THE IMF RAVAGES DEVELOPING COUNTRIES, ETHIOPIA IS THE PROOF

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.