Third World Lightning Rod

By John Nielsen

Never has the IMF been more vital--or more vilified

President Belisario Betancur's welcome to the delegates at the Cartagena conference last week may have been a bit apocalyptic, but the substance struck a responsive chord in his audience. In declaring that Latin America's debt crisis is also the world's crisis, he pointed at the rich countries as the main villains of the drama. Added Betancur: "One of these villains, of course, is the International Monetary Fund." It is doubtful that anyone in the room disagreed with him.

As developing nations have gone deeper into debt in recent years, the IMF has become a major target of their hostility. They covet its money, but fear the consequences of borrowing it. Argentina, for example, desperately needs $2.1 billion in IMF credits. But in return for the money, the fund insists on a range of tightfisted economic policies that could shatter the country's brittle new democracy. Two weeks ago, Argentine President Raul Alfonsin bypassed fund negotiators and appealed directly to IMF Managing Director Jacques de Larosiere for more lenient terms. Yet neither Alfonsin nor any other leader can simply defy the fund. Its seal of approval is the key to vital commercial credit. "The power of the IMF is absolute," says Paul Singer, an economist at the University of Sao Paulo. "No foreign country can get a single cent now without an extended agreement with it."

The IMF was created in 1944 to keep order in the international monetary system. Its guiding genius, British Economist John Maynard Keynes, wanted it to be a true lender of last resort, a global central bank capable of creating its own money. His ideas were deemed too visionary, and the fund's role was limited to helping member states--45 at the beginning, 146 today--ride out balance of payments difficulties. A country in deficit could apply to the IMF for low-interest loans. In return, the IMF required the debtor government to put its economic house in order. When the deficits were "structural," reflecting permanent changes in a country's terms of trade, such adjustments could be painful: currency devaluation, tax increases, reduced government spending, tight controls on monetary growth. But if the immediate impact was harsh, the long-term goals were healthy, sustainable growth and high employment.

However noble the intention, the formula made friction almost inevitable. The burden of austerity fell heavily on those most in need of help and least able to pay the price. The history of the IMF is peppered with instances of resistance and outright hostility by would-be borrowers. Over the past decade, the problem has grown to alarming proportions. Burdened by huge oil bills, worldwide recession, slumping commodities prices and punishing interest rates, developing countries have been hurt as never before. The big debtors among them need new credits just to meet their interest payments, and most are threatened with varying degrees of political instability. The IMF has never been more needed--or more vilified.

Even dispassionate critics question the economic wisdom of the IMF's policies. They charge that the fund's prescription is the same regardless of individual circumstance. For example, the IMF makes no distinction between deficits caused by a government's policies and those beyond its control. In addition, critics contend, the fund's emphasis on reducing inflation at the expense of employment is misplaced in developing countries. Finally, it is held, the IMF's insistence on suppressing consumer demand is inconsistent and self-defeating: carried to its logical conclusion on a global scale, it would stifle international trade. Says Brazilian Industry Minister Joao Camilo Penna: "If the IMF's prescription of austerity and slower economic growth to get a country back on its feet is applied to one or two countries, the medicine can work. But if it is given to an entire continent--or, worse, to every developing country in the world--then we all die from the cure."

Perhaps the most widespread objections to IMF practices are political. Critics charge that the fund does not distinguish between democrats and dictators, and that it disregards the consequences of its policies. Uganda, for example, is in the midst of a brutal civil war. By some estimates, more people have died and more atrocities have been committed in three years under President Milton Obote than in eight years under Idi Amin. Yet between 1981 and 1983, the IMF advanced $373 million to the government of Uganda, praising the "considerable progress" it had made toward rehabilitating a shattered economy.

Alfonsin resisted the fund because he feared that traditional belt tightening, though necessary in narrow economic terms, would lead to hunger, widespread poverty and dangerous political instability. He could cite some disturbing precedents. Jamaica's last two elections, in 1980 and 1983, were precipitated by IMF-imposed austerity. Haiti's long-suffering populace, the hemisphere's poorest, erupted in riots last month after years of hardship under fund programs.

A month earlier, 55 people died in similar riots in the Dominican Republic. Crushed by a $2.5 billion foreign debt and a 1983 trade deficit of $460 million, the government in Santo Domingo was negotiating the second stage of a three-year program of loans totaling about $400 million. Unwisely, it put into effect many of the fund's prescriptions without warning. Over Easter weekend, it shifted the exchange rate on all imports (except petroleum) from one peso per dollar to a free-market rate of 2.5 per dollar. When Dominicans woke up Monday morning, they discovered that many prices had more than doubled. They reacted in a collective rage, and the government had to call out the army to quell the disturbances.

To head off further violence, Dominican President Salvador Jorge Blanco subsequently suspended negotiations with the IMF. The need for credit, however, remains as great as ever. Last week Hugo Guiliani Cury, the Secretary of State for Finance, told TIME that the talks would be resumed. "We never said we would not make the adjustments that the IMF asked for," he explained. "The bone of contention was velocity. If we had gone ahead with more immediate austerity measures, it could have meant the end of our 20-year-old attempt at democracy."

IMF officials argue that countries often come to the fund only when there is no other recourse. As a result, they must make severe adjustments, mainly because external financing has already vanished and imbalances have reached crisis levels. Says a senior fund official: "There are large numbers of countries faced with very severe economic problems. They are not caused by the IMF or IMF programs. They are partly the result of past mistakes, partly the result of world recession, partly the result of high interest rates in the industrial countries. The IMF gets the blame. It's like blaming the doctor because the patient is sick."

Fund spokesmen insist that their unpopular conditions are necessary to restore economic health and replenish the IMF's revolving pool of resources. "The fund does not impose any measures," says an official in Washington. "Reality does. Ideally, a country forms its own policy and comes to consensus itself on what needs to be done, and then the fund supports that. Many of the success cases are those in which that has happened." There have indeed been successes over the years. Two notable case histories:

> In 1981, India faced a gaping, long-term payments deficit. The previous year its oil-import bill had jumped to $5 billion and foreign exchange reserves had fallen by $1.4 billion in seven months. Prime Minister Indira Gandhi, then newly returned to office, responded by negotiating the largest loan in the history of the IMF, $5.8 billion. Critics in New Delhi immediately charged that she had plunged the country into a "debt trap." Yet last November, Mrs. Gandhi announced that her government would not need the last $1.1 billion installment of the loan. What had happened? Increased domestic oil production and remittances from Indians working abroad helped reduce the deficits. But India had also gone to the IMF early, at a time when the fund's conditions were relatively easy to adopt.

> In January 1976, Italy teetered on an economic precipice. Its currency reserves could cover only two months of necessary imports. The lira was plummeting. External credit had dried up. Dramatically, official foreign exchange markets were shut down for five weeks. When they reopened, the government imposed tight restrictions on imports and credit and raised the discount rate 4 percentage points to stem runaway speculation against the lira--all in close cooperation with the IMF. A year later, the fund granted Italy a $530 million stand-by loan, thus opening the door to commercial credit markets. Within four years, Italy's reserve holdings were among the healthiest in Western Europe.

In Italy's case, the IMF probably served a useful political purpose in bolstering government policy against parliamentary opposition. More commonly, the fund is a political lightning rod, in part because it is so centrally involved in painful, eleventh-hour policymaking. "People lose sight of the fact that the alternative would be even worse," says a senior fund official. "I find it illuminating that some of the most vocal critics of the IMF are in countries whose economies continue to deteriorate because they refuse to follow IMF recommendations."

There is a growing consensus that the IMF is extended as far as possible under its present mandate. It has too often become the lender of last resort it was never meant to be. Indeed, the fund is but one element in the mounting global debt crisis. Many experts, for example, consider it "crazy" that commercial banks ever got into the business of deficit financing in the first place. Such a role, in this view, belongs to international institutions--but institutions equipped to deal with the problem. Current recommendations for reform range from expanded IMF resources, combined with more flexible conditions, to a new, massively funded body of the sort Keynes advocated four decades ago.

For the time being, the system will continue to muddle through. The political will for major reform has yet to materialize, and it is unlikely that any of the big debtor countries will force a showdown with the IMF. Why not? Brazilian Planning Minister Antonio Delfim Netto spelled out the reasons in a recent speech: "We would have to shut ourselves up in a closed economy and a poor one. Any foreign court would issue a sequestration order on our ships and cargoes. Our aircraft would fly away and never come back. Our goods would be seized and held until we paid off our whole debt." Talk is considerably cheaper. --By John Nielsen. Reported by Gisela Bolte/Washington and Lawrence Malkin/Paris, with other bureaus

With reporting by Gisela Bolte/Washington and Lawrence Malkin/Paris, with other bureaus