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The Power of the IMF

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The Power of the IMF
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  1  The power of the IMF 1   Sandra HahnUniversity of Salamanca, Spainne certainty about power is thatalways comes to an end. No matter what kind of power it is or how long does itlasts, it will come a time when it´s over. TheInternational Monetary Fund (IMF) had animpressive power over Latin Americancountries during a crucial time of its history, theearly 1980´s, just when the region started toresume the constitutional path after a period of authoritarian rule. This paper explores what were the key elements that made the Fund so powerful andthat its prescriptions accepted by major Latin American countries in the early 80´s, despitethe hard adjustments these required, the secrecy of the main documents and the negative socialconsequences in the short terms. At the sametime, it intends to discuss the influence of theIMF over Europe, which is facing a debt crisis. The first part discusses the concept of power and describes the beginning of conditionality in IMF´s programs. The secondone addresses to the debt crisis in Latin America and the influence of the Fund over theregion during that time. The third one exploresthe recent experience of the IMF with thedeveloped world.Conditions of powerDespite the complexity of summarize themeaning of power, one balanced concept seemsto be used by Barnett and Duvall (2005:42). 1 Presented at the Latin America Conference Ireland inMay 24th, 2013.  They describe that “power is the production, in and through social relations, of effects onactors that shape their capacity to control their fate” . At first sight, the problem seems solved,but when we got a little further it become morecomplex to analyze its dimensions. The difficulties of expressing or defining power were already reflected in the work of Dahl (1957 :202). “We may never get through the swamp, but it looks as if might someday get around it” , relates Dahl, in a metaphorical way.First of all, he indicates, let us agreed thatpower is a relation, and that is a relation among people. He calls the objects in the relationshipof power as actors  –  that could be individuals,groups, roles, offices, governments, nation-states or other human aggregates. Considering this relation the “base of an actor´s power consists of all the resources  –   opportunities, acts, objects, etc.  –  that he canexploit in order to effect the behaviour of  another.”  The base is inert, passive, indicatesDahl. So it must be used in some way in orderto produce an action on someone´s behaviour.  The means to do so are numerous and “often they involve threats or promises to employ thebase in some way and they may be involve actual use of the base”, argues Dahl (1957:203).Power also depends on some conditions.One of these, lists Dahl (1957:204), is the existence of a “time lag, however sm all, fromthe actions of the actor who is said to exert power to the responses of the respondent”.  This means that we can infer power of A overB if the power attempts of A precedes theresponse of B. A second condition cited by Dahl became a classical sentence . “There is noaction at a distance”, he defines, meaning  unless there´s some kind of “connection” between the two actors we can´t concludethere´s a power relation.Barnett and Duvall (2005:42) identify twodimensions to their concept of power: the “kinds” of social relations through which O  2 power works, and the “specificity” of social relations through which effects on actor´scapacities are produced. The first one can beeither an attribute of particular actors or asocial process that represents what they are associal beings. It can be exercise, they exemplify,by pointing a gun and giving commands orthrough social structures and systems of knowledge that establish an advantage of someand the disadvantage of others. The secondrefers to “the degree to which the social relations through which power works are directand socially specific or indirect and socially  diffuse” (Barnett and Duvall, 2005:43). It canoperate in an immediate way or through adiffuse process of international institutions where some rules define who has the right toparticipate in a discussion or a decision.In theory, the IMF does not haveauthority to impose any rule to a country. Evenso, its Structural Adjustment Programs (SAP) 2   where largely adopted in Latin America,especially in the 80´s. At that time, a seriousdebt crisis hit the developing world very muchafter Mexico announced, in 1982, its incapacity to pay the creditors, extending the effects of thedefault throughout the region and othercountries  –  disseminating lack of confidencefrom investors over Third World nations. A year after that, in 1983, 34 uppertranche 3 programs were arranged by IMFinvolving conditionality (Edwards, 1989:30),one of the main and more controversial issuesof the Fund´s programs. Conditionality is thepractice of giving financial assistance 2 Structural Adjustment Facility is a financial facility of theFund established in 1986 to provide concessional loansto low-income Fund member countries. A structuraladjustment changes “the way in which an economy isorganized in order to raise productive capacity” (IMF´s  glossary). 3 Upper tranche was srcinally referred to a creditavailable from the Fund in an amount between 25 and100 percent of a quota, but nowadays issued to any creditabove 25 percent of a quota (IMF´s glossary). contingent on the implementation of specificpolicies (Dreher, 2009:233). This means thatthe IMF will only release the money if thecreditor agrees to adopt some actions, mainly structural adjustments, in exchange for the loanin a given period of time. That list of 34borrowers included Latin American countriesas Argentina, Brazil, Chile, DominicanRepublic, Ecuador, Guatemala, Haiti, Mexico,Panama and Uruguay, among nations fromother regions  –  like Philippines and Portugal. The Fund´s credits were not alwaysconditional. The first example of this practicecame in 1954 when IMF approved a stand-by arrangement for Peru. In this case, the maincondition was a change in foreign exchangemarket (Boughton, 2001:557). Theconditionality became a central matter after1979, succeeding the second oil shock. Reaganadministration, who took office in 1981 inUnited States, pushed to tighten themechanism, but wasn´t the only voice to ask so.Boughton (2001:565) stresses thatrepresentatives from industrial countries -especially from Europe - expressed similar views at the same time that low-incomecountries lending became more frequent. In fact, the conditionality level increased “notably  by the time that the geographical emphasis of the Fund turn from the First World to the  Third World”, notes Peet (2004:97).   Along decades of activity, the Fund changed its role from an institution “help ing advanced economies to correct current accountimbalances to an institution devoted to crisismanagement in emerging economies and tosupport reform programs in low-income countries” (Le Fort V, 2005:108).  The nature of conditionality also suffered a change throughthe years. Until 1970, the conditions attached toIMF loans were primarily macroeconomics,destined to improve external competitivenessand re-establishing circumstances forsustainable growth. After the oil shocks during the 1970´s, the IMF started “supplementing   3 macroeconomic conditions with structuralones, such as liberalizing prices and trade and privatizing state enterprises” (Mayer andMourmouras, 2008:106).Some scholars consider the Great Britainagreement with the IMF in 1976 a turning pointin its mechanism. Between 1947 and 1971,Great Britain took credit from the Fund without relevant requirements (Peet, 2004:92).However, the situation changed in 1976, whenthe government searched for a 3,9 billion dollarloan from the Fund. The IMF negotiatorsdemanded heavy cuts in public expenditure,besides other elements, as a precondition to thecredit. The operation, says Peet (2004:94),contributed to disseminate the idea that theFund was the last institution to search for acredit due to its hard conditions demanded. The return over Latin AmericaConditionality has at least two basicreasons  –  in theory. First, the conditions intend to provide “ assurances to the internationalcommunity that borrowers will adopt adequatepolicies to resolve their economic difficulties(Mayer and Mourmouras, 2008:106) ” . In doing so, the objective is also to assure that they willbe able to pay the loan on time. Besides, this way the Fund´s resources will be again availableto other members. A second reason is to giveconfidence to borrowers that the IMF will notact arbitrarily and they will continue receiving help if they meet the criteria (Mayer andMourmouras, 2008:106).Many critics point out that the conditionsdemanded by the Fund are excessive and don´teven guarantee the return of the loans. Stiglitzis one of them . “Few of the conditions are directly related to the fiduciary responsibility of  a lender to ensure repayment”, he says (Stig  litz,2002:246). In addition, they can even worsenthe capacity of a country to repay, sincepushing it into a deep recession may reduce thechances of repayment, argues him.Other controversial aspect is thesupposed differences between what the Funddemands from a politically weak country orfrom a stronger one. According to Dreher and Vaubel (2003:12), the influence of the applicantover the IMF and the support from the othermembers rise with its Gross Domestic Product(GDP) . “A country with a large GDP possesses a large quota 4 , which means higher voting rights, and it is more important for the worldeconomy  ” , say them. Therefore, a country witha large GDP, they conclude, must probably accept fewer conditions. Apart from the debate over conditionsand its consequences  –  a subject with extensiveliterature available 5    –  over a country, here wediscuss conditionality as a resource to exercisepower. This element was a strong componentthat shaped the relations between the Fund andLatin America countries in the early 1980´s. When a country asks IMF for financialhelp, which one is the most powerful actor? The answer probably depends on the context,even considering the tendency to put thetroubled country in an inferior position due toits vulnerable economic situation. The Funddidn´t have the same power along its entirehistory just as a country can change its relativepower position before other actors. A relevant issue in this Fund-country connection is the intention of the first to causea specific response on the second. It willcertainly find resistance, but the point is if it´s 4 Each member of the IMF is assigned a quota. Quotasdetermine members' capital subscriptions to the Fund, voting power, and the amount of financial assistanceavailable to them from the Fund (IMF´s glossary). 5  The conditionality is under constant critic at least sincethe 1980´s. The IMF revised its terms in 2002 andpublished guidelines establishing: 1) national ownershipof reform programs, 2) parsimony in program-related conditions; 3) tailoring of programs to a member’s circumstances; 4) effective coordination with othermultilateral institutions; and 5) clarity in the specificationof conditions.  4 capable of induce a decision that other way therespondent wouldn´t have. During the 1980´sdebt crisis the Fund had instruments to forceLatin America to adopt its structuraladjustments. It had what they need most,credit, and a resource (conditionality) to inducea desirable response. To measure in whatextension it succeeded in obtaining thisresponse  –  a 100%, 50%, nearly 0%, forinstance  –  is a different and complex part of this relation.Sachs (1989:255) argues, for example,that the role of high-conditionality lending is “more restricted than generally  believed ” andits efficacy is “inherently limited”. Is difficult tocompare the results of a program with thearrangement terms due to multidimensionalcharacteristic of compliance and to the secrecy of the documents. Internal reviews from theIMF show that the result is mixed. Fiscaltargets, he exemplifies (1989:271), wereachieved in about a half of the standby arrangements between 1969 and 1978.Considering data from Fund´s programsbetween 1954 and 1984, Remmer (1999:197)relates failure in achieving its goals to anoverestimated power of the IMF. She considers that changes are more relate to “chance” than to the operation of Fund´s stabilizationprograms and their impact has been “overstated”. Back in the 80´s, the Fund had a morepowerful political position than its Latin American clients, since it had important allies.IMF was backed not only by US governmentbut by commercial banks and other industrialcountries. “Washington -based organizationssuch as the IMF, the World Bank, and the US Treasury pushed aggressively for a certain set of reforms in Latin America (George, 2013:20). ”  In September 1983, the US Treasury Secretary reacted aggressively when the BrazilianCongress rejected a wage bill 6 demanded by theIMF  –  they´re negotiating a loan at that time  –   and adverted there was no “salvation” besides the Fund. After this ostensive interference in adomestic matter, the opposition party leaderUlisses Guimaraes claimed that the country hadlost its sovereignty.Besides that, the Fund had anotherimportant resource: a seal. A negotiation withthe Fund wasn´t valuable only for the money itself, but to give credibility to a country beforeits lenders. To have an agreement with the IMF was a seal of confidence on the government´scompromise to overcome the crisis. To nothave it was a sign of suspicious and lack of credit  –  or credit in an extreme condition. If acountry does not have access to IMF´s fundsthis means the other commercial sources won´tbe probably available. It wasn´t just theeventual use of the base  –  to use Dahl´sconditions  –  , but also the threat of doing it, orrefuse to give its stamp, that made the Fund´sprescriptions largely accepted in Latin America. There are different views for the srcinsof the debt crisis. Orthodox economistsgenerally relate it with domestic policy,especially fiscal expansion and exchange rateovervaluation. Liberal economists focus theiranalysis on external factors, such as the declineof industrial country growth and changing ininternational trade (Pastor, 1989:82)  –  inscenery already difficult after the two oil shocksin the 1970´s.  The fact is after Mexico´s default “theproblem became painfully clear”, as defines Pastor. In response, the banks elevated theirspreads and reduced the availability of credit tothe entire region, which worsened the paymentdifficulties. The region experienced then achange in its relation with the Fund. 6  The government´s first attempt to limit the wage´sindexation failed in a divided Congress, but wasapproved in a lighter version on a second round.  5 During the 1970s, Latin America coulduse private credit to avoid the adjustment ingeneral and IMF conditionality in particular. “Given the availability of independent financing, fewer countries adopted Fundprograms precisely because fewer countries hat to ”, compares Pastor (1989:88 -90). IMF´sconditionality strengthened the search for creditin another markets instead of the traditionalsources, since the offer was accessible, relatively cheap and without political economicconditions (García Menéndez, 1989:341).Searching for more attractive interestrates, commercial banks had turned aggressively its attention to the Third World. This situation weakened temporarily the IMF´s influence over the region. “The Fund´s power had been eroded by the vast expansion of world liquidity”, sustain s Pastor (1989:90). The situation turned back in the 1980´s. With the debt crisis of 1982, the decline in the Fund influence was “dramatically reversed” andLatin America discovered that the once “lenderof last resort” was then the “negotiator of first resort (Pastor, 1989:90) ” . In short, the crisis was an opportunity to the Fund to recover itsinfluence  –  here understood as power  –  overthe region.Brazil, the largest Latin Americaeconomy, was suffering the same urgent needfor credit on those days that Mexico asked forhelp. The military government was still incharge at that time 7 , although the authoritarianregime was giving its lasts steps. The Fund demands to Brazil got theironic consequence of causing the resignationof the Central Bank president Carlos Langoni  –   a PhD in Economics from the University of Chicago and member of an orthodox team. He resigned “in protest over what he saw as 7 The military period had started in 1964 in Brazil and acivil government was elected in 1985, putting an end tothe authoritarian time. harsh ness of the planned adjustment program” (Boughton, 2001:375).In an article defending the IMF from itsmain critics, Rogoff  8 (2003) says thatgovernments from developing countries doesn´t seek for financial help “when the sun isshining” and claims that austerity demands from the Fund are a “myth” . As a rule, sayshim , Fund´s programs “lighten austerity ratherthen created”. In an elastic way of seeing thenegotiations, he claims that “in short term, IMF loans allow a distressed debtor nation to tighten its belt less than it would have to otherwise”.  The Fund will intervene where no privatecreditor would dare. According his view, theeconomic policy conditions demanded by theFund are in order to what the market forces would impose in the IMF´s absence. This line of thought runs into the srcinalconception of the IMF. It was based on therecognition that the markets often doesn´t work well. As Stiglitz points out, the very srcinof the Fund was related to the belief in theneed of collective action in favour of economicstability, just as United Nations was set topolitical stability. Once created with the visionthat markets work badly, now the Fundproclaims market supremacy wi th “ideologicalfervour” , critics Stiglitz (2002:37).Economists like Edwards (1989:7) arguealso that it´s a myth that IMF staff  “ travelsaround the world imposing unnecessarily harshadjustment policies on the developing  countries”    –  although this figure seems to fitpretty much with its activity during the 1980´sin Latin America. Strictly speaking, continueshim, the Fund cannot impose any policy to acountry. The countries require assistance fromthe Fund and, before providing financial help,have to agree with a set of macroeconomicpolicies, interprets Edwards. 8 At that time he was an Economic counsellor andDirector of Research Department from the Fund.
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