Just say no

Vocal rejection of Bank, Fund increasing

2 July 2007

versión en español

Member countries are increasingly rebuffing World Bank and IMF programmes, advice and even membership, with Latin American nations withdrawing from the Bank’s investment arbitration mechanism. (see ICSID article).

The most outspoken critics of the international institutions are in Latin America, especially Venezuela’s president Hugo Chavez. In a surprise pronouncement at the end of April, Chavez said he would formally pull Venezuela out of the World Bank and IMF, which he dubbed “the tools of the empire” that “serve the interests of the North”. Chavez was forced to back down from an immediate exit because Venezuela’s sovereign bond contracts require IMF membership, but confirmed his intentions to leave the institutions eventually. He stated: “There’s a technical commission working on the issue. I’ve made an announcement which somehow can be described as a political statement on the matter.”

the tools of the empire that serve the interests of the North

Venezuela’s anger stemmed partly from its view that the IMF persistently under-projects growth in the country. “For three consecutive years now they’ve gotten it wrong with Venezuela,” said minister of finance Rodrigo Cabezas, in rejecting the IMF regional economic outlook for Latin America. He continued: “It seems like their prognoses have a kind of political commitment in order to discredit the success of the Venezuelan economy in the last few years.” The Fund report and its recommendations were also rejected by Argentina and Ecuador.

This view is buttressed by an April report from the US-based think tank Center for Economic and Policy Research, which found that IMF projections were consistently wrong in both Argentina and Venezuela. It found regular overestimation of growth when Argentina was following Fund prescriptions and underestimates when the country was in dispute with the Fund over debt renegotiation. The report concludes: “The IMF’s large and repeated errors in projecting GDP growth in Argentina since 1999 strongly suggest that these errors were politically driven.”

Ecuador moves against the Bank

In April Ecuador’s president Rafael Correa declared the Bank’s country representative, Eduardo Somensatto, as “persona non grata”, essentially expelling him from the country. The expulsion relates to an accusation of “extortion” by Correa against Somensatto over the Bank’s withholding of $100 million in committed funds in 2005. The Bank withheld the money after Ecuador decided to revise the law governing its use of oil revenue.

Correa also declared in May that Ecuador’s revised constitution may recognise the concept of illegitimate debt. He has repeatedly hinted that he would declare a moratorium on debt repayments to foreigners (see Update 54) and this increases the pressure on the Bank to renegotiate the terms of Ecuador’s $748 million in debt, which Correa believes could be considered illegitimate. In April he completed the promised early repayment of the country’s IMF debt, stating: “We don’t want to hear anything more from that international bureaucracy”.

Taking a more conciliatory tone, Nicaragua’s president Daniel Ortega requested a new Poverty Reduction and Growth Facility (PRGF) arrangement with the Fund. Still, Ortega recognises that involvement with the international institutions is unpopular, saying, “It is a blessing to be free of the Fund, and for the Fund it will be a relief to rid itself of a government that defends the interests of the poor”. He stated that he planned to end Nicaragua’s borrowing from the Fund within five years.

Bigger players grumbling

Latin America is not the only region with gripes against the Fund, as both Russia and China have recently vocalised their rejection of IMF policy prescriptions. Russian president Vladimir Putin called for a restructuring of the international economic architecture, saying that global institutions like the IMF and the WTO should have a much smaller role. He proposed a “new architecture of international economic relations based on trust and mutually beneficial integration”. In April, Russian deputy finance minister Sergei Storchak opposed IMF advice on the spending of oil revenues, saying that oil exporters should be free to spend their revenues however they wish.

China has also continued to reject the IMF’s advice on its exchange rate policy. Despite participating in the Fund’s first multilateral consultations on global imbalances (see Update 54, 51), China continues to resist the idea that its pegged exchange rate is improperly set. The Chinese central bank’s deputy governor, Hu Xiaolian, said in her IMFC statement, “given the limitations of various exchange rate analytical tools, it is well known that the concept of exchange rate misalignment is subject to theoretical weaknesses, their estimates highly unreliable, and therefore could not serve as a criteria or premises for surveillance.” A leader in the China Daily at the time dubbed the IMF’s calls for a more flexible exchange rate as “meddling” and “disturbing”

The IMF is also facing accelerated declines in its credit outstanding with advance repayments on debt by Macedonia and Bulgaria on top of the completed early repayments by Ecuador and the Philippines. Complaints are even emanating from former US treasury secretaries. Robert Rubin, treasury secretary under Clinton, said: “The Bretton Woods system has become outmoded. … these institutions haven’t changed with the times. They need to be rethought and restructured.” And George Schultz, treasury secretary under Gerald Ford, said of the IMF: “If it disappeared tomorrow, I don’t think people would miss it very much.”

Building alternatives

To buttress these rejections of the current institutional framework, many countries are looking to build regional alternatives to the Bank and Fund. Chavez has championed the idea of the Bank of the South (see Update 55), which came one step closer to creation in May as a summit of Mercosur heads of state decided on the institution’s capital and shareholding structure. Despite last minute wrangling over the charter in June, the Bank of the South is expected to maintain equal voting rights for each of its member states.

An open letter from civil society organisations to the presidents of Latin American countries during a late June Mercosur summit called on them to “insure the necessary information, participation, and consultation with the organisations in societies which will be affected by the creation of the Bank of the South.”

In Asia, moves to create an alternative to the IMF are slowly advancing. At a meeting of ASEAN+3 finance ministers in Kyoto in May, the countries of the region agreed to press ahead with an $80 billion regional currency swap arrangement. Though the leaders only reaffirmed their previous commitment to work out the details of the arrangement, regional media hailed it as a fulfilment of the desires for an Asian Monetary Fund.