How the IMF Props Up the Bankrupt Dollar
System
One of the crucial pillars of support for today's Dollar System is
Washington's control of the International Monetary Fund, the IMF.
The way this actually
works is carefully disguised, behind a facade of technocrats and
economic theory of free market ideology. In reality, the IMF
is a modern era collection agency for the Dollar Empire. It
collects its tribute, through major international banks, who use
the dollars to further extend the power of American financial and
corporate hegemony, in effect the driving motor of what is
globalization.
Ironically, though the IMF is a main prop of the Dollar System,
it's nominally headed by a European, today a German, Horst Koehler,
and before him, by a Frenchman, Michel Camdessus. The real power is
carefully concealed behind the facade. Under the constitution of
the IMF, no major decision is possible without 85% support of the
board of directors. The United States, which drafted the original
IMF charter at Bretton Woods New Hampshire in 1944, made sure it
had the decisive veto control with an 18% vote share. That veto
remains to today. Insiders know well that the IMF is
run by Washington. It is no accident that its headquarters
is also there.
The IMF was originally created in the 1944 Bretton Woods New
Hampshire international monetary conference, called by President
Roosevelt to set up a postwar monetary and trade system. It was
intended as a fund to support stability of currencies and trade of
the postwar European allied countries. At that time Washington held
the vast bulk of world gold reserves and expected to lend dollars
to rebuild Europe. The original IMF idea was to pool a share of
reserves of member states, which any single state could then
borrow, in event of a short term payments crisis, to stabilize
their currency. Ten years after the Great Depression, the major
industrial nations, including the USA, were concerned with creation
of a stable, growing Europe, not least as an export market for US
products. The first member to borrow was Great Britain after the
war. The last European state was Italy in 1977.
Since 1977, no European or G7 country has gone to the IMF to
borrow. Instead they have borrowed from private banks or issued
state debt. They know all too well how destructive the IMF
conditions are. By the end of the 1970s some people were suggesting
the IMF had outlived its role, much as some argue with NATO after
the end of the Cold War. Washington had other ideas for the IMF
however.
The role of the IMF
changed dramatically in the early 1980s, under US pressure.
Instead of serving as a stabilizing fund for industrial countries
of Europe or Japan, the IMF became the decisive agency controlling
economic policy of underdeveloped countries. What evolved since the
first Latin American debt crises of the early 1980s, was an
entirely new role for the
IMF to act as policeman to collect dollar loans for private New
York and international banks. The IMF became the driving
motor for what came to be called "globalization."
After the first oil price rise of 400% in the 1970s, many
developing countries such as Brazil, Argentina, or most of Africa,
borrowed heavily to finance needed oil imports, or trade deficits.
They borrowed dollars from major international banks operating in
the London Eurodollar market. London was the center for, in effect,
the recycling of the large sums of petrodollars from Arab OPEC
countries to US and other major banks.
The major banks took the new oil dollars and immediately relent
them at a nice profit, to countries like Argentina or Egypt. Before
the 1970s Argentina had been a fast-growing economy developing
modern industry, agriculture and a rising standard of living for
its people. It had almost no foreign debt. Ten years later, the
country was under control of the IMF and foreign banks. The US
changed the rules, in the process creating the debt
crisis.
In October 1979, a dramatic shock occurred for the debtor
countries. Overnight their cheap dollar loans cost them 300% more
interest charge. Paul Volcker of the Federal Reserve Bank in the
US, unilaterally changed US interest policy to force the dollar
higher against other currencies. The effect was to raise US
interest rates 300% and rates in the London bank market by even
more. The bank loans to Argentina and other countries had been made
in "floating" rate agreements. If the key international rate in the
London bank market, LIBOR, was low, Argentina would pay a low rate
on its dollar loans. But when it suddenly rose 300% in 1979-1980,
many countries suddenly faced a payments crisis.
It took until 1982 for the crisis to reach default level. At that
point, Washington demanded the IMF be brought in to police a debt
collection process on developing debtor nations. This came to be
called the Third World Debt Crisis. The impression was created that
countries like Argentina were guilty for mismanagement. In reality,
whatever political corruption may have existed in the debtor
countries, the corruption
of the IMF system and the petrodollar recycling was far
greater. The Volcker interest rate shock completed the
package of destruction of living standards on behalf of dollar
debts.
How did the IMF act in the third world debt crisis? Here is where
it becomes clear that the
role of the IMF was to support the dollar hegemony of the United
States, and not to help poor countries get through a temporary debt
problem.
The IMF has been described by some as a tool of neo-colonialism.
That is too mild, as 19th Century British or European colonialism,
however harsh, never managed to accomplish the extent of
devastation and destruction of health and living standards the IMF
has done since the 1970s.
The IMF operates as a supranational agency to take control over
helpless debtor states, to impose economic policies that force the
country ever deeper into debt, while opening the market to foreign,
often US capital and global corporate exploitation. The fact that
debtor countries never get out of their dollar debt, only deeper
in, is deliberate. IMF policy in fact insures this. The dollar debt
is a major prop of the dollar system and of private international
banks. When that debt is repaid, banks lose power and credit
contracts. So long as debt grows, bank credit can grow, the paradox
of modern banking.
The tip-off that the real purpose of the IMF is quite different
from its public claims, is that despite repeated proof of the
destructiveness of its policies, called "conditionalities," the IMF
has never changed the method it uses in a target country.
There is a reason for
that.
Take Argentina as a case in point. In early 2002 Argentina
defaulted on repaying $141 billion in foreign dollar debt. One of
the most devastating economic collapses in modern history ensued.
The IMF was crucial. In early 2000 Argentina had turned to the IMF
for emergency credit to prevent a collapse of its currency, then
fixed to the strong US dollar. As the dollar rose, Argentina found
its exports trade collapsing. The country went into recession. The
IMF stepped in with a $48 billion "rescue" package. But there were
conditions.
First the government had to agree to severe IMF-dictated cuts in
government spending before it would get any money. State subsidies
on food for low income were ended, triggering food riots. Interest
rates exploded in a vain effort to convince foreign banks and
bondholders to not sell. That only worsened the economic
depression. State companies were forced to privatize to raise money
and "promote free market" liberalization. The Buenos Aires water
system was sold for pennies to Enron, as was a pipeline going from
Argentina to Chile.
Washington insisted all the while that Argentina hold to its fixed
currency value, arguing that the trust of foreign bondholders and
creditors was the priority. Meanwhile the country sank into its
worst depression in memory, as millions lost jobs, and bank
accounts were in the final stage frozen, so ordinary citizens could
not even draw savings for life necessities.
What exactly does the IMF do when it comes into a crisis country
that asks for emergency lending to overcome a debt or currency
crisis? The IMF always uses the same program, regardless of whether
it is Russia or Argentina, Zimbabwe or South Korea, all very
different cultures, economies and situations. The IMF demands are
often referred to as the Washington Consensus, the name given in
1990 by a US economist and IMF backer, John Williamson, to describe
the IMF method of attack.
IMF medicine almost always includes demands to privatize state
industries, to slash public spending even on health and education,
devalue the national currency against the dollar, and open the
country to free flow of international capital-both in and,
especially, out.
First the IMF demands the government in question sign a secret
Memorandum of Understanding with the IMF, in which it agrees to a
list of "conditionalities", the pre-condition for getting any penny
of IMF aid. Under today's globalized free capital markets, banks do
not invest in a country that does not have the IMF seal of
approval. So the IMF role is far more than giving some emergency
loan. It determines if a country gets any money from any source at
all-World Bank, private banks and other.
The conditions of an IMF deal are always the same. Privatization of
state industries is top on the list. The effect of privatization
with a cheap Peso or Rouble currency is that foreign dollar
investors are able to buy up the prime assets of a country dirt
cheap. Often the politicians involved in the country get corrupted
by the lure of under-the-table deals in privatizing their national
assets. Foreign multinationals can grab profitable mining, oil, or
other national treasures with their dollars.
The case of the Yeltsin government in Russia is classic, with
dollar billionaires emerging overnight on the looting of national
assets via IMF-dictated privatization. The Clinton Administration
backed the process fully. They knew it turned Russia into a dollar
zone, and that was the intent.
The second demand of the IMF is that a country liberalize, that is
open, its financial and banking markets to foreign investors.
This allows high-profile
speculators like George Soros or Citibank or Credit Suisse to come
into a country, run up asset prices in a speculation, take huge
profits, as in Thailand in the mid-1990s, and quickly sell, then
exit with huge gains, as the local economy collapses behind them.
Then Western multinationals can come in after, and take prime
assets at very low cost.
This is what happened to Asia in the 1990s. The IMF and US
Treasury, which actually determines US IMF policy, began strong
pressure on the fast-growing East Asia "Tiger" economies in 1993,
to remove national controls on capital flows. They argued it would
help Asia get large sums of money to invest. What it did was give
US pension funds and big banks a huge new market for speculation.
Too much money flowed in, and an unhealthy real estate bubble grew.
It burst when Soros and other US speculators deliberately pulled
the plug in 1997, triggering the Asia crisis. The end result was
that for the first time, Asian economies were forced to turn to the
IMF to be rescued.
But the IMF did not "rescue" any Asian economy in 1998. It rescued
international banks and hedge fund speculators. In Indonesia, the
IMF demanded the government raise interest rates to 80%, on the
argument that would keep foreign investors from leaving, and
stabilize the situation. In fact, as critics like Joseph Stiglitz
charged at the time, the IMF interest rate demands guaranteed a
full-blown collapse of the Indonesian and other Asian banking
systems.
Once the IMF got control of South Korea, one of the strongest
industrial economies in the world, it demanded breakup of large
industry conglomerates, charging "corruption" and "crony
capitalism." In fact, Washington hoped to weaken a growing
competitor and open the door for US companies like GM or Ford to
take over. In part it worked, until Korea and other regional
economies were strong enough to re-impose national controls.
Malaysia openly defied
the IMF demands and imposed currency controls during the crisis.
The damage to Malaysia was minimal as a result, a great
embarrassment to the IMF.
The next step for IMF conditions, is the demand a country turn to
"market-based" domestic prices. This is code for eliminating
government subsidies or price controls. Often developing countries
have state-subsidized fuel or food or other necessities for their
people. In 1998 the IMF demanded, for example, that Indonesia
remove state food subsidies for the poor. The idea of "market-based price" is
itself a fiction. A market is man-made. The market in Switzerland
or Denmark or Japan is different from the market in Cuba or
Cameroon. What the IMF is after is a slashing of state
budgets to minimize the state role in the economy and make a target
country defenseless against foreign takeover of its key assets. The
government share in the fragile economy is cut also, in order to
insure foreign banks get their "pound of flesh."
Finally the IMF demands the country devalue its currency, and
massively, often by 60-70% or more. Here the argument is that this
will make its exports "more competitive" and bring more income to
repay the foreign dollar debts. This is a crucial part of the IMF
Washington Consensus medicine. If, say, Chile devalues the Peso in
half, or the Republic of Congo, it must export twice as many tons
of copper to earn the same dollar of export surplus. For the giant
multinationals in the industrial world, it means the cost of raw
materials has become cheaper by half.
Over the past twenty years since the IMF stepped in to play the
major role in reorganizing developing countries, world raw
materials prices have been dramatically depressed, even though
demand has risen. The reason is that countries of Africa, Latin
America and elsewhere are mainly raw materials exporters, and their
commodities, like oil, are all exported in dollars. They need to
earn dollars to repay dollar debts. The IMF policies have driven
their raw material prices, measured in dollars, drastically lower.
This has been deliberate, but is never admitted. The IMF is an
agency of American dollar domination of the global economy, not an
agency to help developing countries.
None of this is exaggeration, unfortunately. IMF defenders claim
that "market liberalization" has resulted in major economic growth
over the past 20 years in developing countries. The reality is
opposite. In a study done by Joseph Stiglitz when he was at the
World Bank, between 1989 and 1997 the GDP of every country in the
former Soviet Union had fallen to levels of 30% to 80% of that
before the collapse of state controls, with the sole exception of
Poland. The level in Russia was only 60% that in 1989. GDP had
collapsed 40%, and unemployment went from 2 million to 60 million.
The rapid privatization without adequate legal and institutional
safeguards such as unemployment insurance or health insurance, led
to social catastrophe comparable to wartime. IMF demands to free
capital movement allowed new Russian dollar oligarchs such as
Berezovsky to plunder billions of dollars and put it into secret
bank accounts in Cyprus or Liechtenstein, while they bought luxury
villas in Monte Carlo. [1]
The IMF record in Africa is as outrageous and destructive. In
Zimbabwe, the IMF demanded the government privatize certain state
companies and cut subsidies on food, education and health care to
get IMF aid. The government complied with most demands, and then
the IMF accused it of funding the war in the Democratic Republic of
Congo, using that as an excuse to deny giving Zimbabwe loans. In
Kenya the IMF earlier demanded that specific individuals be named
to the government of Moi, people friendly to Western interests.
Washington then charged these governments being "corrupt," which
conveniently blinds Western opinion from realizing the moral
travesty taking place under IMF auspices.
Take the official World Bank debt statistics and it becomes obvious
that the IMF game is to support the dollar. The first debt crisis
in the Third World erupted in 1982. The IMF stepped in to
"stabilize" the debt problem. Since then, the foreign debts of
developing countries have risen exponentially. In Argentina, the
earlier "success" of the IMF, foreign debt stood at $62 billion in
1990. In 2000 it was $146 billion. Brazil's foreign debt has gone
from $120 billion to $240 billion in the same time. Iran, isolated
from the IMF system by US sanctions, is one of the few developing
countries which has managed to reduce its foreign debt.
The total foreign dollar debt of all low and middle income
countries rose from $1.4 trillion in 1990 to $2.5 trillion in 2000,
almost double. In most cases, the unpayable interest costs on the
debts were merely added to the amount of principal owed foreign
lenders, at compound interest rate, of course. With compound
interest charges often 10% to 15% per year, the debt grows
exponentially.
The result is a Ponzi debt pyramid, in which the more a country
pays, the more it owes. Bankers call it "interest capitalization."
It is no different from the plight of a poor shopkeeper debtor who
is forced to turn to a mafia loan shark to survive and ends up
paying more and more at ever more interest, until he is bankrupt
and the mafia takes all his possessions. The IMF and banks know
only some 80% of Third World debts can ever be repaid. They care
only about the legal fiction and the ability to use the debt as a
lever to grab assets cheaply. According to the World Bank, between
1980 and 1986, for a group of 109 debtor countries, payment of
interest alone to the creditors on foreign debts totalled $326
billion. Repayment of principal on the same debts totalled another
$322 billion, for a combined capital flow out to the New York and
other creditor banks, in debt service, of $658 billions on an
original debt of $430 billion. Yet, despite this enormous effort,
these 109 debtors still owed the banks a sum of $882 billion in
1986. This was because of the pyramid effect of compound interest,
interest capitalization and Volcker's floating rate
policy.
In 1990 the developing world repaid some $150 billion in interest
on dollar debt, three times all aid received. This was a huge boost
to the dollar credit system, which lends on the basis of assuming
it will be repaid the entire $2.5 trillion third world debt. The
IMF allows that myth to continue. Occupied Iraq today must still
"honor" billions in debts of the Hussein era, many to the former
Soviet Union, despite its devastated situation. Russia is still
forced to admit billions in debt from the Soviet era to Western
agencies. Under the IMF system, debt is more sacred than human
life. [2]
The vicious trick in all IMF-led "debt restructuring," is that so
long as a debtor is able to pay interest on its loans, the creditor
banks in New York or London or elsewhere do not have to declare
their loan in default. Even if they know it never will be repaid,
they treat it as if it were a fully good credit, and use it as
capital collateral for further bank lending. The banking system of
the dollar world is to a major degree propped up by the pyramid of
unpayable third world loans from Africa to Indonesia to Argentina
to Croatia.
There has been a dramatic slowdown in economic growth in developing
economies over the past two decades since the IMF was brought in to
police the debtor states in 1982. There is a direct link. In Latin
America, if we take per capita GDP growth, there was a growth of
75% between 1960 and 1980. In the following 20 years to 2000, per
capita GDP grew a mere 6%.
In Sub-Sahara Africa, per capita GDP grew by 36% in the two decade
period to 1980. Then, it fell by a staggering 15% the next two
decades. According to the World Bank itself, some 300 million
Africans, almost half of the Continent, survive on less than ? 0.65
a day. IMF-dictated cuts in national health care have resulted in
rising infant mortality across the Continent. In 2002 Malawi
underwent famine. It coincided with the April 2002 decision by the
IMF to suspend Malawi on allegations of "corruption." The IMF had
ordered Malawi's government to sell its grain reserves in order to
repay a South African bank loan of the National Food Reserve
Agency. The IMF also ordered export of maize to service debt,
ignoring a developing famine crisis. The IMF piously denied it
played any role in the famine crisis however. [3]
For Arab states, including Algeria, Morocco, GDP growth per capita
swung from a plus 175% between 1960-1980 to a minus 2% in the
following two decades, a staggering collapse.
The only apparent exception to this negative trend is East Asia
including China. Here growth was faster between 1980 and 2000. But
the reason is the including of China, which saw a 400% increase in
GDP and accounts for 83% of the region's population. China has
adamantly refused any dealings with the IMF, and runs a controlled
state-guided economy with full currency controls, hardly an IMF
model state.
Globalization is a word used today, often without precision. If we
use the word globalization to refer to the entire process of IMF
and WTO-led neo-colonialism under the Dollar System, then it is a
descriptive term. It describes the creation of a global dollar
imperium, a Pax Americana. Establishment critics of the IMF system
such as Joseph Stiglitz, himself a former Clinton adviser and World
Bank official, make accurate charges against the IMF. They assume,
however, that it is merely misguided policy that leads to the
problems. The entire IMF institution, along with the World Bank and
WTO, however, have been deliberately developed to advance this
globalization of the Dollar System, the second pillar of Pax
Americana after the military power. It is no mistaken policy, no result
of bureaucratic blunders. That is the crucial point to be
understood. The IMF exists to support the Dollar
System. [4]
1. Mark Weisbrot et al, "Growth may be good for the poor — But are
IMF and World Bank Policies good for growth?", Center for Economic
Policy Research, Washington, August 2000. The paper is a strong
critique of IMF policy, documenting the real decline in living
standards since 1980 in IMF target countries.
2. World Bank, "World Development Indicators", 2002, Table 4.16,
External Debt.
3. Anecdotal evidence of the effect of IMF demands on Africa can be
found in the magazine, African Business, January 2003, "Who Caused
the Malawi Famine?" by Kwesi Owusu and Francis Ng'ambi.
4. A useful but limited critique of IMF policies is found in
Stiglitz, Joseph, Globalization and its Discontents,
London, W.W. Norton, 2002.
http://www.serendipity.li/hr/imf_and_dollar_system.htm