Reforming The IMF May Be The Key To Bush's "Invisible" African Policy
In recent days the discussion has begun over what US foreign policy will be toward Africa under President-elect George W. Bush's administration. The conversation has largely focused on conflict resolution on the continent and fighting the spread of HIV/AIDS, both of which are critical issues. But surprisingly, scant attention has been given to the role the International Monetary Fund (IMF) has and is continuing to play in Africa and whether a Bush administration will allow that role to continue.
Since African states first won independence decades ago, the IMF has had as much, if not more influence, over the policies of most African countries than have the elected officials of these nations. After independence, African countries struggled to generate economic growth and sufficient tax revenues necessary to meet budget expenditures, opening the door to undue influence from external institutions like the IMF.
After colonialism, almost every country in Africa's budgets ballooned as governments sought to address the suffering and dissatisfaction of their people by increasing the provision of social services, particularly in the areas of health, education and housing. But due to the legacy of colonialism and poor economic planning on the part of African leaders these nations were never able to generate sufficient tax revenues to pay for their increased budget expenditures and were forced to turn toward domestic and foreign debt as the means to make up for the financial shortfall.
This reliance upon debt began a vicious cycle that eventually caused African nation after African nation to turn toward the IMF for relief, in the form of badly-needed short-term loans and any influence that the IMF may have in renegotiating loan repayment terms these nations had originally agreed to with their international creditors - both private and public. The IMF supplied both - short-term liquidity in the millions and billions of dollars as well as influence over the repayment schedules of debts that African nations had incurred with international lending institutions and bilateral and multilateral institutions.
But they did so at a tremendous price.
When an African country suffered persistent balance of payment deficits, the IMF would send a team to investigate the matter and advise the government on what it deemed to be "appropriate measures" to overcome its difficulties. The country had to accept the IMF's advice as a condition to receiving further IMF assistance and unless the IMF agreed to assist a particular country, the commercial banks would also withhold further loans or refuse to reschedule payments owed to them by that country.
Arguing that a country's balance of payments deficits occurred when a country experienced inflation, the IMF recommended an austerity package that it said was designed to eliminate inflationary pressures inside of the country.
The IMF proscribed policy recommendations to several African nations beginning in 1949 but it would be from the late 1970s into the mid 1980s when the IMF's grip upon Africa would accelerate with disastrous results.
The recommendations were usually the same regardless to the unique circumstances that differentiated one country from another.
The IMF recommended:
1) The country should "find ways" to reduce its budget deficit, including reduced spending in health areas and the laying off of government employees
2) The government should freeze wages to end supposed inflationary pressures
3) The government should restructure taxes; reducing them on foreign investors while raising them on low-income groups in order to balance their budgets.
4) The central banks should raise interest rates to reduce commercial bank lending in an effort to slow the growth in the money supply.
5) The government should reduce its interference in the economy; ending subsidies and closing state-owned enterprises.
6) The country should devalue its currency in order to generate an export-led economic recovery
This was the advice that the IMF was handing out to Africa over 20 years ago and with little variation it is the advice that it is handing out today. And it is advice that not only did not and does not work for Africa but it is advice that has only made problems worse on the continent. Why?
1) Government layoffs only increase widespread unemployment, as the state is often one of the leading employers in African countries. Reduced spending in critical health programs only worsens disease and poverty
2) Freezing wages has absolutely no effect on inflation and as inflation persists, frozen wages guarantee that a worker loses real income.
3) Restructuring taxes in such a regressive manner shifts an unbearable burden on the poor. This is especially true in African countries where inflation eats more and more of people's incomes.
4) Raising interests rates also has little effect on inflation and often has no effect on a country's money supply but it does deprive small business enterprises of badly needed loans for working capital.
5) Reducing government interference in the economy might work, if the African nations had developed industries and if government interference had not propped colonial-era businesses and industries. The dual economy left behind by colonialism mandated some minimal forms of government interference in order to bring rural and impoverished Africans into the economy as producers and government subsidies served as a means to cushion a country from the effects of hyper-inflation.
6) Devaluations only provided a short-term benefit to a country's exports and soon caused domestic inflation to skyrocket. In addition, when a country devalues it is repudiating that percentage of its national debt. In addition, since a county's debt servicing costs are fixed in terms of the currencies of its lenders, when a developing country, like those in Africa, devalues its currency, it automatically results in an increase in its debt servicing costs.
In fact, largely on IMF advice, almost all of the nations in Africa devalued their currencies in between 1978 to 1985. Africa is still reeling from the effects of this era of massive currency devaluation, which also was influenced by US monetary policy.
And today, nations like Zimbabwe lie in economic collapse as a result of submitting to pressure from the IMF to devalue their currencies. At the same, time Nigeria reels from fuel price hikes as a result of taking private IMF advice to end fuel subsidies while Kenyans are forced off of government payrolls and into the ranks of the unemployed as a result of executing a massive IMF-advised austerity package.
After the 1997-199 Asian crisis, which was sparked by IMF advice to both Thailand and Indonesia to devalue their currencies, the IMF came under increased pressure to either reform its policies or risk reduced funding or even its elimination.
And in the past year one of the strongest calls for reform of the multilateral institution came from a the Meltzer Commission, named after economist Allan Meltzer, and which included a group of prominent economists who studied the IMF's history and record of performance.
The Commission advised the US Congress of reforms that it believed the IMF should make.
The Meltzer Commission called for a much smaller role for the IMF and recommended that the multilateral institution advise countries to avoid pegged and adjustable exchange rate systems - which are prone to currency devaluations.
It is known that several of President-elect Bush's economic advisors are supportive of several aspects of the Meltzer Commission Report but many wonder whether Bush's new Treasury Secretary-designate Paul O'Neill, who will be on the point for the new administration's IMF policy, will be willing to oppose the multilateral institution.
Many insiders say that O'Neill's hand against the IMF could be strengthened greatly by the selection of a Deputy Treasury Secretary with Wall St. connections and a keen understanding of the impact that monetary and fiscal polices have on developing countries.
Bear Stearns Chief International Economist, David Malpass, has been described as the prototype to fill such a role. Malpass, influential on Wall St. and well-published, has been very critical of the IMF, particularly during the Asian crisis, and is seen by many as capable of formulating, articulating and executing a strategy by which the US could influence the IMF to embrace policies that are friendly toward developing countries, in Africa and elsewhere.
Malpass is currently being pushed by some inside and outside the Bush campaign to become O'Neill's deputy.
Many believe that because Bush has indicated that Africa is not a high priority in US foreign policy and because Secretary of State-designate Colin Powell and National Security Advisor-designate Condoleezza Rice have shown no great interest in or understanding of African affairs, that it is a foregone conclusion that the Bush administration will direct nothing positive toward Africa.
We disagree that this is a foregone conclusion and believe that such a view stems from the prevailing belief that America must send more money, more troops and more food to Africa.
We don't think that "more" coming from the US and going to Africa is the answer. And in fact would be willing to trade all of the financial and military assistance the US can offer the continent in exchange for the massive reform or elimination of the IMF.
The past twenty-plus year history of the IMF in Africa proves that "less" of the multilateral institution will allow African people and their leaders more freedom to determine their fiscal and monetary polices; collectively pool their resources and generate African solutions to African problems
President-elect Bush, even if he wants to stay totally out of Africa's way, can help by pushing the IMF to accept even greater reforms than those suggested by the Meltzer commission report and he can make this possible by pairing Paul O'Neill with a Deputy Treasury Secretary, like David Malpass, who can make the case for such reforms and push them through.
Wednesday, December 27, 2000