Protest and Consensus: a (very) Brief History of the World Bank and
IMF
Nicholas Guyatt
Rude awakenings
At around five in the morning on April 16th of this year, dozens of finance ministers, economists
and bureaucrats were shepherded from the lobbies of some of Washington, DC’s swankiest hotels
into an unlikely convoy of armed police, trucks and buses. The sleepy technocrats were in town
for long-scheduled meetings of the World Bank and IMF, the international agencies that offer
loans and development assistance to many of the world’s poorest countries. Although such
meetings usually draw little attention, the April convocation had been targeted by tens of
thousands of protesters, hoping to reprise the spectacular demonstrations against the World Trade
Organization in Seattle last November. The delegates, then, were roused from their slumbers by a
shrewd police operation which sought to avoid the disruption and embarrassment dealt to the
WTO’s meetings. If the protesters were determined to disrupt the day’s activities, the police and
delegates would have to start their work by night – and so the conference attendees were bused
into position under cover of darkness, as if their work was too seedy or criminal to take place by
day.
The events in Washington and Seattle have seriously challenged two interpretations of
the developed world which had attained the status of orthodoxies. Since the late 1980s, we’ve
been told repeatedly that (serious) politicians on all sides share a basically similar view of
economics and politics: government can provide some services, but the market is the most
efficient agent in society. We’ve also been told, in the same period, that political activists have
pretty much given up the ghost: people are either self-centered and uninterested in the biggest
political questions, or they’ve taken positions in a balkanized politics of environmentalism, gay
rights, gender equality and other issues which compete with each other for the attention of a
largely bored or contented public. Put yourself, then, on those pre-dawn buses with the
Washington delegates – you belong to a profession which has largely smoothed over some of the
big ideological divisions in the past twenty years, in which the savvy operator (like, say, Alan
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Greenspan1) can win plaudits and job security from politicians on the right and the left. You’ve
watched a series of centrist parties in Europe and the United States take control of government
and sell the public on their moderate beliefs with phrases like ‘triangulation’ and ‘the third way’.
You’ve worked hard to build relationships with your colleagues (in politics and economics)
around the world, to the point where you can converge on the World Bank/IMF headquarters in
DC without fear of a Third-World walkout, or squabbles with the Europeans over monetarism.
And now, you’re forced out of bed at an ungodly hour because of thousands – maybe tens of
thousands – of protesters, many of them under thirty, who feel so passionately opposed to your
actions that they’d camp out for days, shout out their lungs, and throw themselves into custody
for the chance to disrupt your work.
The recent protests suggest that something important is going on right now in the way we
think and talk about the economy (and, by extension, our political beliefs). In Seattle and
Washington, to the horror of cheerleaders of globalization like Jeffrey Garten and Thomas
Friedman, the supposedly fractured ranks of political protest presented a united front – union
members walked alongside environmentalists, students marched with gay rights activists and
church leaders. The global economy, as represented by the WTO and the World Bank/IMF, has
welded these disparate groups into a single engine of protest; and the evidence from Washington
suggests that the loose coalition has gained strength from its successes, and will continue its effort
across the coming months and years.
The coalition also faces plenty of hazards, however, as it works its way towards a bigger
public profile. The loose alliance that’s formed in recent years against globalization is obviously
vulnerable to internal discord and fragmentation – although union members and Methodist
ministers might pool their efforts to protest the WTO, their respective agendas (and imagined
solutions) in doing so might be very different. More ominously, the weight of ‘respectable’
opinion is still firmly on the side of the globalisers. Even the putatively liberal media in the US
has expressed a knee-jerk disdain for the unpractised enthusiasm of the street protesters, and a
fleet of ‘experts’ from the op-ed columns and academia has been launched at the first sight of
trouble, with orders to sink the alternative viewpoints brightly displayed in Seattle and DC. 2
Perhaps the biggest challenge for the protest coalition, though, is to articulate their own vision of
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Of whom more anon. Greenspan has raised inscrutability and absolute discretion in his public profile to almost Zen
levels, thereby placating his masters on both sides of the political ‘spectrum’ and the speculator-investors who are
poised to bet millions on his every pronouncement. Perhaps it’s just as well that we know so little about the man –
would America sleep as soundly if it knew that Greenspan was a serious fan of Clive Cussler’s books?
2 Folks like Thomas Friedman and Jeffrey Garten were particularly incensed by the Seattle protests – Friedman
condemned the protesters as “stupid” in two separate op-ed pieces in the New York Times. During the TV coverage of
the protests, there was little doubt which side the networks were on – Lou Waters of CNN concluded an interview with
a riot policeman in Seattle with a cheery “good luck to you out there today.”
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a global economy, and to persuade the public that this would work better than the version we’re
struggling with right now. This is a tall order conceptually – the US hasn’t proven fertile ground
for the nurturing of fundamental economic change, and there’s a great deal of pressure to accept
the ‘pragmatic’ course, and to ‘work for change within the existing system’, as one might
rationalise it to oneself when voting for Al Gore, or whatever. But this positive agenda also seems
alien to the spirit and tone of the coalition. In Seattle and Washington, its goal was primarily to
shut down the institutions of the global economy: recognising that the WTO, the World Bank and
the International Monetary Fund are extremely powerful and diffuse organizations, the protesters
concentrated their efforts on sabotage rather than debate. Now that this tactic has paid off, and the
American public (along with people around the world) has begun to take notice of the forces
opposed to globalization, the protesters must sell their own vision of a just global economy as
successfully as they’ve assailed the reigning order.
From the perspective of the battles in Seattle and Washington, it’s hard to see the 2000
presidential election as anything but a turf war fought in the political center, with a lot of scripted
division and some important divergence in social thinking, but an essentially identical concession
from both parties to the ascendancy of corporations and the global market. 3 Ralph Nader and Pat
Buchanan, who would certainly challenge the hollow economic triumphalism of Gore and Bush,
are unlikely to win a place in televised debates which are funded and controlled by the
Republican and Democratic parties; and unlikely to win much airtime by other means without
making precisely the concessions to big-business sponsors which have assured the anaemia of the
Bush-Gore economic perspective. Against these formidable obstacles to the expression of
divergent views, the strategy of the anti-globalization protesters to date seems pretty sound – their
guerrilla tactics have bypassed the formal political system and conveyed their dissatisfaction to a
wide audience. But further protests in the same vein may stereotype the coalition as an essentially
unruly, nihilistic force. News organizations have been scampering to present this image already,
concentrating on Starbucks-smashing ‘anarchists’ even as they try to downplay the
preponderance of ordinary working people and peaceful protesters in the crowds. The battle
against globalization, then, is at a crossroads – can protesters continue to disrupt the smooth
operation of the economy as they simultaneously promote alternatives? Can they win respect
I don’t want to be totally glib in dismissing the differences between Bush and Gore. The Democrats take more money
from some industries (like the investment banking fraternity) than the Republicans, who make up for it with their own
favorites (like the pharmaceutical barons of New Jersey). Bush is also much more likely to sign socially-unpleasant
legislation into law, or to pack the Supreme Court with people you’d rather not have to deal with for the next few
decades. But in their basic support for the market’s right to do what it likes, and their essential abandonment of a whole
host of public services to the whims and profits of corporate America, they’re talking the same language: “Yo quiero
mucho, Fortune 500!”
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from the public without attaining the ‘respectability’ and toothlessness of the mainstream political
parties?
Where do we go from here?
If you’re the kind of person who’s pretty happy with the way the economy looks in the US right
now, and not too interested in whether (a) it looks the same way elsewhere in the world, or (b) it’s
going to look so rosy in the US for much longer, then you’d probably be a fool not to cast your
vote for Bush-Gore in November, and to join the chorus of media voices excoriating the Seattle
and Washington protesters for their immaturity, temerity, anarchy, and so on. If, on the other
hand, you have grave doubts about economic justice in the US, and the export of American
economic thinking around the globe, you’re probably sympathetic to the spirit of these street
protests, and at least tangentially interested in the kinds of profound changes that these protesters
seem to want. It’s possible that the traditional split in US politics between Democrats and
Republicans will be less meaningful in the coming years than this more fundamental divide
between those who are happy with the service we get, pretty consistently, from Republicans or
Democrats; and those who aren’t, and are eager for a change. What’s up for grabs right now is
how this more fundamental divide will be expressed, and how it will affect the American public.
One immediate way of entering into this bigger debate is to reject the authority of the
technocrats and to make an effort to reacquaint yourself with some basic history and facts about
how the global economy is structured, and how it got to be this way. This necessitates a degree of
courage, in the sense that the ‘experts’ and politicians have been careful to exoticize this kind of
knowledge, or to suggest that it’s best left in the hands of the cognoscenti.4 But it’s also a
rewarding process, because you realize that a whole lot of stuff that seemed sort-of given and
natural isn’t really either, but instead is fiercely political; and so you make a step towards
recognizing that the field of politics, and (by extension) of democracy, is much larger than you’d
previously thought. This is a necessary process if you’re to partake in the debate over
globalization, and particularly if you’re to have an answer for the ardent globalists who argue,
monotonously, that there’s no alternative to what’s happening now.
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Witness the way that governments in Europe have given away some of their policymaking powers (like the ability to
set interest rates) to unelected central banks, often explaining their action by deferring to the markets and suggesting
that a technocratic (rather than a democratic) approach is more appealing to speculators, and causes less trouble for a
government. Or, closer to home, the way that Alan Greenspan has survived Reagan, Bush and (nearly) Clinton, the
Fed’s answer to Saddam Hussein.
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In what follows, I’m going to move through the history of the World Bank and to the
International Monetary Fund, the targets of the Washington protests in April. The Bank and the
Fund are particularly important because, pace the protests of April, they have a much more
complicated relationship with the global economy than, say, the World Trade Organization. The
history of the WB/IMF reveals a great deal about the direction of the world economy over the
past fifty years, and raises some interesting questions about how that direction might be affected
by protest and popular challenge in the years ahead.
The IMF and World Bank: founding and mission
The Great Depression of the 1930s convinced the United States that governments had an active
role to play in the global economy. Although the Depression had many causes, historians and
economists have pointed out that much of the reckless financial activity (stock market
speculation, over-lending within big economies like the US, reckless loans to poorer countries
(especially Latin America), etc.) flourished in an environment of ‘free trade’ and a vacuum of
government control.5 Franklin Roosevelt based his New Deal policies in the US on the notion that
government had a vital role to play in fostering and controlling economic development; he was
also instrumental in arguing for the IMF and the World Bank in 1944, suggesting that
international governing bodies could work for the global economy in the same way that his
souped-up administration controlled New Deal America. 6
The IMF and World Bank, then, were envisaged as institutions which would be
controlled by the US and the other big powers, and which would help to maintain order in the
global economy.7 The IMF was a kind of policeman for the new policy of fixing the rates of
currencies around the world against each other – the European currencies, for example, were each
5
The big US and European commercial banks, for example, lost a ton of money in the Third World in the 1930s by
making loans which corporations and governments there couldn’t repay. This was bad news for many of them – they
struggled to cover the loans they’d made, and to keep Western investors from withdrawing their deposits and
precipitating a run on the banks; mostly in vain, as it turned out. Widespread bank collapses pretty much nixed the
federal government’s previous rhetoric that banking was best left to the bankers.
6 So the New Deal produced a lot of domestic banking regulations limiting banks to particular states, preventing
commercial banks (in today’s terms, a bank like Chase) from engaging in investment banking (underwriting share
deals, doing currency transactions, selling/packaging bonds, etc. – the kinds of things (again, in today’s terms) that
Merrill Lynch or Goldman Sachs get up to), and so on. Incidentally, the Clinton administration has been busy
dismantling this legislation in the past few years, to the glee of the banking/‘financial services’ industry – but that’s
another story.
7 The ‘developing world’, of course, looked very different in 1944, given the preponderance of colonialism, particularly
in Asia and Africa. The ‘international community’ which met to discuss and finally to draft the agreements at Bretton
Woods (44 countries) had patchy representation from what we’d call the developing world nowadays: only one nation
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pegged at a particular rate against the dollar, and were allowed to move around only within a
small band before the IMF would intervene and buy or sell the currency accordingly. The IMF
would do this buying and selling from a reserve fund, but it was hoped that it wouldn’t have to
intervene so often since currency speculators would realize that they couldn’t drive the value of a
currency below its peg, and that the IMF was too powerful to take on.8
The World Bank, meanwhile, was designed to offer discounted loans to the economies of
Europe which had been ravaged by WWII. Roosevelt and the other architects of the ‘Bretton
Woods system’ thought that private banks would be unlikely to make loans to these devastated
countries, and that those countries would in any case be unable to afford to borrow at commercial
rates.9 The World Bank, then, would channel money from richer governments (predominantly the
US) towards poorer governments, on favorable terms and at discounted rates of interest.
Countries could only receive World Bank assistance if they agreed to join the IMF, so the two
institutions locked in most countries – with the promise either of subsidized lending, or shortterm loans to prop up a currency, or some combination of the two.
The IMF and World Bank were therefore designed not only with specific tasks in mind,
but within a specific global economic context: currencies were ‘pegged’ to each other and to the
dollar, which made the entire economic system less volatile and more predictable; and the poorer
countries (even in Europe) found it hard to raise money from private banks for their development
projects (or simply for balancing their budgets and taking care of essentials), and were obvious
customers for a non-commercial bank which made loans at subsidized rates. In addition, the
United States faced an uncertain world order, and was keen to ensure that it used its economic
power to keep as many countries (or at least governments) on its side as it faced down the Soviet
Union.10
from sub-Saharan Africa (Ethiopia), for example. The same story of a very limited ‘international community’ holds for
the formation of the UN a year later.
8 All sorts of factors affect the value of a particular currency, and currency values have a huge influence on the
competitiveness of a country’s exports, the things it can import, etc. The post-WWII thinking basically asserted that it
was a better idea to fix these values internationally, rather than to let them ‘float’ around at any level. This was, of
course, before the currency speculators (people who make it their business, in a nine-to-five sort of way, to buy and sell
currencies in the hope of making a successful bet on which way they’re headed) took over the store – more on that
later.
9 Again, remember that the big commercial banks (or, at least, those still standing) had been badly burned in the
1920s/1930s, and had a big and recent sense that lending to the ‘third world’ could be disastrous. There’s no profit to
be made out of usurious rates of interest if you can’t get any money out of a debtor.
10 The Soviet Union and its satellites stayed out of the IMF/WB since conditions were attached to the loans. John
Maynard Keynes, the legendary economist (and member of the British delegation at Bretton Woods), had argued
against making loans conditional on particular economic policies in debtor countries; but the US delegation overruled
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Changing circumstances: 1945 to 1982
In the three and a half decades following the founding of the World Bank and IMF, these original
circumstances changed dramatically. In the first place, the United States became interested in
many third-world countries which had previously been off the map for US policymakers, given
the new anxiety about Communism and an extension of Soviet influence. Although the World
Bank was staffed by representatives from a myriad of countries, its president was always
American, and its policies were very heavily influenced by the political and economic muscle of
Washington. Given a US fear of Communist encroachment in south and south-east Asia, Africa
and Latin America, the World Bank was therefore encouraged to make development loans to
countries beyond its original European focus. The bank disbursed large sums to governments
throughout the developing world, usually attaching conditions to those loans which determined
what they were to be used for, or the economic policies of the government which agreed to
them.11
The World Bank in this period was simultaneously an agent for change and development
in the developing world, and an instrument of US foreign policy. Historians have noted the
importance of these development loans to many of the world’s poorest countries, and have
conceded that many third-world nations would have struggled to raise money from private banks
during this period. On the other hand, the US was selective about the kinds of programs it was
happy to support, and the kinds of governments it would lend money to (through the World
Bank). Many of the ‘anti-Communist’ dictators in Africa and Latin America were kept in power
thanks to preferential treatment from the World Bank, and other governments which were rather
more democratic could find their room for economic maneuver constrained by conditions
attached to World Bank loans. For example, developing countries were routinely asked to
concentrate on development projects which would make more efficient their export of raw
materials and commodities; but developing governments were frequently interested in developing
an industrial base beyond these raw materials, and escaping their usual dependence on the prices
him, which pretty much confirmed the Soviets in their suspicion that the IMF/WB were all about shoring up capitalism,
rather than facilitating capitalism, socialism or communism.
11 Thus the WB would lend to a particular country because it was of strategic value to the US (like Egypt, or Zaire, or
Indonesia), in spite of the repressive and/or corrupt government of that country. (Usually the repressive government
made the lending process a whole lot easier – WB reports around the late 1960s were always puffing the Indonesian
government for its cooperative stance, apparently oblivious to the fact that the same government had just killed around
half a million of its own population.) The issue of corruption within developing countries is very important, but I’ve
largely avoided it here. Most of the truly corrupt governments in the 1960s and 1970s, the governments which ran up
huge loans from the West and blew or salted away this money in Europe, were especially undemocratic. There’s a
really crucial issue here about accountability – can the IMF/WB, or private banks for that matter, hold people in the
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of those materials which were set on Western exchanges. There was therefore a tension between
the aspirations of these developing countries, which sought to compete with the West on an equal
footing, and the priorities of Western countries (which controlled the World Bank), which were
eager to avoid massive industrial development in the Third World which might lead to local
competition for established Western industries/corporations.12
In the 1960s and 1970s, therefore, developing governments had some access to cheap
loans, but had often to swallow onerous conditions to get their hands on this money. Those
governments with a rhetoric of industrial development had a problem, then: new industries would
cost a fortune to establish, but the most obvious (and preferred) source of cash (the World Bank)
would probably turn down any requests for this kind of loan.13 Developing countries thus looked
around for other sources of lending. As it happened, the big commercial banks in the West had
started to wonder if they weren’t being too cautious in their steering-clear of the third world, and
those employees who remembered vividly the disastrous debt crisis of the 1930s were slowly
disappearing (through retirement, or death) from the corporate ranks. The Western banking
industry in the 1950s and 1960s was beginning to think once more about lending as a source of
profit rather than a kind of service; and this idea moved from loan-pushing in the US (the
explosion of consumer credit, for example) to a more aggressive courting of potential third-world
borrowers.14 Put yourself in the shoes of a third-world government: you have a rhetoric of
national development and industrialization which stresses your forward-looking philosophy, your
desire to escape from dependence on the West, etc. You have ambitious plans to build an
automobile industry, or to produce your own steel, or to make planes, or whatever. You have no
capital to do any of this, and the World Bank is dragging its heels on any loans which don’t get
directed specifically to your traditional economy – getting gold out of the ground, or harvesting
sugar, or producing cattle, or whatever. And then these commercial banks from the US and
third world responsible for loans that were taken out by corrupt governments which they had no say in electing?
Unfortunately, the answer for all practical purposes is yes.
12 Many Latin American countries were particularly interested in escaping from dependence on commodity exports,
and the varying prices for commodities set (in the West) on the international exchanges. The policy of trying to develop
an industrial base and to redirect an economy away from cash-crop or raw material exports is called (sorry about the
jargon) import-substitution industrialization, or ISI for short.
13 ISI is really expensive because you have to take a big loss on the initial investment in training, equipment, and so on;
you also have, usually, to put up some kind of tariff barriers (see note 16) to ward off cheaper goods (say, snazzy
American cars which might compete with your new and not-so-snazzy Brazilian cars) from abroad. This makes
countries like the US super-pissed and even less likely to give you WB money; so it’s back to the private banks and
their usurious/‘market’ rates of interest.
14 When I say ‘courting’, I really mean it. These commercial banks would actually hire people to go around developing
countries looking for ‘lending opportunities’, in much the same way that you get bombarded these days in America
with junk mail offering you credit/money. You don’t have to be rich to get these offers; if you’re not in prison, you’re a
target market. You’ll tend to receive more of this mail at times when the banks are keener to push their loans. As of yet,
you don’t actually have people wandering from door to door offering you loans, but that’s effectively what big US and
European banks did in the third world in the late 1960s and especially the 1970s.
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Europe try to sell you on the idea of ‘non-political’ lending – the patter goes a bit like this: “Why
should you listen to the World Bank? Why let those guys tell you how you should develop? You
make the choices! It’s your loan!”15
And so the bargain was struck. The World Bank offered the best kind of loans, but they
came with strings attached. The commercial banks offered crappier loans (they came at higher
rates of interest, in shorter maturities, etc.), but they didn’t insist on political/economic
conditions, like a removal of tariffs.16 So you could borrow hundreds of millions of dollars from,
say, Bank of America or Citibank, and invest in your top-of-the-line (and extremely inefficient, at
least in the first instance) aviation plant, but you soon found an increasing proportion of your
GDP going back to these Western banks in interest repayments. Thus the 1970s – a period of
ever-crazier borrowing and lending, with both sides (Western banks and developing
governments) caught in a spiral. For the governments, the higher rates of interest forced more and
more borrowing, eventually leading to loans taken out pretty explicitly to pay off interest from
previous loans; in addition, the possibility that these expensive new industries (which the loans
had originally funded) might some day turn a profit, and turn the tide of all this borrowing,
shimmered in the distance, underwriting more loans.17 The banks, on the other hand, found
themselves in a double-bind. First, the chronically slow growth in their traditional lending
markets in the 1970s (Europe and the US) reduced the number of customers for their loans; but
the high rates of inflation in the West also forced them to lend out their deposits at high rates of
interest, or the money in their vaults would actually depreciate as it sat there.18 Second, they
threw good money after bad in an effort to keep their debtors solvent. On some level, every bank
has an interest in keeping its creditors solvent – once they go belly-up, the bank has to admit that
the loans were bad, and often to write them off. Writing-off loans is about the least-favorite
You’re probably familiar with this sort of rhetoric if you’ve ever received a credit card offer in the mail – notice that
they always tell you that the loan will set you free, where ‘freedom’ equals a new car, or a holiday, or something else
that sounds kind-of nice but usually costs money that you don’t have. You’re in charge! until you start paying it back...
16 Tariffs – the rates of duty you’d slap on imports to try to prevent cheaper goods from, say, the West from flooding
your markets and undercutting your efforts to sell your own country’s cars, or steel, or sewing machines, or whatever.
17 The people who pioneered ISI – often very talented technocrats and economists – were certain that, if you gave these
new industries long enough, they’d at last become competitive not only in their home country, but also on the
international market. So you’d be able to drop your tariffs without any fears, since not only would your own population
want to buy its own goods, but you’d look forward to selling your competitively-priced goods all over the world. Given
the massive head-start of Western industry, and the substantial benefits of better funding and more lavish research
agendas in the West, this prospect of the developing countries catching up with the first world always remained in the
distance.
18 This is the answer to the very good and simple questions: “If lending was so risky, why lend at all? Why not just
leave the loot sitting around in the vault?” When the inflation rate is close to 10%, lending at high rates of interest stops
being just about profit, and instead constitutes a kind of investor/corporate rush-for-the-lifeboats. A lot of the cash in
these bank vaults actually came from ‘petrodollars’, money invested by Middle Eastern potentates who were getting
rich fast on the back of the oil boom. These guys were good customers but they were also creating the problem (oil
price rises causing more inflation in the West) which made it hard for the banks not to lose their money, just by sitting
on it.
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activity of bankers, and they’ll go to great lengths to avoid it; even in situations where the bad
loans stretch into the billions of dollars.19
While all this was going on with the World Bank and commercial lending, the IMF was
also experiencing major changes. Its original mission – to provide top-up loans on a short-term
basis to (richer) countries in temporary economic difficulties – had been altered in several ways.
For one thing, the IMF had begun to extend money to developing countries, helping them to
overcome balance-of-payments deficits. In addition, the basis for the entire Bretton Woods
system – a series of currencies linked to each other at fixed rates, attached also to a dollar value
tied to the price of gold – collapsed in the early 1970s. Problems in the US economy – the
slowdown in US growth, the explosion in US spending on the Vietnam war, and the oil crisis –
forced President Richard Nixon to close the ‘gold window’, and to remove the one concrete value
which had anchored the entire global financial system.20 Instead, the dollar and other currencies
started to float freely against each other, and the IMF was no longer engaged as a point of
principle in sustaining currency bands and keeping currencies at a particular level. Currency
speculators and other traders could now buy and sell most currencies freely, which contributed to
a more unstable international system, and more fluctuations in the value of currencies.21
At the beginning of the 1980s, then, the global economy was in a state of near-disaster,
and the hopes for the World Bank and IMF had been largely dashed. The World Bank was now
lending less money to the developing world than commercial banks, which had become trapped
in a debt spiral whereby they pushed ever larger loans on poorer countries which had no means to
pay back the interest, let alone the principal sum owed. Developing countries found it harder and
I should also say that this market in loans to the third world is terrifyingly complicated – it’s not just a case of a bank
lending to a country (or a corporation or individual within that country); there’s also a very loosely-governed source of
capital, known as the Euromarket, which channeled cash to poorer countries in the 1970s when it had trouble lending
this money to the First World, which was mired in recession. We can cut some corners in getting our heads around this,
however – it’s basically private banks, and some public institutions (IMF, WB, Western governments), lending money
to poor countries.
20 In practical terms, speculators had driven down the value of the dollar, and were actually trying to cash out in gold –
to get their paws on gold bars (real shiny gold bars, like in the movies), in the knowledge that the dollar was overvalued
and they’d be getting a good deal on this gold. Nixon, meanwhile, realized that the basis of the system – that the entire
dollar supply could be redeemed in gold, if the need arose – was no longer viable, since there were many more dollars
in circulation than could be converted into gold. So Nixon declared that the dollar would no longer be fixed to a ‘gold
peg’, and would float freely on the international markets. In other words, the dollar would only have value against other
currencies, rather than against a tangible substance like gold. This also meant you could buy and sell as many dollars as
you wanted to, nudge the value of the dollar (and other currencies) up and down quite substantially, and so on. There
was no longer any government or institution committed to keeping currencies at fixed levels; just the IMF to intervene
in emergency situations with short-term loans. The early 1970s, then, were very good years to get into the currency
speculation business. (See note 8 on the weird nine-to-five-ness of this job.)
21 In some respects, this new system of floating currencies was a very bad thing – it meant that countries were much
more vulnerable to currency speculators. However, the US argued that it simply couldn’t underwrite the entire global
economy anymore with its gold reserves; moreover, the argument that the market was now king enabled many
governments, even in the midst of economic difficulties, to deny responsibility for what was happening – not wholly
implausibly, as it turned out. If this all seems pretty fatalistic and irresponsible, you’re right – it is.
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harder to channel their new loans into the industries which they had hoped would guarantee their
future wealth; and western investors became increasingly suspicious both of the health of the
third world, and of the safety of their own deposits in the big western banks. This precarious
situation did not last for long.
The debt crisis and structural adjustment: 1982 and after
As I’ve tried to show, the IMF and World Bank played a role in the creation of the debt crisis, but
were by no means its chief villains. Private banks had effectively glutted the third world, and
would now turn the tables on their creditors by ending their lending and asking for their money
back. In 1982, the Mexican government announced that it could no longer service its debts, and
fell upon the Western financial community for mercy. The private banks immediately
reconsidered their entire lending portfolio in the developing world, and many other poor countries
instantly faced the same prospect of default – they would be unable to pay even the interest on
their debts unless the West somehow channeled more money in their direction. The big Western
commercial banks, meanwhile, realized with horror that they had now lent so much money to the
third world that they couldn’t cover their own depositors if they faced a run on the banks: in other
words, if the developing loans could not be recouped, the banks had insufficient funds in their
vaults to pay back the deposits they held for Western investors. 22
This was a very big deal. Since the developing countries were bankrupt, the loans made
by banks were, in practical terms, ‘bad’ – simply, the bank couldn’t count on getting them back.
Since the banks had so many of these ‘bad’ loans that they could not return all their depositors’
money if those depositors asked for it back, the choice facing bankers and government officials in
the West was clear: the banks had either to admit that the loans were bad, and therefore to confess
to their investors that the Western banks were themselves broke; or they had to find some way of
making the bankrupt developing countries seem to be solvent, thereby persuading Western
depositors not to ask for their money back from the banks. The ‘bad’ loans had to be presented as
22
The banks could have recalled their loans in the late 1970s, of course, but in 1982 it looked a lot like the whole house
of cards was about to come down. In the early days of the crisis, some banks thought that they might be able to call in
their loans before their competitors did, in much the same way as creditors might each hound a near-bankrupted person
just before s/he went under. The US Treasury and the IMF/WB soon put a stop to this, forcing the banks to act as a
cartel and to avoid this every-bank-for-itself attitude (which might have saved a few, but would have left most banks
with the same nightmarish prospect of collapse).
11
‘good’, even where there was little or no evidence to argue for the solvency of dozens of poor and
indebted countries.23
To put this a little differently: the banks and the developing countries had brought the
international economy to the point of collapse in 1982. The choice I’ve just explained could be
spun this way: the Western bankers and government officials had to decide either to admit the
truth, that the banking system had collapsed, that these loans were bad and could not be recouped,
and that the entire global economy would require massive restructuring; or, alternatively, to prop
up the idea of a solvent third world even though there was little evidence to support it, and
regardless of the social cost for the world’s poorest people.24 Although it sounds like something
from a movie, the decision-makers actually got together in one place – Toronto – in September
1982 to decide this monumental question. Walter Wriston, former head of Citibank, described the
scene: “We had 150-odd finance ministers, 50-odd central bankers, 1000 journalists, 1000
commercial bankers, a large supply of whiskey and a reasonably small city.” Suffice to say, this
crowd was stacked much more heavily in favor of the bankers and Western interests than the
developing world; and, not surprisingly, at the end of its whiskey-fueled deliberations, the
Toronto conference announced that third world debt would be ‘restructured’ rather than written
off.25 The ‘bad’ debts could still be made good, argued US Federal Reserve Chairman Paul
Volcker and IMF director Jacques De Larosière – and so the IMF, the US and other Western
countries began to construct this image of a solvent developing world.
The plan went like this: the IMF would extend its lending to smaller countries, helping
them to overcome their chronic balance-of-payments deficits and to enable them to ensure a tiny
flow of interest payment to their various creditors. The IMF had made loans to the third world
before, but on nothing like this scale – after 1982, it was the principal sponsor of the developing
countries. In addition, Western banks would agree to fold additional loans into the IMF loans, to
produce a package of loans which the indebted countries would be asked to accept. The catch,
however, was that the IMF would insist on rigorous conditions for the new loans. ‘Structural
So the question here is not whether, in some abstract sense, the Western banks were ‘bankrupt’, or overstretched, or
things like that – there’s no doubt that they were. What counts is whether they could successfully construct the opposite
image of solvency, financial responsibility, and investor confidence. They didn’t necessarily have to find the money –
they just had to convince the ‘financial community’ (wealthy folks, and ordinary people like me or you who might have
bank accounts and know very little about third-world lending) that they were going to get it back, at some point – and
that we shouldn’t, therefore, scamper to Citibank and ask for our cash and go stuff it into the mattress. You sometimes
hear people talking about economics and finance as if it’s all about confidence and impressions rather than the raw
numbers – those people are on the money, at least when it comes to calamitous melt-downs like the 1982 crisis.
24 It’s pretty hard not to see this as a straightforward lesser-evil calculation: admit that the system has collapsed, and try
to reconstruct the global economy accordingly; or keep the system intact by screwing more than two billions of the
world’s poorest people for decades. When you’re making this kind of choice in a Toronto conference center, the
absence of any of those poorest people is a good way to clear the head.
23
12
adjustment’ refers to the practice of rearranging an economy in alignment with these IMF
demands. Some of its crucial aspects included:
1. Devaluation of the currency.
2. A vigorous campaign to defeat inflation.
3. Severe cutbacks in public spending, especially in the social sector.
4. Privatization of state-run industries. 26
The aims in this are simple – the IMF intends to reduce a country’s spending on its own people so
that more money will be available to pay back various lenders, and to establish at least the image
that these countries are solvent. Since most developing nations have always produced a cash-crop
or raw material for export, the theory behind this supposed solvency is that the inherent worth of
a country (in strictly financial terms) can best be tapped with the minimum of social obstructions
– the IMF should force a third-world government to concentrate on growing a cash-crop for
export, rather than diversifying its industry, providing social services to its people, or
creating/responding to domestic demand (say, for a different crop than the cash-crop for export).27
The other element of structural adjustment was an insistence on ‘opening up economies’
to foreign investment. This was effectively an invitation to Western corporations and investors to
use the developing world as they saw fit. For example, countries in south-east Asia were
encouraged to court sneaker manufacturers, allowing big US and European corporations to ‘outsource’ their labor needs and production mechanisms to the third-world, without having to worry
about government regulations or restrictions on the movement of foreign capital. A US firm could
easily move across the border into Mexico and make use of the ‘open’ economy there, and the
25
I feel like apologizing for this story because it sounds like the kind of thing a conspiracy theorist would make up, but
it happened, it really did.
26 These policies also tend to reinforce each other – the fight against inflation, for example, is often used to justify
slashing public services and making large numbers of public employees (each of them about to ask for wage increases,
as the theory goes) redundant. This kind of thinking is another example of what happens when economics is more about
numbers than social factors and consequences. I should also remind you that these policies have not been limited to the
developing world – virtually every country in the West, from the US to most of Europe, has had to submit to the same
‘medicine’, often at substantial social cost.
27 Imagine if you had an apple tree in your back yard, and you’d traditionally sold your apples to get income. You’d
also eaten some of your apples, and they were tasty. You’d spent your money on food, clothes, medical bills, and other
essentials. But you’ve run up huge debts (perhaps trying to escape from your dependence on the apple tree, since the
price of apples in your neighborhood could jump around all over the place) and now the bank is trying to call them in.
Instead of recognizing your bankruptcy, which would at least have allowed you to start on a fresh page and escape your
debts, the bank has forced you to stand next to your apple tree and pick apples 24/7 (or wait for more apples to
emerge). No clothes, no medical care, nothing. And the bank won’t let you eat the apples, either, or grow some other
crops to feed yourself. That gives you some idea of what structural adjustment feels like. Of course, if you expand the
example to the scale of a country, you realise that a whole lot of people just keeled over and died while they were
standing next to their tree, from poor sanitation or preventable disease or even famine.
13
Mexican government could do little to stop this (or to police that corporation in any meaningful
way) without risking the lifeline of continuing IMF loans. Thus the structural adjustment
programs did see some progress in industrializing the third world, but this process was played out
according to first-world rules, and almost entirely for first-world gain.28
The IMF, then, moved from the periphery of the debt problem in the 1970s to take centerstage in the 1980s; its funds were replenished by Western governments (according to a formula
which ensured the largest contributions came from the richest countries), and its loans were
coupled with more bank lending and made conditional on developing-country acceptance of the
structural adjustment programs (SAPs). The World Bank, meanwhile, continued to make loans on
the basis of specific projects intended to alleviate poverty and promote development, but insisted
on the same SAPs and the same criteria for economic management as the IMF. Although the
World Bank was not as closely involved in setting the terms of the SAPs and making the shortterm loans which kept the moribund economies alive, its own lending program inevitably
reinforced the new standards for ‘stabilization’, ‘financial austerity’ and ‘open economies’. The
IMF and the World Bank acted as a team in the promotion of this new economic path, and the
exclusion of all others.29
The ‘Washington Consensus’ and the past decade
Even the most right-wing economists and politicians have had to face the fact that, in the 1980s
and the 1990s, the extensive structural adjustment programs had made little or no contribution to
poverty alleviation in the poorest countries (the evidence suggests they may even have worsened
poverty); and that debt burdens remained extremely high. To suggest from this fact that structural
adjustment has failed, however, is maybe to misunderstand the reasons why it was adopted in the
first place. Structural adjustment programs, unlike the original mandate of the World Bank or the
IMF were not intended to foster development and to reduce poverty. They were intended to get
28
Given the calamitous state of much of the developing world as structural adjustment began to bite, you can imagine
that these Western corporations could often seem like potential saviors of particular regions or even countries, as they
brought at least some jobs and money into poorer regions of the world. Factors which could and should be shocking –
extremely low wages, dangerous working conditions, environmental devastation, and so on – were more easily
overlooked by many third-world workers, desperate just to have a job and to feed themselves and their families. This
thinking still holds good in many parts of the world, and explains why (i) many people in south-east Asia go to
substantial lengths (figurative and literal) to work for Nike, and (ii) poorer countries at the World Trade Organization
often dismiss environmental groups’ efforts to force corporations to clean up their act, since an acceptance of
environmental devastation provides the developing world with its ‘comparative advantage’ in the global economy. It’s
a crazy world, but you’ve got to eat.
29 In this, of course, they were simply doing the bidding of their US/Western European eminences grises.
14
the world, and especially the Western financial world, out of a very deep hole which seemed, for
a brief period in 1982, as if it might be bottomless. In this sense, the SAPs have been staggeringly
successful in the past twenty years.30 By and large, western banks have been able to persuade
their investors that their many loans in the third world are sound; in the late 1980s and 1990s,
they were even able to create a substantial market in these debts, whereby they might buy and sell
other people’s loans to the developing world at different prices, set by the market – the apparent
commercial disaster of 1982 had become a commodity, something to be bought and sold in order
to make a profit.31 The IMF has succeeded in squeezing interest payments out of even the poorest
countries, having decimated their social sectors and triumphed in the campaign to cut public
spending even in countries where this expenditure was vital. The World Bank has overcome its
earlier scruples over structural adjustment, and has begun to see SAPs as the only path, however
arduous, to successful development in the third world.
A British economist, John Williamson, looked back across the first decade of this new
thinking in 1990, and coined the term ‘Washington Consensus’ to describe the unanimity of
feeling at the World Bank, IMF and the US Treasury over these responses to the debt crisis. Since
the World Bank and IMF are overwhelmingly controlled by Western governments, these
institutions could safely ponder the success of structural adjustment in terms of Western financial
survival, rather than the precipitous fall in living standards in many developing countries. In fact,
from the Western perspective the SAPs have had a number of useful side-effects which not only
guarantee a stream of debt repayments, but provide juicy business opportunities for US and
European banks and corporations. As we’ve seen, the ‘open economies’ created by structural
adjustment offer excellent prospects for those sectors – textiles, chemical production, heavy
industry – which increasingly face problems of high wages and environmental awareness in the
West. These businesses can retain their ownership and profit structure (almost entirely Westernoriented) but relocate the messy and expensive elements of their work to the developing world,
where people are cheaper and environmental laws are easier to circumvent.32
The ‘open economies’ also appeal to the enormous US-based financial services industry,
which now has myriad new toys to play with in the third world: debt certificates, freely-floating
One of the more grimly entertaining things about first-world rhetoric on structural adjustment is that it’s easier for
the US, IMF and WB to talk about their failure to reduce poverty in the 1980s and 1990s, than to admit their stirring
success in saving their own asses after 1982. Since the choice in 1982, which we’ve explored above, wasn’t widely
publicized, appearances have been kept up even where this leads the IMF/WB into ‘soul-searching’ mode, and denies
them the back-slapping they actually deserve for saving the western banking system. I guess they get the latter at
internal functions (and, to some extent, from the business press).
31 This business of packaging and selling debt is truly way-out-there. US Treasury Secretary Nicholas Brady pioneered
this process in the late 1980s, and the debts of some Latin American nations with substantial GDPs and exports (like
Mexico and Brazil) have proven especially popular on the (get this) international debt markets.
30
15
currencies, shares in newly-privatized industries, and baroque financial instruments such as
derivatives, to name but a few. All these could be packaged around third world economies,
creating big profits for the investment banks that did the packaging, and opportunities for
‘aggressive growth’ for commercial banks, hedge funds and even mutual funds.33 The
‘Washington Consensus’, which has tried to present structural adjustment and ‘open economies’
as a desired path rather than an emergency (and short-term) measure, holds that these changes in
economic structure have essentially freed the developing world from decades of insular thinking
and capital restrictions. Thus, countries like Mexico and Thailand, Peru and Mozambique can
become ‘emerging markets’, places where Western investors can buy and sell money, and where
mostly Western capital can flow freely to reward invention, or punish deviation from the path of
austerity.34
Two things have messed up this rosy picture. The first is that a substantial proportion of
the world’s population remains in a state of chronic poverty, and even nations which have shown
some improvement in their GDP or their average income have seen growing inequality between
their richest and poorest inhabitants. This isn’t necessarily a major concern either of the IMF or of
the Western financial services industry, but it does vex some people at the World Bank who are
concerned at least at some rhetorical level with the boast that the World Bank is striving to end
world poverty.35 We’ll come back to this point in the final section, but it’s worth noting that the
ongoing poverty problem hasn’t escaped the notice either of activists or of some people in
Western governments. Some of the recent talk about debt relief or forgiveness stems from this
32
See note 28 for more on this.
You’ve probably come across mutual funds, which are pools of money from many different investors (usually
individuals, but sometimes institutions) under the control of a fund manager who directs the cash into different
holdings. Hedge funds are much crazier, though they work on a similar principle. Super-fund managers (often Wall
Street legends, or Nobel-Prize-winners (see note 59 on the latter)) head off to some leafy part of New York state or
Connecticut, then move around huge sums of money for super-rich investors. The hedge fund is a particularly
vertiginous influence on the economy since these managers regularly borrow huge sums of money from banks and the
like to ratchet up the stakes of their investments. Although these guys are supposed to be the glitterati of the financial
world, they can lose a sack of cash just as easily as the rest of us – witness Long Term Capital Management’s disaster
in 1998, which threatened to derail the entire US economy. (The solution: a Treasury-arranged bail-out. ‘Paging moral
hazard!’)
34 Again, this is a pretty way-out subject. ‘Financial liberalization’ is the process by which you take down the various
barriers to money entering and leaving your country, and dismantle regulatory systems which police the way in which
that money affects your economy. Wall Street, and especially its powerful investment banking arm, is in love with
financial liberalization because it creates huge business in these new and unfamiliar markets – consultancies,
underwriting, and the packaging of various new financial ‘instruments’/products which commercial banks and investors
can buy and sell to each other. One of the things it’s truly hard to get your head around, as a relatively ordinary person
with no background in economics, is that Wall Street and international investors can make a ton of money out of a
country that has a stock exchange and a tradable currency, even if that country is very poor and an unlikely candidate
for ‘emerging market’ status – sub-Saharan Africa is the new tip, for those of you who are interested. This money is
speculative and is made and lost on things like the variation in currency prices, the short-term inflation/speculation of
particular stocks, changes in interest rates, and a whole lot of other stuff that you’d be flat-out amazed by.
33
16
source; as does the right-wing perspective that the World Bank should be abolished. More on this
in a moment.
The other spoiler has been the apparent instability of this new financial system, in which
‘open economies’ have been adopted not only in the third world, but throughout Europe and
North America. The fact that money can move from New York to Maputo to Wellington
suggests, on one level, that the global economy is extensive and interdependent; on the other
hand, this money can now be moved from place to place at alarming speed, and tends to spend
rather less time in some parts of the world than in others. For example, although there have been
several periods of relative boom in Mexico and Brazil in the past 15 years, at least in terms of the
emerging stock markets or currency trading, both countries have also suffered from catastrophic
slumps precipitated by the speedy exit of short-term investments. In other words, the ‘open
economies’ promoted by the IMF have managed to attract investments from a variety of sources,
but they’ve proven singularly vulnerable to the chaotic departure of the same investments at the
hint of trouble.36 Moreover, the interconnectedness of the world economy has broadened
significantly the definition of ‘trouble’, so that the Asian financial crisis of 1997 and early 1998
can be seen as an important cause of the Russian meltdown in the autumn of 1998, and the
Brazilian crash in the winter of 1998/1999.37 This has caused at least some people to wonder if
things are as rosy as they seem; or if the IMF and World Bank need new strategies for dealing
with the world that their policies have created. As we’ll see, these strategies and suggestions
come from the right as well as the center (there’s not a lot of leftist strategy in the mainstream,
sadly), and it’s worth keeping tabs on them in thinking critically about a different and more
equitable model of global economics and development.
35
Since the World Bank has always been identified (again, rhetorically at least) with the alleviation of global poverty,
it has a tougher job arguing that ‘stabilization’ is in fact the best goal for an international organization in this day and
age, which is pretty much the IMF’s line.
36 This has a lot to do with the fact that much of this money is plainly speculative – people throwing cash at a place or
currency not with any interest in its long-term (or even medium-term) prospects, but to make a quick buck. The key
then is not to pick the best place to invest in the country with the most interesting or useful economy, but to get into
something at the cheapest price, and get out at the highest. Getting in and getting out are more important than the longterm development of the thing you’re getting in to – hence the ‘volatility’ of our new world economy.
37 The influence of one of these crises on another is often pretty mundane – the fund manager decides that because
Asia’s gone belly-up, it’s time to get out of ‘emerging markets’ for a while; whoops, there goes Russia! The basically
fragile nature of the whole ‘emerging markets’ concept makes for a nailbiting moment whenever any developing
country has a problem, regardless of where in the world it is, and what kind of problem it has.
17
2000 and beyond: issues and problems
Although a lot of folks were talking in 1998 and even 1999 about the imminent collapse of the
global economy, a couple of lessons from the Asian and Russian crises of 1997-1998 have
silenced much of the doomsday rhetoric in the US and Europe. First, investors have proved
willing to return to Asia and other markets relatively soon after they’d taken their money out.
Although the new world economy makes it much easier to get money out of a country which
appears to be taking a nosedive, it’s also much easier (and, apparently, more acceptable) to go
back there soon after. After the 1920s and 1930s, when bad debts in Latin America caused many
Western banks to fold, it took twenty-five years for the commercial banks to think seriously about
returning to the region; in 1999, investors who had bet against the Brazilian real were buying
currency or stocks again just a couple of months later. In part, this confidence was bolstered by
the strength of the US economy, which provided a safe haven for investors to lick their wounds
(or count their winnings) before returning to the more volatile ‘emerging markets’; more
generally, though, the incredibly diversified financial services industry, and the technological
changes which have powered its rise to prominence, make this kind of accelerated boom-bust
cycle much more likely than in previous decades. Even though Asia suffered substantial
economic hardship (and serious social unrest) in 1997 and 1998, investors and Western
governments now downplay the dangers of that time as they’ve observed the first (and speedy)
signs of a recovery, and a return of investors to the region. The inclination, then, is to say in the
midst of a recovery that the ‘crisis’ was not so bad after all; and to ignore the likelihood of
another one around the corner.38
The other lesson of 1997/1998, which is more implicitly than explicitly stated in the
business press, is that financial turmoil around the world is apparently compatible with a boom in
the US economy. At first glance, this seems kind-of crazy, given the mantra about the
interconnected global economy – even Western analysts predicted that the US couldn’t ride out a
substantial downturn in Asia, Latin America and elsewhere. However, what seems to have
happened actually proves the ‘interconnected’ theory, but demonstrates that the misfortune of the
rest of the world may turn out to be good fortune for the US. Evidence suggests that the turmoil in
foreign markets (especially in the ‘emerging market’ stock exchanges) may have freed up capital
which was directed to the US, and especially to the rampaging US stock market. The Dow Jones
This theory of a speedy recovery following a sudden crash is still in its early stages; and it’s dependent on the
avoidance of truly awful stuff (like social devastation, or revolution, or war, or such like) in the period, however short,
between the bust and the recovery. The panicked rhetoric of a lot of supposedly knowledgeable economists and
politicians in 1997/1998 can be read as either prudent or terrifying, depending on your mood.
38
18
index, then, burst through 9,000, then 10,000, then 11,000 even as major economies abroad
languished in their various crises. Although the events of the past few years certainly don’t prove
that a global economic crisis will always result in big profits for the US, the big picture indicates
that serious problems in other parts of the world will not necessarily bring down the US
economy.39 Given the legacy of 1982, when bank lending in the developing world certainly
threatened to overturn Western economies as surely as third-world ones, this ‘lesson’ from the
recent crisis has been happily imbibed by bankers, analysts and even politicians in the US. Again,
there’s a clear message here: in spite of the recent turmoil, it’s business as usual.
Let’s return to the IMF and World Bank to see where they fit into this picture. The IMF
has assumed a much more important role in the global economy, and has essentially become a
kind of bail-out agency which moves into a particular country with a collapsing economy and
offers emergency loans to stabilize that economy and ward off further speculation and ‘capital
flight’ (people trying to get their money the hell out). Although it had been performing this role in
many of the world’s poorest countries since 1982 and earlier, the sums of money required to bail
out ‘emerging markets’ have become larger and larger. In 1994, after the US Congress rejected
Bill Clinton’s plan to bail out Mexico, the US leaned on the IMF to provide a $20 billion loan to
the Mexican government to stabilize the tumbling peso.40 Since then, the IMF has been making
huge loans (measured in the tens of billions of US dollars) to other countries which appear to
need assistance on this scale: Thailand, Indonesia and Russia were major recipients in 1997/1998.
Given that this money comes from Western taxpayers (the IMF is funded by contributions from
(mostly) Western governments), some voices in the US and elsewhere have been raised against
the disbursing of such huge sums; particularly when evidence suggests that in some cases, such as
Russia, much of this money may have been illegally appropriated by banking and government
insiders, and may have had little impact on the financial crisis it was intended to assuage.41
Conversely, the Clinton administration has argued that the rude health of the US economy in the
midst of these global crises proves that the IMF is doing its job – economic collapses around the
There’s a chicken-and-egg aspect to this: did the US economy tempt money to leave ‘emerging markets’ more
speedily than it would otherwise have done (‘Why lend to Thailand when I could get 20% returns on Amazon on the
NASDAQ?’), or has this fleeing money alighted on the US and helped to prolong an unprecedented (and artificial)
boom in share prices (‘I need somewhere to put my money, Amazon’s a nice enough name, shame about the huge
losses, but what the hell, it’s a tech-stock’)?
40 This whole saga was, in essence, a scandal – Clinton couldn’t get Congress to agree to the bail-out since, as one
Congressman put it, “Why should Main Street bail out Wall Street?” Then Clinton got Michel Camdessus, the IMF
head, to agree to the largest loan in IMF history without even consulting the IMF’s European members.
41 The Russian government got billions of dollars from the IMF in the summer of 1998, kept the value of its currency
high to allow its pals to cash their roubles into dollars, spent the IMF’s dollars on (worthless) roubles, then devalued
when the IMF pot was empty. A neat trick, and a very lucrative one – hence the nouveau-riche Russian presence on the
French Riviera, and in some Ivy League schools.
39
19
world are effectively addressed and contained by IMF lending, and the American economy is able
to survive the turbulence with only minimal discomfort.
The World Bank, meanwhile, is still committed to its development agenda, lending for
specific projects in the poorest countries, and to projects which might have trouble attracting
commercial lending in slightly wealthier nations (like many Latin American countries). The
World Bank, however, has maintained its requirements for ‘open economies’, privatization,
minimal social spending, and so on – and has been open to partnerships with Western
corporations searching to advance their own ‘development’ agenda in the third world. (Former
World Bank economist Larry Summers, now US Treasury Secretary, was a particular advocate of
this kind of corporate-third world ‘partnership’ in his time at the Bank.)42 The fact that the Bank
offers loans at subsidized rates, however, has raised the ire of commentators and politicians in the
West who are unsympathetic to any form of non-market lending. Despite the World Bank’s
commitment to structural adjustment policies as it makes its cheaper loans, its critics see any
attempt to offer money at discounted rates as an affront to the political right’s most cherished
belief: that the market is the best judge of everything. Just as right-leaning critics deplore the IMF
as a kind of super-national welfare state, dishing out welfare-billions to economies that have gone
broke, so these same critics have condemned the World Bank for peddling cheap money to
countries which are not responsible enough to spend it. The domestic analogy: if you’re out of
work, it’s your own fault and you shouldn’t blame anyone except yourself. If the government
tries to find you a job (pretty much the guiding philosophy behind, say, FDR’s New Deal), it’s
encouraging you in your indolence and basic personal hopelessness. The right way forward is for
you to make the changes you need to get a job, regardless of what those are, and then to come
back to the job market and look for one when you’ve got your shit together.
Let’s pause here for a second and consider how all this plays out in the US right now, in political
terms. Obviously the left isn’t really on the map in any discernible form, so I’m going to put this
in terms of the ‘liberal’ view (roughly speaking, Clinton Democrats) and the ‘conservative’ view
(everyone from George W. Bush to the right-wing economists who made Reagan such a star).43
42
The Clinton adminstration certainly knows how to pick its Treasury Secretaries, in terms of their commitment to free
markets. Preceding the WB alum Summers was Robert Rubin, who’d amassed a $130 million fortune in investment
banking before he joined the Clinton team, and has now gone back to New York (Citigroup, specifically) to make
another one.
43 Sorry to use these terms, especially ‘liberal’. If the latter offends, you could maybe use ‘centrist’, or ‘Third Way’, or
one of the other words the former left has devised to keep down the blood pressure of its big-business buddies.
20
Liberals are big supporters of the new global economy, and believe that the market is the best
judge of virtually everything. Liberals do think, however, that sometimes governments (via
institutions like the World Bank and the IMF) have to intervene to help economies to get over
short-term difficulties, or to kick-start development in the poorest places. In fact, institutions like
the World Bank and IMF are very useful as water-wings for economies which aren’t yet mature
enough to swim in the global whirlpool. Put differently, these institutions can help the US and
Europe to persuade or coerce other economies to adopt the Western model. A country like Cuba,
for example, can be effectively isolated from the international economy (and from ready sources
of investment or lending) unless it agrees to IMF/World Bank rules and ‘discipline’.44 Thus the
IMF and World Bank are, for liberals, both a tool to assist other countries in times of hardship (a
kind of salve to the market’s ruthlessness), and a clever way of ensuring that, in the long run,
every country submits to the rules of the market. You could be pretty Machiavellian about this
double-edged nature of World Bank/IMF programs, but my guess is that liberals don’t fully
understand the ironies of all this themselves. Perhaps the truth is that liberals have come to think
of free markets as an absolute given, like the proportion of nitrogen in the air or the fact that night
follows day; they’re not the advocates of this philosophy, but just a bunch of people who’ll help
you through it as best they can.45 From this perspective, the IMF/World Bank seem less coercive
and more like the helping hand: since there’s no alternative to the free market ideas, these
institutions can hardly be blamed for encouraging countries to accept reality.
Conservatives are also supporters of the global economy, but they think that liberals haven’t gone
far enough in implementing its logic. In particular, conservatives see institutions like the World
Bank and IMF as inherently inefficient, rewarding weakness and failure and providing a safety
net which encourages countries to perform more lazily or flabbily than if there was none. In the
case of the IMF, for example, conservatives look at the large sums paid out to Mexico, Indonesia
and Russia and worry about something called ‘moral hazard’ – this is basically the principle that
if you lend money to people who’ve screwed up really badly, they’ll screw up again somewhere
down the line because they know you’ll bail them out again.46 (Again, the domestic corollary: if
Cuba is, on second thoughts, a bad example because it’s held out against the US/IMF/WB for so long. A country like
Nicaragua in the 1980s would be a better choice; the US finally got its way there in 1990, and the World Bank was on
hand to anoint a new government and its ‘realistic’ economic thinking.
45 This might explain the lack of triumphalism about globalization from the left in the US and Europe; even Clinton
talks repeatedly of ‘putting a human face on the global economy’, acknowledging the problems but repeating the
mantra that there are no alternatives to free markets. Celebrity pundits like the New York Times’s Thomas Friedman are
similarly capable of feeling our pain, even as they defend arguments which can only prolong it.
46 We don’t even want to get into the many ways in which ‘moral hazard’ isn’t applied to favored businesses in the US
which regularly screw up and get bailed out by the government; from hand-outs to the defense industry to the enormous
44
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you set up a welfare state, people won’t really look for a job, because you give them an incentive
not to do so with unemployment benefits, and so on.) Some economists and politicians have
therefore proposed abolishing the IMF; others have suggested that it should lend money on a
much more selective (even a punitive) basis. The same arguments hold for the World Bank.
Although conservatives often share the liberal view that the very poorest countries need
assistance (since there’s a basic minimum of social infrastructure which you need in place before
you can, say, open a stock exchange in Kigali), they’re not at all keen on any sort of subsidised
lending to countries which might be able to raise money on the international markets. For
example, if a country like Ecuador or Pakistan has access to any sort of commercial lending, the
conservatives think that the World Bank shouldn’t touch it. Even with their free-market
commitment, World Bank employees (and liberals) recognize that many projects in these kinds of
countries aren’t going to turn a buck anytime soon; and that they’re therefore not good targets for
commercial lending.47 But the conservatives would insist that such countries apply for
commercial loans regardless. The net effect of this philosophy, if applied to the IMF and World
Bank, would be radically to reduce the role of each institution in the global economy. We’ll look
at the possible consequences of that in a minute.
We can map this liberal-conservative debate pretty neatly onto the Democratic-Republican divide
in US politics, with the exception that small (and, right now, pretty effectively sidelined)
elements in both parties (the Dick Gephardt/union-friendly wing of the Democratic party; the
anti-NAFTA wing of the Republican party) are suspicious of the globalization agenda which
underpins the economic philosophy of both.48 You have to do quite a lot of work, then, to bring
up all the really important issues about the World Bank/IMF, and the global economy which
really shapes and determines their role. In March 2000, the liberals and conservatives began the
latest round in the more prominent battle over the kind of free market economy we’re going to
have. After the 1997/1998 financial crises, Congress appointed a commission (made up of
economists, mostly) to look into the global economy and the roles of the IMF/World Bank.
Chaired by a conservative economist, Allan H. Meltzer, the commission recommended that the
Savings and Loans recovery operation of the late 1980s/early 1990s. The US also embraces a personal bankruptcy law,
a form of moral hazard if ever there was one (but more socially-palatable than a debtors’ prison, for example).
47 I don’t want to get all teary-eyed about the WB at this point, but some of these projects may actually be helpful to
developing countries; though the general coercion and shift towards ‘open economies’ has to be remembered as a
substantial down-side to the process.
48 Most of these domestic opponents work from an annoyance at ‘American’ jobs going to other places, and causing
redundancies within the US; but there are some encouraging signs that the union movement, at least, is starting to
approach the problem globally and at a more fundamental level.
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US government change its policies towards the World Bank to reflect the conservative viewpoint.
Some of the major findings of the Meltzer Commission were as follows:
1. The IMF should only offer major assistance to economies in trouble according to ‘Bagehot’s
principles’49: basically, the loans should be made only for short-term periods, they should be
given out only if a country has collateral (say, substantial mineral reserves or some kind of export
which the IMF can get its paws on), and they should be at punitive rates of interest. Anything
less, argued the Commission, would encourage countries to fall into trouble in the knowledge that
the IMF would bail them out. (The old ‘moral hazard’ chestnut.)
2. Poorer countries should be encouraged to get more and more of their money from private
sources (banks, mutual funds, individual investors, etc.), and should be weaned off World Bank
money for specific projects. This would apply especially to the middle tier of poor countries
(including most of Asia and Latin America, and even some countries in sub-Saharan Africa)
which have opened their economies to foreign investment in recent years. As above, the principle
here would be that even commercially-questionable projects (human development investments
like sanitation and power generation, transport and communications) would need to persuade
commercial lenders that they’d be able to turn a buck.50
3. The IMF should cancel the debt of the very poorest countries (approximately. the poorest
forty). This is a big deal, and would certainly be very helpful to those countries. However, this
comes with conditions – those countries would have effectively to agree to and implement IMF
discipline for a number of years, under constant review and with gradual debt relief. In fact,
schemes of this kind already exist, both in the IMF and among government lenders in the first
world – but this would be another shot at the same goal. Thus, while there’s a tangible gain for
these poorest countries (they’d eventually be relieved of onerous interest payments), they’d have
to submit their economies completely to IMF control; and to continue to nail social spending to
the floor, both during the period in which they qualified for debt relief, and thereafter. 51
Bagehot was a nineteenth-century British journalist and economist who thought that people shouldn’t bail other
people out of a hole unless they were going to teach them a lesson by doing so, with punitively-high interest rates
attached to the loan; a very British approach to discipline. (“Squeeze the pips until they squeak!”, as David Lloyd
George said of the Germans after WWI – a lot of good that’ll do us, mumbled John Maynard Keynes at the time.) If
you need more reasons to be suspicious of Bagehot, you should know that he founded the Economist.
50 It’s not altogether clear that the Commission has thought about whether this is actually a viable proposition; or what
they’d propose if no-one steps up to do this lending.
51 Debt relief is another topic we can’t really get into here, but while we’re on the subject: there have been a whole lot
of proposals for relief/forgiveness, but few of them have been very effective precisely because they’re based on a poor
49
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4. The World Bank should only lend to countries with an average income below $4000. This
would not only limit the bank to chronically poor countries, it would also keep lending away from
countries where a substantial percentage of the population lives in penury, but the massive
inequality of wealth within a society drags the average figure over the $4000 line. Again, this
would effectively prevent the World Bank from funding projects which addressed the neediest
people in countries with a slightly higher average income.
The degree to which the Meltzer Commission has come out on the conservative side has pretty
much lumped everyone who’s not rabidly right-wing on the other side, in defense of the IMF and
especially the World Bank. Moreover, the Meltzer report has raised some pretty disturbing
questions about the ultimate logic of the new world economy, especially in an era in which
institutional and government intervention has become increasingly marginalized. Assuming that
the poorest countries can’t become effective players in the global market, since it’s not profitable
to invest in them to the extent where they might become competitive, what should happen to the
people who live in those countries? Along the same lines: if a big country like Mexico or Russia
gets into economic trouble (as happened in 1994 and 1998 respectively), but doesn’t meet the
IMF’s new, much more stringent criteria for emergency assistance, what will happen to that
country and its people? In the early twentieth century, and pretty much every century before that,
people used to talk about these problems from a political and even philosophical perspective – the
starting-point for thinking about economics was some definition of human subsistence and
happiness, from which everything else was supposed to proceed. The creepy thing about this new,
stripped-down free market stuff is that it’s absolutely devoid of any principle of human welfare or
good. Of course, at some level it’s appealing because it appears to hold out the best prospect for
wealth creation and competition; but for the poorest people, either the lower classes of richer
societies or virtually everyone in the poorest countries, it doesn’t hold out a whole lot. Moreover,
the fact that these poorest people can’t be made profitable or competitive, and can only seem a
social drain on the resources of the wealthy, makes them extremely vulnerable to further
impoverishment, or worse. Even those in richer societies run the risk, in the new world order, of
country meeting IMF standards for several consecutive years. When meeting those standards might mean cutting some
services and social provisions on which people in a poor country absolutely depend, poor-country governments haven’t
been able to ‘meet the challenge’. So the Meltzer reference to debt relief is interesting, but the devil is in the detail.
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economic catastrophes mutating into political disasters – will the US or Europe really be safe
from social and political collapse in Russia or Mexico?52
Where do we go from here (II)?
I want to wrap this up by drawing your attention to some issues, questions and challenges which
come to mind when thinking about protesting the World Bank/IMF.
1. These institutions are not, themselves, decision-makers in any meaningful sense. The US and
Europe agree on the President and Executive Director of the World Bank and IMF, and these men
(no women, so far) take their orders from the member governments, particularly (once more)
those in the West who pump money into the coffers. The World Bank/IMF are instruments of the
global economy, rather than players in its development. Of course, from the perspective of a
third-world government, the IMF is certainly the villain; but the IMF is not in any sense an
independent organization, and is merely implementing an economic philosophy agreed upon in
Europe and the US.53
2. The kinds of things the World Bank and IMF get up to are not peripheral to the world
economy, or limited to the third world – they’re absolutely central to every major economic and
political/developmental decision that gets made around the world today. This is really, really
important to understand off the bat. You can’t talk about the IMF/World Bank without taking
some fundamental position on the way the world’s structured right now, and the way it ought to
be structured to guarantee the best levels of development and prosperity for all.
3. Although the World Bank/IMF began life very much in synch with an international mood that
institutions and governments had to regulate the world economy, these days they find themselves
52
If one were to be cynical about it, one might observe that it makes perfect sense, in this context, for the United States
to maintain defense spending at near-Cold War levels, and to plow development dollars into Byzantine anti-missile
systems – like the various son-of-Star-Wars proposals which are currently producing a rich/expensive crop of test
failures.
53 You might have heard about the controversy in February and March 2000 over who would succeed Michel
Camdessus as Executive Director of the IMF – the US essentially vetoed the original German candidate, even though
the US and Europe have an informal agreement that the European choice gets the job. World Bank President James
Wolfensohn (an American, like every other WB prez) was only reappointed last year after he obeyed an order from
Larry Summers, US Treasury Secretary, to fire the WB’s chief economist, Joseph Stiglitz. Stiglitz’s crime was to have
questioned the free-market, open-economy models in a 1999 article on the Russian financial meltdown. Given these
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increasingly alienated in that view. In some ways, the rush of governments and business to the
right (this ‘extreme’ free-market ideology, like ‘extreme’ snowboarding or something) has left the
World Bank/IMF looking a lot more socially-interested, even if the conditions for their subsidized
lending invariably push countries further towards the free-market view.54
4. If the IMF and World Bank continue to play the role they’re playing right now, we’re going to
see many of the same problems and crises in richer and poorer countries over the coming
decades. If they were abolished tomorrow, however, or radically constrained (as the Meltzer
Commission envisaged), it’s hard to know just what might happen. Unless someone else was
willing to get into the business of lending or otherwise financing poorer countries, and economies
in temporary financial difficulties, it’s possible those countries could simply atrophy and/or
collapse in some frightening and rather spectacular ways. 55
5. Poorer countries have often been vocal in their opposition to structural adjustment and
conditional World Bank lending. However, a powerful bloc of poorer countries are presently
governed by local elites who are unapologetic supporters of the ‘Washington Consensus’ and the
free-market thinking behind structural adjustment. These elites are frequently trained at US
schools, and form contacts with American bankers and corporations which have helped them to
create ‘emerging market’ booms (and busts) in lands far distant from Cambridge or New Haven.56
They also help to legitimize the notion (much beloved of the US and go-getters at the IMF and
World Bank) that everyone in the world is on the same page, when it comes to economics and
development. In fact, some 94% of emerging market investments in 1997 went to only 20 of these
‘hot’ third-world countries; more than 100 others had to fight over the scraps.57
pretty obvious examples of the controlling influence of the US, we have to be careful in picking our targets here.
Attacking the WB or IMF is a little like strangling the ticket-desk clerk because your plane has been cancelled.
54 You can pretty easily contrast the IMF/WB, then, with the World Trade Organization. While the former institutions
are committed to some measure of regulation and intervention, the WTO is basically a club for a whole lot of countries
that want to do away with tariffs and other trade barriers. The Seattle protests of December 1999 thus had a certain
logic – the WTO was inextricably linked with ‘free trade’, ‘open economies’ and so on. The IMF/WB have a more
complicated relationship with these principles; and could easily be configured to hold them in check.
55 See note 52 for advice on how to deal with this outcome.
56 MIT, Harvard and Yale tend to be ground-zero for this proselytising project. Usually in the US, the business press
will confer their approval on a candidate for office (or an elected politician) by calling him or her ‘Harvard-trained’,
thus guaranteeing a certain purity of spirit, clarity of mind and freedom from parochial sentiment – Western investors
like to hear those things, and the Ivy League is a sort-of finishing school for them. Carlos Salinas, the free-marketloving Mexican president who paved the way for the peso crisis in 1994, was one of the more famous recipients of the
‘Harvard-trained’ moniker. Salinas now lives in Dublin, Ireland, not previously known as a popular retirement
destination for former Latin American heads of state. (Mexico and Ireland have no extradition treaty, however, a fact
which may have more tangible appeal to Salinas than Guinness or Bloomsday.)
57 Apart from technocrats and politicians, a powerful lobby in favour of free-market policies in the third world is the
new oligarchy of multi-millionaires and billionaires created on the back of Washington Consensus policies.
Privatisation deals, in particular, allowed well-connected local elites around the world to enhance their existing social
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6. The most important country in the world, both in terms of controlling the IMF/World Bank and
determining the course of the global economy as a whole, is the United States. Moreover, the past
two decades have seen the US grow even more powerful, as western Europe has largely imbibed
free market thinking from American economists and examples. The US Treasury has a mighty
influence on the fate of the world economy, and the Clinton administration’s greatest
achievement may well have been to convert the old Democratic party, the party of FDR and the
New Deal, into a pretty uncritical cheerleader for the free-market thinking which once prevailed
only on the right. This is both a depressing and a slightly hopeful fact. Although it’s true that free
market ideas have swept the globe, the US remains a vital incubator for this kind of thinking; and
the principal home of the money which brings it to life. This means that US-based activists have a
great opportunity to speak to a constituency which has a profound effect on the global economy.
Moreover, the combination of a largely in-the-dark voting population, and a loosely democratic
political system, offers some hope that the course of the US in promoting free-market ideology
can be turned around. Two things are absolutely crucial before this can happen: first, activists
need to educate the US population in what’s actually going on in the world right now, and to
point out the costs and dangers of the free market approach to everyone, not simply the world’s
poorest. Second, activists have to come up with not only replacements for the World Bank/IMF,
but concrete proposals for international development and the future of the global economy.
A final note on ‘concrete proposals’
I don’t want here to preach about what I think might be done with these big questions of
alternatives to the current global economic arrangement. However, it is important to note that an
institutional approach – featuring some kind of regulatory body, like the IMF or World Bank – is
a pretty obvious and appealing way of taming the excesses of a market system. 58 There have
or political status with massive material wealth; in effect, public assets (like power and water companies, mineral
extraction operations, etc.) were given away (i.e., sold off at dirt-cheap prices) to private individuals, who were then
free to keep their money in their own country or to invest it abroad. Thus the paradox of a collapsing Mexican economy
in 1995 and a very happy class of Mexican billionaires sunning it in St Tropez and elsewhere. Russia/the south of
France in 1998 saw exactly the same phenomenon. Since the act of taking large sums out of a country is entirely
compatible with ‘free markets’ and ‘open economies’, the US Treasury finds it hard to mount any sort of campaign
against ‘capital flight’; hence the arguments in 1999 over just what in the name of God happened in Russia the year
before, and who the blame can be pinned on.
58 One of the reasons why I don’t want to get into this is because some folks would say the entire market-based system
is screwed, and we need something else to replace it root-and-branch. My suggestions here don’t go this far, although
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already been proposals to tax currency transactions and other money movements, and to collect
this money in a central fund which could then be used for development in the poorest countries –
this would certainly constitute a viable reform agenda for the World Bank.59 Along the same
lines, there’s no reason why the IMF couldn’t be used to insist on minimum standards in health
care, education and basic human development on the part of governments around the world,
thereby raising the floor of public spending from its current oceanic depths to something
approaching a humane level. If the World Bank’s principle is to facilitate development, it’s easy
to support that aim when it’s effectively and equitably followed through. Similarly, if the IMF
exists to set rules for economies around the world, and to standardize their aspect and
requirements, it could be a very powerful tool for insisting on basic standards in vital areas of
government spending and welfare provision. My point here is that we should remember that the
big thinking is at least as important as the attacks on institutions which merely inflect or
implement the big thinking, particularly now the protesters of Seattle and Washington have drawn
attention to these behemoths of global economic policy, and most of us have a loose sense that
something’s awry.
they go way further than anything on the table at the IMF/WB right now, or in the platforms of traditionally left-leaning
political parties in Europe and the US.
59 James Tobin, who won the Nobel Prize for Economics (not usually a mark of human distinction, it has to be said) in
1981, came up with this idea in 1978; it’s been an especially hot topic since the mid-1990s. Most people have tried to
sell it not as a developmental measure but as a way of making markets more stable and less volatile – this argument
suggests that if you throw a little sand into the new hyperfast wheels of the world economy, you’ll slow them down
some. You can learn a lot about the priorities of most economists by observing that they’re much more interested in this
side of the question than in the potential developmental uses of the money generated from the tax.
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