1999
The economic necessity of social justice
Nicola Bullard
Following
its intervention in Thailand, Indonesia and South Korea, the IMF found itself
under attack from all sides. The debates are wide ranging and call into question
fundamentals such as the efficacy and appropriateness of the Fund’s economic
advice, the way the Fund operates, and its relationship with its key
shareholder, the US.
The
IMF, however, does not admit that some of its policy advice was wrong and
generally seems unwilling to debate the issues publicly. However, in the past
months there have been gradual shifts on some key policy positions. Recent
letters of intent with Thailand, South Korea and Indonesia show a decided easing
of tight fiscal and monetary policy by allowing interest rates to slowly drop
and allowing government deficits to expand (although given dwindling government
revenues due to declining taxes and loss of export earnings, deficits must be
allowed to grow even larger to ensure that new money is pumped into the
economy). According to IMF Asian Regional Director Hubert Neiss "the IMF is
not preaching austerity at the moment, it’s preaching fiscal expansion.
We’re in a different phase now."
In
addition, recent support for the $30 billion Miyazawa Plan put forward by Japan
and the US proposal to establish a quick response credit facility within the
Fund which would not attract the usual IMF policy conditions, recognises the
need for new, alternative and flexible responses to economic crises beyond the
traditional IMF formula.
Since
the early 1990s, the IMF and the World Bank have been pushing countries to open
their capital accounts. Almost every analysis of the causes of the Asian
financial crisis identifies rapid capital account liberalisation and the
subsequent uncontrolled movement of finance capital as a major contributing
factor. However, the almost universal criticism of Malaysia’s decision to
impose currency controls shows that there is deep hostility to nations taking
these matters into their own hands.
The
pain of adjustment is not fairly distributed: Criticisms about the burden of
private sector failure being shifted to the public sector have also been noted.
World Bank Chief Economist Joseph Stiglitz, placed the question squarely on the
World Bank agenda when he says
"The situation is intolerable. We have an international economic
architecture which has led to more frequent crises, and yet our means of
responding have proved inadequate. While there is much talk about pain, the poor
have absorbed more than their share of the pain without sharing commensurately
in the promised gain."
For
Stiglitz, the solution lies in creating more democratic institutions "so
that these silent voices are heard." This must be a cornerstone of the new
global financial architecture, but some more immediate measures have also been
proposed. For example, the US and Japan have unveiled a plan to establish a
G7-funded agency to buy up debts issued by overseas creditors to private
companies in Asia at a discount of 20 to 30 per cent.
UNCTAD’s
1998 Trade and Development Report advocates at a global level some rules akin to
the chapter 11 of the US bankruptcy code, and in particular an automatic
standstill principle, to enable countries in specified circumstances to impose
unilateral standstill, similar to the safeguard action allowed under the GATT.
They should then be able to approach an independent international panel to
justify their case and get further relief. However, the UNCTAD (United Nations
Conference on Trade and Development) report warns that the IMF as presently
constituted is not able to perform this task because its governance structure
gives weight to the views of creditors over debtors.
Other
proposals include bringing the private sector into financing bailout loans,
encouraging greater private sector risk assessment, and establishing
stronger insolvency and debtor-creditor regimes. However, all of these proposals
are somewhat limited in that they depend to a large extent on good-will,
effective domestic legislation and willingness of the private sector to assume
risk. So long as the IMF provides the ultimate guarantee against private sector
risk, the incentives are not strong. Perhaps a more compelling and simpler
solution would be an international bankruptcy law to ensure the orderly work-out
of private sector debt in a transparent and equitable manner.
The
Fund has gone beyond its remit and should be overhauled: The arguments on IMF
mandate have, in fact, gone in the opposite direction with many calls for
expansion of the IMF’s role to include environmental, labour, good governance
and democracy conditions.
On
this issue there are widely diverging opinions: on the one hand critics say that
the Fund needs to take into account the social and environmental impact of its
programs and therefore needs a broader mandate and better coordination with the
World Bank. On the other hand, some argue that the Fund’s role should be
limited to preventing a breakdown in trade due to short-term balance of payments
difficulties, and that the strictly stabilising role of the Fund should be
de-linked from the long-term development mission of the Bank and other
multilateral development agencies. The main drive behind this argument is that
the Fund is not a democratic, accountable or transparent institution, and
therefore should not be given the authority to make judgements about issues such
as good governance or democracy.
The
Fund – keen to extend its purview and staunch criticism -- has attempted to
broaden its dialogue and discuss the social impacts of their programmes. For
example, in many countries the IMF has ‘consulted’ with labour. Not that it
would pass any reasonable test of ‘consultation’ but at least they think
that they should be doing something. Or should they? This raises an interesting
question about the IMF and its mandate: does labour have a right to consult with
the IMF? Does this undermine domestic democratic processes whereby governments
should be accountable to workers? In South Korea, this is a sensitive issue: the
IMF has agreed to meet the KCTU informally, but wouldn’t it be better if the
labour organisation were able to extract a commitment from their government for
workers’ representation in negotiations with the Fund, or better still, be
confident that the elected government would properly represent and protect
workers’ interests?
Although
it is tempting to see the IMF as the deus ex machina which can solve the
problems of Soeharto, corruption and the chaebol, this is dangerous ground. The
IMF is not a democratic organisation, and can in fact take away political power
and undermine domestic political development.
So
far most suggestions for institutional reform have focussed on transparency and
accountability. The Fund itself is completely unused to outside scrutiny, and
responds to most criticisms with defensive arrogance. Transparency is seen as
simply making information available and accountability means making more
information available. Democracy does not seem to be in their lexicon. Again,
Joseph Stiglitz made a pertinent comment on transparency when he remarked to a
group of non-government organisations in Washington that transparency is only
meaningful if people are willing to debate different views.
However,
there are some attempts to loosen the power nexus between the IMF and US
Treasury.
Obviously
shaken by the cataclysmic collapse of Russia, Europe has suddenly realised that
there is a crisis, and they are part of it and the people they thought were
fixing the problems are not. The French
Finance Minister’s proposal at the recent IMF World Bank Meeting to
strengthen the role of the IMF Interim Committee – a 24 member group which is
equivalent to a board of governors and reflects the composition of the executive
board – aims to make the Fund more directly accountable to its main
shareholder governments and to break the policy stranglehold of the Board of
Directors and the Washington power elite. Interestingly the proposal was
supported by IMF Managing Director Michel Camdessus, himself an elite French
bureaucrat, who may be looking for a way to break free of the US Treasury and
save his institution.
For
several decades, Southeast Asia’s tiger economies were held up by the World
Bank, the International Monetary fund and the US – the keepers of the
“Washington consensus” – as emblematic of good development, the very model
of how to do things. Then everything started to spin out of control. And even
when the IMF applied the orthodox treatment, the standard IMF prescriptions,
they came unstuck even more. It is the shattering of a dream – the dream of
export-lead growth, free trade and financial liberalisation – in short the
dream of ‘globalisation,’ that has finally cracked the Washington consensus.
Where to now?
The
Washington consensus is starting to unravel, but what will replace it? The set
of reforms presently on offer is limited and seek to put the train of economic
globalisation back on track. They include measures such as increased
surveillance, uniform reporting and accounting procedures, better risk
assessment, strengthening domestic financial institutions, more transparency in
market transactions.
Many
of them are absolutely necessary in the short term, such as opening the IMF to
greater scrutiny, acknowledging that reckless capital account liberalisation may
not be wise and that speculative money creates instability and volatility,
seeking ways of ensuring that the private sector shares an appropriate
proportion of risks and loss, more coherent and better coordinated policy
responses by governments and international institutions and greater efforts to
predict and prevent crisis. But none of this actually addresses the underlying
weakness of the present system. Without effective and binding mechanisms to
ensure redistribution of resources and environmental sustainability, four fifths
of the world’s population will continue to be excluded from the promised
benefits of free trade and financial liberalisation.
Reform
of the global financial architecture is now on the agenda, but instead of
thinking about architecture, we should be thinking about the people that we are
building it for. Any architect worth their salt starts by consulting the client,
trying to understand what they want and how they live. It is a collaborative
process. Designing the global financial architecture should be no different. But
a word of caution about using the language of the elite. The word
‘architecture’ connotes institutions rather than relationships and limits
our imagination. We should, instead, be thinking about the values that we want
to express and promote. Only then should we think about what sort of
institutions –either local, national, regional or global – we need to do the
job. When the Bretton Woods Institutions were founded more than fifty years ago,
there was a vision – albeit a reflection of the dominant powers – but
nonetheless a vision based on shared values of a better world.
The
basis for our design should be increasing political participation, economic
democracy and social justice, replenishing and sustaining the environment. This
means stripping the IMF of its assumed power to impose policy conditions on
governments. Minimally, it means allowing governments to establish whatever
kinds of barriers they think are necessary to protect their domestic economies
from the unpredictable global economy. Minimally, it means recognising that
there is no single solution – even though the advocates of economic
globalisation would wish that it were so.
Getting
rid of hot money
Joseph
Stiglitz has called for a ‘post-Washington consensus’ which "cannot be
based on Washington.’
"One principle of the emerging consensus," he says, "is a
greater degree of humility, the frank acknowledgment that we do not have all the
answers."
Humility
notwithstanding, there are two items that must be given priority: getting rid of
hot money and ensuring the ‘post-Washington consensus’ does simply reflect
the views of the elite, but ensures that the silent voices – the women,
farmers and day labourers, the workers and small businessmen, are heard.
There
is a lot of talk about ‘cooling down hot money’, but we have to do a lot
more than that. We have to get rid of it and discredit the whole notion that
there is anything useful in speculation. The financial market, as it presently
operates, serves very little useful purpose and is, for the most part, non
productive. It does not create anything that you can eat or hold or sell or use.
It does not add to the public good, and it distorts our collective understanding
of what is valuable and productive. And, as we have seen with the recent
near-collapse of Long Term Capital Management, it can threaten the whole
financial system.
One
of the ways of cooling down hot money is to redirect it into productive
channels. And here is one of the great contradictions of the present economic
system: the massive accumulation of finance and speculative capital is due to
overproduction – which is a bewildering concept considering that we live in a
world where four-fifths of the population struggles daily with poverty. Yet,
this is true. The massive profits of transnational corporations and banks have
no where ‘useful’ to go, so they go into speculation.
But
the other side of overproduction is demand. A simple solution to the problem of
overproduction is to expand markets – that is, to put more money in the hands
of more people, so that they can buy the simple, basic life enhancing consumer
goods that countries like Vietnam, China, Thailand and Brazil are so good at
producing. The good news for the US and Europe is that you do not need to
shoulder the burden of consuming the world’s output on your own!
Redistribution of wealth and purchasing power to the four-fifths of the world
who are not being given a chance to pull us out of this recession would give the
economy a kick start, would ease the problem of overproduction, and provide all
sorts of useful ways to recycle profits. It would also cool down global capital
markets.
However,
creating this demand requires significant social reform in terms of asset and
income distribution – it means land reform and wage and labour reform.
Industrialisation via cheap labour and natural resource exploitation is no
longer viable. We have reached the point where further economic growth can only
be achieved by expanding domestic markets and most importantly by changing our
definition of what is productive to include public goods, culture, the
environment and human security. We are at a moment in history where economic
necessity coincides with social justice.
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