IMF and World Bank - Soviet-style Banks

By Ann Pettifor

Director, Jubilee 2000 Coalition

The IMF and World Bank pride themselves on their commitment to market forces. But they themselves are not subject to market forces. On the contrary they are heavily protected from the wrath of market forces – by western taxpayers. In reality they resemble more closely Soviet-style banks – heavily protected from economic reality, and controlled by a privileged “nomenklatura”.

It is an essential precondition of the functioning of the market mechanism that economic decisions must be accompanied by economic responsibility. The functioning of the market is based on the premise that it is not possible to make gains, without taking risks. Under the centrally planned economies of the former Soviet Union these links between gains and risks were severed. And as many IMF economists complained, efficiency was sacrificed.

Just so with the IMF and World Bank. Both institutions make lending decisions, confident that they can take risks without being threatened by losses. They make badly judged loans to wicked dictators and autocratic leaders (Mobutu, Suharto, Ceacescu, Abacha, Fujimori, Arap Moi and Yeltsin to name but a few) confident that they will never lose. They make loans for loss-making and disastrous projects – knowing they will never be punished by the wrath of market forces.

Even if the wicked dictators who are the grateful beneficiaries of these loans salt away ill-gotten gains into Swiss or British or US banks; and even after they die or are murdered by their peoples- the Bank and the Fund cannot lose. Sooner or later the poor people of their countries will be forced to repay the debts.

The gains (repayments inflated by interest and often, compound interest) from these badly judged loans are not accompanied by real risk. Repayments may be delayed – but finance ministers, executive directors and staff of the Bank and the Fund can afford to wait, knowing that the magic of compound interest is multiplying the debt - even as they sleep comfortably in their beds.

And even while the poor may delay payments themselves, because in reality it is not possible to extract blood from a stone - the Bank and the Fund can rely on protection and subsidies from western taxpayers.

Jubilee 2000 has identified 22 countries on a list of 52 nations in most urgent need of debt cancellation, that have had zero or negative per capita income growth over the last 35 years. This means that on average the people of these countries are worse off in real terms than they were 35 years ago. (Try and imagine how much you or your parents were earning 35 years ago – and imagine what revolutionary forces would be unleashed in your own town/city/country if living standards had dropped back to those levels!)

We have looked at the transfers from these, the poorest countries, to the IMF and World Bank. The results are shocking.

Over the period 1992- 1998 the World Bank and IMF extracted more from this group, the poorest (HIPC) countries, than they offered in new loans and credits. Over this period, the International Bank for Reconstruction and Development (IBRD) which is part of the World Bank group, benefited at the expense of the poorest countries in the world, by a staggering $5.8 billion. The IMF has benefited by just over $1 billion. William Easterly of the World Bank Research Department confirms that the net transfer to HIPCs as a whole from the IMF for the longer period 1988-97 is negative, and in the region of $2 billion: in other words the Highly Indebted Poor Countries paid the IMF a net $2 billion over the period.

We summarise: in total the 22 poorest countries in the world transferred $6.8billion to the IMF and IBRD between 1992-98 – according to the latest figures.

One of the biggest transfers is from Ghana. Over the period 1992-1998, Ghana was obliged to transfer (as interest and compound interest) $560million to the IMF, over and above the amount offered in new loans and credits. Ghana can only afford to spend $7 per person on health a year,

But the IMF and World Bank do not only extract, at no great risk, a surplus from the poorest countries. They are also covered and protected by western taxpayers. Recently the UK Secretary of State for Development reported to the British Parliament that part of $10 million in aid funds to Sierra Leone would be used for the repayment of their debts to the IMF and World Bank in Washington. ^[1] This is common practice where countries cannot afford to repay debts yet International Financial Institutions (IFIs) require debt repayments. After Hurricane Mitch in Central America, a total of $175.4 million in aid money directed to the countries devastated was not used for the victims; instead it was used to enable countries like Honduras to pay debt service into the already overflowing coffers of the Bank and Fund). ^[2]

Zambia and Tanzania provide stark examples of the inadequacy of the relief provided by the current Heavily Indebted Poor Country (HIPC) debt initiative and how western aid money is used to cover up this fact. Zambia paid $147 million to foreign creditors in 1998, $136 million in 1999. After receiving HIPC relief its payments will climb to $235 million by 2002, then drop to $153 million by 2005, but this is still higher than its actual payments before HIPC.

The reason is mainly to do with increased payments falling due to the IMF. ^[3] Zambia is already dependent on official development aid in order to meet scheduled debt repayments - in 1999, 72% of donor aid to Zambia was used for this purpose ^[4].

Zambia's neighbour Tanzania shares a similar fate. New figures released by the government show that Tanzania paid $162 million in fiscal year 1998, $184 million in 1999 and $153 million in 2000. The IMF/World Bank HIPC Decision Point document for Tanzania states that average annual debt service after enhanced HIPC relief is $167.5 million for the fiscal years 2000 -2009 rising to $258 million for $2010-2018. The Tanzanian government figures include domestic debt payments as well, however. This means that Tanzania, like Zambia, faces increased payments after HIPC. ^[5]

In both cases the shortfall will be met with aid payments from western countries, in what has become an established but totally unsatisfactory use of aid. Furthermore, the Zambian example has already set IFI onto IFI. The World Bank has expressed concern that its own aid - in the form of International Development Association funds - will be used up in paying Zambia's dues to the IMF! ^[6]

Western taxpayers expect aid to be used for development, for building hospitals, providing clean water and sanitary facilities and paying schoolteachers. Developing country taxpayers hope that their taxes will be used to finance development. Why should elected politicians in the G7 nations agree to use taxpayers' funds to finance the IMF and World Bank, when these institutions already have healthy reserves?

The reason is simple: these are Soviet-style banks, which exist, not to promote development, good governance or even, good banking. They exist to promote the economic and foreign policy interests of the G7 governments that dominate their Boards. That is why they are state-backed banks. That is why they cannot be exposed to the wrath of market forces. Under market forces they might fail. They cannot either be exposed to the wrath of democratic forces. Scrutiny by and accountability to, democratic institutions and parliaments around the world – particularly in developing countries – would profoundly transform the mandates and the conduct of these institutions. They would have to respond to the needs of people – not to the needs of the Big 7 – the most powerful governments in the world.

They can only exist as institutions cocooned and cushioned from economic and political reality. Like the nomenklatura and bureaucracies of the old Soviet Union – they can only survive if protected from the scrutiny and challenges of democratic forces.

As Kunibert Raffer has noted, “this is a system absurdly at odds with the Western market system. At a time when riskless decision making by bureaucrats is abolished in the East, there is no reason why it should be preserved in the West"” ^[7]

19^th September, 2000

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Footnotes

^[1] Hansard, 20^th June 2000

^[2] Debt Relief Initiative for Poor Countries Faces Challenges, United States General Accounting Office, June 2000. Page 90.

^[3] Zambia, HIPC document July 20^th, 2000

^[4] Citibank, 2000.

^[5] Tanzanian government figures supplied to World Bank, August 2000.

^[6] Jubilee 2000 conversations with World Bank, September 2000

^[7] Kunibert Raffer. “What's Good for the United States must be good for the world” Advocating an International Chapter 9 Insolvency. University of Vienna.

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