IMF:History of Limited Choices and Broken Promises

International Monetary Fund and the Inter-American Development Bank: A History of Limited Choices and Broken Promises - Part I

The following article, which is being published in two parts, explores the historically often unfriendly and adversarial relationship that the International Monetary Fund (IMF) and the Inter-American Development Bank (IDB) have held with Latin America in the past and their attempt to play a reinvigorated role in the region as a result of the current financial crisis. After last month’s G20 Summit during which an agreement was brokered that will increase the IMF’s capitalization from $250 billion to $750 billion, with a special credit line designed for emerging markets, it appears that prospects may exist for the IMF and the IDB to play an increasingly meaningful role in the region.

These lending institutions have had a lackluster record throughout their history in Latin America. The rigid conditions that these lenders of last resort place on credit lines and their chronic adherence to neo-liberal monetary policies often has exacerbated economic crises in the region rather than contain them. COHA Research Associate, Will Petrik, analyzes whether there will be any meaningful modifications to the IMF and the IDB’s traditional lending approaches in the near future. He argues that in spite of the ostensibly consequential revisions to their lending policies, Latin American political leaders should still proceed with caution, as these institutions are still mainly governed by U.S. and European directors and, as a result, the economic and political interests of the region may not be adequately safeguarded or even represented.

Given the complexity of this subject, COHA has divided the Petrik article into two parts. The first part of the analysis will address the deteriorating economic situation throughout much of Latin America and the reemergence of these international lenders in the region. More specifically, Petrik outlines the lending policies of these institutions and their far from always amicable relationship with borrowing nations. The second part, to be published tomorrow, will delineate the recent adjustments to the IMF and the IDB’s lending policies and then question whether such emendations will actually lead to a substantial change in their relationship with Latin America, and whether there will be any realignment in the balance of forces between financial lenders and recipient countries.
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• IMF and IDB gained new stature at recent regional and global meetings

• A questionable history associated with international financial institutions and the IDB in Latin America

• Reform in IMF and IDB policies and governance

• Implications for alternative financial institutions and the future of the IMF

The global credit freeze is now trickling down upon the developing nations. Any prospect of a decoupling of industrialized and emerging market economies has largely faded over the past year. The lack of public and private capital in Latin America is exacerbated by several compelling factors: export volumes and commodity prices have precipitously declined, remittances are expected to fall by 11 to 13 percent this year, and the role for tourism, which is normally responsible for a large portion of the revenue earned by smaller Caribbean nations, is markedly retrenching. The Institute of International Finance (IIF) expects net private capital inflows to Latin America to decline by over 50 percent this year and regional trade to fall by 10.8 percent. This, in turn, will result in a sharp drop in Latin America’s trade surplus, falling from $92.2 billion in 2008 to $10.8 billion in 2009.

As a consequence of this protected economic decay, the region’s public and private sectors are strapped for cash, with domestic banks having limited financing capacity. A recent World Bank report entitled, “Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis,” explains how nations in this sector along with small and medium-scale businesses are being squeezed out of international credit markets due to large-scale loans to industrialized nations. These hefty loans have allowed the U.S. and the European Union to finance massive economic stimulus packages and government bailouts aimed at resolving their own economies, but it has left smaller Latin American development projects, businesses and governments (as well as other developing nations) with limited borrowing options. In the current economic climate, investors have all but lost their appetite for risk and thus, whatever liquidity remains in the system has been reserved for only the most creditworthy borrowers. Poor nations, much like low income individuals, are often deemed unworthy of credit for two primary reasons: first, they do not have the necessary collateral; second, their governments often do not employ responsible monetary policies. As a result, the report suggests developing nations can be expected to face a financing gap between $270 billion and $700 billion.

In an attempt to respond to the region’s demand for financial assistance, the Inter-American Development Bank (IDB) had its 50th annual meeting March 27-31 in Medellín, Colombia. The IDB governors agreed that the bank needed to increase its lending capacity by recapitalizing its funds. According to the Wall Street Journal, the governors approved a resolution ordering the managers of the IDB to “immediately initiate a review of the need for a general capital increase of the ordinary capital and replenishment of the Fund for Special Operations” and formulate funding proposals by the end of April in order to alleviate the plight of the region immediately. Prior to the crisis, the IDB had been annually lending roughly $8 billion. As a result of growing demand for capital in Latin America and the Caribbean, the bank increased that figure to $11.2 billion in 2008. The president of the IDB, Colombian economist Luis Alberto Moreno, proposed a capital increase from $100 billion to between $250 and $280 billion, which would allow the bank to increase its lending figure to $18 billion in 2009.
Just days after the IDB meeting in Medellín, the leaders of the world’s leading economies reached a similar consensus at the G20 Summit in London, as they committed to triple the International Monetary Fund’s (IMF) budget from $250 billion to $750 billion. They also pledged $250 billion for trade finance and $100 billion for multilateral development banks, such as the World Bank and the IDB. The G20 delegates called for more flexible lending policies and a greater say for emerging economies in how the IMF does its business.

History of the IFIs and the IDB in Latin America
Latin American nations historically have had relatively few financing options. As repeated victims of boom and bust cycles and, most recently, irresponsible fiscal policies during the 1980s and 1990s, they were forced to borrow money from the World Bank, the IMF, and the IDB. Theoretically, three different lending institutions should provide the region with a variety of choices and options for borrowing. However, the power structure of these financial institutions is quite similar, and their lending policies have traditionally been informed by neo-liberal ideology. Inevitably, the social, economic and political contracts these banks imposed on recipient nations also have been quite similar from country to country in the region.

As aforementioned, the organizational architecture of the World Bank, the IMF and the IDB are essentially congruent. They all operate under a system of corporate governance, in which a member nation’s quantity of shares and voting rights is directly proportional to its financial contribution to the institution. This gives the wealthiest nations a proportionately greater say in the decision making process. The IDB is somewhat of an exception, because just over 50 percent of the bank is owned by borrowing nations providing the framework for a more equitable structure of governance. However, the U.S. vote still carries more weight than any other nation in the bank, due to proportional representation. For instance, as a majority shareholder controlling “30 percent of IDB Board vote share and about 17 percent of World Bank and IMF shares,” the US has the authority to exercise vetoes over IMF, World Bank, and IDB decisions, according to the Bank Information Center (BIC). In comparison, Brazil, Argentina, Paraguay, Uruguay, Colombia, Venezuela, Bolivia, and Ecuador combined control less than 6 percent of the World Bank, 4 percent of the IMF, and 33 percent of the IDB voting shares. Although emerging markets are becoming more powerful in the global economy, the IMF and the World Bank have not shifted accordingly to provide them with a greater stake in the process. The leadership selection for these organizations is indicative of this inherent discrimination ingrained in their institutional structure. The president of the World Bank, currently Robert Zoellick, is traditionally from the U.S., whereas the managing director of the IMF, currently Dominique Strauss-Kahn, is generally a European national.

IMF’s Structural Adjustments
In order for Latin American nations to be eligible for loans from the World Bank, the IDB, or high-income governments, they traditionally had to meet a number of strict conditionalities established by the IMF, known as Structural Adjustment Policies (SAPs). This gave the IMF enormous influence over domestic economic policies in borrowing nations, as it was essentially the “gatekeeper” for access to foreign credit. The SAPs included implementing fiscal austerity (including public social spending cuts), higher interest rates, the privatization of state owned industries, and rapid liberalization of capital and commercial markets. These imposed “structural adjustments” were based on the neo-liberal economic theory known as the Washington Consensus. Such policies often resulted in disastrous social consequences for the majority of poor people in South American countries. For instance, per capita gross domestic product (GDP) had been growing steadily in the region throughout the 1960s and 1970s, but it dramatically slowed during the structural adjustments of the 1980s and 1990s. This also was the time period when Latin America experienced some of the highest inequality in its living standards in the world.

The most notorious example of the social and economic devastation caused by the IMF’s structural adjustments was the 2001 Argentine crisis. The policies, which included pegging the peso to the dollar, were supported by the IMF under President Carlos Menem and his finance minister Domingo Cavallo. Their policies were widely thought to have perpetuated Argentina’s recession from 1998 to 2002. Furthermore, after Argentina’s banking system and currency all-but collapsed near the end of 2002 and beginning of 2003, the IMF offered virtually no assistance. Instead of following the IMF’s continually flawed economic advice, the Argentine government decided to default on its foreign and IMF debts, persuading the IMF to roll over its credit lines to Buenos Aires. According to the Center for Economic and Policy Research (CEPR), Argentina became the fastest growing economy in the Western hemisphere during the five years following its default in 2003, achieving its growth through policies opposed by the IMF, such as “a central bank policy that targeted a stable and competitive real exchange rate, an export tax, a freeze on utility price increases, and a hard line on negotiations over the defaulted debt.” The IMF’s unconstructive and almost mean-spirited advice during the crisis and its absence from the scene during Argentina’s boom further undermined the lending agency’s legitimacy in the region.

IDB’s Development Model
The IDB’s legacy in the region, similar to that of the IMF’s, has also included “development” based on neo-liberal elements. In this respect, the IDB has encouraged foreign investment and large infrastructure projects, which allow foreign exporters to transfer goods and extract resources. In theory, the wealth, jobs, and benefits created by foreign companies were expected to filter down to the urban and rural poor, but such policies failed to yield such sanguine results as inequality grew in the region.

Civil society groups held an alternative meeting during the recent IDB annual meeting, known as “The IDB: 50 Years of Financing Inequality,” in order to expose some of the inequity behind the IDB’s development schemes. A press release issued by the coalition mentions several IDB development projects which were harmful to communities and the environment because the projects directed wealth away from the land and communities in favor of the private sector. For example, the Cana Brava hydroelectric project in Brazil effectively removed displaced 800 families from their homes; they have yet to be compensated for their loss of land. According to César Gamboa, a representative of the Peru’s Rights, Environment and Natural Resources (DAR) NGO, the Camisea natural gas project in Peru “has harmed indigenous peoples living in voluntary isolation in the Amazonian rainforest. By driving pipelines deep into their ancestral territories, the project brought contact with workers carrying diseases that are deadly to these populations.” Rather than alleviate poverty, these unproductive projects often “destroy the social fabric and community networks necessary for indigenous survival,” according to the Center for International Policy (CIP). Rather than empowering communities to accumulate wealth and social capital by using their natural resources, the land is bought and the wealth of the land is enjoyed by a privatize (often foreign) company.

Although the IDB has been castigated for financing large infrastructure projects, IPS notes that the IDB’s power in deciding which ventures to finance is somewhat over-exaggerated, because it is primarily accountable to its shareholders—national governments and their own often divergent policies and initiatives. It should also be noted that the IDB recently announced a $20 million Emergency Liquidity Facility designed to help microfinance institutions respond to natural disasters and the economic crises. Although $20 million is a small fraction of the expected $18 billion disbursed this year, microfinance institutions do empower small-scale community projects and enterprises.

IFIs’ Decreasing Significance
As a reaction to the World Bank, IMF and IDB and the neo-liberal strategies these institutions have continually imposed on Latin American nations, the populist movements and leftist leaders of the region have sought greater financial autonomy to pursue alternative macroeconomic and development policies. Regional financial institutions, such as Banco del Sur and the ALBA Bank, have been established to decrease the region’s orthodox dependence on foreign capital and the rigid conditionalities attached to such funds. Correspondingly, several Latin American governments had managed to free themselves from the IMF’s influence by repaying loans early with only Peru and Paraguay applying for new stand-by agreements in 2007, according to BIC. A report from CIP supports this claim: “In 2005, 80percent of IMF’s $81 billion loan portfolio was to Latin America. By early 2008, Latin America represented only 1 percent of the IMF portfolio… Prior to the crisis, the total outstanding debt owed to the IMF in Latin America had fallen dramatically to about $700 million.” The region’s governments had the discretionary right to turn away from the IMF because they had budget surpluses, rising credit ratings, and increasing reserves due to high commodity prices and trade deals with China and India. Nations such as Ecuador, Bolivia and Nicaragua also had the help of oil-rich Venezuela providing financing and support with little or no conditions, while Venezuela was buying tens of millions of dollars in Argentine bonds. During the boom cycle of the new millennium, Latin America was beginning to break the chains of debt and financial dependency on U.S. dominated institutions.

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