George Soros has shown that the assistance provided by a single individual can make a difference; surely the concerted efforts of the West, if well directed, could do even more. As we forge broader democratic interactions, we should distance ourselves from those that are allied to the power structures of the past as well as the newly emerging power structures of the oligarchs—at least as far as realpolitik will allow. This above all else: We should do no harm. IMF loans to Russia were harmful. It is not only that these loans and the policy decisions behind them have left the country more indebted and impoverished, and maintained exchange rates at high levels that squelched the economy; they were also intended to maintain the existing groups in power, as corrupt as it was clear they were, so to the extent that they succeeded in this deliberate intervention in the political life of the country, they arguably set back a deeper reform agenda that went beyond creating a particular, narrow vision of a market economy to the creation of a vibrant democracy. My conclusion as I sat in the meetings debating the 1998 loan remains as true today as it was then: If Russia, an oil- and natural resource–rich country, is able to get its act together, it will not need these loans; and if it does not, the loans will be of little benefit. It is not money that Russia needs. It is something else, something the rest of the world can give; but it will require a very different kind of program.
DEMOCRATIC ACCOUNTABILITY AND THE FAILURES
I have painted a bleak picture of Russia in transition: massive poverty, a few oligarchs, a devastated middle class, a declining population, and disillusionment with market processes. This indictment should be balanced with a recognition of the achievements. Russia now has a fragile democracy, far better than the totalitarian regime of the past. It suffers from a largely captive media—formerly, too much under the control of a few oligarchs, now too much under the control of the state—but a media that still presents a diversity of viewpoints far wider than under the state control system of the past. Young, well-educated, dynamic entrepreneurs, while they too often seek to migrate to the West rather than face the difficulties of doing business in Russia or the other former Soviet republics, represent the promise of a more vibrant private sector in the future.
In the end, Russia and its leaders must be held accountable for Russia’s recent history and its fate. To a large extent, Russians, at least a small elite, created their country’s predicament. Russians made the key decisions—like the loans-for-share privatization. Arguably, the Russians were far better at manipulating Western institutions than the Westerners were at understanding Russia. Senior government officials, like Anatoly Chubais, have openly admitted how they misled (or worse, lied to) the IMF.* They felt they had to, to get the money they needed.
But we in the West, and our leaders, have played a far from neutral and not insignificant role. The IMF let itself be misled, because it wanted to believe that its programs were working, because it wanted to continue lending, because it wanted to believe that it was reshaping Russia. And we surely did have some influence on the course of the country: we gave our imprimatur to those who were in power. That the West seemed willing to deal with them—big time with billions of dollars—gave them credibility; the fact that others might not be able to elicit such support clearly counted against them. Our tacit support for the loans-for-share program may have quieted criticisms; after all, the IMF was the expert on transition; it had urged privatization as rapidly as possible and the loans-for-share was, if nothing else, rapid. That it was corrupt was evidently not a source of concern. The support, the policies—and the billions of dollars of IMF money—may not just have enabled the corrupt government with its corrupt policies to remain in power; they may even have reduced pressure for more meaningful reforms.
We placed our bets on favored leaders and pushed particular strategies of transition. Some of those leaders have turned out to be incompetent, others to have been corrupt, and some both. Some of those policies have turned out to be wrong, others to have been corrupt, and some both. It makes no sense to say that the policies were right, and simply not implemented well. Economic policy must be predicated not on an ideal world but on the world as it is. Policies must be designed not for how they might be implemented in an ideal world but for how they will be implemented in the world in which we live. Judgment calls were made not to pursue more promising alternative strategies. Today, just as Russia begins to hold its leaders accountable for the consequences of their decisions, we too should hold our leaders accountable.
* When Chubais was asked if the Russian government has the right to lie to the IMF about the true fiscal situation, he literally said: “In such situations, the authorities have to do it. We ought to. The financial institutions understand, despite the fact that we conned them out of $20 billion, that we had no other way out.” See R. C. Paddock, “Russia Lied to Get Loans, Says Aide to Yeltsin,” Los Angeles Times, September 9, 1998.
CHAPTER 12
THE IMF’S OTHER AGENDA
THE INTERNATIONAL MONETARY Fund’s less-than-successful efforts in the 1980s and 1990s raise troubling questions about the way the Fund sees the process of globalization—how it sees its objectives and how it seeks to accomplish these objectives as part of its role and mission.
The Fund believes it is fulfilling the tasks assigned to it: promoting global stability, helping developing countries in transition achieve not only stability but also growth. Until recently it debated whether it should be concerned with poverty—that was the responsibility of the World Bank—but today it has even taken that on board as well, at least rhetorically. I believe, however, that it has failed in its mission, that the failures are not just accidental but the consequences of how it has understood its mission.
Many years ago former president of General Motors and secretary of defense Charles E. Wilson’s famous remark to the effect that “What’s good for General Motors is good for the country” became the symbol of a particular view of American capitalism. The IMF often seems to have a similar view—“what the financial community views as good for the global economy is good for the global economy and should be done.” In some instances, this is true; in many, it is not. In some instances, what the financial community may think is in its interests is actually not, because the prevalent free-market ideology blurs clear thinking about how best to address an economy’s ills.
Losing Intellectual Coherency: From Keynes’s IMF to Today’s IMF
There was a certain coherency in Keynes’s (the intellectual godfather of the IMF) conception of the Fund and its role. Keynes identified a market failure—a reason why markets could not be left to themselves—that might benefit from collective action. He was concerned that markets might generate persistent unemployment. He went further. He showed why there was a need for global collective action, because the actions of one country spilled over to others. One country’s imports are another country’s exports. Cutbacks in imports by one country, for whatever reason, hurt other countries’ economies.
There was another market failure: he worried that in a severe downturn, monetary policy might be ineffective, but that some countries might not be able to borrow to finance the expenditure increases or compensate for tax cuts needed to stimulate the economy. Even if a country was seemingly creditworthy, it might not be able to get money. Keynes not only identified a set of market failures; he explained why an institution like the IMF could improve matters: by putting pressure on countries to maintain their economy at full employment, and by providing liquidity for those countries facing downturns that could not afford an expansionary increase in government expenditures, global aggregate demand could be sustained.
Today, however, market fundamentalists dominate the IMF; they believe that markets by and large work well and that governments by and large work badly. We have an obvious problem: a public institution created to address certain failures in the market but currently run by economists who have both a high level of confidence in markets and little confidence in public institutions. The inco
nsistencies at the IMF appear particularly troubling when viewed from the perspective of the advances in economic theory in the last three decades.
The economics profession has developed a systematic approach to the market failure theory of governmental action, which attempts to identify why markets might not work well and why collective action is necessary. At the international level, the theory identifies why individual governments might fail to serve global economic welfare, and how global collective action, concerted action by governments working together, often through international institutions, would improve things. Developing an intellectually coherent view of international policy for an international agency such as the IMF thus requires identifying important instances in which markets might fail to work, and analyzing how particular policies might avert or minimize the damage done by these failures. It should go further, showing how the particular interventions are the best way to attack the market failures, to address problems before they occur, and to remedy them when they do.
As we have noted, Keynes provided such an analysis, explaining why countries might not pursue sufficiently expansionary policies on their own—they would not take into account the benefits it would bring to other countries. That was why the Fund, in its original conception, was intended to put international pressure on countries to have more expansionary policies than they would choose of their own accord. Today, the Fund has reversed course, putting pressure on countries, particularly developing ones, to implement more contractionary policies than these countries would choose of their own accord. But while seemingly rejecting Keynes’s views, today’s IMF has, in my judgment, not articulated a coherent theory of market failure that would justify its own existence and provide a rationale for its particular interventions in the market. As a result, as we have seen, all too often the IMF forged policies which, in addition to exacerbating the very problems they sought to address, allowed these problems to play out over and over again.
A New Role for a New Exchange Rate Regime?
Some thirty years ago, the world switched to a system of flexible exchange rates. There was a coherent theory behind the switch: exchange rates, like other prices, should be determined by market forces. Attempts by government to intervene in the determination of this price are no more successful than attempts to intervene in the determination of any other price. Yet, as we have seen, the IMF has recently undertaken massive interventions. Billions of dollars were spent trying to sustain the exchange rates of Brazil and Russia at unsustainable levels. The IMF justifies these interventions on the grounds that sometimes markets exhibit excessive pessimism—they “overshoot”—and the calmer hand of the international bureaucrat can then help stabilize markets. It struck me as curious that an institution committed to the doctrine that markets work well, if not perfectly, should decide that this one market—the exchange rate market—requires such massive intervention. The IMF has never put forward a good explanation either for why this expensive intervention is desirable in this particular market—or for why it is undesirable in other markets.
I agree with the IMF that markets may exhibit excessive pessimism. But I also believe that markets may exhibit excessive optimism, and that it is not just in the exchange rate market that these problems occur. There is a wider set of imperfections in markets, and especially capital markets, requiring a wider set of interventions.
For instance, it was excessive exuberance that led to Thailand’s real estate and stock market bubble, a bubble reinforced, if not created, by hot speculative money flowing into the country. The exuberance was followed by excessive pessimism when the flow abruptly reversed. In fact, this change in the direction of speculative capital was the root cause of the excessive volatility in exchange rates. If this is a phenomenon comparable to a disease, it makes sense to treat the disease rather than just its manifestation, exchange rate volatility. But IMF free-market ideology led the Fund to make it easier for speculative hot money to flow into and out of a country. In treating the symptoms directly, by pouring billions of dollars into the market, the IMF actually made the underlying disease worse. If speculators only made money off each other, it would be an unattractive game—a highly risky activity, which on average made a zero return, as the gains by some were matched by equal losses from others. What makes speculation profitable is the money coming from governments, supported by the IMF. When the IMF and the Brazilian government, for instance, spent some $50 billion maintaining the exchange rate at an overvalued level in late 1998, where did the money go? The money doesn’t disappear into thin air. It goes into somebody’s pocket—much of it into the pockets of the speculators. Some speculators may win, some may lose, but speculators as a whole make an amount equal to what the government loses. In a sense, it is the IMF that keeps the speculators in business.
Contagion
There is another, equally striking example of how the IMF’s lack of a coherent and reasonably complete theory can lead to policies which exacerbate the very problems the IMF is supposed to solve. Consider what happens when the Fund attempts to quarantine “contagion.” In essence, the Fund argues that it must intervene, and quickly, if it determines that an ongoing crisis in one country will spill over to others, that is, the crisis will spread like an infectious, contagious disease.
If contagion is a problem, it is important to understand the workings of the mechanism through which it occurs, just as epidemiologists, in trying hard to contain an infectious disease, work hard to understand its transmission mechanism. Keynes had a coherent theory; the downturn in one country leads that country to import less, and this hurts its neighbors. We saw in chapter 8 how the IMF, while talking about contagion, took actions in the Asian financial crisis that actually accelerated transmission of the disease, as it forced country after country to tighten their belts. The reductions in incomes led quickly to large reductions in imports, and in the closely integrated economies of the region, these led to the successive weakening of neighboring countries. As the region imploded, the declining demand for oil and other commodities led to the collapse of commodity prices, which wrought havoc in other countries, thousands of miles away, whose economies depended on the export of those commodities.
Meanwhile the IMF clung to fiscal austerity as the antidote, claiming that was essential to restore investor confidence. The East Asia crisis spread from there to Russia through the collapse of oil prices, not through any mysterious connection between “confidence” on the part of investors, foreign and domestic, in the East Asia Miracle economies and the Mafia capitalism of Russia. Because of the lack of a coherent and persuasive theory of contagion, the IMF had spread the disease rather than contained it.
When Is a Trade Deficit a Problem?
Problems of coherence plague not only the IMF’s remedies but also its diagnoses. IMF economists worry a lot about balance of payments deficits; such deficits are, in their calculus, a sure sign of a problem in the offing. But in railing against such deficits, they often pay little attention to what the money is actually being used for. If a government has a fiscal surplus (as Thailand did in the years before the 1997 crisis), then the balance of payments deficit essentially arises from private investment exceeding private savings. If a firm in the private sector borrows a million dollars at 5 percent interest and invests it in something that yields a 20 percent return, then it’s not a problem for it to have borrowed the million dollars. The investment will more than pay back the borrowing. Of course, even if the firm makes a mistake in judgment, and the returns are 3 percent, or even zero, there is no problem. The borrower then goes into bankruptcy, and the creditor loses part or all of his loan. This may be a problem for the creditor, but it is not a problem that the country’s government—or the IMF—need worry about.
A coherent approach would have recognized this. It would have also recognized that if some country imports more than it exports (i.e., it has a trade deficit), another country must be exporting more than it imports (it has a trade surplus). It is an unbreaka
ble law of international accounting that the sum of all deficits in the world must add up to the sum of all surpluses. This means that if China and Japan insist on having a trade surplus, then some countries must have deficits. One cannot just inveigh against the deficit countries; the surplus countries are equally at fault. If Japan and China maintain their surpluses, and Korea converts its deficit into a surplus, the problem of deficit must appear on somebody else’s doorstep.
Still, large trade deficits can be a problem. They can be a problem because they imply a country has to borrow year after year. And if those who are providing the capital change their minds and stop making loans, the country can be in big trouble—a crisis. It is spending more to buy goods from abroad than it gets from selling its goods abroad. When others refuse to continue to finance the trade gap, the country will have to adjust quickly. In a few cases, the adjustment can be made easily: if a country is borrowing heavily to finance a binge of car buying (as was the case recently in Iceland), then if foreigners refuse to provide the financing for the cars, the binge stops, and the trade gap closes. But more typically the adjustment does not work so smoothly. And problems are even worse if the country has borrowed short term, so that creditors can demand back now what they have lent to finance previous years’ deficits, whether they were used to finance consumption splurges or long-term investments.
Globalization and Its Discontents Revisited Page 39