Volume 1, Number 20
28 August 2001

The International Monetary Fund

Dear Friends,

Back in 1950, the gag was "How do you get to Washington?" Answer: "Go to Harvard and turn left."

So I did just that. Back then, the International Monetary Fund (IMF, or just "the Fund") was a darling of the Lefties. I was a Lefty, so I joined the Fund with my freshly-minted PhD. Now the IMF is the scourge of the Lefties, and I am no longer a Lefty. I do not work for the Fund any more, so I can speak of it dispassionately. I join the Lefties in thinking the IMF should be abolished, but I have my own reasons.

The IMF was created in 1947 to solve the problems of the 1930s. These problems had vanished by the 1950s, after I had left the Fund, and the Fund itself gradually evolved into a different creature. Its main purpose has always been to help member countries solve their balance of payments problems, but those problems fall into a different pattern from when I used to work there.

Here is the current pattern. The government of Country X spends more than its people are willing to pay in taxes. It "buys votes" by paying subsidies to many sectors, often including education and health services for the poor. It sets up state enterprises to sell gas, electricity, and transport to the people at less than cost, then bails them out when they suffer lossses. It lends to private businesses so they can pay wages higher than their sales revenues allow, but it is politically reluctant to demand repayment. It puts money in the pockets of politicians, who deposit it in Swiss banks. To cover the excess of spending over taxes, Country X prints money, which causes inflation. Since X's prices become higher than those of the rest of the world, foreigners buy less of X's goods, while X-residents buy more abroad. As demand for X's goods falls, unemployment leads to full-scale depression, much unrest and riots. Foreign investors, who have been supporting X's economy, withdraw their funds at the first inkling of crisis, and available jobs plummet further. This pattern has been taking place mainly in Asia, Africa, and Latin America — more recently in Russia and former Soviet countries.

Fearing for its existence, the government of X runs to the IMF for a loan. The IMF will lend on two conditions:

  1. X should devalue its currency to bring local prices more into line with foreign. If X-currency prices are higher than dollar prices, the mismatch can be made up by giving more X-currency for the dollar. This is a devaluation of X-currency.
  2. X must agree to stop overspending its budget, so the situation will not recur. These requirements are known as "conditionality."

By the time the problem is recognized, however, so many individuals and groups have vested interests in the federal budget that the budget cannot be balanced suddenly, without a political upheaval. So the IMF lends dollars to the government to cover its balance of payments deficit until the budget can be reduced gradually, under the two requirements just mentioned. To see that the government behaves, the IMF usually sends "advisors," who are really monitors. Aha! The IMF is now looking over the shoulder of the government, monitoring its financial behavior.

In 1960 I was asked by the United States foreign aid program to be financial "advisor" to the Government of Bolivia. Bolivia had spent much money wastefully and had a triple-digit inflation, but they had now agreed (after a devaluation) to balance the budget. Not only the IMF, but the US foreign aid program, had loaned funds to tide the government over, so both the IMF and the US sent them advisors.

One day in the office of the Governor of the Central Bank, I saw a sign (in Spanish), "Don't be afraid to ask for credit. It will be cheerfully refused." On another occasion, I was sitting around the table with President Paz Estenssoro and his cabinet. The President was proposing some expenditures that I knew would violate the agreement. So I reminded him. He sloughed off the question, saying, "Oh, we know all about that." He had ways of getting along with the US Ambassador. But in general, the agreement was kept, the inflation conquered, and the IMF was paid off.

Since the poor always suffer most in inflation, I felt I was doing my part to help them. Since the government had been corrupt, I didn't mind monitoring its newly-good behavior. I felt good about my job and proud of the IMF.

Since then, I have had assignments all over the world. As I associated with presidents, governors of central banks, and ministers in Asia, Africa, and Latin America, I became more aware of their power and their greed. For example, a "land reform" would really benefit the Minister of Agriculture rather than the farmers. (Later on, I co-authored a book on the perversion of land reforms everywhere, entitled The Peasant Betrayed.)

As I met high officials of multinational corporations (sometimes CEOs), I found them more benign to the poor than were their governments. They paid their workers better than other employers and provided more health care, education, and housing. (These personal observations have been confirmed by scholarly research, including studies by the International Labor Organization). So I ceased to be a Lefty, believing that governments that "take care" of their poor generally take care of their own power first -- this includes the United States -- but that private businesses are more compassionate, not because they want to be but because the market forces them to be. MNCs treat their workers better because they want the pick of the crop.

Conditionality did not work (in my opinion). Governments were still wasteful and corrupt. State enterprises have been lining the pockets of their officers and putting the money in Swiss banks, knowing the state would bail them out. China and Russia have been notorious for this.

Curiously enough, the IMF often did not enforce conditionality. After all, the IMF had to look out for its own existence. If it kept trying vainly to enforce its terms it would have to cut off the disobedient governments. If it didn't make loans, it would go out of business. So, when conditionality was not met, the IMF would often extend the period, making another loan (this happened several times in Russia).

Instead of demanding that borrowing governments simply balance their budgets, the IMF began to insist that they balance them in certain ways that the IMF would stipulate. The principal causes of the budget deficits were corrupt state enterprises and subsidies to private enterprises enabling them to pay wages higher than their income would allow. So the IMF began demanding that state enterprises be privatized and wage ceilings be enforced. (In many countries, such as Argentina, the government oversees annual bargaining and sets the allowed wage increase).

These stricter requirements became known as "structural adjustment." Structural adjustment often requires the government to cut down on social services and keep wages low. But the horse is already out of the barn. The rich have made off with the loot, and now they demand that the poor pay. Still, no one on earth can make the rich pay, so if the poor do not pay, no one will.

One famous news picture showed the Managing Director of IMF, arms folded, standing over the President of Indonesia, who was bent over a table signing the agreement for structural adjustment. This picture caused great resentment throughout the Third World, but the IMF's position always has been (from the beginning): "You got yourselves into this mess. If you don't like our conditions, you don't need to borrow."

Here are two scenarios, in either of which the poor suffer:

In the first, the government puts the IMF conditions into effect. Education and social services are cut, and employers cannot borrow the money to pay excess wages. State enterprises are privatized and can no long employ redundant workers. The inflation is stopped, but the government no longer supplies the services to which the poor had become accustomed. (It also has nothing for the rich to send to Swiss banks).

In the second — the one preferred by the Lefties — the government defies the IMF and continues to print money for social services, education, and the like. The cycle is repeated, inflation erodes away the social services that were kept, and the poor suffer even more from higher prices for their necessities. The ultimate result is joblessness and violence. So in this scenario also, the poor suffer.

What a dilemma! The poor suffer either way, because the rich have already made away with the loot, and there is no way a foreigner can make them pay it back, short of invading the country and running it ourselves, as we did with Germany after WWII. So long as the rich remain in power, they can to work around any conditions foreigners place on them. They know the territory better than we do.

Therefore, structural adjustment should not be imposed by foreigners (read, IMF). Instead, the IMF should be abolished, an international bankruptcy court established, and governments should go bankrupt in hopes they would be replaced by honest ones, even though that is not assured. Lenders would lose. Yes, the poor will suffer, and we should help them directly with cash — but not help or excuse their corrupt governments.

Finally, is the IMF a tool of multinational corporations and banks? I believe the IMF errs in continuing to finance countries like Russia, Argentina, and Country X when, time and again, these countries have not mended their profligate ways. In supporting them nonetheless, the IMF bolsters financial markets so that foreign lenders and investors do not lose, or lose less (and the IMF survives). Do they do this because they are tools of the investors, or because they honestly believe they are saving the economies of the borrowing countries? I vote for the latter. My successors on the Fund staff believe they are doing the right thing for everyone. I disagree, but I do not question their integrity.

Last minute note: Since I wrote the preceding paragraph, the IMF has agreed to lend Argentina $8 billion, on conditions yet to be worked out. They argue that a depression in Argentina would spread to the rest of Latin America (as indeed it would). Is the IMF a tool of foreign banks that fear that their holdings of Argentine debt would be defaulted, or is the IMF trying to preserve the entire Latin American economy from depression and unemployment? I believe the latter. But my "what-to-do" would be different from theirs. Mine would be: No IMF money. Let the Argentine government default; let bondholders take the consequences. In this, I agree with the Lefties. But mostly the Lefties have not figured out that the cycle would be repeated, and after the inflation takes hold again the poor will be without jobs and maybe without food. If that truly concerns us, we will think of programs to help Argentine workers directly, without going through the government.

My regret now is a personal one. Friends say I am not "compassionate" because I no longer march to the Lefties' drums (see letter from Steve Willey, below). But I could not live with my conscience if I did.

Sincerely your friend,

Jack Powelson

Readers' Comments

Please send comments on any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

As a trained economist and a Quaker, I, too, often despair that my Quaker colleagues spend so much energy and affection on economic causes that if successful, would probably achieve the opposite of what they desire. The law of unintended consequences applies to radical dreams just as to mainstream ideas.

— Jim Booth, Red Cedar Friends Meeting, East Lansing (MI).

Some of the comments regarding the nature of Friends Meetings and their "liberal" views struck home with us. When we moved to California in 1969, we hot-footed it one of the local Friends Meetings at our earliest opportunity. What we found was more like a political cell and, in addition, we never felt a sense of community. After several weeks we abandoned them for the Congregational Church, where we found much better Quakers led by an inspirational minister. We have occasionally attended the Friends meeting over the years since then but we have found no reason to change our minds. During the 60's Kirk was on the New England Regional Committee of the AFSC. At those meetings the discussion centered on political activism with very little attention to weekend workcamps, etc., with little attention to a more person-to-person approach to improving the community — local or world-wide — in the manner of David Richie. Another big disappointment.

— Kirk and Janet Roberts, Palo Alto (CA).

As I do not know exactly what crackpot economics you propose, I do not want to sound as if I support them. But the general ideas that the more vocal elements of the society seem to have lost track with the world reality, I do agree with. I have been living outside the US for the last fifteen years, and although I retain my membership at my home meeting, I have often felt that our views on economics and politics diverge. And I absolutely cringe, when I hear the discussions on international issues. That being said, I have never doubted my religious and spiritual ties. I think that in fact there are much more divergent views in the society than sometimes appear. I will now sign up for your news letter, and I am looking forward to read your economic views.

— Kruskal Hewitt, Tokyo, Japan, Media (PA) Meeting.

Here's my preferred scenario [for the IMF]... Yes, stop making the disastrous and ineffective, even harmful big loans to corrupt governments. Stop the structural adjustment programs which harm the poor, and by some accounts have led to millions of indirect deaths of the poor (e.g. privatized water systems that the poor cannot afford). Instead, direct the wealthy nation monies to build up undeveloped countries from the bottom up. Do this by massive, decentralized and non- governmental banking programs to create the dispersion of economic power you speak of in The Moral Economy, Centuries of Economic Endeavor, and elsewhere. The main institutional vehicles to accomplish this would be self sustaining banks issuing non-usurious interest micro- loans to individuals and small businesses.

— Rich Andrews, Boulder (CO) Meeting of Friends.

Personally — not speaking for FCNL — I enjoy reading your commentaries. I do so as often as I can. Sometimes I agree with your analysis; sometimes I think it falls short of the mark. But almost always, I find it stimulating and insightful. Classic liberal economic analysis is certainly one of the essential tools in my policy analysis tool box. I find it is one lens among many which can provide important insights into public policy. I value and welcome your contribution to the Quaker discourse on the important issues of the day, and I look forward to reading more.

— Ned Stowe, Friends Committee on National Legislation.

In many countries, there are serious economic and financial problems, a degree of corruption, of mismanagement by parts of government — but at the same time, there are people in government who know what's wrong and are trying to do something about it. In the real world, there is often a struggle going on between the reformers and those who do well out of the status quo. Is the Fund to wait until the reformers have completely won and done nearly all of what's necessary — because if so, we would always be too late. No, what we have to do is judge whether, or when, the chances of success are reasonable and would be helped by Fund advice and external finance. We'll make mistakes of course, but should we give up? One reason we don't is that the Fund enjoys an extraordinary amount of support from its shareholders, in finance ministries and the central banks: of course they would all rather not have to call us in, but if they do have to seek help, they very much want the Fund to be around.

— Huw Evans, Friends Meeting of Washington (DC), and International Monetary Fund.


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Rich Ailes, Middletown (PA) Friends Meeting.
  • Roger Conant, Mount Hope Friends Meeting, Northampton, MA.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasville, GA.
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Bethesda (MD) Friends Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2001 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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