The IMF and the World Bank: bribing allies



27th September, 2001.

AMERICA has lost no time rewarding its new allies in the war against terrorism. In the past week it has lifted economic sanctions on Pakistan and India, rescheduled $379m of Pakistan's bilateral debt, offered to expand Indonesia's special trade preferences and passed a long-delayed free-trade agreement with Jordan. More bilateral help for allies is likely. And, if the past is any guide, that will not be all. The IMF and the World Bank will also be under pressure to increase help for America's new friends and to come down hard on its enemies.

In some cases, that means that efforts at economic reform will get a boost. In Pakistan, for instance, a one-year, $596m loan programme with the IMF is about to end. Since the government has made quite good economic progress, this loan was likely to be followed by another, more concessionary, loan even before the September 11th attacks on America. Now, a second loan is certain, and its probable size is likely to be far bigger (officials in Islamabad talk of $2.5 billion).

Pakistan will also probably get more relief on its $37 billion of external debts, $13 billion of which is owed to rich-world governments. Until recently, the Paris Club of official creditors had discussed only a modest rescheduling. Now, big write-offs of debt are on the cards. Egypt's official foreign debt was cut in half in 1991, partly as a reward for its help in the Gulf war. Jordan, another Middle Eastern reformer, may also suddenly find the IMF more generous. It is in the last year of a three-year, $164m loan programme. For a new American friend, a sizeable successor loan is assured.

America's new allies are not all countries trying to pursue sensible economic policies. Uzbekistan is a nasty dictatorship with scant regard for human rights and no interest in economic reform—though it is keen on loans from the IMF. Earlier this year, the IMF pretty much gave up on the place and dropped any resident representative. But now that American troops are heading for Uzbekistan, the Bretton Woods institutions may find it hard to ignore requests for cash. Indeed, staff at the World Bank are already thinking of potential projects in Uzbekistan and other central Asian countries—in case they have to lend a lot of money fast.

The IMF and the World Bank are no strangers to lending driven by political considerations. Throughout the cold war, both organisations were a favourite tool for helping useful, if unsavoury, regimes: Mobutu's Zaire, for instance. The history of such lending is dismal. Although the World Bank may this time find useful things to spend the money on—coping with large numbers of Afghan refugees for instance—much of it is likely to be wasted.

Using the Fund and the Bank to punish potential American enemies is harder, since few have any ties with the two institutions. The IMF has had no dealings with Afghanistan since 1991 (though that could quickly change if the Taliban regime is toppled and another more to America's liking is installed). Sudan is an interesting case study. It has long been one of the IMF's worst debtors: a few years ago its voting rights as a member were suspended, because it was so far behind in its repayments. Recently, though, Sudan has been improving its standing. It could even be eligible for new loans within a few years. Whether that happens depends as much on Sudan's reputation for harbouring terrorists as on its economic policies.

Formally, America cannot direct IMF policy, since it casts only 17% of the board's votes. In practice, it puts huge pressure on other rich countries to follow its lead. In 1998, for instance, Croatia was denied an IMF loan payment, even though its economic policy was deemed sound by the technocrats, because it had failed to hand over war criminals. But such political decisions come at a price: they undermine the Fund's credibility as a purely economic institution. In recent years, political interventions have been mercifully rare. That looks about to change.