Moves to usher in a globalized neo-liberal economic framework are being pursued by such international institutions as the IMF, OECD and WTO. A recent address by IMF deputy managing director Stanley Fischer dwelling on a possible role for the Fund as a lender of last resort may be the latest such attempt. If realized, this role could entail borrowing economies assuming capital account obligations and opening up to foreign financial institutions.

by Chakravarthi Raghavan
Third World Economics No. 204, 1-15 March 1999

GENEVA: After the breakdown of the Bretton Woods international monetary and financial system in 1971 – when US President Richard Nixon (after summoning the IMF chief to the White House and giving him the information just a half-hour beforehand) announced a US dollar devaluation against gold, repudiating the US commitment to exchange dollars for gold at $35 an ounce – it took five more years for the industrial and developing countries to agree on the Jamaica agreement to change the IMF articles and set up a revised Bretton Woods architecture and system.

In between the Nixon repudiation of the Bretton Woods agreement and the Jamaica amendments to the articles of the IMF, had come the first oil price rise, and the orchestrated effort of the US and others to use the Northern banks to intermediate the funds: taking in the capital surpluses of the oil-exporting Gulf states and lending them to the governments of the North and their corporations – directly or through bond and other market instruments – and persuading and directing the developing world to look to the market for finance (short-term trade finance and capital for investment).

"Non-system"

The Jamaica agreement and the new architecture, with floating exchange rates (and the industrial countries being committed to current account convertibility and moving towards capital account convertibility), it was argued, would produce stability.

But no such stability came and the IMF has come to be the manager of a "non-system", with a principal role as debt- collector in the South for and on behalf of official and private creditors from the North.

At the time of the Jamaica agreement, which came after two years of negotiations within what later became the Interim Committee of the IMF, the developing countries missed a historic opportunity to ensure democratic governance of the international financial institutions.

The developing countries had not been present at Bretton Woods, but by the time of Jamaica, if they had acted together, they had enough votes to block any amendment, and could have brought about some compromises for changes that would be supportive of development.

But they failed to balance their short-term and long-term interests.

For the promise of additional money, through a gold trust fund (for recycling OPEC dollars), promises of development finance (ODA, World Bank loans and so on), and the promise of liquidity through the special drawing rights (SDRs) (whose issuance depended on the approval of the G-5 and their voting power), the developing countries acquiesed in the Jamaica agreement. Only Tanzania saw it as a "mess of pottage" and dissented. Its then finance minister and IMF governor, the late Amir Jamal, later explained to this writer that though Tanzania counted for nothing in terms of the financial system or world economy, it wanted to make a point in its dissent.

And any possibilities of development were in fact ended by the aggressive embrace by the IMF and World Bank (and now the WTO) of neo-liberalism – in the wake of the Thatcher-Reagan counter-revolution.

The IMF and the World Bank promoted so-called "structural adjustment", which entailed leaving the economy to the "market" and governments following "pro- market" and then "market- friendly" policies. These soon became synthesized into the so- called "Washington Consensus" (a consensus within the official Washington establishment) for disarming the state in the economic arena and leaving everything to the market, adhering to neo-liberalism or laissez-faire in developing countries – even as the major industrial centres have been engaged in neo- mercantilism, and an active government role to promote the interests of their corporations, and expansion of the finance economy at the cost of the real economy.

The IMF and the Bank, through their policies, had been forcing unilateral trade liberalization and the opening up of the services economies in developing countries to the foreign banks and financial services providers.

During the Uruguay Round, the two institutions had actively promoted policies in developing countries that favoured the major industrial world, and encouraged the developing countries to agree to the demands from the US and the EC for negotiations under the "trade rubric" of the entire range of economic policies of countries – in goods, services and intellectual property rights. They also pushed, through their "conditionality" policies, unilateral trade liberalization by developing countries.

Enter the WTO

Since the establishment of the WTO on 1 January 1995, the Bank and the Fund have been promoting the same policies and approach with some "assistance" at informal secretariat level from the WTO. They have been encouraging and promoting developing countries notifying and scheduling trade concessions in the WTO, thus binding the countries and making any change of course a costly exercise. Acting without any authority, the WTO secretariat in informal advices has been trying to help this process along.

Some of the statements and interviews by the WTO head, Mr. Renato Ruggiero, after the Asian crisis began in Bangkok in July 1997, strengthen the view that the WTO (and the US) used IMF influence, for example, to pressure several developing countries to "liberalize" their financial sectors and make commitments in the WTO financial services negotiations that ended with an accord in December 1997. The agreement is yet to enter into force.

Meanwhile developing countries, and more so their finance and trade ministers, have been viewing as separate and distinct the financial services liberalization issue at the WTO, the capital convertibility issue at the IMF, and the OECD and UNCTAD/WTO processes for a multilateral investment agreement (that would provide full freedom for all kinds of foreign investors and investments – ranging from traditional protection of property rights against expropriation to the right of establishment and exit for foreigners for all kinds of capital).

Same task

But careful analysis of the policy pronouncements of the OECD, its Development Assistance Committee, the "advocacy" economic research papers of the WTO secretariat, and the pronouncements of the IMF and so on leaves little doubt that, while there is a mutual turf battle, all of these institutions are engaged in the same task: ushering in a globalized neo-liberal economic framework, under which international regimes and rules would restrict the rights of states and their governments and expand those of the foreign corporations. In the wake of the Asian crisis that broke out in July 1997 and quickly began spreading, the World Bank has sought to distance itself from its earlier policies and the IMF remedies and, moving away from the "Washington Consensus", has been talking now of "Washington-plus" (in the words of its chief economist, Joseph Stiglitz).

However, at the trade policy level, the Bank is still promoting the WTO approaches. Learning from its experience (and failure in the Uruguay Round), the Bank is offering technical assistance to developing countries purportedly to help them negotiate better. But there are fears that in fact the staff will promote the Northern view of new negotiations, including via such concepts as "full integration" of developing countries and discouraging the renewed demand from developing countries for special and differential treatment.

Meanwhile, the IMF management, which had been aggressively advocating (since its 1994 50th anniversary meeting in Spain) changes to its articles of amendment to bring about "capital account" convertibility, in the wake of the Asian crisis that spread from Asia to Russia and now to Latin America, appears to be staging a "tactical retreat".

The developing countries, and particularly the Group of 24, after the Asian crisis began having some second thoughts on moves for capital account convertibility and opening their capital accounts, and have slowly begun reversing track, and pressing for a new financial architecture and a task force and process to achieve it.

Several mainstream economists have also been questioning and challenging the capital convertibility idea, while many others including free trade ideologues like Jagdish Bhagwati, even when supporting and advocating "trade liberalization", began attacking both the IMF advocacy of capital convertibility and the WTO/OECD moves for multilateral investment rules.

In this situation, the IMF and the US Treasury have "coopted" the call for a new financial architecture, and have attempted to bring it under their influence and control, through some window-dressing reforms that will ensure that the transnational banks and financial service operators would be able to operate in the emerging markets, backed by IMF presence and conditionalities.

The IMF’s deputy managing director and US national, Stanley Fischer, has been singing a siren song of a new financial architecture and the IMF as the lender of last resort.

His views and arguments on this were presented at the joint luncheon meetings of the American Economic Association and the American Finance Association in January in New York, and are available on the IMF webpages. The paper is an attempt to meet the objections of developing countries and dilute their opposition to the IMF ideas – by presenting capital account convertibility as a long-term objective and a process to be undertaken at each country’s pace.

At the same time, Fischer has been holding out the prospect of the IMF functioning as a lender of last resort of sorts and providing funds.

But his speech seems to envisage this in relation to the countries, among others, moving to capital convertibility and opening up their economies to operations by foreign banks and financial intermediaries.

[According to participants, Jagdish Bhagwati at the same American Economic Association meeting, while participating in a panel discussion, assailed the IMF policies and proposals for furthering the interests of Wall Street.]

In his paper at the AEA/AFA lunch, Fischer has looked at issues of lender of last resort and capital account liberalization, and has gone on to argue that the IMF could serve as the international lender of last resort.

The IMF was set up in 1944 to deal with payments crises and current account problems, hence the provisions in its articles to effectively prevent members from having recourse to IMF funds for capital account problems, and the IMF specifically being authorized to recommend to the countries imposition of capital account restrictions.

Fischer in his address has dealt with, and given some misleading analogies about, domestic lenders of last resort – bringing in and mixing up the roles performed in this regard (and largely in terms of US experiences and practices) by the US Federal Reserve and the US Treasury, as well as in some other countries where the "lender of last resort" has no power to create "money".

The major thrust of his argument, and the "lollipop" being held out to the developing countries and their treasuries desperately looking for outside finance, is that the IMF could become such a lender of last resort with reference to their capital account.

Backdoor effort?

Tied to this are issues relating to the extension of IMF surveillance.

Is it really possible for the Fund to become a lender of last resort without extending its surveillance (over developing countries) to a number of new areas, including the practices in the financial systems of countries – domestic and external?

It is also difficult to see how the IMF can become a lender of last resort to countries on their external capital account, without countries undertaking obligations with respect to the capital account.

Nor is it easy to see whether it will be possible to vest the IMF with such lender-of-last-resort authority on the capital account without engaging in some capital account negotiations.

Shorn of verbiage, is it really feasible to consider the proposal to make the IMF a lender of last resort in isolation, and separate from the IMF’s earlier efforts for capital account convertibility? Or is the proposal no more than a backdoor effort to achieve the same and ensure capital account liberalization?

Even if such a liberalization and convertibility obligation will no longer be through the IMF articles, but be a voluntary one, would it not result in a further division of member- countries of the IMF?

Even now, in terms of the current account, there are two groups of IMF members: those who borrow from the IMF (developing countries and the transition economies mostly) and those who lend.

Those who lend have no enforceable obligations to the IMF beyond those in the Art. IV surveillance – and there is not enough convincing evidence that such surveillance has in fact brought about a change of policies in the lending countries.

But those who borrow, do so under "conditionality" and are thus governed by the "subjective" obligations and conditions imposed by the IMF management.

Three-tier system

The IMF proposal to become a lender of last resort on the capital account could thus mean that countries which have accepted the conditions and disciplines attached to the loan (or those announced in advance as eligible for capital account loans) would be separate from countries that have access to the IMF windows on the current account. There will thus be a three- tier system of IMF membership.

And given the fungibility of money and resources, this would create a problem in terms of the Fund’s resources – and easily result in division (and/or diversion) of the Fund resources for capital and current account purposes.

Even as it is, there are concerns among developing countries that the current system does not adequately support or provide for development needs and that IMF and World Bank funds are being used for "bailout" operations.

And as the recent packages show, it is not only IMF funds that are involved. Under various guises, including so-called social safety assistance, the funds of the World Bank and regional development banks, and the budgets and resources of the industrialized countries are being called in and used.

Of the three classes of members, the industrialized countries would be those lending funds officially to the IMF, and perhaps even their private capital may become involved.

Of the others, there will be one class of members, perhaps a small number of so-called "emerging markets", which accept capital account obligations and have rights to the IMF resources on the current account as well as to the lender-of- last-resort facilities.

The third class of IMF members would be those having only rights of conditionality access to current account facilities.

This will have differing effects on the market ratings for borrowings of the two classes of members.

A country that does not want to open its capital account and does not accept IMF surveillance over a new range of areas may find itself handicapped when it seeks to tap international markets in different ways (than capital account liberalization).

Any idea of an international lender of last resort raises the question whether there could be a genuine lender of last resort without discretion to create money and liquidity.

The Fischer thesis attempts to argue in the affirmative.

Fischer tries to argue that within countries the treasury has acted as such a lender of last resort, even when liquidity creation is in the hands of an independent central bank. He also cites the role played in the early part of this century by private bankers like J.P. Morgan.

But a treasury lending money or a J.P. Morgan doing so cannot be confused with a "lender of last resort".

An important difference is that a lender of last resort stands ready to lend, in theory, unlimited amounts, if certain conditions are met.

Even though the IMF can issue SDRs, under its articles, such issuance is dependent on approval of the members, and the major countries. If the IMF is enabled to freely issue SDRs, they will become a major rival reserve currency to the dollar and the euro. Alternatively, political considerations (of the majors) could prevail in respect of issuance of SDRs to ensure that the major countries’ dominance is not eroded.

And given the conditions, for example, that the US Congress has already laid on the US executive director in IMF matters, political considerations will prevail to an even greater extent if the IMF is to become a lender of last resort.

Within a national context, the objectives of a lender of last resort (an independent central bank) and the government of the country will not be all that different.

But at an international level, there are conflicts of interest between nations. And, given the IMF’s decision-making and management structure, and the fact that the IMF itself is a creditor, it will be impossible for the Fund to be an impartial lender of last resort, when the management derives its powers from share-holders and their weighted voting rights.

For many years, it has been a part of financial orthodoxy to advocate that countries meet their financing needs from the market, and not from the multilateral financial institutions.

But now the IMF and its moves involve increasing the resources of these institutions.

But there is a difference. The financial orthodoxy prescription to look to the market for financing related to the current account and investment, whereas now the resource increases demanded for the IMF are to enable capital financing.

But the resources that will be needed to bail out the global financial institutions in the event of capital account problems will be very much larger than the amounts needed to help out countries.

Condition for access

And Fischer lets the cat out of the bag when he underlines as one of the conditions for access to the IMF’s "lender-of-last- resort" facilities, and loans being made on the basis of collateral and without conditionality, "the requirement that foreign banks be allowed to operate in the country, a change that should be adopted in any case."

Banks are no longer mainly in the business of taking in short-term deposits and savings and lending them long-term to enterprises, or seeking lowest-cost funds and channelling them to areas of highest risk-adjusted returns. Their main aim is to maximize fees and commissions, thus maximizing the rate of return on bank capital. They do this through over-the-counter (OTC) derivative instruments, "structured derivative packages" – created and provided to clients such as institutional investors and professionally managed pension and other funds which are required to invest their funds in rated bonds and instruments that give lower returns. The OTCs are structured often to enable these funds "to circumvent these restrictions" and earn more.

This is the business that now earns the banks in money centres the most income through commissions and fees, and they are anxious to enter the emerging markets to earn these fees, but in effect with an IMF "safety net" to guarantee that investors could exit easily. And if banks structure OTCs for home investors to get around regulations, is it not likely that they would act similarly in host countries?

A question that arises from the Fischer thesis is whether the IMF is not in fact – by becoming a lender of last resort, and conditional on capital account obligations and opening up to foreign banks by eligible countries – facilitating a process by which investors in capital- exporting countries can get around the prudential regulations in their countries, with the banks further facilitating this process for commissions and fees, assured of an IMF guarantee of sorts?

Such questions suggest that the developing countries may need to take a hard look at the whole spectrum of proposals circulating around – whether disguised as new international financial architecture, changes at the IMF including lender-of- last-resort and capital account issues, liberalization of trade in financial services at the WTO, moves for multilateral investment rules (in various forums), or other variations that could be brought up in other fora.

And while in one sense they are weaker than at the time of the Jamaica agreement for amending the IMF articles, in other respects, they have some leverage to be used to fashion an overall international framework that would be less asymmetric, have greater equity and be supportive of development.

If the governments of the South once again, for some small short-term illusory gains, act as they did at the time of the 1976 changes to the IMF charter, they would be judged harshly, not only by history, but in the present by their societies – where globalization and neo-liberalism are increasing economic hardships and marginalization of the large majority of their peoples, generating social and political disorder. (Third World Economics No. 204, 1-15 March 1999.)