When floating exchange rates began the IMF's role was over. It was set up to monitor countries' balance of payments accounts and lend to countries whose currencies were under threat of devaluation. Its purpose was to help them maintain their fixed currency exchange rates and reduce deficits without their having to resort to interest rate rises and damaging deflation. With floating exchange rates currency values change all the time so there is no need for help in this way. However no organisation likes winding itself up and the IMF is no exception, so it quickly found an even more influential role for itself as an international economic consultant and adviser. It retained the power to bail out stricken countries, and whenever it doled out money it predicated its assistance on recipient countries reforming their economies - in the way the IMF dictated (Conway 2014 p398).
In fact the IMF has turned its founding principles on their head. It was created because markets often work badly, so it would act as a stabilising influence to help counter the impact of destabilising market forces. It was to be the friend of countries that found themselves so much in debt to creditor countries that private lenders would no longer lend. IMF loans would help them to extricate themselves from difficulties that threatened to lead to severe and lasting economic damage. It has now become the friend of creditor countries, imposing draconian measures designed to ensure that debtor countries repay their debts, including putting their most attractive economic assets on the international auction block at bargain basement prices, come what may to the health and lives of their people and especially those of their children (Hahnel 2014 p218).
This is how Joseph Stiglitz described the IMF in 2002:
Founded on the belief that there is a need for international pressure on countries to have more expansionary economic policies - such as increasing expenditures, reducing taxes, or lowering interest rates to stimulate the economy - today the IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to a contraction of the economy. Keynes would be rolling over in his grave were he to see what has happened to his child. (Stiglitz 2002 pp12-13)
After the massive oil price rises in 1973 and 1979 oil-rich countries found themselves awash with dollars - known as petrodollars - and were on the lookout for somewhere to invest them.[286] Their own economies were generally too small to accommodate significant quantities in terms of investment, but they did spend some on defence systems and consumer products. The only other alternative was investing overseas, which they did in great quantities, mainly in US government bonds and in US and European banks. Those banks in turn needed somewhere to invest the money they received, and developing country governments, especially in Latin America, seemed like a good idea. Those countries desperately needed investment because of the oil price rises and because of the need to develop their economies.[287] Foreign government lending was seen as very secure, because governments are able to raise taxes to repay debts.
The poorest countries, mainly in Africa, weren't able to borrow very much from private sources so borrowed principally from the IMF and World Bank.
Then, beginning in the 1980s when monetarism came to the fore in the US, dollar interest rates were raised dramatically in order to bring down the rampant inflation that was raging at the time. This had a devastating effect on countries that had borrowed in dollars, and in 1982 the 'third world debt crisis' was well under way.[288]
A particularly poignant element in all this was that much and sometimes all of the original loans were spirited away in 'capital flight' - where money is moved quickly out of the country, often to secret accounts in tax havens by corrupt politicians and others in positions of authority, so the people of the countries involved - those saddled with the debts - saw very little benefit if any. The amounts stolen vary significantly, the worst offenders being Venezuela (240%), Philippines (188%), Bolivia (178%), Uruguay (159%), Nigeria (136%), Ecuador (115%), Mexico (114%), Argentina (111%) and Colombia (103%). These are the percentages of long-term public and publicly guaranteed debts incurred by each country that went abroad. More than 100% implies that not only the money from loans went abroad but privately held capital went too (see the third world debt crisis reference).
In stealing money lent by foreign banks, investors and the IMF a very pertinent question is: Who was the money stolen from? Surely it was from those who provided the loans - the lenders, after all the populations had no say in accepting the loans and had no money to steal. But the lenders, aided by the IMF, used their power to transfer the theft from themselves to the poor populations.
It's like my taking out a big unsecured loan and then running off with it, and the lender making my penniless children work to pay off the debt.
The IMF and World Bank operate primarily as bankers to the central banks of nation states (Peet 2009 p17), and although they are international in reach they are controlled by rich countries, especially the US, which can use its power to veto any decision that it doesn't like (Peet 2009 p53 - IMF and p142 - World Bank). The role of the IMF is to oversee the international monetary system, and to assist all member counties, both rich and poor, that find themselves in temporary balance of payments difficulties. The World Bank seeks to promote the economic development of the world's poorer countries, providing long-term financing for development projects and programs. Having said that there is considerable overlap between the two in dealing with poorer countries and both subscribe to the Washington Consensus - see below. A detailed explanation of the difference between these organisations is provided at https://www.imf.org/external/pubs/ft/exrp/differ/differ.htm
The World Trade Organisation (WTO) evolved from the earlier General Agreement on Tariffs and Trade (GATT), which was a multilateral agreement regulating international trade. The basic idea behind GATT was to eliminate protectionism and discrimination, allowing trade in goods but not services to flow smoothly between countries. It all changed in the Uruguay Round, which lasted from 1986 to 1994, and represented a new phase in trading history within a new era of neoliberal globalisation. Coverage was extended to include services, intellectual property (TRIPS agreement - Trade Related Aspects of Intellectual Property Rights) and investments. The WTO was founded as the enforcing organisation in this round. On the face of it the WTO is much more democratic than the IMF and World Bank in that it allows each country an equally weighted vote and no country can veto any decision. But peel back the democratic facade and we find that it is just as undemocratic. No vote has ever been taken, instead decisions are made by consensus, but a consensus heavily dominated by rich countries which negotiate behind doors closed to poor countries and then use their power to intimidate or entice them by means of foreign aid budgets or by using their influence on the loan decisions of the IMF, World Bank and other lenders. The WTO holds no public hearings and has never opened its processes to the public. Its meeting rooms don't even have a section for the public to observe its activities. The rules on intellectual property rights (IPR) have had particularly harmful effects on poor countries, where the World Bank estimates that following the TRIPS agreement the increase in technology licence payments alone will cost them an extra $45 billion a year without any corresponding benefit because they don't have comparable levels of IPR. Rich corporations get all the benefits. These aspects are discussed more fully in bullet points (i) to (v) in chapter 75. (Peet 2009 Chapter 5), (Chang 2008 pp36-37).
As neoliberalism was embraced by governments and economists in the 1980s its principles became the policies of power-wielding organisations. The international approach was known as the Washington Consensus, so called because it was strongly advocated by the three most powerful economic organisations in the world - all based in Washington - US Treasury, IMF and World Bank (Chang 2014 p70).
The Washington Consensus consisted of the following principles:
i. fiscal discipline;
ii. re-ordering public expenditure priorities;
iii. tax reform;
iv. liberalising interest rates;
v. competitive exchange rates;
vi. trade liberalisation;
vii. liberalisation of inward direct foreign investment;
viii. privatisation;
ix. deregulation; and
x. property rights.
When John Williamson[290] drew up this list and coined the term in 1989 it represented what he believed were ten policies that would be more or less agreed by everyone in Washington (comprising Congress, economic agencies of US government, international financial institutions, the Federal Reserve Board, and economic think tanks) as needed by countries in difficulties, notably Latin America, at the time. He never imagined that it would become a widely used term or that the interpretation of the policies would be commandeered by neoliberals and applied as a one-size-fits-all set of requirements for all developing countries in all circumstances. Indeed he believed that most of the neoliberal ideas of the Thatcher and Reagan Governments, notably monetarism, supply-side economics, and minimal government, had by then been discarded as impractical or undesirable fads. The one idea that he did believe was beneficial and widely accepted from that period was privatisation. Williamson is at pains to distance himself from the later interpretation where it is used as a synonym for the policies of neoliberalism, including minimising and demonising the state; creation of a laissez-faire global economy; and where the only thing that matters is growth in terms of GDP. In particular Williamson did not agree with the free movement of capital or with the polarised approach to exchange rates - i.e. fully floating or fully fixed - preferring instead the middle ground adopted at Bretton Woods of pegged but adjustable rates.[291]
Nevertheless IMF policies from the 1980s onwards reflected neoliberal ideology, where debts must be paid; the state must be minimised; public assets sold off; public spending cut; interest and exchange rates determined by world markets; markets deregulated; and capital allowed to move freely across borders. This can be seen as a possible interpretation of Williamson's original list, but it is an interpretation that Williamson himself rejects.
As Stiglitz so wryly observed:
We have an obvious problem: a public institution created to address certain failures in the market but currently run by economists who have both a high level of confidence in markets and little confidence in public institutions. (Stiglitz 2002 p196)
These harsh policies, applied principally by the IMF and World Bank and known as 'Structural Adjustment Programmes', either caused or made worse a number of major crises - Latin America and Sub-Saharan Africa in the 1980s, East Asia in the 1990s, and Russia after the collapse of communism. The countries involved often disagreed strongly with the policies applied but they didn't complain publicly for fear of incurring the IMF's displeasure and subsequent withholding of loans, not just by the IMF but by all foreign banks and the World Bank, who took their lead from the IMF. Such was the power that the IMF had over them. It is no wonder that 'Washington Consensus' and 'IMF' are terms of abuse in developing countries. Lessons learned during this period, notably in Asia, led them later to accumulate US Dollars in great quantities in order to avoid the risk of similar humiliations and economic damage in the future. The details of these policies and the damage they caused are discussed at length in Chang 2008, Peet 2009 and Stiglitz 2002.
The basis of the IMF and World Bank approach is austerity. A quote from Richard Peet sums up the situation:
The policies suggested by the IMF almost always require reducing tariff barriers on imports, and this eliminates jobs. They increase interest rates to cool the economy and reduce inflation, and this too reduces employment. At the same time, they impose austerity programs that cut back government services and remove state subsidies that have kept food prices low. So, critics argue, IMF policies create unemployment and poverty while reducing the national state's power to remedy the resulting social problems. Immediately people who can least afford it are made to pay for loans to governments whose previous policies are deemed mistaken by IMF economists. (Peet 2009 p67)
As has been shown it is employment that creates wealth, so putting people out of work does the opposite. How can a country whose problems stem from insufficient wealth creation solve them by reducing wealth creation? This is what austerity tries to do and of course it doesn't succeed.
Economic success stories other than Chile in this period were in economies where there was extensive state intervention and markets were liberalised only gradually, the best examples being Japan, South Korea, Taiwan, Singapore and China (Chang 2014 pp93-94). Ironically their successes are often claimed as successes of neoliberalism, but they came by deliberately avoiding neoliberalism because they knew full well the damage it could cause. Chile is often cited as a success story of a country following neoliberal doctrines, and overall it has done well, but the story isn't straightforward. It was suffering under the ruthless dictatorship of General Pinochet, and the early adoption of neoliberal policies from the mid-1970s ended in a disastrous financial crash in 1982 when GDP fell by nearly 14% and 20% of the workforce was unemployed (Stiglitz 2002 p114). This was only resolved by nationalisation of the whole banking sector. The country only recovered its pre-Pinochet level of income in the late 1980s. After the crash the country started to pick up, but only by going against the neoliberal creed in giving government assistance to exporters and imposing capital controls to reduce the inflow of short-term speculative funds. Also over the years it has come to depend more and more on natural resource exports rather than on manufacturing, which has declined significantly. As discussed in chapter 66 the more that resources are devoted to producing raw materials for rich countries rather than to producing essentials for home consumption, the more dependent a country becomes on rich countries, both for the import of manufactured goods that make modern life possible and for continuing demand for exports. Its fortunes are tied very closely to the economies of rich countries, and it is therefore very vulnerable to downturns in those economies when demand for raw materials drops and manufactured goods become unaffordable. Not only that, dependence on natural resource exports limits prosperity to the rate at which resources can be harvested or extracted, whereas manufacturing can be expanded indefinitely as technologies evolve. These effects cast serious doubt on the long-term prospects for Chile's success (Chang 2008 pp30-31).
At the same time as rich countries insisted on the abolition of poor country trade barriers against rich country imports they maintained their own barriers in the form of strict limits on imports from poor countries and by government subsidies for their own country's agricultural exports. By these means they limited poor country exports and made what they did export uncompetitive on the world market, depressing prices and depriving them of desperately needed export income. This is the strong bullying the weak. This is Stiglitz again: "The critics of globalisation accuse Western countries of hypocrisy, and the critics are right." (Stiglitz 2002 pp6-7).
In more recent times, and in response to the 2008 crash, there has been some softening of the IMF's insistence on free capital movement[292], but its other policies remain rigidly in place as evidenced by its treatment of Greece[293], where very harsh conditions were imposed including deep austerity involving very substantial public spending cuts, extensive dismantling of labour market protection, and increased privatisation of public assets (Crouch 2016 pp40-41). This approach is a further example of the well-worn path of austerity - attempting to increase wealth creation by stifling wealth creation - see chapter 90.
According to Stiglitz the IMF approach makes sense only if its actions are viewed as being to serve the interests of the global financial community, rather than - as was its mandate - to serve the interests of the countries concerned. Many of its key personnel were drawn from that community and went back to it after leaving the IMF. With this insight its focus on ensuring that foreign creditors are paid rather than domestic businesses remain viable and populations remain fed is more understandable (Stiglitz 2002 pp207-208).
The billions of dollars which it [the IMF] provides are used to maintain exchange rates at unsustainable levels for a short period, during which the foreigners and the rich are able to get their money out of the country on more favourable terms (through the open capital markets that the IMF has pushed on the countries). (Stiglitz 2002 p209)
The people enforcing these conditions perhaps believed - or persuaded themselves to believe - that their approach would benefit the countries involved in the long run, but their beliefs were based on faith rather than evidence, and they did immense harm to countries whose populations were desperate for help (Stiglitz 2002 Chapters 8 and 9).
Hahnel summarises the situation well:
If the interests of international creditors are given priority, the IMF programs make perfectly good sense. They are only counterproductive if one cares about employment, output, productive investment, and prospects for economic development in economies where the poorest four billion people in the world live and suffer. (Hahnel 2014 p224-225)
The hypocrisy of Western countries cited earlier by Stiglitz doesn't end there. The outstanding universal benefits that are claimed to arise from the free trade and laissez-faire ideology are sold to the world on the basis of a myth. The myth is that Britain became great by applying this ideology from the 18th century onwards, and by the middle of the 19th century its approach was so successful that it was copied by other countries, and general prosperity was enjoyed by all until the First World War. Following that things deteriorated when countries began re-erecting trade barriers in response to global instability, causing economic misery right up to the outbreak of the Second World War. Thereafter the world economy was re-organised along more liberal lines under US leadership, but protectionism and state intervention still persisted, especially in most developing and communist countries. Happily the rise of neoliberalism in the 1980s led to much wider recognition of the benefits of that ideology, and it is gradually being adopted globally with the encouragement and assistance of the IMF, World Bank and WTO. When it reigns supreme throughout the world there will be global prosperity on a scale that is unparalleled throughout history (Chang 2008 pp21-23).
It's a persuasive story but it completely misrepresents the truth. As early as 1721 Robert Walpole, Britain's prime minister, recognised the economic benefits of importing raw materials and turning them into manufactured goods for export. To promote this policy he introduced a law aimed at protecting manufacturing industries from foreign competition by the use of export subsidies and high import tariffs for foreign manufactured goods. At the same time tariffs on raw material imports were reduced or dropped altogether. In fact the measures adopted were very similar to those applied by the 'miracle' economies of East Asia after the Second World War. Strong protectionist measures remained in place in Britain until the mid-19th century, during which time Britain's manufacturing industries caught up with and then passed those on the Continent. At that time Britain had a growing empire, and was able, by force, both to prevent colonial competition in manufactured goods and to ensure a continuing supply of raw materials (Chang 2008 pp43-45). In one of the most shameful episodes Britain went to war with China to force it to import opium from Britain that Britain imported from India. In China the sale of opium was illegal, but to the British that was merely an inconvenient barrier to a desirable trade that would enable Britain to balance its books with China because of large imports into Britain of Chinese tea (Chang 2008 p24). In relation to the opium wars William Gladstone declared:
...a war more unjust in its origin, a war calculated in its progress to cover this country with a permanent disgrace, I do not know and I have not read of.[294]
The free trade that developed prior to the First World War was made possible largely by the use of force, or the threat of force, imposed on unwilling and weaker trading partners to their significant disadvantage by rich colonial masters, for their own great benefit (Chang 2008 p 24).
The US learned from Britain and applied similar protectionist policies after independence. The Washington Consensus may be Washington's prescription for developing countries, but it was certainly not Washington's prescription for the United States (Schlefer 2012 p183 and Chang 2002 pp48-56).
Developing countries, if they are to develop, need time for their infant industries to become proficient enough to compete on the world stage. A new business that is directly exposed to world markets will be destroyed because its products are initially lower in quality and often higher in price - it hasn't had time for its staff to acquire necessary management and production expertise or to develop smooth production processes. Chang explains it in terms of the development of children - he suggests, tongue in cheek, that his six year old son should get a job! No-one questions the need for children to be safeguarded from market forces until they acquire the necessary skills and worldly wisdom to be able to contribute at least on something approaching equal terms with other participants (Chang 2002 pp65-83). Furthermore, acceptance by poor countries of Ricardo's theory of comparative advantage keeps them at the level of exporting just their raw materials and prevents them from developing further (see chapter 66), which of course suits businesses in rich countries by avoiding the emergence of new competitors, but it is ultimately worse for all because the more countries that trade on equal terms the more wealth that is created overall.
Companies in developed countries shouldn't be protected from other similar but more efficient companies because it wastes resources to do so. A company that can't compete with its peers is suffering from poor management, poor or inappropriately skilled workers, or is failing to keep up with technology or other developments. Such a company should be exposed to market forces to improve its working practices and therefore its efficiency. However a different situation arises when companies in developed countries can't compete with other companies that use cheap labour in developing countries. The bigger the company the more easily it is able to take advantage of foreign cheap labour, and the better its trading position with respect to smaller companies. The effect strongly favours the bigger company, which is able to take great advantage of poorer countries' weak labour laws, lack of regulation, and low health, safety and environmental standards compared to those of the developed world. These companies are the multinational corporations, and are discussed in more detail in chapter 75.
The free movement of capital has its most destructive effects when inflicted on poor countries. All seems to be well as capital floods into a poor country, but that capital inflow is always based on hopes for high returns to the foreign investor, and not for the good of the country itself, though if investments are successful then the country reaps benefits too. Very often a poor country becomes an asset bubble as the investor herd instinct kicks in, with increasing urban land and property values and ever decreasing investment potential. When investor disillusion sets in, as it does with all bubbles sooner or later, capital floods back out again as investors rush for the exits by selling their holdings for whatever they can get - which isn't usually much at this stage - to avoid being left holding unwanted and worthless assets. That is when the damage is done. All businesses that haven't yet reached the stage where revenue exceeds costs - many in developing countries subject to former high levels of foreign direct investment (FDI) - are forced to shut down and lay off workers, and those whose revenues do exceed costs find that demand for their output drops as their customers can't afford their products so they lay off people too in a vicious downward spiral. It is always a problem in any country for laid-off workers to find new employment, but workers in poor countries are especially disadvantaged because all sources of employment tend to dry up together as foreign investment moves out. It is also impossible for populations to move back to an earlier peasant form of lifestyle because so many have moved into cities to take advantage of the better paying employment opportunities that foreign investment made possible. Poor countries don't have effective welfare states so the inevitable result is widespread poverty and death.
What purpose is served by rapid capital movement in and out of poor countries? It is an opportunity for the rich to make money. Those quick off the mark do make money, the slower ones lose money, but the real price in ruined lives is paid by the local population.
This situation is bad enough in making worse the already heavily distorted wealth distribution between rich and poor people and rich and poor countries, but the rapid movement of capital out of a poor country destroys the creation of wealth because of the inherent inertia that wealth creation involves. This was discussed earlier in chapter 61 and is even more pertinent in poor countries where wealth creation inertia is higher (fewer opportunities for redeployment of workers and productive equipment) and the consequences for the population are much harsher (no welfare state and people have little or no savings to cushion them against destitution). Again what is required is for movement of capital to be subject to the same level of inertia as the wealth-creating process it supports. In poor countries that means limiting outflow by quantity and time, and restricting inflow by purpose. China has very successfully implemented such controls and its e