From the CIA to the IMF

The end of the Cold War was a traumatic period, and a whole slew of authors now had to search for a new enemy to replace the CIA and the KGB...

The end of the Cold War was a traumatic period, and a whole slew of authors now had to search for a new enemy to replace the CIA and the KGB. Some, like John le Carre, were quick to find a replacement in the evil multinational corporation (The Constant Gardener), which tested deathly drugs on unsuspecting Third World nations, and enlisted the support of governments to hush up matters. Others found solace in renegade and breakaway factions of the CIA/KGB, who refused to accept that the Cold War was over. And, fortunately for those with a little less imagination, there were Saddam Hussein and the Al-Qaeda, whose terror tactics, even if reported without any frills, made for absorbing reading.

Add to this category now, a new kind of villain who, as luck would have it, too has a three-letter CIA/KGB kind of name: enter the IMF, or the International Monetary Fund. Think of any form of eco-terrorism, from deliberately inducing recession in countries, to forcing the financial systems of various countries into bankruptcy, and the IMF was behind it — at least the way Joseph E. Stiglitz, recipient of the Nobel Prize for economics in 2001, puts it. And the conspiracy, it makes the plot even thicker, appears to be driven largely by western banks and financial institutions. Stanley Fischer, the deputy managing director of the IMF who played a critical role in such episodes, for instance, went directly from from the IMF to become a vice-chairman at Citigroup, says Stiglitz.

Globalization and its Discontents
By Joseph E. Stiglitz
W.W. Norton
Price: $24.95

In 1997, for instance, when the IMF was working on a bailout package for Korea, it insisted on moving up the date of opening Korea’s markets to certain Japanese goods although this could not possibly help Korea address its currency crisis — clearly, the IMF’s agenda was something else. Similarly, in the Ivory Coast, the telephone company was privatised before a regulatory system was put in place, and this resulted in the cost of phone services going up so high that students couldn’t even afford Internet connections.

And, in the case of Southeast Asia, when the economic crisis occurred and the exchange rates began crashing, the IMF forced countries to raise interest rates dramatically — to over 25 per cent in the case of Korea. High local interest rates, textbook economic theory tells you, attracts capital into the country. So, the IMF argued, capital that was flowing out would now start flowing back, and the problem would get solved. Yet, the exact opposite happened. Since most firms in Southeast Asia had huge amounts of debt, the interest hike made them insolvent immediately and this, in turn, bankrupted the banks as well. So, despite the higher interest, capital kept flowing out of the region.

Stiglitz’s book is replete with such examples of the IMF-World Bank exacerbating the crisis in countries they said they were trying to help. That he should be able to narrate such a gripping tale, of course, is hardly surprising given that he’s had a ringside view — prior to his job as the chief economist for the World Bank, he was part of Bill Clinton’s Council of Economic Advisers.

Stiglitz, for the record, states that he doesn’t believe in the conspiracy theory. The IMF advice which resulted in a recession in Southeast Asia, and then resulted in western firms picking up great bargains once Asian companies were up for sale, he insists, was not a result of a conspiracy, but purely as a result of the IMF not understanding how economies functioned.

Several economists will point out numerous flaws in Stiglitz’s arguments. Take Stiglitz’s argument on the Korean crisis, for instance. He insists that the IMF prescription unnecessarily forced Korean firms, and then banks, into bankruptcy. But what he doesn’t take into account is that most Korean firms had way too much debt (some top chaebols had debt-equity ratios as absurdly high as 14:1), and would probably have collapsed anyway. Besides, forcing banks to clean up their act and, in turn, forcing industry to restructure, may actually have actually helped Korea whose economy bounced bank.

Stiglitz’s, of course, is not a work of fiction, but now that he has so convincingly highlighted the problems with IMF-World Bank solutions, and underlined the possible areas of grand conspiracy as well, we may just be witnessing the birth of a new genuine post-Cold War villain. Watch this space.