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 | Life After Colonialism, Part II: Economic Independence January 3, 1997 |
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Questions asked in this forum:
Our guest answered your questions.
NewsHour Backgrounders
December 30, 1996: The Online NewsHour's first Post-Colonialism forum deals with political issues for developing countries.
June 28, 1996: After meeting in France, the leaders of the world's seven richest democracies gave a generally upbeat accessment of the global economy. But some economists are painting a different picture.
June 11, 1996: The NewsHour interview with World Bank President James Wolfensohn.
OUTSIDE LINKS
Visit the site of the International Monetary Fund.
The English economist John A. Hobson wrote presciently in 1902 about the economic basis of imperialism.
Some countries, like Rwanda and Uganda, are looking to ecotourism as a means of economic independence.
Perhaps an even more daunting task than political independence and stability for developing nations is economic progress.
During the Cold War and before, there were many countries independent in name only, whose chief economic sector - indeed, often its only industry - consisted of developed nations' corporations harvesting natural resources with little local benefit. Nationalization of oil, mining or agricultural industries was frowned upon by world powers. Indeed, one of the premises for Fidel Castro's revolution in Cuba was to extract the country from the influence of U.S. sugar companies during the regime of President Batista.
Even recently, European countries like France have used Africa's desperation for foreign capital as leverage to store France's nuclear waste safely away from French citizens' backyards.
Today, as developing nations try with varied success to mimic Western economic models, debt, low wage labor and big infrastructure projects seem to be the rule. Some countries like Indonesia and Singapore appear to recognize the sale of information as a key element in the 21st Century economy, and are developing their own Silicon Valleys. One of the key players in this dynamic is the International Monetary Fund, or IMF, a 50-year-old organization whose mission is "to promote monetary cooperation, to facilitate the expansion and balanced growth of international trade (and to) promote exchange stability," among other precepts.
The IMF extends credit and provides loans to member countries who have problems with their balance of payments, in order "to support policies of adjustment and reform" in those countries, according to the IMF. But to many in developing nations, the IMF model is manipulative and meddling.
Recently, the IMF halted payments on a loan to Uzbekistan, citing dissatisfaction with Uzbek economic progress and reforms brought about by a poor harvest and resulting policies. Some have even suggested that it is the IMF that controls the valuation of a country's currency. In an interview in Ecuador, an economist joked to an American writer, "Hey, it's your money. The IMF and strong countries tell us to devalue the sucre, we devalue it. It's not our money."
Another player in the international development game is the World Bank. Based in Washington, D.C., the Bank, a private entity, loans money to nations and guarantees financing for development projects by enterprises in developing countries. Large hydroelectric dam projects are a favorite of the Bank, which exists to approve projects, critics say, even when the prospect for realistic on-budget completion are dubious.
Desperately needy countries like Haiti have welcomed World Bank attention under the energetic leadership of Bank President James Wolfensohn. But huge outcries have erupted - and in some cases, halted projects - in places like India, China, Laos, Paraguay and Nepal - when human displacement, water pollution and adverse long term environmental effects of huge dams - which outside analysts say will never provide anywhere near the promised electrical output - have been shown to be too great.
Some economists and activists believe both the World Bank and IMF models for aiding developing countries are based on outdated theories. Some are even proposing that previously ignored factors such as cultural continuity and ecological sustainability be figured into GNP calculations with the same weight as bottom line figures like deadline and profit.
But defenders of current policies ask how else a place like Turkmenistan can be expected to finance the building of, for example, factories to harness its huge natural gas deposits?
What it all may come down to is whether imposing Western economic models uniformly upon developing societies ignores a critical diversity in human culture and endeavor. Laos, for example, is invariably described in outside news articles as "poor and landlocked." But a visit to the Southeast Asian country shows low population density, sufficient food, water and electric resources, and millennia-long cultural continuity. What, some argue, is the need for a half billion dollar, by all accounts environmentally-destructive World Bank dam project which would displace thousands of people and export electricity to Thailand?
Our forum asks: Who makes the decisions at the IMF on currency stabilization and loans? What are the criteria? Does the World Bank have a sufficient understanding of local cultures and economies before making such a huge impact in developing world countries? How well can developing nations compete in a world economy on their own?
Our participant in this forum is Karen Parker, Associate Fellow for economic studies at the Council on Foreign Relations, on leave from the International Monetary Fund. Ms. Parker's answers reflect her own views, not those of the IMF. Nor do they indicate any specific information she possesses regarding the Fund's current operations in member countries.
Scroll down to read Karen Parker's answers to your questions.
- Do both the IMF and the World Bank follow a uniform model for approving/disapproving loans made, and is the bottom line profits?
- Do Western economic models help or hurt developing nations?
- How can citizens of developing nations be made aware of the economic plans for their countries?
- Has the IMF failed in Russia and other places whose societies are unstable?
- Under what circumstances does the IMF halt a loan?
- More of your questions and comments.
A question from Kelly Murphy of Austin, TX:
Do both the IMF and the World Bank follow a uniform model for approving/disapproving loans made? If so, is it true that statistics, rather than real life exposure to the needs of a particular developing country, are the criteria followed when decisions are made to approve or disapprove any loans? Is the bottom line motive the same as for commercial financial institutions; to secure a profit from each and every loan made? How does the IMF measure the success of its projects?
Karen Parker responds:
It is useful to begin by clarifying the distinct roles played by the IMF and the World Bank. These sister institutions were created in the aftermath of World War II by a group of world leaders who sought greater prosperity and stability in international economic relations. While they work together, the two organizations serve very different purposes.
The IMF acts as a kind of international "credit union," lending money through a revolving fund to ease countries' balance of payments difficulties. Virtually all the countries of the world are members of the IMF, and Fund staff visit each of them at least once a year (yes, the IMF even gives advice to the U.S. Treasury!). However, most of the IMF's loans are to developing countries. The Fund's resources come from quotas (interest-bearing deposits made by members in proportion to the size of their economy) and special borrowing arrangements with a number of larger countries. IMF loans are not intended to fund specific development projects, but rather to finance much-needed imports and/or debt service payments in times of crisis. In almost all cases, a number of quantitative and qualitative conditions are attached to the loan. These conditions include macroeconomic "performance criteria" on monetary policy, fiscal policy, and the balance of payments, as well as "structural benchmarks" to measure progress in key policy reforms. Conditionality is intended to remedy the underlying causes of a country's economic distress. It also seeks to ensure that the country will be in a position to repay its loan to the IMF within an appropriate time frame, thereby making the Fund's resources available to other members.
The World Bank also has extensive lending operations in developing countries, most of which involve specific projects: roads, schools, hospitals, ports, etc. In addition, the Bank makes sectoral loans in support of microeconomic reforms such as privatization, trade liberalization, and financial sector reform. The latter may also carry performance criteria. Because the success of Bank projects depends critically upon a country's macroeconomic situation, the Bank and Fund work closely together. The World Bank's resources come from the bonds it places in international capital markets.
In light of the foregoing, it is clear that the Bank and Fund do not follow the same approach to lending in developing countries. However the IMF, like the World Bank, does strive to treat its members in an evenhanded fashion. This principle is reflected in the Fund's guidelines on access (the amount a country may draw, which is based on the size of its quota, its balance of payments need and the quality of its adjustment program), performance criteria, and the terms of its loans. These guidelines are not intended to ensure equal treatment of all countries, but rather equitable treatment. As a result, IMF programs do bear a certain family resemblance.
In its dialogue with a member country, the IMF seeks to understand the origin of its economic difficulties, and to work with the national authorities to devise an effective adjustment program. Since countries' problems differ greatly, there is considerable variety in their adjustment strategies. Indeed, there is much more variety than is commonly believed. Prudent fiscal policy is a common element of IMF programs, but the approach to budgetary reform is far from uniform. Similarly, the role of monetary policy in macroeconomic stabilization depends very much on a country's exchange rate regime, level of inflation, and availability of foreign exchange reserves. With regard to currency management, there is no single approach that is appropriate for all countries in all circumstances. Indeed, within the Fund there are differing views as to the effectiveness of fixed exchange rates in bringing down inflation. Ultimately, the government has the final say regarding whether and how an adjustment program will be carried out. This is entirely appropriate, for only those programs to which countries are truly committed will be effective over the longer term.
The size, terms and conditions attached to IMF loans vary in accordance with a member's circumstances and the strength of the adjustment effort. Countries implementing more comprehensive programs, and those experiencing protracted balance of payments difficulties, may request an Extended Arrangement, for which the timetable of disbursements and repayments is longer. Lower-income countries may be eligible to borrow under one of the IMF's Structural Adjustment Facilities, which carry longer repayment terms and lower interest charges. The IMF also has special facilities to help countries cope with temporary shocks to the prices of their imports and exports. The Fund is not a profit-making organization. It sets charges on loans at a level sufficient to cover its operating costs and to meet interest obligations on the quotas paid by members.
Fund staff visit program countries on a regular basis--usually once per quarter--to assess the economic situation and discuss whatever adjustments may be needed in the policy package. Since the IMF is mainly concerned with macroeconomic performance, our discussions typically are held with representatives of the central bank, the ministry of finance, the planning commission and other economic authorities. We also meet with private businessmen, economists in policy institutes and think tanks and, occasionally, regional government authorities. Over the past decade the IMF has grown increasingly sensitive to the difficulties and challenges of adjustment--in part by widening our dialogue in member countries. These contacts have been invaluable in helping the organization to better meet the needs of its members; however, they are not a substitute for solid economic analysis, the main tool of which is statistics.
A question from Nathan Everett of New Bedford, MA:
In what way do you believe the effects of Western market systems and capitalistic models help or hurt the development of impoverished nations in a world economy which, for better or for worse, is more and more being controlled by the workings of multi-national corporations? Are environmental considerations ever factored into the equation?
Karen Parker responds:
This is an important and complex issue. The experience of a wide variety of countries during the postwar period suggests that "market-friendly" policies promote more rapid growth and greater macroeconomic stability than do highly interventionist strategies. Furthermore, research has shown that economic growth--together with low inflation--is the key to combating poverty. Redistributive approaches are unlikely to be effective, or even feasible, in countries that are not growing rapidly.
That said, "getting the prices right" by simply deregulating markets does not constitute a development strategy. Deregulation may be highly appropriate in some instances; many observers credit reform of India's industrial and trade regime with that country's rapid growth over the past few years. Privatization and/or restructuring of inefficient public sector enterprises is almost always advisable. However, in some cases more, not less regulation is needed. This is often the case in the financial system, where inadequate prudential norms and supervision have contributed to banking crises with sometimes severe macroeconomic consequences. Furthermore, many economists believe it is prudent to discourage volatile international capital flows through tax and monetary policies. Regulatory reform may also be needed to prevent excessive concentration of economic power in the course of privatization and financial liberalization.
Nowadays, most developing economies would like to attract more foreign direct investment, which tends to be less volatile than portfolio capital, brings in new technology, and creates additional competition for (and reduces the concentration of) domestic industry. Once wary of multinational corporations, developing countries have come to realize that their impact on the economy--like that of domestic firms--can be better managed through tax and trade policies than through direct controls.
Economic development requires not only greater efficiency in the use of a country's limited resources, but also a strategy to encourage more rapid mobilization of resources. In this respect, the economies of East Asia did remarkably well in the postwar period, achieving marked increases in domestic savings through a combination of fiscal prudence, low inflation, financial sector development and equitable growth. High savings were invested not only in capital projects, but also primary education, health care, infrastructure and rural development. The economic strategies pursued in East Asia often diverged from "laissez-faire." Governments took purposeful steps to invest in human capital, promote industrial development and exports, and encourage the development of domestic financial systems. But they did so in a way that did not fundamentally contravene market principles. Therein lay the secret of their success.
A question from John Latsko of Youngstown, OH:
Having lived and worked in Guinea-Bissau as a Peace Corps volunteer from 1990-94, I saw many changes, including the adoption by the government of multi-party elections, which many people believed were the result of negotiations with the World Bank and the IMF. I can tell you from experience there is low awareness among largely rural citizens in such developing nations about their own economic development. Is there any effort made by the these institutions to make those citizens aware of what agreements are made and what kinds of discussions are occurring about their future, and about the consequences of such interventions? Should this be part of any cooperative contract, on an IMF loan or a World Bank project?
Karen Parker responds:
Over the past decade, the IMF's Managing Director has made an enormous effort to increase awareness of the objectives and purposes of Fund-supported adjustment programs.
The Bank's new president, James Wolfensohn, has already acquired a reputation as an indefatigable traveler, visiting Bank projects all over the world to discuss their effectiveness with local managers and government officials. As a result, there is now much less apprehension in developing countries about the role of the Bank and Fund in the economic dialogue.
Nonetheless, it is clear that much more needs to be done by both institutions--and by the governments they serve--to explain policies that have an enormous impact on the material welfare of their citizens. I personally would like to see much greater openness on the part of both institutions, including through the publication of loan documents. The Fund and Bank might also take a more direct approach to disseminating information and seeking feedback regarding their programs--possibly in conjunction with a government's own public relations effort. This would mean greater reliance on press conferences, briefings, and meetings with concerned citizens and business groups.
A question from Joseph Mazuryk of Danville, California:
Given the fact that the true basis for a country's stability is not just economic progress but the providing of a secure social system to its citizens, would you consider IMF policies in Russia (and in some other places) to be a failure because regardless of economic results, pluralism, security and environmental sustainability haven't been realized there, in the Former Republics and in many other places? Or would you argue that these are long-term goals that take generations, perhaps, to establish?
Karen Parker responds:
Ultimately, the success of any economic program must be judged on its ability to deliver a higher standard of living to the majority of the public. With greater prosperity, countries are in a better position to combat crime, ensure national security, and protect the environment. These tasks need not be postponed for generations (indeed, until the Russian authorities contain organized crime, they will find it difficult to generate badly-needed tax revenue). But securing economic recovery is the most urgent task.
No one should be cavalier about the pain that economic adjustment has brought to the citizens of Russia. There has been enormous dislocation and uncertainty. Salaries have fallen sharply in real terms and are often delayed due to budgetary disarray. Pensioners' incomes have been eroded by hyperinflation. The past five years have witnessed a marked decline in life expectancy and in fertility rates. Environmental degradation continues. Crime has surged. Not surprisingly, doubts about the course of political and economic reform persist.
Observers disagree about the extent to which Russia's difficulties can be attributed to the failings of the communist regime, poor implementation of stabilization and reform measures, the inadequacy of external financial support, or the design of the economic program itself. Probably each of these explanations deserves some of the blame; some are mutually reinforcing. Most economists underestimated the difficulty of the task Russia faced: to create all of the institutions of a market economy from scratch, in an environment of macroeconomic instability and political disorder. However painful, the transition to market was unavoidable. The government has shown enormous courage in taking the difficult steps toward that goal. These efforts have begun to pay off, as the economy has stabilized and as recovery takes hold.
A question from Michael Ladd of Sudbury, MA:
Is it simple enough to explain how the IMF decides when to halt payments on a loan? Are there political or purely economic reasons? If the latter, how do you respond to the argument that when the IMF stops payments, or for that matter decides to approve a loan to a new nation, it exerts undue influence over the affairs of a country?
Karen Parker responds:
It is not simple. In principle, the IMF is authorized to suspend disbursements on a loan when a country fails to meet one or more of the performance criteria to which it has agreed. In practice, the decision to suspend a disbursement involves a number of difficult--sometimes agonizing--choices.
First, Fund staff and the Executive Board (which represents the members and votes on all loan decisions) consider the circumstances underlying a country's failure to meet the performance criterion. In some cases, the Board will grant a waiver and proceed with the disbursement. This might be occur if, for example, the target was missed by a small amount, or if the shortfall reflected a temporary development outside of the authorities' control (such as a natural disaster or a sudden drop in commodity prices). If the target is missed by a large amount--or if economic circumstances have fundamentally changed--the program may be renegotiated and new targets established. The decision whether or not to proceed with the original disbursement then depends upon the authorities' ability and willingness to implement the program.
This process involves a series of judgments, some of which are highly subjective. Considering the stakes involved, it is not a decision that the institution ever takes lightly. There are sometimes disagreements within the Fund about the appropriate course of action. Suspending a disbursement can in some cases encourage more rapid progress in economic reform. But often, it makes a government's task more difficult. The Fund can exert some influence over the policymaking process; if it did not there would be little rationale for the organization to exist. But the institution much prefers to wield its influence through persuasion.
Additional Comments...Dennis Burke of Campbell, MN
American business has recently been demonstrating the superiority of decentralizing organizational structure over trying to accumulate central control in the face of crises and change. Trust is increasingly placed in the people on the front line to consider the complex interactions of many types of human relationships. If that is where the delicate balance may best be found, shouldn't organizations like the IMF and the World Bank in regard to issues of trust, share power control of projects? If centralization of power remains the byword, what justifies the economic, cultural and environmental costs to global citizens?
Thomas M. Coyne of Houston, Texas
I wonder why American leadership cannot understand that developing countries would become more stable if developed nations would concern themselves with helping them increase their domestic food production/processing. Instead of transfering weapons system which becomes scrap in a few years, the transfer of American food industry know-how would go far to creating worthwhile development in these countries.
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