Will the IMF survive?
[An old piece but still relevant]
The IMF is widely regarded as an institution that has failed. This failure is essentially political and its character has been emphasized by the slowdown in global output growth and the persistent turmoil in world financial markets triggered by the Asian crisis which began in mid 1997. This paper (a) presents an interpretation of the present global slow down (b) situates the IMF within the political economy of global capitalism and (c) suggest some elements of an IMF strategy that Pakistan can pursue to its advantage.
I.Global Capitalist Slowdown
All multilateral agencies have been revising downward their growth expectations since late 1997. The IMF World Economic Outlook of October 1998 forecasts a world output growth rate of just 2 percent for 1998 – this is lover than the rate of growth of world population so per capita global income is expected to fall. In September 1997, the IMF had forecast a world output growth rate of 4.5 percent for 1998. In May 1998, the IMF had forecast a growth rate of 3 percent for the present year. In October 1998, it regards even the 2 percent forecast as optimistic: “the risk of a steeper, wider and more prolonged downturn have escalated”, it warns! The 2 percent growth forecast is premised on several dubious assumptions; that the Japanese recovery will begin, that the Asian crisis will “bottom out” and that the growing current account imbalances of the OECD countries will not lead to a fall in investment.
Most analysts believe that a slowdown is also likely to occur in major OECD economies. In October 1998, the European Union revised its 1998 growth forecast for the region from 3.2 percent to 2.6 percent. Few pundits believe that the US boom will continue into 1999 – that is why repeated cuts in the US interest rate fail to generate a sustainable response in major financial markets. The IMF forecasts an average growth rate of 2 percent for the OECD countries in 1998. In October 1998, J.P. Morgan forecast a 1999 growth rate of 0 percent for the US economy.
In September 1998, Clinton described the global slowdown as “ the worst crisis in fifty years”. Greens-pan talks of “ virulent deflationary forces in foreign markets” UK Chancellor Gordon Brown forecasts a two third fall in world trade growth and says that his country is already in a recession. Today, there seems to be something of a consensus among leading imperialist policy makers that we are in for a serious slowdown. But, is this a crisis for capitalism? Probably not. Prices of commodities and manufactures have been falling but mainly of those which are produced and exported by poor countries. Wages have also been falling but again mainly for unskilled, semi-skilled or racially disadvantaged workers – average wages in the Untied States have increased robustly during most of 1998.
But, a sustained fall in bond yields has hit the rich countries –and many of the rich in poor countries. Ten-year government bond yields have halved during the past decade in Germany and America and they are now less than 0.7 percent in Japan. Lower bond yields may reflect lower inflation expectations – on the basis of current bond yields, inflation might be expected to average minus three percent in Japan and about 2 percent in America during the next decade. But, lower bond yields may also reflect a “ flight to safety” by investors hurt by the collapse of Long Term Capital Management (LTCM) and Russia – this might have reduced risk premia and expected yield on bonds.
The crisis – if it can be so described – is a crisis of finance. Banks are in trouble in many imperialist countries; Bank of America, America’s largest banking group announced provisions of $1.4 billion for loan losses during the third quarter of 1998. Risk management laxity led to the resignation of UBS’s top boss in September – UBS is Switzerland’s largest bank. As the LTCM bailout shows major, American banks have seriously increased their exposure to risky assets, as has Barclays. Hedge funds and investment banks – including ING. Barring, Merrill Lynch and a host of smaller ventures – have been seriously hurt by the withdrawal of major banks from the markets for financial derivatives.
Major American banks have not however, been seriously hit by the crisis in East Asia – exposure is relatively modest and restricted to neither the six major US banks nor are German losses due to Russian default unmanageable. The major cause of falling bank profits is imprudent risk taking and rushes into derivatives and options business. These markets have, during most of 1998 been far more volatile than the banks anticipated.
Hedge fund and investment banking markets are contracting (collapsing?). Banks are flush with cash – American M3 has been growing at its fastest rate in 1998 since 1983 – but many financial markets are illiquid. State support is becoming indispensable for sharing up near bankrupt hedge funds. In September 1997, the Fed had to engineer a bailout for LTCM for according to Greenspan its collapse “ could have inflicted serious damage on many market participant and many nations including our own. Unsurprisingly, there are now many calls from the US congress to regulate the hedge funds.
Hedge funds – with total liabilities in excess of US $200 billion in mid 1998 – are among the least regulated of all financial institutions. They are also extremely difficult to regulate because they are off share and because their business is highly diversified ranging from foreign exchange to bankruptcies and mergers to “market neutral” arbitrage transactions. They are usually highly leveraged – in September 1998; LTCM had a leverage ratios of 5000 percent. Leverage ratios of 1000% are quite common. Investment banks also typically have leverage ratios of 2000% and above.
Financial markets are getting riskier – statisticians even have a word for it, Leptokurtosis. This implies that “abnormal” outcomes have increasing probabilities. Leptokurtosis gets worse as spreads between different financial assets – American Treasures, and emergent market bonds for example – widen as has been happening during 1998. Moreover, exit from such markets becomes extremely difficult as illiquidity spreads. Such financial markets thus become paralysed.
Capitalism’s inability to understand speculative behaviours is graphically illustrated by the fact that 1997’s Nobel Prize winners for their contribution to financial risk theory was among the founders of LTCM – Robert Merton and Myron Scholes. But despite this lack of understanding, speculative behaviour must be accommodated – had the LTCM’s net liquidity position of $2000 billion been liquidated the markets world have gone wild. Commercial bank operations have become riskier as profitability of lending has fallen and the dependence of banks on trading activities has increased. So increased regulation of the financial system involves increased public surveillance of risk management strategies – or withdrawal of deposit insurance which at least at present is not a viable option:
Inability to effectively regulate financial markets reveals a basic, structural weakness of present day capitalism; its financial, commodity and labour markets are out of synch. We will come back to this question in another paper. Let us here sketch the IMF’s role within the international economy, specifying specially what it cannot do.
II.What the IMF cannot do
Capitalism’s systemic needs are well specified in the declaration of the group of seven finance ministers and central bankers issued in October 1998. They called for (a) increasing transparency and openness of the international financial system. (b) Increased macroeconomic stability through more effective regulation and (c) improved debt workout arrangements. What role can the IMF play in achieving any of these objectives?
Financial crisis can occur in the most accountable and highly transparent capitalist economies. This is shown by the Scandinavian financial crisis of the early 1990s. In any case, the IMF is not the type of organisation, which can do much to increase international financial transparency or accountability – the Bank of International Settlements (BIS) and OECD and group of seven sponsored agencies seem more suitable for such a role. Whether such “tougher” regulation can be institutionalised is ultimately a political question.
A central feature of the American and European “turn to the right” in the early 1980s has been the triumph “capital” over “labour” symbolised by the ideological hegemony of both libertarian and social democratic Reganism. In modern capitalist policies the interests of “capital” are prioritised and state policy is a means for adjusting the economy to accommodate this prioritisation, as Kaldor foresaw more than twenty-years ago. Systemic strains-social, political, and economic – generated by this prioritisation of capitalist interests cannot be appreciated by the new political economy which enjoys the patronage of the Bank and the Fund.
It is ultimately this “poverty of philosophy” which explains the Fund’s failure to recognise the disjunctures characteristic of present day international financial chaos. It did not foresee the crisis in the metropolitan imperialist countries or in Japan, Mexico, East Asia, and Russia. It did not put in place an effective monitoring system – indeed, it lacks a theory which can tell it what to monitor. It fights shy of admitting the existence of a crisis and continues to pretend that all is well, as long as, it is possible to do so. It’s fundamental misunderstanding about how modern capitalism works is graphically reflected in its country by country approach to adjustment. This ignores the overwhelming importance of the linkages which subordinate the macroeconomics of the peripheral countries to imperialism’s core economies. Most important the standardised macro adjustment packages fail to take account of the microeconomics (impact of oligopolistic competition on bank behaviour) of world capital markets. The IMF is forced to continue to ignore the activity of hedge funds and propriety trading divisions of banks. It does not even recognise that its national adjustment policies systematically encourage speculative behaviour by promoting moral hazard. Increasing the IMF’s resource base is simply a means for encouraging speculative behaviour by international lenders.
Today, according to Henry Kaufman “despite the explosion of information, no one knows the extent of exposure in international lending and investment, no one knows the extent of off-balance sheet exposures in the form of financial derivatives and no one knows who will be repaid and who won’t”. He calls for gathering such information within a “new international institutions with supervisory and regulatory responsibilities over major financial institutions and markets.” This is begging the all-important question: does capitalism have the political resources to create a supra-national, supra-regional state.
Certainly the IMF is a non-starter in this regard. It is designed to be neither a lender of first resort nor a lender of last resort. Since the passage of the second Amendment to its Articles of Agreement, in 1978, it has become essentially a surveillance agency for imperialist governments and other international creditors. Even if, there is a significant increase in resources following the American $18 billion injection; this is just bailout money – money for bailing out the imperialist lenders and encouraging them to take bigger risks in the future. There are no credible initiatives for giving the IMF some authority over international lenders. It is politically impossible to do so.
Private sector financiers want Western governments to “stand tall” against countries such as Russia and Malaysia which challenge the rules of the game – Russia by unilaterally defaulting and Malaysia by imposing highly successful comprehensive capital controls. Banks do not want more regulation – certainly not, by multilateral institutions as shown by the revisions of the Basle formula for assessing capital adequacy in August 1998. This modification allows banks to use their internal models for guaging credit risk in line with their practices for assessing market risk. No one with any influence is calling for turning the IMF into a central bank for the world. Reforms proposed centre on more flexible debt restructuring and high profile creditor participation in negotiations leading to “ orderly debt workouts.”
X-------------X
The weakening of the IMF within the international financial system is reflected in the manoeuvrings of that old foxy Zionist fellow traveller. James Wolfensohn, currently president of the World Bank, Wolfensohn, and Joseph Stiglitz, the Bank’s chief economist have crafted a strategy to distance the World Bank from the Fund. They have been resisting Fund – and US government pressure – to provide short term-credit for countries on the IMF’s sick list. Structural adjustment lending is now a contested area with both institutions: trying to pre-empt each other’s role. Wolfensohn has suddenly become a voluble critic of the adverse social consequences of IMF lending and seeks to tout Bank programmes as means for promoting political stability. The new “holistic” lending framework of the Bank embraces issues of governance, redesigning the legal system and infra – and infostructure management. The World Bank sees itself as imperialism’s main public agency for making the world safe for capitalism. Wolfensohn insists that the IMF cannot play this role.
A condition attached to the $18 billion bailout of the Fund by America also reveals a weakening of the Fund. US support is conditional on IMF reform involving subservience to international financial markets and to the US government. Such an agency of course, has no role to play in disciplining international lenders. During the 1998 Washington meeting Michael Camedesus, IMF’s MD, of ten expressed his anxiety about “a loss of authority for the Fund.” The IMF has neither the authority nor the resources to coerce private financial institutions to participate in debt restructuring. This is “like asking the icebergs to save the Titanic” – perhaps the icebergs can be persuaded but certainly not by the IMF.
Calls for the abolition of the IMF have become increasingly frequent in the United States. This and other signs of its growing systemic weakness have induced the IMF to buckle under: it is pleading with its debtors not to go the way of Russia and Malaysia. In mid 1998 the Fund’s board okayed continued lending to defaulter countries provided they agreed to “orderly workouts”. Even so the IMF’s own group of 22 proposed the creation of a special body including private interests for insuring against defaults and for lending to defaulter countries. Wolfensohn is also muscling in on this business and the inter American Development Bank is not far behind.
The timidity of the Fund is evident in the revised, concordant with the Bank, the welcoming of the recent private sector deals struck by Argentina and Mexico and increased touting of “debt workouts” by defaulter countries. Camedesus says that “the Fund has no grandiose scheme” to offer and would be grateful for small mercies – such as; permission for sanctioning “debt workouts” and for countenancing current and capital account restrictions within the context of SAF/ESAF programmes. Despite the American bail out the IMF continues to beg for money. Its liquidity ratio has been forecasted to fall to 25 percent at end 1998 – at end 1993 the liquidity ratio was 160 percent. The Fund envisages no role as regulator in the world financial markets. Stanley Fischer, no two Fund manager, talks wistfully of “effective measures to bail in the private institutions” in the debt workout programme but initiatives for this will necessarily take place outside the Fund.
The Fund’s weaknesses are also clear that if one looks at the November 1998 deal with Brazil. The IMF is committed to providing $18 billion out of a total package of $37 billion over a 12-month period. Brazil has, however, refused to change its exchange rate regime. The Brazilian economy is contracting at the rate of 3 percent per capita per annum. This will make it impossible for Brazil to produce the fiscal surpluses promised under the programme. No private lender is associated with the Brazil bail out package because no one believes that it can succeed. An estimated $40 billion has been withdrawn from Brazil during August – November 1998.
III.Pakistan’s IMF strategy: some suggestions
The recognition that the IMF is now something of a toothless tiger and unlikely to acquire new dentures – is reflected in Pakistan’s post nuclear blast dealing with that organisation. The Nawaz government has realised that the IMF has no option except to bail out Pakistan’s creditors. This is not because these creditors would sustain significant, financial loss were they not to be bailed out; it is because in the absence of such a bail out Pakistan would have no option but to follow in the steps of Malaysia and Russia. If Pakistan repudiates its foreign debt many other developing countries would emulate Pakistani’s example.
The Fund and the Bank are past masters at arm-twisting. They will work relentlessly during the next six months to engineer a financial and an economic crisis in Pakistan. The imperialist agencies can be thwarted if we consolidate the gains that we have made since, May 1998. This would involve:
(I) Consolidating our status as a nuclear power. The Fund and the Bank must be told that we will never again treat our defence programme as a bargaining counter. We can only become a part of the non-proliferation regime if and when the imperialist countries recognise our status as a world nuclear power. Never before, Defence expenditure must be rapidly increased. A strategy of deliberately unbalanced growth must be devised in which defence related capital goods industries become the leading sectors and their spread effects are maximised. Our achievements in nuclear technology have shown that such a development / investment strategy can be domestically sourced.
(II) An important step in the right direction has been taken in October 1998 and a new team has been installed in the ministries of finance and commerce and in the CBR. This will impede leakage of information to the imperialist agencies and enhance our capacity to formulate an independent and proactive, fiscal and trade policy. Leakage of strategically important information to the imperialists is however, still taking place through imperialist funded social sector service and research agencies such as AKRSP, OPP, SPDI, SPDC, AZA etc., Such agencies played a crucially important role in facilitating imperialist penetration of the East European countries during the 1980s. It is vitally important to exercise effective surveillance over these agencies.
(III) Imperialist control over monetary policy remains unchecked. It is vitally important to install a new patriotic leadership in the State Bank and the national commercial banks – unless this is done the Fund and the Bank will probably succeed in creating a financial crisis in Pakistan before June 1999. Our liberation from imperialist financial domination began with the government’s wise and courageous decision to seize the foreign currency accounts and at least partially reverse dollarisation. The institution of a multi-tiered exchange rate system is also a very welcome move. We must gradually move towards abandoning all elements of current and capital account convertibility. Even the IMF regards capital account convertibility as disastrous for countries such as Pakistan. The principle cause of the East Asian crisis was the capital account liberalisation introduced in 1994 and not banking sector weaknesses for these had existed since the early 1970s. Chile – imperialism’s most pampered lapdog, since Allende’s overthrow – has long been a practitioner of capital controls. Pakistan should consider measures to limit the inflow of portfolio and loan capital through taxation and the placing of limits on the foreign borrowings of banks. The opaque balance sheets of foreign banks – particularly Citibank and ABN Amro – should be scrutinised with particular care. Foreign banks must be inhibited from running up short-term debts to foreigners. Malaysia has shown what can be done. It has withdrawn the ringitt from international circulation by ordering a repartition of all ringitt held outside the country. The ringitt has been pegged at the ratio of M$3.80 to the dollar. This has increased bank liquidity and at least, partially solved the problem of growing infection ratios. Capital controls have stimulated investment and boosted equity markets in Malaysia. Foreign investors have been barred from repatriating dividends and profits for a one-year period. There is no evidence that foreign investment has been withdrawn to any significant extent. Indeed, as interest rates have fallen investment attractiveness has grown. Companies with large foreign debts are particular beneficiaries from the pegged exchange rate. Not surprisingly growth forecasts for 1999 have improved and the imperialists have responded by attempting to create a political crisis thorough the quisling Anwar Ibrahim.
(IV) Capital controls should be accompanied by introduction of rigorous credit rationing. Market based monetary policy has been an unmitigated disaster – real interest rates have gone up, infection ratios and uncollectable debt volumes have soared, commodity producing sectors, specially large scale manufacturing, are credit starved and speculators are having a hey day. Without capping interest rates and imposing strict credit rationing the problem of under financing of major projects through domestic sourcing cannot be overcome. A market based monetary policy will also systematically erode the national capacity to effectively manage the foreign exchange. Strict subordinating of SBP to the Ministry of Finance should end Bank subservience to international money markets.
(V) The imperialists will of course seek to frustrate this strategy although their capacity to do this is limited. Foreign investment is not going to come to Pakistan in any case. Balance of payments financing will continue as long as the IMF fears the regional / systemic consequence of a unilateral default. If and when this disappears such financing may be gradually withdrawn – at the first sign of this we should repudiate our public debt; both domestic and foreign as was done by China in 1949, Iran in 1979, and Sudan in 1983.
(VI) The major cost imposed upon us by the imperialists will be import contraction. The import / GDP ratio has already fallen from about 25 percent in the early 1990s to about 18 percent today – but the dramatic improvement in our trade balance since 1997 shows that we are well on the way to achieving a capacity to self-finance our imports. The concern should be to increase exports to non-OECD markets especially to China, Iran, and the ECO region. We can significantly reduce the import intensity of investment through a revitalisation of the locally manufactured machinery scheme and other elements of the deletion programme. The highest rate of capacity under-utilisation in Pakistan in the engineering sector.
(VII) Most importantly, an anti-imperialist strategy for constructing a self-reliant national economy can succeed only if a prolonged process of mass mobilisation sustains it. These mass movements must not be rights oriented – that is playing into the hands of the imperialists. They must be focussed on the implementation of this Shariah, the development of Riba free modes of financing severance of linkages with international liberalism and above all enhancing political and military support to the Kashmir Jihad. Such popular mobilisation is a pre-requisite for articulating a self-reliant economic strategy. It is also a pre-requisite for defeating the imperialist sponsored racialist parties, in particular the PPP which seek the disintegration of Pakistan.
The IMF is widely regarded as an institution that has failed. This failure is essentially political and its character has been emphasized by the slowdown in global output growth and the persistent turmoil in world financial markets triggered by the Asian crisis which began in mid 1997. This paper (a) presents an interpretation of the present global slow down (b) situates the IMF within the political economy of global capitalism and (c) suggest some elements of an IMF strategy that Pakistan can pursue to its advantage.
I.Global Capitalist Slowdown
All multilateral agencies have been revising downward their growth expectations since late 1997. The IMF World Economic Outlook of October 1998 forecasts a world output growth rate of just 2 percent for 1998 – this is lover than the rate of growth of world population so per capita global income is expected to fall. In September 1997, the IMF had forecast a world output growth rate of 4.5 percent for 1998. In May 1998, the IMF had forecast a growth rate of 3 percent for the present year. In October 1998, it regards even the 2 percent forecast as optimistic: “the risk of a steeper, wider and more prolonged downturn have escalated”, it warns! The 2 percent growth forecast is premised on several dubious assumptions; that the Japanese recovery will begin, that the Asian crisis will “bottom out” and that the growing current account imbalances of the OECD countries will not lead to a fall in investment.
Most analysts believe that a slowdown is also likely to occur in major OECD economies. In October 1998, the European Union revised its 1998 growth forecast for the region from 3.2 percent to 2.6 percent. Few pundits believe that the US boom will continue into 1999 – that is why repeated cuts in the US interest rate fail to generate a sustainable response in major financial markets. The IMF forecasts an average growth rate of 2 percent for the OECD countries in 1998. In October 1998, J.P. Morgan forecast a 1999 growth rate of 0 percent for the US economy.
In September 1998, Clinton described the global slowdown as “ the worst crisis in fifty years”. Greens-pan talks of “ virulent deflationary forces in foreign markets” UK Chancellor Gordon Brown forecasts a two third fall in world trade growth and says that his country is already in a recession. Today, there seems to be something of a consensus among leading imperialist policy makers that we are in for a serious slowdown. But, is this a crisis for capitalism? Probably not. Prices of commodities and manufactures have been falling but mainly of those which are produced and exported by poor countries. Wages have also been falling but again mainly for unskilled, semi-skilled or racially disadvantaged workers – average wages in the Untied States have increased robustly during most of 1998.
But, a sustained fall in bond yields has hit the rich countries –and many of the rich in poor countries. Ten-year government bond yields have halved during the past decade in Germany and America and they are now less than 0.7 percent in Japan. Lower bond yields may reflect lower inflation expectations – on the basis of current bond yields, inflation might be expected to average minus three percent in Japan and about 2 percent in America during the next decade. But, lower bond yields may also reflect a “ flight to safety” by investors hurt by the collapse of Long Term Capital Management (LTCM) and Russia – this might have reduced risk premia and expected yield on bonds.
The crisis – if it can be so described – is a crisis of finance. Banks are in trouble in many imperialist countries; Bank of America, America’s largest banking group announced provisions of $1.4 billion for loan losses during the third quarter of 1998. Risk management laxity led to the resignation of UBS’s top boss in September – UBS is Switzerland’s largest bank. As the LTCM bailout shows major, American banks have seriously increased their exposure to risky assets, as has Barclays. Hedge funds and investment banks – including ING. Barring, Merrill Lynch and a host of smaller ventures – have been seriously hurt by the withdrawal of major banks from the markets for financial derivatives.
Major American banks have not however, been seriously hit by the crisis in East Asia – exposure is relatively modest and restricted to neither the six major US banks nor are German losses due to Russian default unmanageable. The major cause of falling bank profits is imprudent risk taking and rushes into derivatives and options business. These markets have, during most of 1998 been far more volatile than the banks anticipated.
Hedge fund and investment banking markets are contracting (collapsing?). Banks are flush with cash – American M3 has been growing at its fastest rate in 1998 since 1983 – but many financial markets are illiquid. State support is becoming indispensable for sharing up near bankrupt hedge funds. In September 1997, the Fed had to engineer a bailout for LTCM for according to Greenspan its collapse “ could have inflicted serious damage on many market participant and many nations including our own. Unsurprisingly, there are now many calls from the US congress to regulate the hedge funds.
Hedge funds – with total liabilities in excess of US $200 billion in mid 1998 – are among the least regulated of all financial institutions. They are also extremely difficult to regulate because they are off share and because their business is highly diversified ranging from foreign exchange to bankruptcies and mergers to “market neutral” arbitrage transactions. They are usually highly leveraged – in September 1998; LTCM had a leverage ratios of 5000 percent. Leverage ratios of 1000% are quite common. Investment banks also typically have leverage ratios of 2000% and above.
Financial markets are getting riskier – statisticians even have a word for it, Leptokurtosis. This implies that “abnormal” outcomes have increasing probabilities. Leptokurtosis gets worse as spreads between different financial assets – American Treasures, and emergent market bonds for example – widen as has been happening during 1998. Moreover, exit from such markets becomes extremely difficult as illiquidity spreads. Such financial markets thus become paralysed.
Capitalism’s inability to understand speculative behaviours is graphically illustrated by the fact that 1997’s Nobel Prize winners for their contribution to financial risk theory was among the founders of LTCM – Robert Merton and Myron Scholes. But despite this lack of understanding, speculative behaviour must be accommodated – had the LTCM’s net liquidity position of $2000 billion been liquidated the markets world have gone wild. Commercial bank operations have become riskier as profitability of lending has fallen and the dependence of banks on trading activities has increased. So increased regulation of the financial system involves increased public surveillance of risk management strategies – or withdrawal of deposit insurance which at least at present is not a viable option:
Inability to effectively regulate financial markets reveals a basic, structural weakness of present day capitalism; its financial, commodity and labour markets are out of synch. We will come back to this question in another paper. Let us here sketch the IMF’s role within the international economy, specifying specially what it cannot do.
II.What the IMF cannot do
Capitalism’s systemic needs are well specified in the declaration of the group of seven finance ministers and central bankers issued in October 1998. They called for (a) increasing transparency and openness of the international financial system. (b) Increased macroeconomic stability through more effective regulation and (c) improved debt workout arrangements. What role can the IMF play in achieving any of these objectives?
Financial crisis can occur in the most accountable and highly transparent capitalist economies. This is shown by the Scandinavian financial crisis of the early 1990s. In any case, the IMF is not the type of organisation, which can do much to increase international financial transparency or accountability – the Bank of International Settlements (BIS) and OECD and group of seven sponsored agencies seem more suitable for such a role. Whether such “tougher” regulation can be institutionalised is ultimately a political question.
A central feature of the American and European “turn to the right” in the early 1980s has been the triumph “capital” over “labour” symbolised by the ideological hegemony of both libertarian and social democratic Reganism. In modern capitalist policies the interests of “capital” are prioritised and state policy is a means for adjusting the economy to accommodate this prioritisation, as Kaldor foresaw more than twenty-years ago. Systemic strains-social, political, and economic – generated by this prioritisation of capitalist interests cannot be appreciated by the new political economy which enjoys the patronage of the Bank and the Fund.
It is ultimately this “poverty of philosophy” which explains the Fund’s failure to recognise the disjunctures characteristic of present day international financial chaos. It did not foresee the crisis in the metropolitan imperialist countries or in Japan, Mexico, East Asia, and Russia. It did not put in place an effective monitoring system – indeed, it lacks a theory which can tell it what to monitor. It fights shy of admitting the existence of a crisis and continues to pretend that all is well, as long as, it is possible to do so. It’s fundamental misunderstanding about how modern capitalism works is graphically reflected in its country by country approach to adjustment. This ignores the overwhelming importance of the linkages which subordinate the macroeconomics of the peripheral countries to imperialism’s core economies. Most important the standardised macro adjustment packages fail to take account of the microeconomics (impact of oligopolistic competition on bank behaviour) of world capital markets. The IMF is forced to continue to ignore the activity of hedge funds and propriety trading divisions of banks. It does not even recognise that its national adjustment policies systematically encourage speculative behaviour by promoting moral hazard. Increasing the IMF’s resource base is simply a means for encouraging speculative behaviour by international lenders.
Today, according to Henry Kaufman “despite the explosion of information, no one knows the extent of exposure in international lending and investment, no one knows the extent of off-balance sheet exposures in the form of financial derivatives and no one knows who will be repaid and who won’t”. He calls for gathering such information within a “new international institutions with supervisory and regulatory responsibilities over major financial institutions and markets.” This is begging the all-important question: does capitalism have the political resources to create a supra-national, supra-regional state.
Certainly the IMF is a non-starter in this regard. It is designed to be neither a lender of first resort nor a lender of last resort. Since the passage of the second Amendment to its Articles of Agreement, in 1978, it has become essentially a surveillance agency for imperialist governments and other international creditors. Even if, there is a significant increase in resources following the American $18 billion injection; this is just bailout money – money for bailing out the imperialist lenders and encouraging them to take bigger risks in the future. There are no credible initiatives for giving the IMF some authority over international lenders. It is politically impossible to do so.
Private sector financiers want Western governments to “stand tall” against countries such as Russia and Malaysia which challenge the rules of the game – Russia by unilaterally defaulting and Malaysia by imposing highly successful comprehensive capital controls. Banks do not want more regulation – certainly not, by multilateral institutions as shown by the revisions of the Basle formula for assessing capital adequacy in August 1998. This modification allows banks to use their internal models for guaging credit risk in line with their practices for assessing market risk. No one with any influence is calling for turning the IMF into a central bank for the world. Reforms proposed centre on more flexible debt restructuring and high profile creditor participation in negotiations leading to “ orderly debt workouts.”
X-------------X
The weakening of the IMF within the international financial system is reflected in the manoeuvrings of that old foxy Zionist fellow traveller. James Wolfensohn, currently president of the World Bank, Wolfensohn, and Joseph Stiglitz, the Bank’s chief economist have crafted a strategy to distance the World Bank from the Fund. They have been resisting Fund – and US government pressure – to provide short term-credit for countries on the IMF’s sick list. Structural adjustment lending is now a contested area with both institutions: trying to pre-empt each other’s role. Wolfensohn has suddenly become a voluble critic of the adverse social consequences of IMF lending and seeks to tout Bank programmes as means for promoting political stability. The new “holistic” lending framework of the Bank embraces issues of governance, redesigning the legal system and infra – and infostructure management. The World Bank sees itself as imperialism’s main public agency for making the world safe for capitalism. Wolfensohn insists that the IMF cannot play this role.
A condition attached to the $18 billion bailout of the Fund by America also reveals a weakening of the Fund. US support is conditional on IMF reform involving subservience to international financial markets and to the US government. Such an agency of course, has no role to play in disciplining international lenders. During the 1998 Washington meeting Michael Camedesus, IMF’s MD, of ten expressed his anxiety about “a loss of authority for the Fund.” The IMF has neither the authority nor the resources to coerce private financial institutions to participate in debt restructuring. This is “like asking the icebergs to save the Titanic” – perhaps the icebergs can be persuaded but certainly not by the IMF.
Calls for the abolition of the IMF have become increasingly frequent in the United States. This and other signs of its growing systemic weakness have induced the IMF to buckle under: it is pleading with its debtors not to go the way of Russia and Malaysia. In mid 1998 the Fund’s board okayed continued lending to defaulter countries provided they agreed to “orderly workouts”. Even so the IMF’s own group of 22 proposed the creation of a special body including private interests for insuring against defaults and for lending to defaulter countries. Wolfensohn is also muscling in on this business and the inter American Development Bank is not far behind.
The timidity of the Fund is evident in the revised, concordant with the Bank, the welcoming of the recent private sector deals struck by Argentina and Mexico and increased touting of “debt workouts” by defaulter countries. Camedesus says that “the Fund has no grandiose scheme” to offer and would be grateful for small mercies – such as; permission for sanctioning “debt workouts” and for countenancing current and capital account restrictions within the context of SAF/ESAF programmes. Despite the American bail out the IMF continues to beg for money. Its liquidity ratio has been forecasted to fall to 25 percent at end 1998 – at end 1993 the liquidity ratio was 160 percent. The Fund envisages no role as regulator in the world financial markets. Stanley Fischer, no two Fund manager, talks wistfully of “effective measures to bail in the private institutions” in the debt workout programme but initiatives for this will necessarily take place outside the Fund.
The Fund’s weaknesses are also clear that if one looks at the November 1998 deal with Brazil. The IMF is committed to providing $18 billion out of a total package of $37 billion over a 12-month period. Brazil has, however, refused to change its exchange rate regime. The Brazilian economy is contracting at the rate of 3 percent per capita per annum. This will make it impossible for Brazil to produce the fiscal surpluses promised under the programme. No private lender is associated with the Brazil bail out package because no one believes that it can succeed. An estimated $40 billion has been withdrawn from Brazil during August – November 1998.
III.Pakistan’s IMF strategy: some suggestions
The recognition that the IMF is now something of a toothless tiger and unlikely to acquire new dentures – is reflected in Pakistan’s post nuclear blast dealing with that organisation. The Nawaz government has realised that the IMF has no option except to bail out Pakistan’s creditors. This is not because these creditors would sustain significant, financial loss were they not to be bailed out; it is because in the absence of such a bail out Pakistan would have no option but to follow in the steps of Malaysia and Russia. If Pakistan repudiates its foreign debt many other developing countries would emulate Pakistani’s example.
The Fund and the Bank are past masters at arm-twisting. They will work relentlessly during the next six months to engineer a financial and an economic crisis in Pakistan. The imperialist agencies can be thwarted if we consolidate the gains that we have made since, May 1998. This would involve:
(I) Consolidating our status as a nuclear power. The Fund and the Bank must be told that we will never again treat our defence programme as a bargaining counter. We can only become a part of the non-proliferation regime if and when the imperialist countries recognise our status as a world nuclear power. Never before, Defence expenditure must be rapidly increased. A strategy of deliberately unbalanced growth must be devised in which defence related capital goods industries become the leading sectors and their spread effects are maximised. Our achievements in nuclear technology have shown that such a development / investment strategy can be domestically sourced.
(II) An important step in the right direction has been taken in October 1998 and a new team has been installed in the ministries of finance and commerce and in the CBR. This will impede leakage of information to the imperialist agencies and enhance our capacity to formulate an independent and proactive, fiscal and trade policy. Leakage of strategically important information to the imperialists is however, still taking place through imperialist funded social sector service and research agencies such as AKRSP, OPP, SPDI, SPDC, AZA etc., Such agencies played a crucially important role in facilitating imperialist penetration of the East European countries during the 1980s. It is vitally important to exercise effective surveillance over these agencies.
(III) Imperialist control over monetary policy remains unchecked. It is vitally important to install a new patriotic leadership in the State Bank and the national commercial banks – unless this is done the Fund and the Bank will probably succeed in creating a financial crisis in Pakistan before June 1999. Our liberation from imperialist financial domination began with the government’s wise and courageous decision to seize the foreign currency accounts and at least partially reverse dollarisation. The institution of a multi-tiered exchange rate system is also a very welcome move. We must gradually move towards abandoning all elements of current and capital account convertibility. Even the IMF regards capital account convertibility as disastrous for countries such as Pakistan. The principle cause of the East Asian crisis was the capital account liberalisation introduced in 1994 and not banking sector weaknesses for these had existed since the early 1970s. Chile – imperialism’s most pampered lapdog, since Allende’s overthrow – has long been a practitioner of capital controls. Pakistan should consider measures to limit the inflow of portfolio and loan capital through taxation and the placing of limits on the foreign borrowings of banks. The opaque balance sheets of foreign banks – particularly Citibank and ABN Amro – should be scrutinised with particular care. Foreign banks must be inhibited from running up short-term debts to foreigners. Malaysia has shown what can be done. It has withdrawn the ringitt from international circulation by ordering a repartition of all ringitt held outside the country. The ringitt has been pegged at the ratio of M$3.80 to the dollar. This has increased bank liquidity and at least, partially solved the problem of growing infection ratios. Capital controls have stimulated investment and boosted equity markets in Malaysia. Foreign investors have been barred from repatriating dividends and profits for a one-year period. There is no evidence that foreign investment has been withdrawn to any significant extent. Indeed, as interest rates have fallen investment attractiveness has grown. Companies with large foreign debts are particular beneficiaries from the pegged exchange rate. Not surprisingly growth forecasts for 1999 have improved and the imperialists have responded by attempting to create a political crisis thorough the quisling Anwar Ibrahim.
(IV) Capital controls should be accompanied by introduction of rigorous credit rationing. Market based monetary policy has been an unmitigated disaster – real interest rates have gone up, infection ratios and uncollectable debt volumes have soared, commodity producing sectors, specially large scale manufacturing, are credit starved and speculators are having a hey day. Without capping interest rates and imposing strict credit rationing the problem of under financing of major projects through domestic sourcing cannot be overcome. A market based monetary policy will also systematically erode the national capacity to effectively manage the foreign exchange. Strict subordinating of SBP to the Ministry of Finance should end Bank subservience to international money markets.
(V) The imperialists will of course seek to frustrate this strategy although their capacity to do this is limited. Foreign investment is not going to come to Pakistan in any case. Balance of payments financing will continue as long as the IMF fears the regional / systemic consequence of a unilateral default. If and when this disappears such financing may be gradually withdrawn – at the first sign of this we should repudiate our public debt; both domestic and foreign as was done by China in 1949, Iran in 1979, and Sudan in 1983.
(VI) The major cost imposed upon us by the imperialists will be import contraction. The import / GDP ratio has already fallen from about 25 percent in the early 1990s to about 18 percent today – but the dramatic improvement in our trade balance since 1997 shows that we are well on the way to achieving a capacity to self-finance our imports. The concern should be to increase exports to non-OECD markets especially to China, Iran, and the ECO region. We can significantly reduce the import intensity of investment through a revitalisation of the locally manufactured machinery scheme and other elements of the deletion programme. The highest rate of capacity under-utilisation in Pakistan in the engineering sector.
(VII) Most importantly, an anti-imperialist strategy for constructing a self-reliant national economy can succeed only if a prolonged process of mass mobilisation sustains it. These mass movements must not be rights oriented – that is playing into the hands of the imperialists. They must be focussed on the implementation of this Shariah, the development of Riba free modes of financing severance of linkages with international liberalism and above all enhancing political and military support to the Kashmir Jihad. Such popular mobilisation is a pre-requisite for articulating a self-reliant economic strategy. It is also a pre-requisite for defeating the imperialist sponsored racialist parties, in particular the PPP which seek the disintegration of Pakistan.
posted by Alghazalians at 10:05 AM
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