IMF, buffeted over its conditions on loans, bends a bit
Jacques de Larosiere, the smooth Frenchman who runs the International Monetary Fund, has sounded slightly defensive during this important institution's annual meeting here this week.
That's because the IMF has been getting something of a verbal drubbing for the conditions it normally attaches on loans to those nations needing help in financing balance-of-payments deficits.
Those terms are too harsh, the critics say. Particularly in the developing countries, IMF-prompted austerity programs can cause riots in the streets. This actually happened in Cairo when food subsidies were reduced.
At a press conference Monday, Mr. de Larosiere maintained that such attacks on the fund "are not always well founded." His basic reason was what he termed the "resource gap" problem. This term means there is a gap between the foreign earnings a country gets from exports, tourism, remittances from workers abroad, foreign aid, other foreign income, and sustainable foreign borrowing and its expenditures on imports or other foreign spending.
In other words, a country, like an individual, can't normally spend more than it can earn or borrow for very long. It must somehow cut back on its spending or increase its earnings to bring its books back into reasonable balance.
Even if the cause of the deficit is no fault of the country -- say, OPEC nations boost the price of oil -- the poor nation must still get its international payments back into better shape. Mr. de Larosiere called it "a more sustainable financial deficit." That process, to the horror of governments, can mean a politically explosive reduction in living standards that ofttimes are already terribly low.
To help this process, the IMF works with the country to figure out just how much internal consumption must be cut or foreign income increased. It looks at what economists term "macroeconomic variables," such as fiscal policy and monetary policy. Should the government spend less or tax more? Should it tighten credit? Should the currency be devalued?
But, said Mr. de Larosiere, it is left to the governments to decide how "to distribute the burden of adjustment in society." That is, a government must make the politically delicate and often unpleasant choices between cutting back on subsidies of consumer goods, military spending, public-works spending, or whatever.
"It is a little unfair," the IMF managing director complained, "in saying that the fund is the source of those painful adjustments."
That defense didn't stop the criticism, however. Next day Amir H. Jamal, finance minister of Tanzania, in his opening address as chairman of this IMF and World Bank meeting, maintained that "the most needed structural change today is in the Bretton Woods institutions themselves." (The IMF and the World Bank were created at a conference in Bretton Woods, N.H., in 1944.)
"Right from the very first day of achieving political independence, the burden of adjustment to the world structure has fallen on the poor developing countries," he said.
He asked rhetorically: "Should they abandon the pursuit of basic needs?Are food and shelter, health and education, any less vital for their well-being? How do they achieve an equilibrium in external trade without accepting a feudal relationship with the capital-surplus countries? . . . And have the wealthy and powerful the capacity to supervise such a relationship without investing their capital in enforcing domination, which in the final event means still greater expenditure on armaments and military personnel? If capital is available for this purpose, is it not infinitely more befitting to use it for development?"
Mr. Jamal admitted that the IMF "has begun to show a little flexibility" in imposing conditions on its loans. But he still didn't sound happy. He noted how his own extremely poor country has just concluded a two-year "standby arrangement" -- a promise to give a loan -- "to import some critically needed inputs." But that loan will have to be paid back in three to five years. Moreover, previous loans are falling due now.
"We have decided," he said, "to make an effort to conclude an agreement, though quite candidly, as finance minister my fingers will remain crossed all the way, for the duration of the program or for the duration of my own job, whichever ends earlier."
Mr. Jamal went on to talk about how Tanzania's terms of trade had deteriorated. In other words, it has had to pay more for imports and got relatively less for its exports.
He criticized the "unrealistic time-frame" given for a nation to recover from "external battering," such as rampant inflation in the industrial countries, higher food, grain, or energy prices, and drought. He argued that some of the macroeconomic measures suitable for an industrial country are not appropriate for a poor nation like Tanzania. He termed "conditionality" a "Procrustean bed or a carte blanche for further fund policy prescriptions."
But Mr. Jamal did admit that some sort of conditionality, as loan terms requiring economic policy changes are called, is imperative.
Mr. de Larosiere was next to speak and was all set in his prepared talk to reply in quiet language. The IMF has new adjustment policies, he noted. It will extend loans and larger loans "over a longer period than that considered normal in the past." It is pursuing adjustment programs that not only cut back on consumption but step up "supply" -- meaning income from exports or other foreign sources of income. He admitted that higher foreign aid levels might ease adjustment problems. And he urged nations to come to the IMF early, before their international payments get so far out of whack that drastic action is necessary.
But Mr. de Larosiere did not back down from the basic fact of economics: A nation must somehow pay its bills.