Fussing While Victims Suffer
Fight Between World Bank, IMF
by Abid Aslam
Nineteenth Street in downtown Washington is starting to become like the Siachen glacier, a disputed mountain expanse over which Indian and Pakistani troops sporadically exchange gunfire.Only here, economists from the World Bank and its next-door neighbour, the International Monetary Fund (IMF), periodically exchange volleys over economic crisis in Asia. Hostilities flared again this past week, impelling Bank President James Wolfensohn to throw himself into the fray.
At issue was the Bank's latest 'Global Economic Prospects' report, released Wednesday. Without naming the IMF, the document assailed the high interest rates and austerity measures demanded of crisis-stricken Asian countries in exchange for Fund-led international bailouts.
Events have forced the Fund to soften its stance somewhat and accept that Asian countries must run bigger budget deficits that originally demanded. Nevertheless, the initial hard line had ''contractionary consequences'', deepening the crisis in Asia and adding to a ''substantial risk'' of global recession next year, according to the Bank.
Media reports citing the document and comments by the Bank's outspoken chief economist, Joseph Stiglitz, said this amounted to an attack on the IMF's initial handling of the crisis.
''This interpretation is false,'' Wolfensohn said in a statement Thursday. ''There has never been any doubt on our part that the International Monetary Fund has carried out this most difficult task with strength and judgment,'' he maintained. ''We support them and are grateful for the irreplaceable role that they play.'' He never once challenged the factual accuracy of the media accounts, however.
Many at the IMF have, however, perceived an attack. In September, Fund chief economist Michael Mussa declared, ''Those who argue that monetary policy should have been eased rather than tightened (immediately after crisis struck) are smoking something that is not entirely legal.''
Stiglitz appeared to retaliate Wednesday, disparaging the high interest rate policy as ''bad psychology and worse economics.''
IMF officials have defended high interest rates as necessary to restore investor confidence and halt currency devaluations by offering returns attractive enough to tempt foreign investors to return. According to Stiglitz, however, investors stayed away anyway, sensing that the interest hikes would choke local businesses and, combined with budget cuts, lead to social unrest by deepening recession.
''You ask the question, 'Who are you protecting?''' by raising rates, Stiglitz said Wednesday. ''You're protecting firms that gambled'' on currency markets. ''Who is paying the price? ... Workers who are going to be put out of jobs.''
Stiglitz had launched his offensive on the Fund's policies in January, warning, ''You don't want to push these countries into severe recession. One ought to focus... on things that caused the crisis, not on things that make it more difficult to deal with.''
Stiglitz, who also is the Bank's senior vice president, vanished from public view shortly afterwards. Upon resurfacing, Stiglitz recast his criticisms as an attempt to spur academic debate on the issues.
His arguments have resonated not only with critics of the economic orthodoxy but also among Bank staffers, according to agency and diplomatic sources here. They added, however, that the dispute owes as much to Washington politics as it does to concern about the real consequences for Asians of policies aimed at soothing international investors' nerves.
Wolfensohn himself is said to have been irked that the Bank was sidelined by the IMF and the U.S. Treasury. The IMF took the lead in responding to the Asian crisis because of its macroeconomic mandate, according to diplomats and political analysts, but also because of active pushing by the United States, which holds nearly one-fifth of all votes in both organisations.
''The U.S. government and IMF have worked very closely,'' Jo- Marie Griesgraber, director of the non-governmental 'Rethinking Bretton Woods' project, said Friday. ''The Bank may differ but the U.S. Treasury and IMF have a very similar take on how to deal with the crisis.'' She maintained that Washington remained committed to ''traumatic and failed stabilisation programmes which have seen a run on banks (and) killed real economies.''
During meetings of World Bank and IMF governors in October, the Bank launched a public-relations effort - through speeches and publications - to assert a distinct role for itself after being pressured by the Fund and U.S. Treasury to provide 16 billion dollars in crisis loans in fiscal 1998, which ended in June.
Only some two percent, or 300 million dollars of that sum, was disbursed to 'pro- poor' social programmes -- the bulk, in effect, was ploughed into short-term relief to speculators, market failures and irresponsible governments in hard-hit countries. That type of activity was the Fund's traditional job, Wolfensohn implied to reporters.
Despite Stiglitz's attacks, the Bank has pushed ''the same policy of deregulating financial markets that led to the present instability,'' said Catherine Caufield, author of 'Masters of Illusion: The World Bank and the Poverty of Nations'.
''The Bank has been trying to distance itself from the IMF, but the fact is that it has pursued the same flawed policies since the 1980s,'' she said.
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This article is excerpted from a longer analysis by Aslam.
These organizations spend tens of billions of dollars. Do they show wisdom?
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