|
Consider the adage, “Give a man a fish; he eats for a day. Teach a man to fish; he eats for a lifetime.” While likely one of my least-favorite clichés, I can’t help but think of it when I consider today’s IMF. The IMF’s lending structure allows it to hand out free fish to whichever governments come calling. Instead, it should teach people to fish, or, in other words, stop handing out loans for free, require local sacrifice before lending money, and embrace grassroots-based development.
We know reform is necessary because past aid has done little to relieve the pain of those trapped by poverty. Regular calls for aid increases since 1960 have produced increases in the amount of aid, but not in the results. As William Easterly notes, since 1960, despite huge increases in aid to Africa, “African growth [has] remained stuck at zero percent per capita.” As evidence of past aid’s failure, 923 million people worldwide currently suffer from malnourishment, and 1.4 billion live on less than $1.25 per day. Since 1960, we’ve given out more and more fish. Now is the time to start teaching people how to catch their own.
Reforming IMF lending policies offers hope to those hoping to see the IMF help countries out of poverty, rather than keep them mired in it. Greg Mortenson, author of Three Cups of Tea, identified the number one problem with foreign aid: programs and loans given to countries that do not make a reciprocal contribution are destined to fail because sacrifice from a local community is necessary for a program’s long-term viability.
For example, in 2001, Argentina asked the IMF for a loan. The IMF agreed and asked only that Argentina institute a Structural Adjustment Policy (SAP) in return for a $40 billion loan—70% of Argentina’s federal budget. The result: Argentina accumulated foreign debt it couldn’t repay and eventually defaulted on loan payments. Argentina got a free fish, but that didn’t solve its problems.
Easterly describes the other side of the story in The White Man’s Burden. He cites a program in Malawi, where local Malawians working for the Washington-based Population Services International developed inexpensive insecticide-treated bed nets to prevent malaria. The nets sold for 50 cents each in rural Malawi and for five dollars each in urban Malawi. In 2000, only 8% of children under five years old slept under bed nets. By 2004, that number increased to 55%. Easterly attributes the success of the program to the fact that local Malawians paid for the nets; they sacrificed for them. In stark contrast, when the nets were handed out for free in nearby Zambia, 70% of recipients chose not to use the nets. The difference is that the Malawians sacrificed for the nets. The Zambians did not. Communities that sacrifice for a program indicate an interest in solving the problem, have a vested interest in its success, and are more likely to help the program succeed.
Mortenson noted a second problem with aid: development efforts typically center on government policy rather than local communities. Communities—not governments—drive true development. The SAP in Argentina depended on government action and failed. But in a small village in Jurm, Afghanistan, grassroots-based development is working.
Initially suspicious of the projects, villagers hesitated to jump on board. But, eventually, jump they did. They donated the two things Mortenson says poor communities can still supply: land and labor. Tangible benefits like clean water systems and schools proved to the community the plans worked. Ghulam Dekan, a local worker, noted a benefit even more important than water or education. He said simply, “We taught them to have confidence.”
Confidence is what the poor need to help themselves. The IMF can’t loan confidence, but it can facilitate development efforts of local heroes. If a local community can provide land and labor for a project and a local investor only needs capital for supplies, the IMF should jump at the opportunity. This way, the IMF will teach people to fish.
Jacob is a freshman studying political science.
|
Comments
But I'm not sure what you're suggesting here--the IMF was created to assist countries through crises related to capital account adjustment and currency collapse (hence the name International Monetary Fund). Development aid in the typical sense of the term falls under the auspices of the World Bank and regional DBs. The IMF expanding to work on local development aid would be dramatic mission creep--in addition to stepping on the toes of the World Bank. The Bretton Woods organizations were created to have specific, non-overlapping missions; and while the IMF has certainly broadened its activities since the collapse of the BW exchange rate regime, involvement in local development aid would make the World Bank redundant (and funnel IMF resources away from their primary purpose: currency and capital account stability).
As for 'teaching to fish': the most common criticisms leveled at the IMF have been for focusing too much to 'teaching to fish' during crises in which handing out free fish would have been more appropriate. Until recently, all IMF loans were conditioned on serious fiscal and monetary policy adjustments which were designed to ensure long-term fiscal and capital account sustainability. Too much focus on long-term, teach-how-to-fish concerns at the expense of putting out fires exacerbated crises in Southeast Asia and elsewhere. Joe Stiglitz is a good source for this line of reasoning and evidence, which is certainly persuasive.
The Argentina example leaves out several important factors. The loan to Argentina was hardly a 'free fish'--SAPs are no walk in the park; they cost governments dearly in future resources and government political capital. Perhaps it turned into a free fish when Argentina defaulted, but even that has rendered the country unable to issue sovereign debt. Additionally, economic crisis in Argentina's largest trading partner, Brazil, and its accompanying devaluation of the real made Argentina's fixed exchange rate unsustainable. Add to this Argentina's tendency towards populism undermining the confidence of investors, and you have a macroeconomic disaster. No amount of malaria nets can prevent the consequences of an indefensible currency peg, chronic government fiscal irresponsibilit y, and the destruction of export demand in partner economies. The IMF certainly contributed to the problem, but the World Bank was engaged in the local development you speak of to no avail.
You call for IMF reforms, but the IMF has made major reforms in the last 2 years or so. These reforms were not designed to make the IMF imitate the World Bank as you advocate, but they did eliminate rigid SAP requirements in many cases. During the crises of 2009, probably a dozen countries benefited tremendously from the new loan facilities developed under IMF reforms (ESFs, FCLs, and the rest). Many could argue that these new facilities, while being perhaps flexible enough to be handing out free fish, fall in line better with the IMF's actual mission. While you assert that "The IMF can't loan confidence", there is considerable evidence that the new Flexible Credit Line facility generated significant confidence in governments and financial markets in Colombia, Mexico, and elsewhere. On balance, history will credit the IMF as having been a crucial, effective resource for countries during our recent turmoil, preventing crisis in dozens of countries and regions.
This makes me wonder, what exactly are you advocating? Do you want the IMF to abandon its role of providing insurance against currency and capital account financing collapse and put on the hat of the World Bank? What would the World Bank do? What international financial institution would serve as a lender of last resort for countries like Latvia which face currency crisis?
Thanks for your response. You bring up some good points that I didn’t have space to address in my article.
First of all, concern over overlapping duties and fear of “stepping on toes” is one of the largest problems in the US government and the international community. The idea that only one organization can work toward a common goal, only one person can take the credit, only one group can work in a certain sphere, is the cause of the same bureaucracy that millions complain about when government programs fail. Two organizations arguing over whose duty it is to solve Problem X is like two kindergartners arguing over who gets to go down the slide first – it’s pointless and unproductive. If we let your concern about overlapping duties get in the way of real, legitimate reform, we fall victim to the problem that has caused much of the current crisis: bureaucracy.
The problem with SAP’s is this: They don’t work. Period.
They are not the hard-fought, serious reform you suggest. Too many countries “implement” SAP’s for nothing else than to get the money. By “implement,” I really mean “manipulate the IMF,” since reforms are often temporary and aimed only at securing the loan. The IMF often gets duped into making loans when it shouldn’t and enforcing SAP’s it shouldn’t. Why? Because it lets governments in need of loans tell it what to do. Such was the case in the Argentinean debacle, when after Argentina defaulted on loan payments, IMF officials claimed they were against the fixed exchange rate – included in the SAP – and massive loans all along. They said they only did so to please the Argentinean government. Here’s the question: Who really holds the power? Do these governments really sacrifice to obtain these loans, or do they suggest a plan to the IMF and hope the IMF goes along quietly in the name of great PR? History suggests the latter.
While you might disagree, these loans are exactly free fish. These countries aren’t sacrificing for loans; they’re setting conditions for them. Sometimes, “negotiations” have turned into manipulation and outright forgery while numbers are fudged and books are cooked to make SAP’s look more favorable. Then, instruments like the 2005 Multilateral Debt Relief Initiative now allow the IMF to forgive debts of certain countries entirely. Giving a loan with no expectation of repayment is free money.
That’s a free fish.
Argentina isn’t the only example of failed IMF policies. Two of the best examples of misguided SAP’s are Brazil and Russia, who were plagued by failed SAP’s in the late 1990’s. Overvalued currencies, massive loans, and incredibly high interest rates stood in the way of private investment – real development. Now that those SAP’s are out of the way, Russia and Brazil have two of the fastest-growing economies in the world.
This brings us to the real problem: Governments cannot drive true development. That must come from the people. Improvement in interest rates and capital account financing are not the same as economic recovery, nor do they cause it. Ironically, though, they can stand in the way of true development.
The IMF doesn’t work because macroeconomics don’t fuel real recovery. The World Bank doesn’t work because not enough projects have reached the poor. That’s why this reform is necessary. Concern over macroeconomics has destroyed concern for the individual. We need MORE of these projects to reach the poorest parts of the world. Let’s forget about overlapping duties. Let’s forget about whose turn it is for the swingset this time. Let’s forget about what the original aim of the IMF was. It hasn’t worked. We need to change something. Not for the corrupt dictators of these countries, not for Washington politicians, but for the mothers, fathers, and children who have no other option. They want development, but as it is now, the IMF only stands in the way. Let’s remove the obstacles of SAP’s from the road to true development and let local heroes do the work.
I will address three claims you make in your thoughtful comment: (1) your assertions about the relationship between macroeconomics and development, (2) your claims about the nature of the IMF-client relationship being one of countries manipulating the institution into providing costless handouts, and (3) your arguments about the respective missions of the IMF and other international financial institutions.
Despite your claim that “macroeconomics don’t fuel real recovery,” you cite macroeconomic factors as precisely the barriers to growth in Brazil and Russia in the 1990s. Interest rates, exchange rates, and private investment are the very indicators observed most in the study of macroeconomics. Implied in your assertions is that in the absence of SAPs, interest rates, exchange rates, and private investment stabilized and fueled growth in both countries. Attempts to divorce development from macroeconomics are counterproducti ve, since better macroeconomic outcomes are among the indicators we use to measure development.
Indeed, the development successes of the postwar period provide evidence which contrasts starkly with your assertions that neither macroeconomics nor governments drive development. Countries experiencing long-run growth in the postwar period, most notably the Asian Tigers, experienced dramatic increases in labor productivity, a macroeconomic phenomenon. In 1988, Alice Amsden noted that Taiwan’s rapid growth “required deliberate state policies” (Bringing the State Back In, 82). Further, “flows of foreign direct investment played a critical role in capital formation” (90), a macroeconomic process crucial for the private investment you correctly claim is so important. A careful combination of state intervention and the harnessing of market forces drove rapid growth throughout Southeast Asia. We agree that local development is important: I’m more aware than you think of the plight of impoverished women and families in extreme poverty and their need for immediate assistance prior to long-term macroeconomic planning. However, without increases in capital formation, expansions in market access, improvement in labor productivity, and the careful development of government institutions, long-term development will not be possible. In other words, both governments and macroeconomics matter a great deal. Interest rates and the capital account are extremely important for development; much of the trauma in Latin America over the past year was driven by inability to finance capital accounts (and much trauma was prevented through IMF guarantees). Without trade finance, prices rise and incomes decline. With bad interest rates, lack of credit reduces wages and private investment. Your attempt to disconnect these factors from development is puzzling; you can sell all the malaria nets you want, but without improvements in the above indicators, economies don’t grow.
You further contradict yourself by claiming that IMF recipient countries manipulate the IMF into “free fish” terms for assistance while simultaneously claiming that IMF policies were destructive in these countries, and getting out from under said policies is what led to subsequent growth. If the former assertion is correct, then blaming the IMF for policies actually desired by recipient countries is misguided; if the latter assertion is correct, these costly adjustment policies are far from free.
Some evidence for your claims about SAPs being free lunches would be helpful. Joe Stiglitz, who has written extensively about IMF policies (especially in the 1990s), relates several counterexamples to your claim about countries manipulating the IMF and receiving costless handouts (from Globalization and Its Discontents). In South Korea in 1997, the IMF “imposed excessive fiscal stringency. . . . Korean officials reluctantly explained that they had been scared to disagree openly. The IMF could not only cut off its own funds, but could use its bully pulpit” to discourage FDI (42). During the same regional crisis, the IMF “contended that the kinds of restraints that Thailand had imposed to prevent a crisis interfered with the efficient market allocation of resources. . . . The IMF admits that the fiscal policy it recommended was excessively austere” (101-6). IMF requirements for Indonesia led to riots! In general, “In dictating terms of the agreements, the IMF effectively stifles any discussions within a client government” (43). In the November 1998 edition of Current History, Robert Wade lists the requirements imposed on resistant Asian governments then notes that “most Asian governments acquiesced to the IMF’s strategy” (367). You can find similar arguments from Jeff Sachs’and Nouriel Roubini’s writings circa 1998. The evidence suggests that rather than manipulating the IMF, client countries have been strong-armed into austerity measures far beyond their ability to implement. While we agree that SAPs have been misguided and destructive, your assertion that “governments in need of loans tell [the IMF] what to do” is contradicted by history. Contrary to your claim that the IMF regularly gives out loans without expectation of repayment, it is actually largely self-financing (which would be quite a task for a fund neglecting to collect debts!), and its rigid fiscal conditions were designed precisely to reduce the risk of default. Your one example of the Argentine failure does not neutralize the dozens of fulfilled loan obligations collected by the Fund—with interest.
Finally, while your idealism about all international institutions happily taking up the task of local development based on Bill Easterly’s arguments is admirable, it is not feasible. The IMF’s mission is just as distinct from local development as the mission of the BYU Dutch Club. Asking the IMF to reorient its priorities towards missions already being pursued by more relevant organizations is impractical. Such a change would require a complete re-staffing of the institution, eliminating its expertise in currencies, trade finance, and fiscal conditions, and the hiring of economists who specialize in other topics entirely (not to mention the scrapping of crucial reforms which reduced the magnitude of the recent global crisis). Such an expansion of mission statement would inevitably increase your feared bureaucracy; despite your claim that these institutions have a “common goal,” their goals at creation were and still are distinct. Further, the switch would require either a marked increase in IMF resources, and if you observed the IMFs capital request in the summer of 2009 you know how politically difficult this would be; or abandonment of the IMFs monetary and finance role, in which case some other institution would have to fulfill this responsibility. The IMF’s primary goal is not development; it is crisis treatment. Why ask the IMF to do something other organizations should be doing and have to create a new one to take its place? In general, I’m asking you to explain why you chose the IMF as your target for development assistance reforms rather than an institution more suited to the task. It seems that you’re confusing the roles of the global financial organizations.
You are correct; I said macroeconomics do not fuel recovery, but macroeconomic factors can be a barrier to it. Read my second-to-last paragraph. The potential to stand in the way of development is not the same as being responsible for it when it succeeds. Macroeconomics can be (and is) an important indicator of economic growth – note that I said “indicator” – but that does not mean macroeconomics caused development.
I fully agree that macroeconomics are one way to measure growth, with the caveat that they do not actually cause it. They can stand in the way – see Brazil or Russia – but that is hardly the same as being the primary cause of development. Economies develop first; the numbers follow afterwards.
What you suggest about my claims in regards to relationships of the IMF and recipient countries is misleading. The Argentinean example is clear; IMF officials did claim that Argentina pressured them into that particular SAP. Mark Weisbrot, an international finance economist, has documented this and other loan relationships. However, I did not suggest that the same was true in all countries. This has occurred in several countries, but just that – several. Even so, it remains a cause for concern. I didn’t suggest that this occurs universally; you did.
In many countries, this manipulation does not take place. Again, Brazil and Russia are perfect examples, in addition to dozens of others, like the Asian countries you cited. It seems we agree on that. However, I would caution against universalizing all of my examples and cross-applying arguments specific to certain countries in order to create a contradiction. Perhaps I was unclear initially, but I believe a careful re-reading of my argument would clear up confusion.
I am aware of how the IMF finances itself. But recently, the IMF has issued many loans without repayment. After passage of the 2005 Multilateral Debt Relief Initiative, debts of many countries were forgiven entirely. As of last July, 26 countries had been granted full relief while 16 more would be granted relief shortly. The IMF will never collect that money. Again, I do not suggest that this is always the case – just that it happens frequently enough to be of concern.
I suppose I chose the IMF because I believe in potential. Call me a blind optimist, but I wrote about what should happen, not what will. Perhaps you’re right; this reform likely will never happen. It is certainly difficult and impractical. But, that doesn’t change what the best possible scenario is. This is way I would wish to see the role of the IMF changed. I certainly understand that my vision is far different from the status quo. I understand it would be a drastic change. But I remain convinced that this type of reform would better the world – however unlikely the reform is to take place.
First--the distinction you continue to make between macroeconomics and development is unclear and lacks depth. What do you mean when you say "economies develop first"? Economies develop before macroeconomic factors? ECONOMIES ARE MACROECONOMIC IN NATURE. And why do you suppose that macroeconomics are simply numbers? You're creating a false distinction which betrays a lack of rigor in your definitions. Perhaps your argument would improve if you clearly define what you think actually causes development. Then we can explore whether macroeconomic factors are really as irrelevant for causing development as you want to think (you'll find that the items you think cause development are heavily dependent on macroeconomic factors and conditions, in addition to government institutions). Your lack of rigor is what's causing confusion about what you're suggesting.
Second--You still didn't answer my question about why you chose the IMF instead of an organization more suited to the task of implementing the reforms you suggest (though your suggestions aren't entirely clear). I'm willing to tolerate the lack of realism in asking the IMF to make these changes, but you (1) fail to address my criticisms about who would fill the role the IMF currently plays with regard to international monetary stability, and (2) fail to explain how an organization so distinct in mission from what your asking is better suited for providing "the best possible scenario" than another organization with institutional and human resource assets far better suited to the task. This is important, because I think it may betray a lack of understanding of the international monetary system and the Bretton Woods institutions. The IMF has been the subject of a lot of hype for people recently introduced to international political economy, and I'm suggesting that this is why you chose the IMF instead of an organization which would be better at performing the tasks you ask for. The IMF controversy often provides a first introduction to the shortcomings of the current global political economy. In other words, this has nothing to do with you being a blind optimist--I'm fine with that--but everything to do with failing to understand the relative responsibilitie s and capabilities of the IFIs.
Third--The IMF debt forgiveness activities you cite are not specific to the Fund. Rather, these are part of a much larger movement, to which all the IFIs and many NGOs are subject, asking for debt relief for countries whose debt-servicing activities have rendered them unable to govern. The debt relief goals were chosen by member countries, not IMF bureaucrats. No matter what kind of reforms the IMF makes, it will still be subject the wishes of its stakeholders, which include these more general debt relief initiatives. Hence, while you're hoping to criticize the IMF, your criticism applies to a much larger movement.
On a side note, you're also ignoring the requirements the IFIs have for countries to qualify for debt relief, which are nontrivial. Rejecting debt relief out of hand as a free handout is severely lacking in nuance. Without a real cost-benefit discussion, your claim comes off as naive and, perhaps, uninformed.
RD, I'm glad you are smart enough to point out flaws in an article written by a brand new freshman. Look, there are some issues he needs to work out with his ideas. That doesn't justify calling him "naive, and perhaps, uninformed," just to prove how smart you are. The kid is informed, and considering how few political science classes most freshmen take before their missions, this is impressive writing. The proposal has some issues, sure, but it's impressive nonetheless.
Jacob, keep writing, keep learning, keep researching. When you take as many classes as RD has, you'll be an incredible writer and thinker. Don't let one person killing your ideas because they've taken more classes than you get you down. You have loads of potential.
RSS feed for comments to this post.