THE IMF RAVAGES DEVELOPING COUNTRIES, ETHIOPIA IS THE PROOF.

April 26, 2002

By: Joseph E. Stiglitz

After resigning from the World Bank in which he was acting as the Vice president, Mr. Joseph

E. Stiglitz in his last book describes the obstacles faced in connection with the International

Monetary Fund. We are publishing the part related to Ethiopia.

Le Monde Diplomatiqe. April 10, 2002.

When I started my functions as First Vice-President and Chief Economist of the World Bank,

on 13 February 1997, what captured my attention when I entered the vast, magnificent

and modern premises of its Headquarters on 19th street in Washington, was its slogan: "Our

dream: a world without poverty". In a sort of atrium of thirteen floors stood a statue: a

young boy leading a blind old man. It commemorates the eradication of the onchocercose.

Thousands of persons lost their sight every year in Africa because of this curable disease

before the World Bank, the World Health Organization (WHO) and other institutions united

their forces to combat it. On the other side of the street stands another magnificent

monument: the Headquarters of the International Monetary Fund. Inside, the atrium of

marble, decorated with luxurious flora, reminds Ministers of Finance that they are at the

center of fortune and power. These two institutions, which The public opinion often

confuses, present great contrasts: they differ by their culture, style and mission. One is

dedicated to the eradication of poverty, while the other one preserves the world stability.

Both send teams of economists on mission for three weeks, but the World Bank made big

efforts to assign a significant number of its members in the country which they try to help.

The IMF, often has only one " resident representative " in areas where its powers are

limited. Its plans, as a general rule, are dictated by Washington, and put into practice during

high officials' brief missions: from the moment they get off the plane, they immerse into

Ministry of Finance and the Central Bank data and for the rest, of the time they live

comfortably in five star hotels of the capital.

THE ABYSS AMONG THE POOR PEOPLE AND THE RICH RACKED ITSELF,

THE NUMBER OF PERSONS WHO LIVE IN THE ABSOLUTE POVERTY INCREASED.

The difference is not only symbolic: one can not learn to know and to love a country without

seeing its countryside. It is not necessary to see the unemployment as a simple statistics,

an "enumeration of corpses" - none deliberate on victims of the war against the inflation or

for the repayment of western banks. Unemployed persons are persons of flesh and bone,

they have families and all these lives are afflicted, sometimes destroyed, by the economic

measures recommended by foreign experts-as in the case of the IMF. The modern

technological war is conceived to kill all physical contact: bombs are dropped from an

altitude of 15000 meters so that the pilot does not "feel" what he does.

The modern management of the economy is the same. Down from a luxury hotel, one

imposes without many policies which one would think twice if one knew the human beings

whose life is going to be ravaged. What the figures show is that those who go out of the

capital cities see it; in the villages of Africa, Nepal, Mindanao, Ethiopia: the abyss among

the poor people and the rich racked itself, the number of persons who live in absolute

poverty-less than a dollar a day- increased. (. . .) Mentalities do not change in one day: this

is true in the rich countries as it is in the developing world. Granting independence to

colonies (. . . ) did not change former bosses' mentality: they always perceive themselves

"as those who know". They have never ceased to believe that the new independent

countries should rely on them and apply their recommendations. After so many broken

promises and betrayals one would have been able to believe that it would be otherwise.

But, in fact, these counties continued to follow the advises given to them because of the

money which accompanied them, and not because they really believed in these

prescriptions. The post-war years saw the decreasing influence of former colonial powers,

but the colonialist mentality remained that of feeling certain that they know better than the

developing countries, as to what is good for them.

As for the United States, which become a dominat power on the world economic scene,

even though they had a lighter inheritance in colonialism, have all the same leaned to the

same mentality. Less so by virtue of an "obvious fate" which would have pushed them to

expansionism because of the cold war, during which the principles of democracy were

scoffed or ignored (. . . ) The day before my entry to the World Bank, I had held my last

press conference as President of the Council of Economic Advisers. Because we had a good

control over the internal economy, I considered that the biggest challenge for an economist

was the problem of the aggravated poverty in the world . What could we do for all these

inhabitants of the planet -1.2 billions - which lived on less than a dollar a day- 2.8 billions,

more than 45% of the world population -who had less than two dollars a day? What could I

do to realize the dream of a world without poverty?

I settled for three tasks: determine the most effective strategies to stimulate the growth

and reduce the poverty; work on their implementation with the governments of developing

countries; and gear all my efforts in favor of pleading the interests and concerns of the

developing world to the developed countries. (. . . ) I knew these tasks would be difficult,

but I never thought that one of the worst obstacles faced by developing countries was

created by man , un necessarily and that it came from the other side of the street: our

"sister institution", the IMF. I indeed thought that, the priority of all the leaders of

international financial institutions or governments which supported them, was not eliminating

poverty, but that there would be an open debate on strategies whose failures were

obvious. On this point, I was going to be disappointed.

ETHIOPIA HAD A PER CAPITA INCOME OF 110 DOLLARS A YEAR AND

HAD UNDERGONE DROUGHTS AND REPEATED FAMINES WHICH HAD

KILLED TWO MILLION PERSONS.

After four years in Washington, I became used to the strange world of bureaucracies and

politics. But it is in March 1997, by going to Ethiopia, one of the poorest countries of the

world, one month hardly after having taken my function in the World Bank, that I was

suddenly engulfed by the stunning politico-arithmetical univers of the IMF. Ethiopia had a per

capita income of 110 dollars/year and had gone through droughts and repeated famine which

had killed two million people. I was going to meet Prime Minister Meles Zenawi. He had led a

guerrilla war for seventeen years against the bloody Marxist regime of Mengistu Haile Mariam.

(The regime of Mengistu must have killed at least 200 000 persons, according to Human

Rights Watch, and made 750 000 refugees. He defined himself with mockery, as a 'socialist' of

the neo-liberal era.)

His forces overthrew the regime in 1991, after which the government got down to the

difficult task of reconstruction. With a doctor's training Meles had studied economics in

England Open University, because he knew that, to free his country from centuries of

poverty, he would require nothing less that an economic revolution. He proved his knowledge

of economics and creativity which would licence him to take over classes in all my university

lectures. (. . .) Meles incorporated in these intellectual qualities an integrity without defect:

nobody questioned his honesty, and there were few charges of corruption against his

government (. . .) When I went to see him, in 1997, Meles was engaged in a bitter

controversy with the IMF, which had suspended its loans. The "Macroeconomic"

performance of Ethiopia on which the IMF’s decisions were supposed to be base could not

be better. There was no inflation. In fact, prices fell. Production increased steadily since

the overthrow of Mengistu. He proved that, with good policies even poor African countries

can achieve steady economic growth. After years of war and reconstruction, international

aid began to return. (. . .) But Meles had problems with the IMF. And at stake was not only

the 127 million dollars that came within the framework of the structural adjustment

programme imposed by the Fund - loans with high subsidized rate to help very poor

countries-but also the World Bank financing.

The IMF plays a special role in international assistance. It is supposed to supervise the

macroeconomic situation of each recepient member country and make sure that it does not

go beyond its means. Because if this happens, inevitable difficulties will arise . A country

can live on live on this in the short-term while borrowing, but the hour of truth will sooner or

later come and there will be crisis. The IMF is particularly concerned about inflation. When a

state spends more than it receives in taxes and in foreign aid, there will often be inflation, in

particular if it finances its deficit with banknote plate. (. . .)

ETHIOPIA WAS, APPARENTLY, THE TYPE OF GOVERNMENT WHICH THE

INTERNATIONAL COMMUNITY SHOULD HAVE HELPED

A country can have a weak inflation, nil growth and high unemployment. In such a situation

most economists will judge its macroeconomic situation as being catastrophic. For them,

reducing inflation is not an end in itself, it is a means at the service of another end. If

inflation is that much worrying it is because high inflation often entails weak growth, and

massive unemployment. But the IMF, it seems, often confuses ends and means, and looses

sight of the fundamental preoccupation: even if the unemployment is two digit for years, it

will note "A" (the best mark) such as countries like Argentina, as long as its budget will

balance and its inflation is under control! If a country does not fulfill certain minimal criteria,

the IMF suspends its assistance, and other donors follow suit. Well I understand that the

World Bank and the IMF, lend only to countries whose macroeconomics situation is healthy

(. . . )

Not only the economic basis of Ethiopia were healthy, but the World Bank had ample proof of

the competence of the government and its commitment to the poor. Ethiopia had designed a

rural based development strategy with focus on the poor in particular the 85% of the

population which lives in rural areas . It had considerably reduced its military

expenditure-remarkable initiative for a government which came to power through armed

struggle, because its leaders knew that money spent for armaments would not help to fight

poverty. It was, evidently, the type of government that the international community should

have assisted. But the IMF had suspended its program of loans to Ethiopia, despite its good

macroeconomic performance, because it claimed it was worried about the budget balance of

the country.

The Ethiopian government had two sources of income: taxes and foreign assistance. The

budget of a state is in balance as long as its income covers its expenditure. Ethiopia, like

many developing countries, gets a good share if its income from foreign assistance. The IMF

was worried that if this assistance was to dry up, suddenly the country would face problems.

Consequently, the budget balance of Ethiopia could be considered as solid only if its

expenditure did not exceed its income taxes.

The logic of the IMF poses an obvious problem: it implies that if it obtains assistance for any

project whatsoever, a country will never be able to spend this money. If Sweden, for

example, grants a financial assistance to Ethiopia to build schools, the logic of the IMF forces

the latter to preserve these funds in its reserves. (. . .) But it is not for this purpose that

international donors grant their assistance. In Ethiopia, donors, who work independently and

have no obligation towards the IMF, wanted to build new schools and hospital which was

also the intention of the Ethiopian government. Meles did not chew his words: he told me

he had not for seventeen years so that international bureaucrats will come to tell him that

he can not build schools and hospitals for his people after he had succeeded in convincing

donors to finance them. The point of view of the IMF was not explained by doubts on the

long term outcome of the projects. We previously had witnessed countries using the

assistance money to build schools or hospitals, then, with the money fully exhausted, not

having any means of making them function. The donors had become aware of the problem

and took it into account in their projects, launched in Ethiopia and elsewhere.

But what the IMF claimed in the Ethiopian case exceeded by far this concern. It affirmed

that the international assistance was too unstable to rely on. I believed that its position

did not make any sense, and not only because of its absurd consequences. I knew that,

often, the assistance is infinitely more stable than income taxes, which can vary according to

the economic situation. Upon my Return to Washington, I asked my colleagues to check the

figures, and they confirmed it to me: the international assistance was more stable than the

income taxes. Thus, if they wanted to apply the IMF reasoning in all logic, Ethiopia and the

other developing countries should rather foresee their budgets by counting on foreign

assistance rather than income taxes. And if they had no right to register in the column of

receipts neither the money from the assistance nor the income taxes , all countries would be

in a very bad shape!

FOR ETHIOPIA, THIS DESIRE FOR INTERVENTION APPEARED LIKE A NEW

FORM OF COLONIALISM

However, the reasoning of the IMF was even more absurd. There are several appropriate

measures in trying face the instability in revenues: for example, establish supplementary

reserves, or keep some flexibility in the expenditure - if income, wherever they come from,

decrease and if there is no reserve from where to draw, the State should be ready to spend

less.

But the assistance received by a poor countries like Ethiopia is, for the major part,

intrinsically flexible. If the country does not receive any money to build another school, it

does not build it. The leaders of Ethiopia were conscious of the problem. They understood

that it was necessary to think about what could take place if income (tax or assistance)

decreased and they had conceived plans to face eventualities. What they did not

understand and, neither did I, is why the IMF did not see the logic of their position. And

the stake was important: schools and hospitals for some of the poorest inhabitants of the

planet. Besides this discord in the way of taking into account the foreign assistance, I was

also immediately involved in another problem between the IMF and Ethiopia. Ethiopia, by

drawing from its reserves, had in anticipation paid off an American bank. Economically, this

decision was perfectly sensible. In spite of the quality of the pledge (an airplane), Ethiopia

paid an interest rate by far higher than the one that it received for its reserves. I would

have advised it to pay it off (...) The United States and the IMF had protested against this

early refund. It was not the logic of the decision that they criticised, but the fact that

Ethiopia had taken it without the approval of the IMF. Now why would a sovereign state ask

for the permission of the IMF for every decision it takes? (...) For years, at the

headquarters of the IMF at 19th Street in Washington, one had repeatedly said "financial

responsibility", and "we judge the outcome"

The policy performance of Ethiopia, mostly conceived by itself, should have been convincing

that Ethiopia was capable of taking matters in its own hands. But the IMF considered that

countries to whom it paid money had obligations to keep it informed of any decision

regarding loan; if they did not, this was sufficient reason to suspend the funds, whether the

initiative is reasonable or not. For Ethiopia, this new form of intervention looked very much

like colonialism. For the IMF, it was just a normal administrative procedure. There was

another point of friction between Ethiopia and the IMF in relation to the liberalisation of

Ethiopian financial markets. The dynamism of financial markets is the distinctive sign of

capitalism, but in no other domain is the gap between developed and less developed

countries wider. The whole banking system of Ethiopia (measured, for example, in the size of

its assets) is a little lower than that of Bethesaida, Maryland; small suburb of Washington

which has 55 277 inhabitants. The IMF wanted not only that Ethiopia open its financial

markets to western competition, but also that it splits its main bank in to several fragments.

In a world where certain financial American mega institutions like Citibank and Travelers, or

Manufacture Hanover and Chemical, declare that they merged so as to be able to participate

effectively in the competition, a bank of the size of the North East Bethesaida National had

obviously no means to compete with a global giant like Citibank. (...)

The IMF wanted more than a simple opening of the banking system in the foreign

competition. It intended 'to strengthen' the financial system by creating a market of auction

for the Treasury Bonds of the Ethiopian State -a reform which, so desirable as can be in

numerous countries, was totally without connection with the level of development in

Ethiopia. It wanted also that Ethiopia 'liberalise' its financial market, that is to say let the

market freely determine the interest rates - what the United States and Western Europe did

not do before 1970s, when their markets, and the necessary device of regulation, were

infinitely more developed.

ETHIOPIA HAD EXCELLENT REASONS FOR RESISTING THE IMF’S DEMAND

TO "OPEN" ITS BANKING SYSTEM.

The IMF confused ends and means. One of the first objectives of a good banking system is to

supply, on good conditions, credits to people who will pay them back. In a mainly rural

country like Ethiopia, it is important for the poor farmers to have access to credits on

reasonable conditions in order to buy seeds and fertilizers. This was not an easy task; even

in the United States, at crucial stages of their development where agriculture was important,

the state played a major role in supplying necessary credit. The Ethiopian banking system

was very effective, at first sight as least, as the distance between its credit and debtor

rates was much weaker than in other developing countries which followed the advice of the

IMF's. But the Fund was not satisfied: it considered that the interest rates should be freely

determined by international market; whether those markets were competitive or not. For the

IMF to liberalise the financial system was an end in itself. It is the naive faith in markets

which persuaded it that a liberalized system would decrease the interest rates of the loans,

thus increasing available assets. It was so sure of the correctness of its dogmatic position

that it did not see the need to examine real experiences. Ethiopia had excellent reasons for

resisting the IMF when it demanded to 'open' its banking system. Ethiopia had seen what

had happened to one of its East African neighbours Kenya, which had given in. The IMF had

insisted that Kenya 'liberalize' its financial market, convinced that the competition between

banks was going to decrease interest rates. The results had been catastrophic. This

measure had been followed by a fast growth of indegeneous banks, during a time when the

banking legislation and the surveillance of banks were inadequate, leading to predictable

results: fourteen bankruptcies in 1993 and 1994. After all, the interest rates had not

decreased, but increased. The Ethiopian government, was understandably, cautious. Desiring

to see a rise in the standard of living in rural areas, the Ethiopian government would have a

devastating effect on its economy. The farmers who had until then managed to get loans

were going to be incapable of buying seeds and fertilizers, because they would not get any

credit, or would be forced to pay higher interest rates, which they could hardly afford. We

speak of a country devastated by droughts, which resulted in great famines. Its leaders did

not want to aggravate things. The Ethiopians feared that the IMF's advice will entail a fall in

the incomes of farmers, as this would exacerbate the already critical situation. Seeing

Ethiopia reluctant to give in to its requirements, the IMF concluded that the government did

not seriously undertake the reform, and suspended its operations. Fortunately, other

economists of the World Bank and myself were able to persuade the management of the Bank

that increasing our loans to Ethiopia would be a good decision. (...) The World Bank tripled

its loans, even if months were needed for the IMF to finally revise its earlier positions. (...) I

learnt that considerable time and efforts were needed to make this change even from with in

an international bureaucracy. These organizations lack transparency: not only was the

information out flow very insufficient, but it may be even more so in the other direction- it is

difficult for incoming information to penetrate the bureaucracy. Information coming from the

base of the organization to the top had difficulty of opacity. (...) Listening to the reflections

of 'country customers' on issues such as the strategy of the development or the budgetary

austerity does not interest the IMF so much. Too often, it addresses them with the tone of a

colonial boss.

A simple picture is worth a thousand words. A picture taken in 1998 and shown to the whole

world is incripted in the minds of thousands of people particularly ex-colonies. The

Director-General of the IMF, Mr. Michel Camdessus, a French Treasury ex-bureaucrat,

diminutive and well dressed claiming to be a socialist, stands up with an austere glance and

crossed arms, over the humiliated Indonesian President. The latter, powerless, is forced to

abandon his country’s economic sovereignty to the IMF, in exchange for the assistance

which Indonesia needs. Paradoxically, a good deal of this money did not help Indonesia but

went to its creditors - who belonged to the private sector of "colonial powers" (...)

Camdessus asserts that the photo is unfair: he had not realized someone took the picture .

But it is indeed the issue : in the ordinary contacts, far from cameras and journalists, it is

exactly this attitude that agents of the IMF, from the Director General to the smallest

bureaucrat adapt. (...) The attitude of the IMF, as that of its leader, was clear: he was the

lively source of wisdom, the holder of a too subtle orthodoxy to be understood by the

developing world. In the best of cases, there was a member of the elite (...) with whom the

IMF could possibly have a sensible dialogue. Outside this circle, it was not an issue to even

be discussed: it presented no interest. (...)

In modern democracy, we expect from any public authority to be responsible to its citizens.

The international economic institutions evaded this direct responsibility. The hour has come

'to evaluate" them, on their results, to examine their activities, to gauge the level of their

success- or failure- in the fight for growth and against poverty.

Unofficial Translation

NB. Joseph E. Stiglitz - Nobel prize Winner and ex-V. President and Chief Economist of the

World Bank.