After the Rain : how the West lost the East Part 25

Additionally, a regime of stable exchange rates won't go far towards facilitating the second result: to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. If a country runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency, in the name of exchange rate stability - its balance of payments is only likely to worsen. Take Macedonia: with a 14% of GDP deficit in its BOP - it MUST devalue and URGENTLY. Its currency is HEAVILY overvalued and the whole economy is deflating. Yet, the IMF is about to repeat there the same grave error it committed in Russia: to protect the currency, the whole system is drained of liquidity (demonetised), interest rates are kept insanely high and the balance of payments deficit skyrockets, until the inevitable collapse. If the IMF is interested in self-perpetuating crisis situations in order to preserve its clout - it is doing a fine job indeed.

The IMF was never authorized to rate the creditworthiness of its shareholders (=the countries). It is acting ultra vires in providing clean or soiled bills of financial health. Its ability to strangle a country financially if it does not comply with its programmes - no matter what the social or economic costs are - is very worrying.

LANGUAGE

Tom:

The language in the IMF doc.u.ment can be roughly divided into two sections.

A Phrases concerning the-history-role/activities-nature of the IMF B Phrases concerning - subjective economic and political concepts - local policy - international policy.

Here's my summary of the kind of language used:

1.Quasi-intellectual terms ("big words for a dismal science"), e.g. disequilibrium, comprehensive a.n.a.lysis, policy strategy;

2.Spin-doctoring euphemisms, e.g. promote, facilitate, balance, co-operation, safeguards, monitoring, responsibilities, precautionary arrangements, endors.e.m.e.nt, benchmarks. This also includes intimidating terms such as "surveillance";

3.Distancing terms, e.g. members, general economic situation, policy strategy.

(1) Is simply pretension. The average "comprehensive a.n.a.lysis"

undertaken by the IMF is often curiously selective and self-serving.

Sam:

Not to mention cursory "kangaroo-court" economic judgements replete with clear contempt and disregard for the "natives". The latter are held to be cheats who are merely trying to extort as much money as they can and probably stash it in Swiss bank accounts (private ones, needless to say).

Tom:

(2) Is the most obnoxious section. These phrases mislead. They paint a picture of the stability and democracy that supposedly is Western capitalism. They paint an image of the IMF as a fair, unbiased, caring, and democratic organisation. These phrases also confuse in that they connect "nice terms" (like balance, co-operation and safeguards) with complicated and subjective economic terms. Thus the language often functions as a "pacifier", or perhaps as a "chaser", softening the blow of the "hard stuff".

(3) Indicates the insular att.i.tude of the IMF. Their "grand scheme" is apparently removed from localised activities and concerns.

Sam:

There is one place, which absolutely complies with the IMF utopia.

There is no inflation there. People do not particularly care if the exchange rate never changes or what is the outlandish level of interest rates needed to ensure this eerie stability. It is the cemetery.

The IMF's deadly sin, yet to yield its grapes of wrath, is not to understand that economics is a branch of psychology and should be at the service of humans and society. When setting economic goals one must always act with pragmatism and compa.s.sion. In the realm of humans, to be compa.s.sionate IS to be pragmatic. Otherwise, reality is bound to frustrate the most rigorous planning. If social costs are not accounted for - unemployment will bring about crime and a black market, which will render the official market and its statistics meaningless, for instance. If exchange rate stability supported by inanely high interest rates prevails over the goals of industrial reconstruction and export-enhancement, the result is erosion of the very fabric of society. Lack of liquidity translates into a lack of trust in fellow citizens and in inst.i.tutions. If public expenditures are harnessed too strenuously - corruption will flourish. The IMF's propensity to provide a "catchall" one-measure-fits-all panacea is nothing short of shortsighted and disastrous. It cannot be that the same financial recipe will apply to Pakistan, Macedonia, Estonia and Russia. Yet, a close scrutiny of the four IMF programmes imposed upon these countries (Estonia wriggled out) - demonstrates striking similarities. It is a fact that there are conflicting CAPITALIST economic models. Not because human nature is so diverse - and it is - but because different people have different preferences. Americans prefer profits and self-reliance to social justice. Not so the French. Paradoxically, this is exactly why markets exist: to trade in disparate preferences. The IMF is a central planning agency but as opposed to previous models it believes that it is omniscient - and knows that it is omnipotent.

Tom:

The IMF's desire to paint a kind of stasis on the world economy is, as you have said, a kind of religious-ideological defence mechanism. The language employed by the IMF is an attempt to give form to the haphazard and contradictory nature of international trade and development. This language functions in a similar way to their policies, in that both seek to describe and promote a uniform concept/practice of international economics.

The reference to economics as a branch of psychology is spot-on. It is ignorant, unethical and unworkable to attempt to impose or promote any kind of exclusive and conformist concept of "the economy". Indeed, the IMF's bizarre language and policies reveal a mistaken view (commonly held) that there is such a single practice or ent.i.ty called "The Economy", or "International Trade". Absolutist and limiting concepts of economy (communism, now capitalism) are increasingly being shown to be unworkable. The language used by the IMF is evidence of the impractical, restrictive and unethical nature of an elitist concept/practice of economics.

FINAL STATEMENT

Tom:

The IMF is a part of the industry of "trade", "development", and "economics" in general. This criticism of the language found in their promotional doc.u.ments is, in some ways, a criticism of the aforementioned "economics industry" in general. When I first read the IMF's comments/reports, I was struck by the combination of arrogance and defensiveness (in a tone of barely muted desperation). I now believe that these doc.u.ments were written with the first whiff of fear in the NYC air-conditioned office ambience. No doubt that those miners, steel workers, farmers, and manufacturers whose own industries were flattened by free trade hysteria will feel a tiny degree of satisfaction, if we really are seeing the decline of the "economics industry".

The IMF is unethical because it espouses an abstract concept "free trade" that influences the complex process of "development" (too often defined with insufficient complexity) while being unconcerned with specific and local realities and interactions. It is simply too abstract: international development is not a.s.sisted on a truly local level by investment in the military, state, or heavy industry. It is ridiculous for a third world country to build ma.s.sive steel-plants, or allow foreign companies to extract vast amounts of timber or oil, when local people are concerned with finding clean drinking water. This abstraction criticism stands for the entire "economics industry", and will continue to do so while it has an insufficiently perceptive and complex understanding of localised realities.

The language of economics is murky, and our criticism of it will remain justified as long as the IMF (et al) produce officious and misleading doc.u.ments. The practice of economics is also murky, and our criticism of it too will remain justified as long as policies that are illogical, impractical and unethical are produced and enforced.

Sam:

The IMF is an essential inst.i.tution. There must exist a multilateral organization geared towards the maintenance of the marketplace itself.

But the IMF should get rid of its Multiple Personality Disorder. It must first decide WHAT is it: a lender of last resort? A creditworthiness-rating agency, sort of an ominous Moody's? A missionary organization, preaching a particular brand of the religion known as capitalism? A commercially-orientated, return-on-investment based financial organization? Dumping grounds for aging politicians and third-rate bankers doing the USA's bidding? Whatever the definition, it is bound to be far superior to the current muddled state of affairs.

Second, the IMF must maintain transparency. It controls vast resources.

It is p.r.o.ne to be inefficient (not to say corrupt). Transparency humbles, ensures the injection of fresh intellectual blood, improves performance, and gives taxpayers a good feeling. The IMF needs to be humbled. Its actions have been politicised lately. It intervenes in the internal affairs of dozens of sovereign, reasonably managed countries - and its intervention is not confined to matters economic. It develops an internal "Organizational cult" (we know best and always). It is one of the most rigid and intellectually handicapped organizations in the world, yet it considers itself a bastion of economic ingenuity and righteousness. Delusions of grandeur are dangerous on such a scale.

Third, the revamped, no-longer-haughty, IMF must be able to fine tune to different social and cultural constraints in different spots of the world. It must strive at least to BE SEEN to be trying to minimize the social costs of its often-botched plans. It must not behave as a colonial power, which it often does. It must establish trust rather than impose discipline. Otherwise, it stands no chance to laugh last.

Actually, it stands no chance even to survive.

(Article published January 4, 1999 in "The New Presence")

Return

Financial Crisis, Global Capital Flows and the International Financial Architecture

The recent upheavals in the world financial markets were quelled by the immediate intervention of both international financial inst.i.tutions such as the IMF and of domestic ones in the developed countries, such as the Federal Reserve in the USA. The danger seems to have pa.s.sed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We may face yet another crisis of the same or a larger magnitude momentarily.

What are the lessons that we can derive from the last crisis to avoid the next?

The first lesson, it would seem, is that short term and long-term capital flows are two disparate phenomena with very little in common.

The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows".

There are investments (including even long term portfolio investments and venture capital) - and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries - it can be destructive in less liquid, immature economies or in economies in transition.

The two phenomena should be accorded a different treatment. While long-term capital flows should be completely liberalized, encouraged and welcomed - the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long-term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever-higher yields. There is nothing inherently wrong with high yields - but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.

The second lesson is the important role that central banks and other financial authorities play in the precipitation of financial crises - or in their prolongation. Financial bubbles and a.s.set price inflation are the result of euphoric and irrational exuberance - said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspan and who can dispute this? But the question that was delicately sidestepped was: WHO is responsible for financial bubbles? Expansive monetary policies, well-timed signals in the interest rates markets, liquidity injections, currency interventions, and international salvage operations - are all co-ordinated by central banks and by other central or international inst.i.tutions. Official INACTION is as conducive to the inflation of financial bubbles as is official ACTION. By refusing to restructure the banking system, to introduce appropriate bankruptcy procedures, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the implementation of anti compet.i.tion legislation - many countries have fostered the vacuum within which financial crises breed.

The third lesson is that international financial inst.i.tutions can be of some help - when not driven by political or geopolitical considerations and when not married to a dogma. Unfortunately, these are the rare cases. Most IFIs - notably the IMF and, to a lesser extent, the World Bank - are both politicised and doctrinaire. It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent"

themselves, their doctrines and their recipes. This added conceptual and theoretical flexibility led to better results. It is always better to tailor a solution to the needs of the client. Perhaps this should be the biggest evolutionary step:

That IFIs will cease to regard the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather they should regard these countries as CLIENTS, customers in need of service. After all, this, exactly, is the essence of the free market - and it is from IFIs that such countries should learn the ways of the free market.