Home > The Economy > The IMF as a servant of Wall Street

The IMF as a servant of Wall Street

Here is a translation, by Merijn Knibbe, of a post which appeared yesterday on the Dutch economist Eduard Bomhoff’s blog, whom I’m told is a monetarist/maverick and a former staff member of the IMF.. As it contains some inside information as well as a concise and very clear view on the relation between Wall Street banks and IMF policy I thought it might be of interest to RWER Blog readers. 

The Netherlands have to give up on their seat in the IMF-board

Onno Ruding (minister of finance (of the Netherlands, M.K.)), 1982-1989) was the last Dutch politician with a deep interest in the IMF. His successor Wim Kok (minister of finance 1989-1994) was too busy with his leadership of the PvdA (the social-democratic party of the Netherlands, M.K.), Gerrit Zalm (minister of finance 1994-2006, M.K.) focused on Europe because of the introduction of the Euro and Wouter Bos (minister of finance 2006-2009) was again occupied with the PvdA. The periodic speeches of Bos at the meetings of the IMF are on the IMF website: commonplaces without own, progressive, Dutch sound. “Ruding was a conservative, but he was interested in international monetary business and knew what he was talking about – Kok should as a social-democrat have had more attention to help poor countries, but he never had time, so Ruding was a bigger help to us” – so I heard from IMF staff members when I worked at the IMF in Washington. [emphasis added]

The IMF as a servant of USA interests

Right from the start in 1945 the USA  dominated the IMF. At first this was logical and reasonable, as the USA were half the world economy and the dollar the foundation of the international monetary system. It was too easy for the USA to create deficits and to create dollars in an excessive way. European governments became suspicious and started to trade paper dollars from their international reserves for gold at a fixed price, President De Gaulle from France led the way. The amount of gold in Fort Knox deteriorated in a dangerous way and in 1971 president Nixon was forced to cut the tie between the dollar and the fixed price of gold. There followed a decade with chaotic fluctuations of rates of exchange and high inflation (also in the Netherlands with overrated Jelle Zijlstra, the then president of the Dutch Central Bank)). When in 1980 the USA finally started to combat inflation with Paul Volcker (the predecessor of Alan Greenspan) interest rates and the dollar rose simultaneously. Mexico had been loaned 80 billions of dollar from the international banks and in June 1982 it could not pay anymore. Volcker took care that the IMF paid the interest to American banks directly. It did not provide Mexico with credit, but increased Mexican debt with the interest paid. The same with crises in Argentina and Brazil. Not only Mexico but the whole of South America lost ten years of economic growth, because the USA used the IMF to guard the interests of American banks. Historian Alan Meltzer writes: “the importance of financial markets and USA banks had priority above interests of developing countries… It would have been better to write down part of the debt and keep the market alive with temporary loans”.  

This pattern repeated itself with subsequent crises. The USA – with the help of other rich countries including the Netherlands – forced the IMF to prioritize the interests of large western banks above poor inhabitants of developing countries. Academic specialists like Jeffrey Sachs and Meltzer explain that partial write downs and quick refinancing of international debt solve the problem of uncertainty for international financial exchange, which enables renewed economic growth, but in every crisis the IMF is a 100% spokesman for the interests of Wall Street.

The 1997 East Asian crisis was almost fatal for the IMF. The IMF wrote a wrong prescription on basis of a wrong analysis: this was no government crisis, as most of the times in Latin America, but a crisis of developers who used dollar loans to start too many hotels and malls in Bangkok and other big cities. Prime Minister Mahathir of Malaysia became famous with his claim that his land would come out of the crisis without the IMF – and he was right – and all around the world countries chose rates of exchange which were less constrained and  chose more monetary autonomy.

The IMF searches a new role.

The influence of the IMF in a world with exchange rates which change every day is not that clear. The official role to advise on the stability of fixed rates of exchange is not valid anymore, and the USA remains adamant against powers for the Fund to give binding directions to member states. During Bush’s presidency the USA was the only important country that refused to let the IMF carry out a SWOT analysis of its own financial system. Only this year, during Obama, was the IMF allowed for the first time to report on Wall Street.

Shifting balance in the world

The changes in the If board fit into a world in which the USA and Europe have less economic weight and Asia more. Figures on national debt are unequivocal. In America, government debt per family of two parents and two children is, for the firt time in history more than 100.000 dollar. According to the IMF this will double during the next ten years. Interest on government debt will be about one fifth of the government budget and an American family has to pay about 10.000 dollar a year to pay this interest. That’s just interest; paying it back is out of the question. In Germany and France the figures are no different, in Italy they are even more threatening.

China has a different position. National debt is low and hardly increases, and international reserves are a multiple of national debt – it can pay back the entire Chinese government debt with dollars from these reserves. Financial power has to shift to East-Asia and to follow political and military power.

The Netherlands have to give up their seat

The Netherlands will miss nothing by giving up their seat, as our country does not have global players anymore in the banking sector, but it has Shell, Unilever and so many eporting companies in manufacturing and non-financial servies. These have little or no connection with the IMF, but a large interest in free trade, public tenders of government investments and the battle aganst corruption. Active policy in the World Bank, the WTO and Transparancy International is a direct Dutch interest, much more that a seat in the board of the IMF, surely when this seat only serves to vote with the USA in favor of the large Wall Street banks.

The Dutch man in the IMF, Age Bakker, now states that Belgium and Switzerland have to go first. This will make no friends in these countries, its more diplomatic for the Netherlands to give up the IMF board seat voluntarily, for instance in favor of Indonesia. At this moment the Euro zone has six board members, but Asean, the club of South East Asia with almost twice the number of inhabitants, just one: Thailand. Indonesia is the biggest member of the IMF without a vote in the board, and economically already one and a half time as large as the Netherlands. Why quarrel with Belgium and Switzerland when we can make friends in Asia with a beautiful gesture?

With regard to the IMF, the Netherlands can look back in pride on Jacques Polak, for a long time chief economist of the Fund, and Johan Witteveen, head of the fund from 1973-1978 and among other things responsible for the saving of the United Kingdom by the IMF in 1976. Now it is reasonable that there will be more room for Asia and that’s no loss for the Netherlands – there is no shred of evidence that the Netherlands have contributed anything unique to decision making. A voluntary exit from the IMF board is a fitting and elegant gesture for a country that has to accept that Asia is relatively getting stronger and that Holland can do more useful work in the World Bank, WTO and Transparency International.

Translated from: Eduard Bomhoff, “Nederland moet IMF-zetel opgeven”, Me Judice, jaargang 3, 7 november 2010, http://www.mejudice.nl/artikel/517/nederland-moet-imf-zetel-opgeven

 

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