World Bank and IMF: The match continues

Our experts debate the role of globalism's de facto government against the backdrop of protests in Washington.

By Daryl Lindsey
Published April 18, 2000 10:00AM (EDT)

In Round 1 of Salon's debate on the role of global organizations, we brought together a diverse and intellectually rowdy round table of free-trade proponents and environmental and debt-relief activists (who often approach globalization skeptically) and even the economics correspondent for a leading daily paper. We asked each to scrutinize the track records of the World Bank and the International Monetary Fund and the Seattle protesters who took their anti-globalization street theater (replete with puppets that even Julie Taymor would endorse) to Washington last weekend.

Today, the same group tackles the IMF and World Bank's records on international economic bailouts, which some critics say helped fuel the spread of the Asian flu of '97; the fiscal austerity measures attached to IMF loans that labor organizers say devastate local working conditions and widen the trade deficit; the controversial environmental impact of certain World Bank projects; and the overall impact the Bretton Woods institutions have on Americans and the world.

Here's the final round of debate:

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What role should environmental policy play in IMF and World Bank programs?

Pete Leyden is coauthor of "The Long Boom" and former managing editor of Wired: Environmental policy should be central, but not in the conventional sense. The way to truly solve the environment problems of this planet is to accelerate the migration to new generations of technologies. This needs to happen not just in the developed countries, but especially in the developing ones. We need Western autos to increasingly be super-efficient hybrids and ultimately be based on hydrogen fuel cells. But what we really need to do is ensure that China starts off with these most-efficient technologies rather than older, dirtier ones. If they're building a modern auto industry, then start clean. These global institutions, particularly the World Bank, can play a big part in getting this kind of thinking incorporated into all development plans.

Mark Hertsgaard is the author of "Earth Odyssey," a book about the human toll of environmental devastation: The bank itself says that practicing "sustainable development" is essential to its mission of fighting poverty. Too bad it doesn't do a better job of practicing what it preaches. The bank is too important a force in the world to write off as irredeemable, however. Its battered reputation might still be restored, but only through a thorough reform of its attitudes and behavior.

Instead of financing rain forest destruction and climate change, the bank should support a Global Green Deal: A program to renovate human civilization environmentally from top to bottom while truly fighting poverty. And make no mistake: Poverty is central to humanity's environmental predicament. To accommodate this mass ascent from poverty without ruining the natural systems that make life on Earth possible in the first place will be an enormous challenge. But the World Bank is uniquely situated to jump-start the environmental revolution needed to meet it.

Consider China, the world's largest consumer of coal and second largest producer of greenhouse gases. With its huge population and grand economic ambitions, China could doom the world to severe global warming if it keeps expanding coal use. But China would use 50 percent less coal if it simply installed the energy efficiency technologies -- better lights, motors and insulation -- now available on the world market.

Merrill Goozner is chief economics correspondent in the Chicago Tribune's Washington bureau: Mr. Hertsgaard said it all in his comments [Friday] about Chad and Cameroon, which has become the poster project for the anti-WB demonstrators. But I have to object to his thoughts that they should go for solar power. Getting the proven oil reserves out of the ground and into the international market is a way for Chad and Cameroon to earn foreign currency. A pipeline through Cameroon is the only way for Chadian oil to get to sea; is it impossible to run a pipeline through a rain forest without environmental damage? If the world is going to use oil, there is no reason in principle why those countries shouldn't be allowed to participate in that market. Yes, Chad has a quasi-military dictatorship oppressing its Christian/animist south and a breakaway government faction in the north; and Cameroon was ranked as the most corrupt government on earth by Transparency International. So the WB involvement there is ipso facto absurd. But even if the governments were clean, the people would still be extremely poor. Western environmentalists telling them to use solar power has a Marie Antoinette ring about it.

As for the larger issue, of course, the WB shouldn't bankroll environmentally destructive dams, oilfield projects, etc. But that doesn't mean all dams and all oilfield projects are harmful. I have to think some can be designed in environmentally benign ways.

Are the loan conditions imposed by the World Bank and IMF overly harsh? Do they favor Western creditors as critics charge?

Goozner: Overly harsh conditions on long-term loans are inexcusable. The lender, as much if not more than the borrower, should be penalized for the failure of development projects. It's like a bank not doing due diligence on a mortgage. But harsh conditions on short-term lending in a crisis makes sense. To do otherwise is to invite what the economists call moral hazard. Who would bother to pay attention if there wasn't the fear of losing one's shirt? The great crime of the Thai, Indonesian and Korean crises bailouts was that many of the Western lenders escaped with their capital intact, while the people of those countries paid the price of IMF-imposed austerity. The lesson learned from that experience is that the private sector has to be involved in bailouts. I take that to mean companies, mutual funds and banks taking a haircut on their investments. That didn't happen, at least not in a significant way, so the criticism that they favored Western creditors over local residents is accurate.

Leyden: Nothing will replace private capital as the true modernizer of these countries. A few World Bank loans are just Band-Aids. That means that these countries need strategic loans that provide the infrastructures and the incentive to lure private capital there. These countries also need to prove that they can and will pay back on decent terms. The quicker they get to that proving point, the quicker the private money will come. Again, that's the harsh reality, but it's real.

IMF and World Bank programs are designed to shore up the economies in Third World countries. How do these organizations (and their programs) impact the U.S. economy?

Goozner: Open trading regimes and traditional macroeconomic stabilization policies in Third World countries provide open access and better guarantees for U.S. capital, and presumably that results in better profit opportunities, which can benefit U.S. stockholders. (The record on improving living standards in the countries that adopt such policies is mixed at best). When those foreign-made goods flow in, U.S. consumers benefit from lower prices. U.S. businesses and people who work in the headquarters-functions economy (Information Age workers) benefit by vastly expanded jobs and income opportunities. But there are losers, too. Lower-wage manufacturing workers in the U.S. see some of their jobs go abroad. Those who remain employed are forced into direct competition with lower-paid workers abroad, which dampens their ability to win wage gains. [Federal Reserve Bank chairman] Alan Greenspan thinks this is a good thing. It's this uneven distribution of costs and benefits that leads to the kind of protests we saw in Seattle and are seeing this week.

Hertsgaard: The main way they affect the U.S. economy is by rewarding U.S.-based global corporations that want to enter into these Third World markets with the political cover and financial-risk reduction provided by the bank and IMF.

Goozner: As the global lender of last resort, the IMF comes in after the party and cleans up the mess. The "massive crisis" staved off in the '80s was in the Western banks, whose balance sheets would have gone kablooey without Latin American restructuring. In Latin America, they refer to the '80s as the lost decade. So whose success was it?

The IMF admits it made the Asian crisis worse. That's because they came in with macroeconomic stabilization countries better suited to those running huge current account deficits. Asia, because of its manufacturing base, runs huge surpluses. The crisis was a classic panic: Western capital fled at the first signs of instability. The IMF should have performed Walter Bagehot's classic definition of the proper role of the lender of last resort in such situations: Lend liberally at penalty interest rates. Instead, the IMF came in and prescribed austerity policies.

The global economy of the 21st century will need a global lender of last resort. The only questions are what rules and what skills it must have. The current version appears to have as much wisdom as the then-16-year-old Federal Reserve Board had in 1929.

Leyden: What happened in Asia is more complicated than mismanaged IMF policies. Basically, the Asian economies needed a shock because they needed some severe structural upgrades to their financial and economic infrastructures. The boom of the '80s and early '90s, based on the old 20th century industrial economic model, masked these deep-seated problems. They needed much more financial transparency, much more corporate accountability and more openness and competition within their politics.

It sounds harsh, but they needed to take the more painful route to more fundamental structural reform. If the IMF had loosened up and lessened the pain, there may not have been the political will to make the difficult transition. A case in point is that wealthy Japan, which was not subject to IMF policies, has yet to make the reforms with any vigor and so their economy is still in a coma, a situation it's been in for 10 years now. Korea, meanwhile, which was highly dependent on IMF policies, has made many major changes, both economically and politically, and seems to be rebounding quite well.

The United States and Great Britain went through much of their form of restructuring (the developed country's model) in the brutal 1980s, and they are reaping the benefits today. Latin America also had a difficult financial restructuring in the '80s, and so they were more resilient than Asia in the '90s.

The IMF could have done better facilitating that transition. They don't even think of themselves as playing that role, let alone figuring out the best way to do it. But stability, per se, is not the goal, I would argue. Stability often preserves the status quo. The goal is meaningful restructuring that positions these countries to thrive better in the future.

Hertsgaard: Stability is one useful measure of an economy's health, but so too are the living standards of the people living within it, and on this count the IMF has often been disastrous. Its conditionality programs usually require the governments of poor nations to cut back on social spending in order to "balance the books," another phrase used by those who value stability, but care little for its human consequences. The Asian crisis of 1997 is a good example. Tens if not hundreds of millions of people suffered. That was by no means entirely the IMF's fault, but the IMF was throwing gasoline on the flames.

Debt relief has been a major area of concern for anti-globalization protesters. The most economically prosperous nations recently launched a $29 billion debt-relief program -- will this help ease the financial pressures of fund recipients?

Hertsgaard: Debt relief is perhaps the most important and immediate reform needed. The debts that so many Third World governments owe to northern creditors impose a crushing burden on any efforts to lift their people out of poverty. Oxfam International has pointed out that, "In Africa, where one out of every two children doesn't go to school, governments transfer four times more [money] to northern creditors in debt payments than they spend on the health and education of their citizens." That's why debt relief is so urgently needed.

Will we get it right now? Unlikely, it seems to me, if only because the World Bank and IMF will not want to appear to be bending to the will of the protesters. But soon it will come, precisely because the northern governments have begun to coalesce around the idea -- driven, perhaps, by the realization that there is no practical way for these Third World governments to pay off the debts in any near-term future. Providing debt relief also would allow the North to preempt the option that really frightens it: A mass declaration by southern governments that they won't pay their debts, which could destabilize the entire global financial system.

Leyden: I'm all for meaningful debt relief. There is so much wealth being created in the United States and the developed world that we should be much more magnanimous about this issue. We also should be thinking long term. These countries need to be investing in the technologies and infrastructures of the future to help make them vibrant players in this new global economy. That's in everybody's interests. Paying back the past is the wrong direction to look. Forgive much of this and move forward.

Goozner: The conditionality question looms. The IMF and WB insist that countries have poverty alleviation strategies so the money saved by not having to pay interest doesn't go into corrupt kleptocrats' pockets, armies or bloated civil services. In principle, a good idea. But who's the judge and jury?

Daryl Lindsey

Daryl Lindsey is associate editor of Salon News and an Arthur Burns fellow. He currently lives in Berlin and writes for Salon and Die Welt.

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