ECONOMIC WATCH
Dr Bharat Jhunjhunwala
The name of Rural Development Minister Jairam Ramesh has not been pushed by Government of India for the position of Chief of the World Bank. There is an unwritten agreement between the United States and the European countries that chief of the World Bank will be an American National and that of the IMF will be a European national. At the time of writing this article, Brazil and South Africa were planning to put up their candidate. The developing countries rightly believe that having a person from a developing country would make the IMF softer towards them. This is true. But this is the smaller truth. The bigger truth is that the IMF was established by the Western countries to promote their economic interests globally and fundamental character of the institution remains precisely that. This fundamental truth will scarcely be changed by a person from developing country heading the institution.
The IMF was formed after the Second World War. At that time the United States was center of the world economy. Europe stood at No 2. Quotas were determined in line with this reality. The United States and European countries were the major contributors with rest of the world being marginal players. The IMF started its lending activity with this corpus. The structure of the world economy has changed much since then, however. Share of the developing countries has increased dramatically but the quotas remain more or less at the old level. For example, India’s share of the world income according to purchasing power is 6.2 percent but her vote share in the IMF is 2.5 percent. On the other hand, Germany’s share in the world economy is 4.0 percent but it has a vote share of 6.1 percent. The present quota system, therefore, does not reflect the true status of the world economy. The IMF is structured like a private company. Countries are allotted quotas just as private companies allot shares after an Initial Public Offering. Member countries contribute to the corpus of the IMF and also get voting rights in this proportion. The developing countries are demanding that the quotas be redistributed according to the present status of a country in the world economy but the developed countries are not accepting this.
Why should they? They have contributed to the IMF in order to promote their economic interests. The IMF, naturally, promotes the interests of their multinational companies and not those of the businesses of the developing countries. A parallel objective is to maintain stability of the world economy—a stability that secures the present dominance of the developed countries. The developing countries also borrow directly from foreign banks in addition to borrowings from the World Bank and the IMF. Foreign companies invest in their share markets. The whole global financial system can breakdown if a major developing country defaults on these repayments. Such a breakdown would not only lead to huge losses for the Western banks but also jeopardize dominance of the developed countries. Thus developed countries prefer to provide loans to the troubled developing countries and prevent such an eventuality.
The orientation of the Chief of the IMF or the World Bank has but a small impact on the policies followed by that institution. Take the example of the IMF. Before Strauss-Khan, the IMF wholly advocated free market policies. It wanted developing countries to encourage private sector, allow entry to multinationals, privatize public sector undertakings, minimize role of the government and leave exchange rate of the currency to be determined by the market. Thinking was that this would unleash the energies of the private sector, raise the rates of economic growth and reduce poverty. The reality has been quite different. The neoliberal prescription has seen inequality both with- and between countries rising. This model works only if the upper classes first make money. Then part of that money is expected to be distributed among the poorer people. There is no possibility of equality here. Also, free market approach promotes capital-intensive production. Unemployment is rising across the world—in developed- as well as developing countries. Strauss-Kahn moderated this neoliberal approach and placed employment generation and reduction of inequality explicitly on the agenda of the IMF. The developing countries should surely back their candidate in order to prevent the IMF sliding back into its old ways.
The IMF imposes certain conditions before granting loans even in times of distress. For example, IMF can require the borrowing country to reduce import duties on items like cloth. The loan would be granted only if the borrower agreed to this condition. Such conditions impact the people adversely. Domestic weavers lose their livelihoods. But these conditions are music to the developed countries. Their companies get access to developing country markets and multinationals are able to make investments. Yet, developing countries had to accept such hard conditions faced with financial bankruptcy. Choosing head of the IMF from the developing countries would prevent imposition of such hard conditions. India had made such a borrowing in 1991 when faced with balance of payments crisis and also accepted certain conditions.
The changes made by Strauss-Kahn pale into insignificance in face of this larger reality. The main effort of the IMF under his leadership continued to be to safeguard the interests of Western banks who have lent monies to the developing countries. The developing countries should understand this fundamental character of the IMF and not get swayed by the institution being headed by one of their own nationals.
Nationals from the developing countries have headed important global institutions in the recent past. The last three Secretary Generals of the United Nations have been Bourtos-Bourtos Ghali of Egypt, Kofi Annan of Ghana and Nan Ki Moon of South Korea. Head of the International Atomic Energy Agency is Mohamed ElBardei. Yet the world has changed little. The developed countries still call the shots. Therefore, the developing countries should think about establishing an alternative while persisting in their efforts to hoist one of their own upon the IMF.
An institution under the name of ‘Chiang Mai Initiative’ has been established in the year 2000 under the leadership of China, South Korea and Japan to face this arm twisting by the developed countries. The corpus of Chiang Mai is US$ 120 billion which is quite respectable considering that corpus of the IMF is US$ 750 billion. Chiang Mai will operate like the IMF and provide assistance to Asian countries in distress. Role of Chiang Mai can be understood by an example. Say a villager is under financial distress. Normally he would approach the village moneylender. He would mortgage his land and perhaps remain indebted for decades. However, if there was a Self Help Group that could provide the financial assistance then he would be saved. Chiang Mai is like the Self-Help Group. East Asian countries have resolved to bail their brother-in-distress out instead of having to approach the IMF. We should put Jairam Ramesh to make set up a similar Initiative in the form of an Asian Monetary Fund of all the developing countries. That would be much more valuable than he heading the World Bank.
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