Global Economics 101
Five Things Everyone Should Know about the IMF, World Bank and WTO
by Eric S. Piotrowski
On Saturday, April 15, I arrived in Washington, D.C. with four other people from my hometown of Gainesville, Florida, to engage in a weekend of protests against the World Bank and International Monetary Fund (IMF). Everyone else who was there probably has more exciting and important stories to tell of the protests themselves (I did not risk arrest for a variety of reasons, including my own fear, and was sick all day Monday). Instead, I would like to share the information that compelled me to travel so far to add my voice to the Mobilization for Global Justice.
Over the past few years, I have closely studied the World Bank and IMF, as well as the World Trade Organization (WTO), which faced protests of its own in Seattle in November of 1999. Here then is a summary of what I have learned; I feel it is essential information for citizens in the new global economy.
1. The History of the World Bank and IMF
After World War II left Europe devastated (and centuries of colonialism and resource plunder had severely impoverished what is now called the Third World), a conference was convened at Bretton Woods, New Hampshire, to create institutions separate from the United Nations that could oversee the regulation of international trade and assist in the rebuilding of Europe. The result was the International Bank for Reconstruction and Development, which became the World Bank, and the International Monetary Fund (IMF). The stated goal of the World Bank was to aid Europe's reconstruction and help to develop poor countries around the world. The original mandate for the IMF was to facilitate global trade while leaving countries free to establish their own economic guidelines.
One of the main tenets of the IMF for many years was strict control of capital -- the ability of corporations and other monied interests to move production facilities from country to country. This system "was the basic framework of the Bretton Woods system of 1944, including the charter of the IMF," writes Noam Chomsky in his 1999 book /Profits Over People/. Economic policy planners of the time, Chomsky notes, worried that deregulation of capital "would create what some international economists call a 'virtual senate,' in which highly concentrated financial capital imposes its own social policies on reluctant populations, punishing governments that deviate" by removing their capital.
Unfortunately, this is more or less what has happened. Global trade was radically liberalized in the 1970s at the behest of the United States and Britain -- two of the IMF's main "donor countries," who are able to exert considerable influence as a result of their large contributions to the fund. This has allowed capital to move quickly and freely around the world, resulting in tremendous power for transnational corporations and the institutions that serve them (and severe disempowerment for the rest of us).
Perhaps the most troubling aspect of these international financial institutions is their profoundly undemocratic nature. The executive directorate are not elected or chosen by any sort of democratic means, and the institutions themselves are accountable to no one except their paymasters. Renato Ruggerio, Director General of the World Trade Organization, has said "We are writing the constitution of a single global economy." If this is in fact the case, don't we as citizens of the world deserve a voice in what that constitution includes?
The IMF and World Bank claim to wage war on global poverty through development. But there are serious questions to be asked about what is meant by "development." Gross National Product (GNP) is often the main measure used to assess the health of a nation's economy. If the GNP is growing, then all is well by the standards of the World Bank. High levels of starvation, massive numbers of desperately poor workers, and rampant disease are acceptable losses, so long as the GNP is healthy.
Development usually means that the governments of poor countries are forced to allow foreign corporations in to extract resources (as in the current plans for an oil pipeline in Chad and Cameroon), pay the workers near-slave wages (as Disney does in Haiti and many corporations do in the maquiladoras of Mexico), and endanger the lives of the people (as Union Carbide did when it killed 8,000 people in Bhopal, India in 1984).
The other main effect of IMF and World Bank policy is the imposition of crippling austerity measures on countries that seek aid, in the form of Structural Adjustment Programs.
2. Structural Adjustment Programs (SAPs)
When a country or region appeals for aid, the World Bank and IMF often agree to provide assistance only if the receiving government promises to make certain changes to the structure of the nation. Thus they are able to impose their Structural Adjustment Program (SAP).
"Officially, of course," writes Joseph Stiglitz, who was chief economist at the World Bank until 1996, "the IMF doesn't 'impose' anything. It 'negotiates' the conditions for receiving aid. But all the power in the negotiations is on one side -- the IMF's -- and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society. Sometimes the IMF dispenses with the pretense of openness altogether and negotiates secret covenants."
The force with which the IMF and World Bank must enact SAPs is indicative of how unwelcome they are in the target country. Usually, SAPs encourage the reduction of social spending, the elimination of land reform (meaning that land must be opened up to private purchase), and less investment in things like education and infrastructure.
In a recent editorial, Pakistan's most widely circulated English newspaper, DAWN, said: "The entire burden of this process falls on the poor because it accentuates inequalities, creates unemployment, transfers national assets to foreigners in the form of privatization, causes financial instability as a result of high-paced liberalization, makes essential utilities expensive, and so on."
Perhaps the most notorious example of an SAP gone awry was in Indonesia in the late 1990s. Ravaged by decades of extreme corruption by the Suharto dynasty, intensive resource extraction by foreign interests, and massive speculative investment, Indonesia was ordered to impose austerity measures on its already-suffering population in order to stabilize its turbulent economy. The resulting hardship and chaos resulted in riots and demonstrations, which eventually forced Suharto out of power. Today, the people of Indonesia are still suffering under neoliberal economic policies and practices that reward elite forces at the expense of the majority of the population (of which union-busting Nike sweatshops are but one example).
The crippling debt in which many Third World countries find themselves has a variety of causes. Artificial re-valuation of US currency is one major cause, as is the explosion in transnational speculative investment over the past twenty years. As interest rates fell in the 1970s, Western banks lent out money to governments trying to forestall economic crises in their own countries, which was often used for purposes other than stabilizing the economy. When these governments defaulted or threatened to default on their loans, the IMF and World Bank came in and provided bailouts (which carried strict SAP guidelines).
As a result of this massive debt, many Third World governments find themselves in a devastating cycle of dependence and obligation to the banks. The Jubilee 2000 campaign, which seeks the cancellation of the unpayable debts of the world's poorest countries, reports that "developing countries pay the West nine times more in debt repayments than they receive in grants." In order to service this debt (usually only the interest can be covered by developing governments), severe restrictions have to be placed on services to the general population such as health care, education, employment, environmental preservation, and housing.
The debt is not the result of the will of the people -- governmental agents, encouraged and instructed by local elites and foreign investors, are the ones who accrued the debt. These agents of capital are the ones who have received the profits from investments and pork-barrel spending, but it is the public who must pay the costs. The bailouts orchestrated by the IMF and World Bank pay little attention to such nuances. If the government of Indonesia owes money to Swiss banks because they spent all their money buying tanks and bombs from the United States, then it is the people of Indonesia who must starve themselves and work for slave wages in order to pay it back.
The countries of Africa find themselves in particularly dangerous conditions of indebtedness, which cannot be separated from the history of Western imperialism, colonialism, and exploitation experienced by these countries. Jubilee 2000 notes that "sub-Saharan Africa owes . . . 83 per cent of its total GNP [to other countries and banks]." Small wonder, then, that Ethiopia is once again poised on the brink of a massive epidemic of starvation.
4. The Multilateral Agreement on Investment
In May of 1995, the private Paris-based Organization for Economic Cooperation and Development (OECD) -- composed of delegates from countries which house 477 of the Global Fortune 500 corporations -- began to negotiate a comprehensive new treaty called the Multilateral Agreement on Investment (MAI). Because of the sweeping changes proposed in the MAI, efforts to pass it were carried out in secret. Business Week described it as "the explosive trade deal you've never heard of," which remains more or less true today. Although the potential impact of the MAI is dramatic indeed, most Americans have never heard of it, an effect that seems quite deliberate.
Because it is an "investors' agreement," the MAI is designed to secure the rights of investors to gain more profits and increase the return on their investments. The rights of people, on the other hand, are of limited importance, and don't come up much in the treaty's language. In fact, many analysts believe the MAI will strike a significant blow against the rights of people and workers.
One of the main components of the MAI is the further liberalization of capital. "Government interference" would be restricted, reducing the power of ordinary people to control their labor, the resources of their land, and the environmental conditions of that land.
Under the MAI, investors (including corporations themselves, who have the rights of persons under U.S. law) would be able to sue governments for "violations of free trade." Such a violation allegedly occurred in 1997, when the Canadian government banned MMT, a gasoline additive classified in Canada as a dangerous toxin. The Ethyl Corporation brought a $250 million suit against Canada for losses caused by the ban. The Canadian government, unable to face such a crushing financial loss, lifted the ban.
The MAI also contains language requiring countries to trade with one another on equal footing, regardless of either country's record of human rights, use of torture, environmental standards, etc. This would destroy the power of solidarity legislation such as the Massachusetts/Burma law, which was enacted to protest the horrendous human rights record of Burma's military government. The anti-apartheid divestment programs of the 1980s would have been illegal under the MAI.
No one knows exactly what would come of the MAI if it were signed by the world powers, largely because the text of the agreement has been kept secret and is intentionally vague. Still, policy analyst Cheryl Bishop says that the agreement "threatens to give multinational corporations the same standing as nation-states," a scary prospect to say the least.
The target date for member countries to sign the MAI was April 27, 1998, but a serious lack of consensus kept it from being instituted. The treaty is now in a new round of negotiations: hurt by the setback, but not defeated by any means.
While certain nations were concerned that the MAI would erode their cultural and political sovreignty, another significant reason for the failure of the MAI's passage was overwhelming popular pressure against it. The Internet was used with remarkable force not only to reveal the existence of the MAI -- French activists posted the first public drafts online -- but also to organize grassroots resistance to it. London's Financial Times reported that the OECD's efforts "have been ambushed by a horde of vigilantes" -- in other words, ordinary people who don't wish to see their democratic rights swept away in "the constitution of a single global economy."
5. The Impact at Home
While the policies of the global financial institutions wreak havoc on the Third World, they have corresponding negative impacts in the West as well. Perhaps the most significant is the requirement that American taxpayers pay for IMF/World Bank bailouts. The banks take in all the profits from slipshop investing practices, but the American public is forced to front the money needed to bail them out. Note the similarity to Third World workers' obligation to shoulder the debt costs for the irresponsible debtors of their countries.
Meanwhile, the United States has debt of its own; in fact, the U.S. is one of the most indebted industrialized nations in the world. The consequences of this debt are similar to those in the Third World -- we're told that we have no money to spend on schools, housing, and heating assistance to poor families, because we have to pay down the debt. Naturally, of course, these obligations don't stand in the way of corporate subsidies, but this should come as a surprise to no one.
Another important benefit of the IMF and World Bank for the wealthy is the effect that liberal capital flow has on local labor conditions. If a corporation is allowed to move production very easily, then it can use the threat of such a move to break up a union, force concessions from workers, and so on. Some employers admit, in fact, that the North American Free Trade Agrement (NAFTA) has allowed them to use the threat of moving production to Mexico as a way to command obedience from their workers. This results in demoralized and unorganized work forces, which can then be pitted against each other (both between countries and within the United States).
Furthermore, the desperation of poor communities (both at home and abroad) has led to a nice "shot in the arm" for industries designed to quell turbulence in those communities. Prison construction is one of the largest growth industries in the United States, with privatized facilities leading the charge. Weapons manufacturers are handling the fallout from troublemakers overseas, resulting in a "flat-funding" for the Pentagon at Cold War-era levels. Weapons sales to repressive governments around the world enjoy a considerable boost when restrictions on such sales cannot be attached to human rights records, the use of torture, the use of child soldiers, or internal repression.
This is all leading to a kind of Third World model of economic development right here at home. In the richest country in the history of the world, one third of all children live below the poverty line. Meanwhile, one percent of the U.S. population owns 40% of the wealth. Working people are having to work harder and harder just to keep their heads above water. Unemployment may be at a record low, but many people are having to take second jobs because benefits have been cut from many jobs by corporations who would rather funnel the money into profits for investors.
It's interesting to note, also, that corporate profits are no longer studied in terms of their size alone. Profit growth is the key term in the modern era: how much more has the corporation made this year than it did last year? If Exxon makes 5% more money in 1998, and only 4% more in 1999, it is facing financial trouble. These are only some of many consequences of a society that focuses primarily on the needs of investors.
Those of us who wish to remain active as democratic citizens with a voice in the structures of our civilization should take it as a compliment that the powers that be are so threatened by our work. The same "horde of vigilantes" that helped to derail the MAI also halted the WTO meeting in Seattle and stood in the way of the IMF/World Bank gathering in Washington, DC. We must continue to exert our influence as citizens, as workers, as environmentalists, as labor advocates, as human rights activists, as members of the world community.
The protestors in Seattle and DC were not, as many media reports claimed, confused kids with noplace better to be, who travelled in search of a good time and an expression of youthful rebellion. We took action because the policies of the IMF, World Bank, and WTO are causing untold suffering, misery, poverty, and death. We spoke out because we want to live in a world based not on greed and profit, but on human needs, equality, and economic justice. We want everyone to have food, housing, medical care, and a decent standard of living. In a world as wealthy and bountiful as ours, here is no reason for caring people to accept the suffering that exists all around us.
The struggle goes on.
There is a wealth of information available on these topics (and many others directly related to issues of global justice and economic organization). Unfortunately, most of it is kept out of the corporate media and requires diligence and work to locate. Here are some important resources, many of which provided essential data for this report.
The New American Crisis, edited by Greg Ruggiero & Stuart Sahulka, contains many excellent essays about the myriad problems facing America in the modern era. Particularly relevant to this discussion are "NAFTA, GATT, and the World Trade Organization: The New Rules for Corporate Conquest" by Kristin Dawkins; "Global Village or Global Pillage?: Resistance to Top-Down Globalization" by Jeremy Brecher; and "A Sustainable Economy for the Twenty-first Century" by Juliet Schor.
Noam Chomsky has written a number of important texts about global economic power, but his latest, Profit Over People, is the most useful for understanding the issues in an historical context.
Corporate Watch maintains a website on Bhopal and the Union Carbide disaster.
Cheryl Bishop's article on the MAI is a very good overview of its main components and their significance.
Joseph Stiglitz, the former chief economist at the World Bank, wrote a damning critique of the IMF's practices, which is quite valuable for its insider perspective.
Finally, ZNet maintains a very comprehensive site with literally dozens of valuable, detail-packed articles, commentaries, interviews, essays, and factsheets dealing with global economic issues, as well as links to relevant websites from resistance organizations and advocacy groups. Set aside two hours and visit it.