another developing country.
Analysis
This chapter provides an excellent basis for criticism of the IMF. However, Stiglitz fails to criticize the other global institutions that are just as guilty of exacerbating the economic problems of developing countries. According to most sources, the World Bank often acts in conjunction with the IMF. It also seems that the World Bank has a system of conditionality when negotiating loan contracts, just like the IMF. According to many Zambians, the World Bank was just as much to blame as the IMF in the Zambia situation. Most Zambians blame their poverty on "the resounding and irreversible failure of the IMF and World Bank indirect rule in Zambia" (Patel). Market liberalization and privatization still remain "the position of major international bodies like the IMF and the World Bank and is reflected in the system of incentives and penalties which they incorporate in their loan agreements with developing countries" (Byers). This means that the World Bank is just as guilty of exacerbating poverty as the IMF is.
As Stiglitz himself works for the World Bank, one is left to wonder if this information was omitted to protect his job, or to draw the blame away from his institution. As Stiglitz formerly held the position of chief economist within the World Bank, he certainly would have been privy to this information, therefore this fact certainly couldn't have been omitted through ignorance.
This chapter of Stiglitz's book provides the background for economic policies that have paved the way for large corporations (such as Nike) to expand their companies into developing worlds, as is discussed in Klein's book. With institutions such as the IMF and the World Bank pushing developing countries to open their markets to private institutions, the door is also opened for the exploitation of these people by immoral companies looking for cheap labour.
Works Cited
"About the IMF." International Monetary Fund. http://www.imf.org/external/about.htm (23 Feb. 2004).
Baker, Gil. "Bulls in a tight economy" thebanker.com 3 Nov. 2003. http://www.thebanker.com/news/fullstory.php/aid/854/Bulls_in_a_tight_economy.html (24 March 2004).
Byers, Stephen. "I Was Wrong. Free Market Trade Policies Hurt the Poor: The IMF World Bank Orthodoxy Is Increasing Global Poverty." Guardian: Global Policy Forum 19 May 2003. http://www.globalpolicy.org/globaliz/econ/2003/0519wrong.htm (24 March 2004).
"History of Zambia." destinationplanner.com http://www.destinationplanner.com/africa/zambia/history.html (24 March 2004).
"IMF Surveillance." International Monetary Fund. http://www.imf.org/external/np/exr/facts/howlend.htm (23 Feb. 2004).
Jere, Dickson. "Anti-IMF Protests in Zambia." 27 April 2000. http://www.nadir.org/nadir/initiativ/agp/free/imf/africa/zambia.htm (24 March 2004).
Mohandas, Siddharth. "Market Fundamentalism." Washington Monthly 34.7/8 (2002): 54-56.
Patel, Raj. "Zambia: Gov't Resists IMF Threats over Bank Privatization." 14 Dec. 2002. http://lists.nu.ac.za/pipermail/ccs-l/2002/000882.html (24 March 2004).
Stiglitz, Joseph. Globalization and Its Discontents. New York: W.W. Norton & Company Inc., 2002.
"Zambia: IMF urged to understand privatisation concerns." IRINnews.org 11 Feb 2003. http://www.irinnews.org/report.asp?ReportID=32239&SelectRegion=Southern_Africa&SelectCountry=ZAMIBIA (24 March 2004).
© Katherine Walker, 2004
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