Simply, the EU got frightened. Excessive zeal can give anyone – let alone the Brussels amphibian bureaucrats – cold feet. Dates are being pushed back. Commitments hushed or rehashed. Now the Czechs "enjoy" the worst of both worlds: they are being treated as a colony and their date of entry is ceaselessly postponed.This should and could have been different. The Czechs should not have shown any enthusiasm or anxiety. These are bad negotiating tactics. They should have negotiated with the EU as consumers (markets) do with producers elsewhere in the world. They should have extracted at least a commitment regarding the date of accession and detailed timetables. And they should have kept these timetables.(Article published December 14, 1998 in "The New Presence")ReturnNew Paradigms, Old CyclesNew paradigms die hard. It took a looming global recession to convince wild-eyed optimists that old cycles are more reliable guides than new paradigms.Business cycles – from the smallest to the biggest – go through seven phases. Centuries of cumulative economic experience allow us to identify these stages more accurately than ever before.An economic cycle invariably starts with inflation. The previous cycle having ended – and the new one just began – the economic environment is as uncertain as can be. The fundamental component is the scarcity of goods and services (following recession or deflation) and the maladapted money supply. Too much money chases fewer commodities. The general price level rises. But this constant, ubiquitous, all pervasive rise (known as "inflation") is also the result of mass psychology. Households and firms compensate for the growing uncertainty (=growing risk) by raising prices. They have no idea what should the appropriate or optimal equilibrium price level be. Market signals are garbled by psychological noise. Everyone is trying to stay ahead of perceived economic threats and instabilities by raising the risk premiums that they demand from their clients. Consumers, on the other hand, are willing to pay more today because they are convinced that the price trend is unidirectional and irreversible: up. The psychological underpinnings and bearings of inflation have been studied deeply in the last few decades. It is the source of the uncertainty that remained obscure. My hypothesis is that the end of every economic cycle fosters this panicky uncertainty, which is monetarily reflected as inflation. In more technical terms, inflation is a market pathology, a market failure.Inflation disguises bad economic performance of firms and of the economy as a whole. "Paper" profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks get distorted and do not allow for meaningful analysis of the performance of the economy. Inflation leads to technological and economic stagnation. Plants do not modernize, the financial aspects of the firm's operations are emphasized, the industrial and operational aspects de-emphasized and neglected. Economies are seized by the pathological economic condition known as "stagflation" – zero or negative growth, coupled with inflation. A sense of urgency and crisis sets in and clears the path towards the next, second phase.In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. Firms innovate and streamline. Efficiency, productivity and competitiveness are the buzzwords of this phase. As trade barriers fall, cross border capital flows (=investment) increase, productivity gains and new products are introduced – the upward price spiral is halted and contained. The same money buys better products (more reliable, more functions, more powerful). The same wages generate more products. This is technological deflation. It is beneficial to the economy in that it frees economic resources and encourages their efficient allocation. Real incomes rise and generate increased demand and production.Inevitably, technical deflation leads to a restraint in the general price level. Increased consumption (both public and private) coupled with moderate asset price inflation prevents an outright monetary deflation (=a downward spiral in the general price level). Inflation is kept to sustainable levels. This phase is known as "disinflation". It is a transitory phase. The transition from hyperinflation or high inflation to a supportable level of inflation is a matter of one or two decades. This period is bound to be shortened by the revolutions in information, communications and transportation technologies. In fact, the whole cycle is hastened due to the more rapid dissemination of information. It is the availability and accessibility of information, which determines the values of important parameters such as the equilibrium general price level and other parameters of expectations (such as equity prices). The more information is available more readily – the more efficient the markets and the shorter the cycles. This enhances the false perception of instability inherent in modern markets. But speed does not necessarily a imply lack of stability. On the contrary, the faster and more violent the adjustments in the market mechanism – the more efficient it is.The psychological well-being and assurance brought on by disinflation generate demand for assets, especially yielding assets (such as real estate or financial assets). The more certain the future value of streams of income, the more open the economic environment, the shorter the economic cycle, the more frequent and rapid the economic interactions – the more valuable assets become. Assets are mainly stores of expectations regarding future values. An assets bubble is created when the current value (=price) of money is low and the future value of money is certain and likely to grow through stable or decreasing prices. Stock exchanges, real estate, and financial transactions – all balloon out of proportion in a kind of irrational exuberance.All bubbles burst in the end – and so do these assets bubbles. This is the fifth phase. It is crucial because it signifies the termination of the bull part of the cycle. The prices of assets collapse precipitously. There are no buyers – only sellers. Firms find it impossible to raise money because their obligations (commercial paper and bonds) are rendered valueless. A credit crunch ensues. Investment halts.The collapse of assets bubbles generates asset price deflation. The psychological counterpart of this deflation is the disappearance of the "wealth effect" and its replacement by a "thrift effect". This influences consumption, inventories, sales, employment and other important angles of the real economy. If not countered by monetary and fiscal means – a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets – a monetary deflation might set in. Admittedly, a full-fledged deflation is rare. More frequent are a recession, a slump, a credit crunch, a slowdown, a growth recession and other less exotic variants. It is also possible to have differentiated or discriminatory deflation. This is a deflation in certain sectors of the economy or in certain territories of the globe – but not in others. In any case, a monetary deflation is a monstrous, venomous economic beast. Due to reversed expectations (that prices will continue to go down), people postpone their consumption and spending. Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. Investment and production slump – inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases. Coupled with declining prices of assets, it leads to bank failures as a result of debts gone sour. It is a self-perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle.This is the phase of reflation. The market failure, at this stage, is so pervasive that all the self-balancing and allocation mechanisms are rendered dysfunctional. State intervention is needed in order to restart the economy. An injection of money through a fiscal stimulus, a monetary expansion, a lowering of interest rates, firm support of the financial system, tax and other incentives to consume and to import. Unfortunately, all these goals are best achieved by engaging in warfare. It is often the case: a convenient war reflates the economy, re-ignites the economic engine, generates employment, and increases consumption, innovation and modernization. But with or without war – people sense the demise of an old cycle and the imminent birth of a new one, fraught with uncertainty and ignorance. They rush to buy things. Because the economy is just recovering from deflation – there aren't usually many things to buy. A lot of money chasing few goods – this is a recipe for inflation. Back to phase one.But the various phases of the cycle are not only affected by psychology – they affect it. During periods of inflation people are willing to take on risk. The risk of inflation is clear to them and the only compensation is through higher yields (returns, profits) on financial instruments. Yet, higher returns inevitably and invariably imply higher risks. Thus, people are forced to offset or mitigate one type of risk (inflation) with another (credit or investment risk). Paradoxically, an inflationary period is a period of certainty. Inflation is certain. People tend to develop an ideological type of economics. Based on the underlying and undeniable certainty of ever-worsening conditions, the intellectual elite and decision-makers resort to peremptory, radical, rigid and sometimes coercive solutions backed by an ideology disguised as "scientific knowledge". Communism is a prime example, of course – but so is the "Free Marketry" variant of capitalism, as practised by the IMF and by central bankers.Deflation, on the other hand, is usually a much shorter period. People do not expect it to last. They fully expect it to be followed by inflation – they just do not know when. Thus, its nature is more transitory. Assured of low prices and preoccupied with economic survival – people become strongly risk averse. While in times of inflation people are seeking to protect the value of their money – in times of deflation people are in pursuit of sheer livelihood. A dangerous "stability" sets in. People invest in land, cash and, the more daring, in bonds. Banks do the same. In such times, ideologies are the first victims. They are replaced by philosophies and worldviews. People become much more pragmatic. They look to the possible rather than to the ideal. Communism is replaced by Socialism, Capitalism replaces Free Marketry. Perhaps this is the only good outcome of deflation.(Article published November 9, 1998 in "The New Presence")ReturnLessons in TransitionQuestion:What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?Answer:Empirical research has demonstrated that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will take advantage of existing schemes (and ask for more, pitting one country against another). But these will never be the determining factors in their decision-making. They are much more likely to be swayed by the level of protection of property rights, degree of corruption, transparency, state of the physical infrastructure, education and knowledge of foreign languages and "mission critical skills", geographical position and proximity to markets and culture and mentality.Question:What have been successful techniques for countries to improve their previously negative investment image?Answer:The politicians of the country need to be seen to be transparently, non-corruptly encouraging business, liberalizing and protecting the property rights of investors. One real, transparent (for instance through international tender) privatisation; one case where the government supported a foreigner against a local; one politician severely punished for corruption and nepotism; one fearless news medium – change a country's image.Question:Should there be restrictions on repatriation of foreign investment capital (such restrictions could prevent an investment panic, but at the same time they negatively affect investor's confidence)?Answer:Short term and long term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) – and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries – it can be destructive in less liquid, immature economies or in economies in transition. The two phenomena should be accorded a different treatment. While long-term capital flows should be completely liberalized, encouraged and welcomed – the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long-term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever-higher yields. There is nothing inherently wrong with high yields – but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.Question:What approach has been most useful in best serving the needs of small businesses: through private business support firms, business associations, or by government agencies?Answer:It depends where. In Israel (until the beginning of the 90s), South Korea and Japan (until 1997) – the state provided the necessary direction and support. In the USA – the private sector invented its own enormously successful support structures (such as venture capital funds). The right approach depends on the characteristics of the country in question: how entrepreneurial are its citizens, how accessible are credits and microcredits to SMEs, how benign are the bankruptcy laws (which always reflect a social ethos), how good is its physical infrastructure, how educated are its citizens and so on.Question:How might collective action problems among numerous and dispersed small and medium entrepreneurs best be dealt with?Answer:It is a strange question to ask in the age of cross-Atlantic transportation, telecommunication and computer networks (such as the Internet). Geographical dispersion is absolutely irrelevant. The problem is in the diverging self-interests of the various players. The more numerous they are, the more niche-orientated, the smaller – the lesser the common denominator. A proof of this fragmentation is the declining power of cartels – trade unions, on the one hand and business trusts, monopolies and cartels, on the other hand. The question is not whether this can be overcome but whether it SHOULD be overcome. Such diversity of interests is the lifeblood of the modern market economy, which is based on conflicts and disagreements as much as it is based on the ability to ultimately compromise and reach a consensus. What needs to be done centrally is public relations and education. People, politicians, big corporations need to be taught the value and advantages of small business, of entrepreneurship and intrapreneurship. And new ways to support this sector need to be constantly devised.Question:How might access of small business to start-up capital and other resources best be facilitated?Answer:The traditional banks all over the world failed at maintaining the balancing act between risk and reward. The result was a mega shift to the capital markets. Stock exchanges for trading the shares of small and technology companies sprang all over the world (NASDAQ in the USA, the former USM in London, the Neuemarkt in Germany and so on). Investment and venture capital funds became the second most important source quantitatively. They not only funded budding entrepreneurs but also coached them and saw them through the excruciating and dangerous research and development phases. But these are rich world solutions.An important development is the invention of "third world solutions" such as microcredits granted to the agrarian or textile sectors, mainly to women and which involve the whole community.Question:Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?Answer:By providing them with the conditions to work and exercise their entrepreneurial skills. By establishing day care centres for their children. By providing microcredits (women have proven to be inordinately reliable borrowers). By giving them tax credits. By allowing or encouraging flexitime or part time work or work from home. By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their pay. By protecting them from sexual or gender harassment.(Article written on October 15, 1999 and published November 22, 1999in "Central Europe Review" volume 1, issue 22)ReturnLucky RussiaAs early as August 17th, a few minutes following the devaluation, the financial markets predicted that the Rouble would stabilize around 18-20 Roubles to the US dollar. This was the price quoted for CME forward Rouble contracts. Moreover, not everyone think that hyperinflation is imminent. Simply, there is not enough purchasing power to generate this kind of surge in prices.Russia is lucky. I am not being cute: this crisis could not have come at a more opportune time. Russians have witnessed (if not actively enjoyed) the advantages of a consumer capitalist economy. For one thing, most of them have some kind of private property and the abundance of all types of products together with the elimination of queues and shortages served to provide a foretaste of the "capitalist heaven". They are not likely to go back, politically or economically. That capitalism is not well entrenched is a blessing in no disguise: this crisis does not deprive people sufficiently to foster a revolution. Social unrest, a dramatic rise in crime rates, more crony capitalism and other malignant forms of "get rich quick" schemes – perhaps. But not another revolution.Russia and Russians are prone to dramatic extremes. Russia is simply going through a crisis which will ultimately engulf all of Eastern, Central and Southern Europe and, more generally, all the protective, etatist economies. From Macedonia to the Czech Republic, from Kazakhstan to China, from Slovenia to Bulgaria – all are likely to experience a similar shock. This is because none has really reformed. Under the banner of "capitalism" a small, corrupt elite of oligarchs and politicians robbed the assets of the state. Industry is still protected against outside competition, tax collection is a farce, the banking system a shambles, Western handouts the only pillar of the economy. This cannot and will not go on. The invisible hand of the market will devalue overvalued currencies, force industry to restructure, force the banking system to amalgamate, force inept and corrupt politicians out. The Day of Judgement is here. Russia is lucky to go through all this now – because it will be uniquely positioned, as a result.The Russian banking system will be forced to restructure. Hundreds of banks will go insolvent and bankrupt. The rest will consolidate. But this will only result in the formation of a few "bad banks". The next stages will involve the formation of healthy retail activities, where none exist today. Banks will begin to compete for savings. They will diversify their portfolio and, as a result, their exposure (risk) will diminish. Then they will have to invest this money to generate the kind of returns that will attract the savers. They will not risk another asset bubble. They will not invest in brokerage operations, speculate, or bet against the Rouble anymore. Their future profits will be the result of investments in real assets: industry, the services sector, new and small businesses. These are very good news: the banks have been taught a lesson they will not easily forget. It is: paper profits and paper assets are on paper only. Here today, gone tomorrow.A devalued Rouble will enhance the competitiveness of the Russian industrial and commodity production sectors. Rouble inflation will not fully reflect the devaluation for a long time. This difference will allow Russian manufacturers and commodity producers to compete vigorously.Russia was long subjected to the quack "medical experiments" of the IMF. It was led down the path of deflation, which the IMF has plunged half the world into. It needed to reflate urgently. It could not have "chosen" a better way to do so. The devaluation will reflate the economy. It is equivalent to the infusion of new blood to a body dilapidated by endless austerity and economic bloodletting.It might sound outlandish – but Russia is showing the way to other countries in the Third World as it has so often done in the past. It, in effect, has acted against the IMF dictates and by devaluing its currency it has readopted the path of John Maynard Keynes. It was about time.(Article published August, 1998 in "The New Presence"and October 28, 1998 in "Argumenti i fakti")ReturnRussian RouletteThe more involved the IMF gets in the Russian economy – the more controversy surrounds it. True, economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are loudly complaining. Some economists regard this as a sign of the proper functioning of the IMF – others spot some justice in some of the complaints. The IMF is supposed to promote international monetary cooperation, establish a multilateral system of payments, assist countries with Balance of Payments (BOP) difficulties under adequate safeguards, lessen the duration and the degree of disequilibrium in the international BOPS of member countries and promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.It tries to juggle all these goals in the thinning air of the global capital markets. There is little dispute that the IMF is indispensable. Without it, the world monetary system would have contracted more readily and many countries would be worse off. It imposes monetary and fiscal discipline, forces governments to plan, and introduces painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters endure. Lately, it began to lend credibility to countries and to manage crisis situations. But, this scapegoat role allows politicians in Russia to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a reformed market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to have prolonged the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if not – the IMF is always to blame. Negative feelings, which would have normally brought about a real, transparent, corruption-free, efficient market economy are vented and deflected.The IMF money in Russia encourages corrupt and inefficient spending because it cannot really be controlled and monitored. The rule is: the more resources the Federal and regional governments have – the more will be lost to corruption and inefficiency. The IMF cannot rationalize spending in Russia because its control mechanisms are flawed: they rely too heavily on local, official input and they are remote (from Washington). They are also underfunded.Despite these shortcomings, the IMF assumed – and not only in the case of Russia – two roles which were not historically allocated to it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. Russia experienced it last month. No banks or donor countries extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) shifted – so did responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments ("why worry, the IMF will bail me out in case of default"). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline. There is no better example than the bloated and wrongly priced Russian market for short-term government obligations, the GKOs.The IMF is too restricted in both its ability to operate and in its ability to conceptualise and to innovate. It, therefore, resorts to prescribing the same medicine of austerity to all the sovereign patients, which are suffering from a myriad of economic diseases. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (the daily turnover in the foreign exchange markets alone is 6 times the total resources of the IMF). The result is fiascos like South Korea and Indonesia where 40-60 billion USD aid packages was consumed by sick economies in days to no avail. More and more, the IMF looks anachronistic and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico, which shares a border with the USA and not Bulgaria, which doesn't?), politicisation (South Korean and Indonesian officials complained that the IMF officials tried to surreptitiously introduce trade concessions to the USA into an otherwise financial package of measures) and too much red tape.The problem is that the IMF forces governments to restrict flows of capital and goods, and to reduce budget and balance of payments deficits. Consequently, governments find themselves caught between non-compliance with the IMF performance criteria – and addiction to its assistance. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". This looks a trifle overblown. But the process that he describes is, to some extent, true and fully applicable to Russia.The inevitable devaluation of the Rouble (supposed to encourage exports and stabilize the currency) will lead to increased inflation. The higher prices will burden businesses and increase their default rates. The banks will increase their interest rates to compensate for higher risks and for inflation. Wages in Russia are never fully indexed or paid timely so the purchasing power of households will be further eroded. Despite recent posturing, tax revenues will fall as a result of a decrease in wages and the collapse of many businesses. Thus, the budget will be either cruelly cut or the budget deficit will increase. The options of raising taxes or improving the collection methods are fantastic in the chaotic environment euphemistically known as the Russian Economy. The Rising costs of manufacturing (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) will lead to the pricing out of the local markets of many local firms. A flood of cheaper imports will ensue. The comparative advantages of Russia will disappear as it slides into ever growing trade deficits. Finally, The Russians believe, Western creditors will take over the national economic policy. Communism will be replaced by IMF-ism. No country is independent if the strings of its purse are held by others. Russians, too nationalistic to acquiesce, will rebel. The price will be partly paid by the likes of the Prague Stock Exchange.(Article published October 2, 1998 in "The New Presence")ReturnForeigners do not Like RussiaRussia's New EconomyWith no Russian in sight, foreigners like to belittle and mock Russia. "It is a criminal gangland" (an American term which better fits Italy), "corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They point to its 160 billion USD in foreign debt. But this is one of the lowest rates in the world (c. 40% of GDP). The USA owes almost twice as much per its GDP.Foreigners do not like Russia. Russia should stop relying on them so heavily. Not because of nationalistic reasons. Because of realistic ones. It is not realistic to expect foreign institutions and lenders (such as the IMF) to provide Russia with another 45 billion roubles. It was the IMF that de-monetised the Russian economy. Its outlandish demands to limit the money supply reduced the amount of roubles in circulation to a dangerous, life-threatening, level (15% of GDP). The result was an unprecedented barter economy (more than 75% of all transactions) and a collapse of the popular trust in the rouble.There has never been a post-communist "Russian Economy". There was a "Moscow Economy" and a "Rest of Russia Economy". The first was a bubble of consumption, novelty seeking, vanity and financial assets. The "crisis" in August was merely the bursting of the MUSCOVITE bubble. How come I consider this to be good for Russia?First, it will weed out the weak economic players. Shady companies, the manufacturers of shoddy goods, financial leeches and parasites – all will vanish together with easy, corrupt and criminal money. Foreign firms, which came over to ride the wave of unbridled consumerism and to make a quick buck, will go home. The export revenues of oligarchs and robber barons will revert back to the nation. In time, their inefficient and corrupt fiefdoms and monopolies will crumble. They may even begin to pay taxes.Multinationals committed to the still promising Russian market will not go away. They will invest more and provide even more credits to local suppliers and partners. They will hire good staff, reduce costs and finally acknowledge the existence of life (and markets) outside Moscow. The crisis in Moscow is blessing for the rest of Russia, as has often been the case in history.This is also the chance of domestic industry and services. With unemployment up, wage costs are down by half. So are rent and security costs and other overhead. Many good people are available today at a reasonable price. Companies have rationalized, cut the fat, sacked unneeded people, become lean and mean. They are fast becoming competitive in their own markets and, later on, perhaps, in export markets.Additionally, imports are down by 45%. Domestic firms face much less competition, on the one hand, and less choosy clients, on the other hand. This is their chance to capture market share. Russian businesses are used to operating without a banking system, or in hyperinflation. Foreigners are not. Shops will prefer to stock cheaper domestically produced goods. Both product quality and the attention to the consumer's needs and demands need to improve. But the prize is enormous: control of the Russian market.But is there a Russian market? This is the only cloud in the silver lining. Russia is being regionalized, broken down. The movement of both people and goods is gradually restricted. The fragmentation of a hitherto unified market is detrimental. This is the real risk facing Russia. Whatever the POLITICAL arrangements – the economy must remain united. The various oblasts, mini-states and fiefdoms are simply not economically viable on their own.(Article published November 23, 1998 in "The New Presence")ReturnIMF – Kill or CureThis was the title of the cover page of the prestigious magazine, "The Economist" in its issue of 10/1/98. The more involved the IMF gets in the world economy – the more controversy surrounds it. Economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are not too happy with it, all are loudly complaining. Some economists regard this as a sign of the proper functioning of the International Monetary Fund (IMF) – others spot some justice in some of the complaints.The IMF was established in 1944 as part of the Bretton Woods agreement. Originally, it was conceived as the monetary arm of the UN, an agency. It encompassed 29 countries but excluded the losers in World War II, Germany and Japan. The exclusion of the losers in the Cold war from the WTO is reminiscent of what happened then: in both cases, the USA called the shots and dictated the composition of the membership of international organization in accordance with its predilections.Today, the IMF numbers 182 member-countries and boasts "equity" (own financial means) of 200 billion USD (measured by Special Drawing Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110 countries. It is truly international.The IMF has a few statutory purposes. They are splashed across its Statute and its official publications. The criticism relates to the implementation – not to the noble goals. It also relates to turf occupied by the IMF without any mandate to do so.The IMF is supposed to:A. Promote international monetary cooperation;B. Expand international trade (a role which reverted now to the WTO);C. Establish a multilateral system of payments;D. Assist countries with Balance of Payments (BOP) difficulties under adequate safeguards;E. Lessen the duration and the degree of disequilibrium in the international BOPS of member countries;F. Promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.The IMF tries to juggle all these goals in the thinning air of the global capital markets. It does so through three types of activities:SurveillanceThe IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "consultation" (with the countries' monetary and fiscal authorities). The famed (and dreaded) World Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance.Sometimes, countries, which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country – or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings.The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement, which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored.Financial AssistanceWhere surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair.Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later.Technical AssistanceThe last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data – where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions – no policy will succeed, no matter how right.From the narrow point of view of its financial mechanisms (as distinct from its policies) – the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal.A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction.A country can draw no more than 25% of its quota in the first tranche of a loan that it receives from the IMF. The first tranche is available to any country, which demonstrates efforts to overcome its BOP problems. The language of this requirement is so vague that it renders virtually all the members eligible to receive the first instalment.Other tranches are more difficult to obtain (as Russia and Zimbabwe can testify): the country must show successful compliance with agreed economic plans and meet performance criteria regarding its budget deficit and monetary gauges (for instance credit ceilings in the economy as a whole). The tranches that follow the first one are also phased. All this (welcome and indispensable) disciplining is waived in case of Emergency Assistance – BOP needs which arise due to natural disasters or as the result of an armed conflict. In such cases, the country can immediately draw up to 25% of its quota subject only to "cooperation" with the IMF – but not subject to meeting performance criteria. The IMF also does not shy away from helping countries meet their debt service obligations. Countries can draw money to retire and reduce burdening old debts or merely to service it.It is not easy to find a path in the jungle of acronyms, which sprouted in the wake of the formation of the IMF. It imposes tough guidelines on those unfortunate enough to require its help: a drastic reduction in inflation, cutting back imports and enhancing exports. The IMF is funded by the rich industrialized countries: the USA alone contributes close to 18% to its resources annually. Following the 1994-5 crisis in Mexico (in which the IMF a crucial healing role) – the USA led a round of increases in the contributions of the well-to-do members (G7) to its coffers. This became known as the Halifax-I round. Halifax-II looks all but inevitable, following the costly turmoil in Southeast Asia. The latter dilapidated the IMF's resources more than all the previous crises combined.At first, the Stand By Arrangement (SBA) was set up. It still operates as a short-term BOP assistance financing facility designed to offset temporary or cyclical BOP deficits. It is typically available for periods of between 12 to 18 months and released gradually, on a quarterly basis to the recipient member. Its availability depends heavily on the fulfilment of performance conditions and on periodic program reviews. The country must pay back (=repurchase its own currency and pay for it with hard currencies) in 3.25 to 5 years after each original purchase.This was followed by the General Agreement to Borrow (GAB) – a framework reference for all future facilities and by the CFF (Compensatory Financing Facility). The latter was augmented by loans available to countries to defray the rising costs of basic edibles and foodstuffs (cereals). The two merged to become CCFF (Compensatory and Contingency Financing Facility) – intended to compensate members with shortfalls in export earnings attributable to circumstances beyond their control and to help them to maintain adjustment programs in the face of external shocks. It also helps them to meet the rising costs of cereal imports and other external contingencies (some of them arising from previous IMF lending!). This credit is also available for a period of 3.25 to 5 years.1971 was an important year in the history of the world's financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF – it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility), which provided, for the first time, MEDIUM term assistance to members with BOP difficulties, which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years.The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account), which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established.During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes – the contributions did not meet its expanding roles.It got involved in the Latin American Debt Crisis – namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening – the monetary police of the global economic scene.The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord, which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low-income members, which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth – providing that they are enduring protracted BOP problems. ESAF loans finance 3-year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds.In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility – also used by Macedonia). It was a temporary outfit, which expired in April 1995. It provided financial assistance to countries, which faced BOP difficulties, which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years.In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund's approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia.Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision-making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank.The Board of Governors oversees the operation of a Board of Executive Directors, which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987 till 2000) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System.The members' voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK.There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers – many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully).This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if failing – the IMF is always to blame. Rage and other negative feeling, which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have – the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) – the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result – from donor countries, as well) – the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded.Despite these shortcomings, the IMF assumed two roles, which were not historically identified with it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) is shifted – so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline.The IMF is too restricted both in its ability to operate and in its ability to conceptualise and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients, which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin – a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (to use a gross understatement – the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic) and its goals untenable.The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico and not Bulgaria – is it because it shares no border with the USA), politicisation (South Korean officials complained that the IMF officials were trying to smuggle trade concessions to the USA in an otherwise totally financial package of measures) and too much red tape. But this was to be expected of an organization this size and with so much power.The medicine is no better than the doctor or, for that matter, than the disease that it is intended to cure.The IMF forces governments to restrict flows of capital and goods. Reducing budget deficits belongs to the former – reducing balance of payments deficits, to the latter. Consequently, government find themselves between the hard rock of not complying with the IMF performance demands (and criteria) – and the hammer of needing its assistance more and more often, getting hooked on it.The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". With all due respect (Chossudowski conducted research in 100 countries regarding this issue), this looks a trifle overblown. Overall, the IMF has beneficial accounts, which cannot be discounted so off-handedly. But the process that he describes is, to some extent, true:Devaluation (forced on the country by the IMF in order to encourage its exports and to stabilize its currency) leads to an increase in the general price level (also known as inflation). In other words: immediately after a devaluation, the prices go up (this happened in Macedonia and led to a doubling of the inflation which persisted before the 16% devaluation in July 1997). High prices burden businesses and increase their default rates. The banks increase their interest rates to compensate for the higher risk (=higher default rate) and to claw back part of the inflation (=to maintain the same REAL interest rates as before the increase in inflation). Wages are never fully indexed. The salaries lag after the cost of living and the purchasing power of households is eroded. Taxes fall as a result of a decrease in wages and the collapse of many businesses and either the budget is cruelly cut (austerity and scaling back of social services) or the budget deficit increases (because the government spends more than it collects in taxes). Another bad option (though rarely used) is to raise taxes or improve the collection mechanisms. Rising manufacturing costs (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) lead to pricing out of many of the local firms (their prices become too high for the local markets to afford). A flood of cheaper imports ensues and the comparative advantages of the country suffer. Finally, the creditors take over the national economic policy (which is reminiscent of darker, colonial times).And if this sounds familiar it is because this is exactly what is happening in Macedonia today. Communism to some extent was replaced by IMF-ism. In an age of the death of ideologies, this is a poor – and dangerous – choice. The country spends 500 million USD annually on totally unnecessary consumption (cars, jam, detergents). It gets this money from the IMF and from donor countries but an awful price: the loss of its hard earned autonomy and freedom. No country is independent if the strings of its purse are held by others.(Article written in January, 1998)ReturnThe IMF DeconstructedA Dialogue with Mr. Tom RodwellThe following is a standard IMF document, taken from its own website.Underlined phrasesare related to categoriesAand/orB(see below). The phrases here are general examples as part of general criticism of the ideological tone and "aesthetic" of the IMF. This dialogue is a combination of philosophy and economics: does/can the IMF (or any organization) "facilitatethe expansion andbalancedgrowth of international trade?"The IMF is the cornerstone and centrepiece of the financial architecture of the world. Long a sacred cow, it has lately become the eye of a controversy. Its prescriptions to ailing countries as diverse as Zimbabwe and Russia have, at times, proven to be inadequate, some say: ruinous. The IMF is a result of an ideology and its instrument. This is clearly revealed in its intentionally vaguely phrased documents. Tom and Sam, a philosopher/journalist/composer and a philosopher and physicist turned economist, try to read between the lines (in the best of East European traditions…).The IMF:Statutory PurposesThe IMF was created topromote international monetary co-operation; tofacilitatethe expansion andbalanced growthof international trade; to promote exchangestability; toassistin the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties underadequate safeguards; and to shorten the duration and lessen the degree ofdisequilibriumin the international balances of payments of members.Areas of ActivitySurveillanceis the process by which the IMFappraisesits members' exchange rate policies withinthe framework of a comprehensive analysisof thegeneral economic situation and the policy strategyof each member. The IMF fulfils itssurveillance responsibilitiesthrough: annual bilateral Article IVconsultationswith individual countries; multilateral surveillance twice a year in the context of its World Economic Outlook (WEO) exercise; andprecautionary arrangements,enhanced surveillance, and program monitoring, which provide a member withclose monitoring from the IMF in the absence of the use of IMF resources. (Precautionary arrangements serve to boostinternational confidence in a member's policies. Program monitoring may include the setting ofbenchmarksunder a shadow program, but it does not constitute a formal IMFendorsement.)IMF IDEOLOGICAL TONETom:The nature of the IMF is inextricably linked with its controlling member state and staff's economic and political viewpoints. The IMF talks about itself, and about economic/political phenomena generally, in precisely the same terms. The kind of economics it discusses is one of authority, monitoring, and, dare I say it, intervention. While the IMF allegedly intends to promote "international monetary co-operation" and to "facilitate the expansion and balanced growth of international trade" (standard free-market shibboleths), it consistently refers to "enhanced surveillance", "close monitoring", and "precautionary arrangements". Orwellian undertones are hardly muffled.Sam:The IMF has yet to adopt the "client-orientated" approach. It harbours deep (and oft-justified) distrust of the willingness of governments to blindly follow its dictates. It is a paranoid organization, based on authoritarian techniques of "negotiations" and "agreement". Euphemisms rule. Normally, the IMF holds "consultations" with the host governments. These are rather one-sided affairs. The governments are needy and impoverished ones. They lack the cadre of educated people needed in order to truly engage the IMF in constructive discourse. They are intimidated by the bullying tactics of the IMF and of its emissaries. The tone is imperial and impatient.Tom:The IMF clearly sees itself astheauthority on international development ideology. International development becomes an ideological construction, with subsets of subjective terms: free trade, financial contact, and economic vision. Many of these terms are defined in such a way that they enframe that which they discuss. The ideological position of the influential members is often significantly different from the developing countries. Sadly, the ideology only becomes reality when it is part of every day life in the developing nations.Sam:Worse still, the IMF's language is riddled with contradictions in terms and logical fallacies. Let us review a few:International monetary co-operationin IMF lingo meansexchange (rate) stability.But with such stability the expansion andbalanced growthof international trade is not achievable. Trade is based on dynamic exchange rate disparities. Moreover, there is nothing inherently wrong in such dynamism. The changing disparities reflect the relative advantages of the countries involved. In a world of fixed exchange rates – trade stagnates. And what is "balanced" growth anyhow? Trade has been growing at 3-5% annually for a few years now. Is this balanced, overdone or insufficient, as some free trade zealots cry out?Additionally, a regime of stable exchange rates won't go far towards facilitating the second result: to shorten the duration and lessen the degree ofdisequilibriumin the international balances of payments of members. If a country runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency, in the name of exchange rate stability – its balance of payments is only likely to worsen. Take Macedonia: with a 14% of GDP deficit in its BOP – it MUST devalue and URGENTLY. Its currency is HEAVILY overvalued and the whole economy is deflating. Yet, the IMF is about to repeat there the same grave error it committed in Russia: to protect the currency, the whole system is drained of liquidity (demonetised), interest rates are kept insanely high and the balance of payments deficit skyrockets, until the inevitable collapse. If the IMF is interested in self-perpetuating crisis situations in order to preserve its clout – it is doing a fine job indeed.The IMF was never authorized to rate the creditworthiness of its shareholders (=the countries). It is acting ultra vires in providing clean or soiled bills of financial health. Its ability to strangle a country financially if it does not comply with its programmes – no matter what the social or economic costs are – is very worrying.LANGUAGETom:The language in the IMF document can be roughly divided into two sections.APhrases concerning the-history-role/activities-nature of the IMFBPhrases concerning – subjective economic and political concepts – local policy – international policy.Here's my summary of the kind of language used:1. Quasi-intellectual terms ("big words for a dismal science"), e.g. disequilibrium, comprehensive analysis, policy strategy;2. Spin-doctoring euphemisms, e.g. promote, facilitate, balance, co-operation, safeguards, monitoring, responsibilities, precautionary arrangements, endorsement, benchmarks. This also includes intimidating terms such as "surveillance";3. Distancing terms, e.g. members, general economic situation, policy strategy.(1) Is simply pretension. The average "comprehensive analysis" undertaken by the IMF is often curiously selective and self-serving.Sam:Not to mention cursory "kangaroo-court" economic judgements replete with clear contempt and disregard for the "natives". The latter are held to be cheats who are merely trying to extort as much money as they can and probably stash it in Swiss bank accounts (private ones, needless to say).Tom:(2) Is the most obnoxious section. These phrases mislead. They paint a picture of the stability and democracy that supposedly is Western capitalism. They paint an image of the IMF as a fair, unbiased, caring, and democratic organisation. These phrases also confuse in that they connect "nice terms" (like balance, co-operation and safeguards) with complicated and subjective economic terms. Thus the language often functions as a "pacifier", or perhaps as a "chaser", softening the blow of the "hard stuff".(3) Indicates the insular attitude of the IMF. Their "grand scheme" is apparently removed from localised activities and concerns.Sam:There is one place, which absolutely complies with the IMF utopia. There is no inflation there. People do not particularly care if the exchange rate never changes or what is the outlandish level of interest rates needed to ensure this eerie stability. It is the cemetery.The IMF's deadly sin, yet to yield its grapes of wrath, is not to understand that economics is a branch of psychology and should be at the service of humans and society. When setting economic goals one must always act with pragmatism and compassion. In the realm of humans, to be compassionate IS to be pragmatic. Otherwise, reality is bound to frustrate the most rigorous planning. If social costs are not accounted for – unemployment will bring about crime and a black market, which will render the official market and its statistics meaningless, for instance. If exchange rate stability supported by inanely high interest rates prevails over the goals of industrial reconstruction and export-enhancement, the result is erosion of the very fabric of society. Lack of liquidity translates into a lack of trust in fellow citizens and in institutions. If public expenditures are harnessed too strenuously – corruption will flourish. The IMF's propensity to provide a "catchall" one-measure-fits-all panacea is nothing short of shortsighted and disastrous. It cannot be that the same financial recipe will apply to Pakistan, Macedonia, Estonia and Russia. Yet, a close scrutiny of the four IMF programmes imposed upon these countries (Estonia wriggled out) – demonstrates striking similarities. It is a fact that there are conflicting CAPITALIST economic models. Not because human nature is so diverse – and it is – but because different people have different preferences. Americans prefer profits and self-reliance to social justice. Not so the French. Paradoxically, this is exactly why markets exist: to trade in disparate preferences. The IMF is a central planning agency but as opposed to previous models it believes that it is omniscient – and knows that it is omnipotent.Tom:The IMF's desire to paint a kind of stasis on the world economy is, as you have said, a kind of religious-ideological defence mechanism. The language employed by the IMF is an attempt to give form to the haphazard and contradictory nature of international trade and development. This language functions in a similar way to their policies, in that both seek to describe and promote a uniform concept/practice of international economics.The reference to economics as a branch of psychology is spot-on. It is ignorant, unethical and unworkable to attempt to impose or promote any kind of exclusive and conformist concept of "the economy". Indeed, the IMF's bizarre language and policies reveal a mistaken view (commonly held) that there is such a single practice or entity called "The Economy", or "International Trade". Absolutist and limiting concepts of economy (communism, now capitalism) are increasingly being shown to be unworkable. The language used by the IMF is evidence of the impractical, restrictive and unethical nature of an elitist concept/practice of economics.FINAL STATEMENTTom:The IMF is a part of the industry of "trade", "development", and "economics" in general. This criticism of the language found in their promotional documents is, in some ways, a criticism of the aforementioned "economics industry" in general. When I first read the IMF's comments/reports, I was struck by the combination of arrogance and defensiveness (in a tone of barely muted desperation). I now believe that these documents were written with the first whiff of fear in the NYC air-conditioned officeambience. No doubt that those miners, steel workers, farmers, and manufacturers whose own industries were flattened by free trade hysteria will feel atinydegree of satisfaction, if we really are seeing the decline of the "economics industry".The IMF is unethical because it espouses an abstract concept "free trade" that influences the complex process of "development" (too often defined with insufficient complexity) while being unconcerned with specific and local realities and interactions. It is simply too abstract: international development is not assisted on atrulylocal level by investment in the military, state, or heavy industry. It is ridiculous for a third world country to build massive steel-plants, or allow foreign companies to extract vast amounts of timber or oil, when local people are concerned with finding clean drinking water. This abstraction criticism stands for the entire "economics industry", and will continue to do so while it has an insufficiently perceptive and complex understanding of localised realities.The language of economics is murky, and our criticism of it will remain justified as long as the IMF (et al) produce officious and misleading documents. The practice of economics is also murky, and our criticism of it too will remain justified as long as policies that are illogical, impractical and unethical are produced and enforced.
Simply, the EU got frightened. Excessive zeal can give anyone – let alone the Brussels amphibian bureaucrats – cold feet. Dates are being pushed back. Commitments hushed or rehashed. Now the Czechs "enjoy" the worst of both worlds: they are being treated as a colony and their date of entry is ceaselessly postponed.
This should and could have been different. The Czechs should not have shown any enthusiasm or anxiety. These are bad negotiating tactics. They should have negotiated with the EU as consumers (markets) do with producers elsewhere in the world. They should have extracted at least a commitment regarding the date of accession and detailed timetables. And they should have kept these timetables.
(Article published December 14, 1998 in "The New Presence")
Return
New Paradigms, Old Cycles
New paradigms die hard. It took a looming global recession to convince wild-eyed optimists that old cycles are more reliable guides than new paradigms.
Business cycles – from the smallest to the biggest – go through seven phases. Centuries of cumulative economic experience allow us to identify these stages more accurately than ever before.
An economic cycle invariably starts with inflation. The previous cycle having ended – and the new one just began – the economic environment is as uncertain as can be. The fundamental component is the scarcity of goods and services (following recession or deflation) and the maladapted money supply. Too much money chases fewer commodities. The general price level rises. But this constant, ubiquitous, all pervasive rise (known as "inflation") is also the result of mass psychology. Households and firms compensate for the growing uncertainty (=growing risk) by raising prices. They have no idea what should the appropriate or optimal equilibrium price level be. Market signals are garbled by psychological noise. Everyone is trying to stay ahead of perceived economic threats and instabilities by raising the risk premiums that they demand from their clients. Consumers, on the other hand, are willing to pay more today because they are convinced that the price trend is unidirectional and irreversible: up. The psychological underpinnings and bearings of inflation have been studied deeply in the last few decades. It is the source of the uncertainty that remained obscure. My hypothesis is that the end of every economic cycle fosters this panicky uncertainty, which is monetarily reflected as inflation. In more technical terms, inflation is a market pathology, a market failure.
Inflation disguises bad economic performance of firms and of the economy as a whole. "Paper" profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks get distorted and do not allow for meaningful analysis of the performance of the economy. Inflation leads to technological and economic stagnation. Plants do not modernize, the financial aspects of the firm's operations are emphasized, the industrial and operational aspects de-emphasized and neglected. Economies are seized by the pathological economic condition known as "stagflation" – zero or negative growth, coupled with inflation. A sense of urgency and crisis sets in and clears the path towards the next, second phase.
In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. Firms innovate and streamline. Efficiency, productivity and competitiveness are the buzzwords of this phase. As trade barriers fall, cross border capital flows (=investment) increase, productivity gains and new products are introduced – the upward price spiral is halted and contained. The same money buys better products (more reliable, more functions, more powerful). The same wages generate more products. This is technological deflation. It is beneficial to the economy in that it frees economic resources and encourages their efficient allocation. Real incomes rise and generate increased demand and production.
Inevitably, technical deflation leads to a restraint in the general price level. Increased consumption (both public and private) coupled with moderate asset price inflation prevents an outright monetary deflation (=a downward spiral in the general price level). Inflation is kept to sustainable levels. This phase is known as "disinflation". It is a transitory phase. The transition from hyperinflation or high inflation to a supportable level of inflation is a matter of one or two decades. This period is bound to be shortened by the revolutions in information, communications and transportation technologies. In fact, the whole cycle is hastened due to the more rapid dissemination of information. It is the availability and accessibility of information, which determines the values of important parameters such as the equilibrium general price level and other parameters of expectations (such as equity prices). The more information is available more readily – the more efficient the markets and the shorter the cycles. This enhances the false perception of instability inherent in modern markets. But speed does not necessarily a imply lack of stability. On the contrary, the faster and more violent the adjustments in the market mechanism – the more efficient it is.
The psychological well-being and assurance brought on by disinflation generate demand for assets, especially yielding assets (such as real estate or financial assets). The more certain the future value of streams of income, the more open the economic environment, the shorter the economic cycle, the more frequent and rapid the economic interactions – the more valuable assets become. Assets are mainly stores of expectations regarding future values. An assets bubble is created when the current value (=price) of money is low and the future value of money is certain and likely to grow through stable or decreasing prices. Stock exchanges, real estate, and financial transactions – all balloon out of proportion in a kind of irrational exuberance.
All bubbles burst in the end – and so do these assets bubbles. This is the fifth phase. It is crucial because it signifies the termination of the bull part of the cycle. The prices of assets collapse precipitously. There are no buyers – only sellers. Firms find it impossible to raise money because their obligations (commercial paper and bonds) are rendered valueless. A credit crunch ensues. Investment halts.
The collapse of assets bubbles generates asset price deflation. The psychological counterpart of this deflation is the disappearance of the "wealth effect" and its replacement by a "thrift effect". This influences consumption, inventories, sales, employment and other important angles of the real economy. If not countered by monetary and fiscal means – a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets – a monetary deflation might set in. Admittedly, a full-fledged deflation is rare. More frequent are a recession, a slump, a credit crunch, a slowdown, a growth recession and other less exotic variants. It is also possible to have differentiated or discriminatory deflation. This is a deflation in certain sectors of the economy or in certain territories of the globe – but not in others. In any case, a monetary deflation is a monstrous, venomous economic beast. Due to reversed expectations (that prices will continue to go down), people postpone their consumption and spending. Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. Investment and production slump – inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases. Coupled with declining prices of assets, it leads to bank failures as a result of debts gone sour. It is a self-perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle.
This is the phase of reflation. The market failure, at this stage, is so pervasive that all the self-balancing and allocation mechanisms are rendered dysfunctional. State intervention is needed in order to restart the economy. An injection of money through a fiscal stimulus, a monetary expansion, a lowering of interest rates, firm support of the financial system, tax and other incentives to consume and to import. Unfortunately, all these goals are best achieved by engaging in warfare. It is often the case: a convenient war reflates the economy, re-ignites the economic engine, generates employment, and increases consumption, innovation and modernization. But with or without war – people sense the demise of an old cycle and the imminent birth of a new one, fraught with uncertainty and ignorance. They rush to buy things. Because the economy is just recovering from deflation – there aren't usually many things to buy. A lot of money chasing few goods – this is a recipe for inflation. Back to phase one.
But the various phases of the cycle are not only affected by psychology – they affect it. During periods of inflation people are willing to take on risk. The risk of inflation is clear to them and the only compensation is through higher yields (returns, profits) on financial instruments. Yet, higher returns inevitably and invariably imply higher risks. Thus, people are forced to offset or mitigate one type of risk (inflation) with another (credit or investment risk). Paradoxically, an inflationary period is a period of certainty. Inflation is certain. People tend to develop an ideological type of economics. Based on the underlying and undeniable certainty of ever-worsening conditions, the intellectual elite and decision-makers resort to peremptory, radical, rigid and sometimes coercive solutions backed by an ideology disguised as "scientific knowledge". Communism is a prime example, of course – but so is the "Free Marketry" variant of capitalism, as practised by the IMF and by central bankers.
Deflation, on the other hand, is usually a much shorter period. People do not expect it to last. They fully expect it to be followed by inflation – they just do not know when. Thus, its nature is more transitory. Assured of low prices and preoccupied with economic survival – people become strongly risk averse. While in times of inflation people are seeking to protect the value of their money – in times of deflation people are in pursuit of sheer livelihood. A dangerous "stability" sets in. People invest in land, cash and, the more daring, in bonds. Banks do the same. In such times, ideologies are the first victims. They are replaced by philosophies and worldviews. People become much more pragmatic. They look to the possible rather than to the ideal. Communism is replaced by Socialism, Capitalism replaces Free Marketry. Perhaps this is the only good outcome of deflation.
(Article published November 9, 1998 in "The New Presence")
Return
Lessons in Transition
Question:What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?
Answer:Empirical research has demonstrated that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will take advantage of existing schemes (and ask for more, pitting one country against another). But these will never be the determining factors in their decision-making. They are much more likely to be swayed by the level of protection of property rights, degree of corruption, transparency, state of the physical infrastructure, education and knowledge of foreign languages and "mission critical skills", geographical position and proximity to markets and culture and mentality.
Question:What have been successful techniques for countries to improve their previously negative investment image?
Answer:The politicians of the country need to be seen to be transparently, non-corruptly encouraging business, liberalizing and protecting the property rights of investors. One real, transparent (for instance through international tender) privatisation; one case where the government supported a foreigner against a local; one politician severely punished for corruption and nepotism; one fearless news medium – change a country's image.
Question:Should there be restrictions on repatriation of foreign investment capital (such restrictions could prevent an investment panic, but at the same time they negatively affect investor's confidence)?
Answer:Short term and long term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) – and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries – it can be destructive in less liquid, immature economies or in economies in transition. The two phenomena should be accorded a different treatment. While long-term capital flows should be completely liberalized, encouraged and welcomed – the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long-term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever-higher yields. There is nothing inherently wrong with high yields – but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.
Question:What approach has been most useful in best serving the needs of small businesses: through private business support firms, business associations, or by government agencies?
Answer:It depends where. In Israel (until the beginning of the 90s), South Korea and Japan (until 1997) – the state provided the necessary direction and support. In the USA – the private sector invented its own enormously successful support structures (such as venture capital funds). The right approach depends on the characteristics of the country in question: how entrepreneurial are its citizens, how accessible are credits and microcredits to SMEs, how benign are the bankruptcy laws (which always reflect a social ethos), how good is its physical infrastructure, how educated are its citizens and so on.
Question:How might collective action problems among numerous and dispersed small and medium entrepreneurs best be dealt with?
Answer:It is a strange question to ask in the age of cross-Atlantic transportation, telecommunication and computer networks (such as the Internet). Geographical dispersion is absolutely irrelevant. The problem is in the diverging self-interests of the various players. The more numerous they are, the more niche-orientated, the smaller – the lesser the common denominator. A proof of this fragmentation is the declining power of cartels – trade unions, on the one hand and business trusts, monopolies and cartels, on the other hand. The question is not whether this can be overcome but whether it SHOULD be overcome. Such diversity of interests is the lifeblood of the modern market economy, which is based on conflicts and disagreements as much as it is based on the ability to ultimately compromise and reach a consensus. What needs to be done centrally is public relations and education. People, politicians, big corporations need to be taught the value and advantages of small business, of entrepreneurship and intrapreneurship. And new ways to support this sector need to be constantly devised.
Question:How might access of small business to start-up capital and other resources best be facilitated?
Answer:The traditional banks all over the world failed at maintaining the balancing act between risk and reward. The result was a mega shift to the capital markets. Stock exchanges for trading the shares of small and technology companies sprang all over the world (NASDAQ in the USA, the former USM in London, the Neuemarkt in Germany and so on). Investment and venture capital funds became the second most important source quantitatively. They not only funded budding entrepreneurs but also coached them and saw them through the excruciating and dangerous research and development phases. But these are rich world solutions.An important development is the invention of "third world solutions" such as microcredits granted to the agrarian or textile sectors, mainly to women and which involve the whole community.
Question:Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?
Answer:By providing them with the conditions to work and exercise their entrepreneurial skills. By establishing day care centres for their children. By providing microcredits (women have proven to be inordinately reliable borrowers). By giving them tax credits. By allowing or encouraging flexitime or part time work or work from home. By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their pay. By protecting them from sexual or gender harassment.
(Article written on October 15, 1999 and published November 22, 1999
in "Central Europe Review" volume 1, issue 22)
Return
Lucky Russia
As early as August 17th, a few minutes following the devaluation, the financial markets predicted that the Rouble would stabilize around 18-20 Roubles to the US dollar. This was the price quoted for CME forward Rouble contracts. Moreover, not everyone think that hyperinflation is imminent. Simply, there is not enough purchasing power to generate this kind of surge in prices.
Russia is lucky. I am not being cute: this crisis could not have come at a more opportune time. Russians have witnessed (if not actively enjoyed) the advantages of a consumer capitalist economy. For one thing, most of them have some kind of private property and the abundance of all types of products together with the elimination of queues and shortages served to provide a foretaste of the "capitalist heaven". They are not likely to go back, politically or economically. That capitalism is not well entrenched is a blessing in no disguise: this crisis does not deprive people sufficiently to foster a revolution. Social unrest, a dramatic rise in crime rates, more crony capitalism and other malignant forms of "get rich quick" schemes – perhaps. But not another revolution.
Russia and Russians are prone to dramatic extremes. Russia is simply going through a crisis which will ultimately engulf all of Eastern, Central and Southern Europe and, more generally, all the protective, etatist economies. From Macedonia to the Czech Republic, from Kazakhstan to China, from Slovenia to Bulgaria – all are likely to experience a similar shock. This is because none has really reformed. Under the banner of "capitalism" a small, corrupt elite of oligarchs and politicians robbed the assets of the state. Industry is still protected against outside competition, tax collection is a farce, the banking system a shambles, Western handouts the only pillar of the economy. This cannot and will not go on. The invisible hand of the market will devalue overvalued currencies, force industry to restructure, force the banking system to amalgamate, force inept and corrupt politicians out. The Day of Judgement is here. Russia is lucky to go through all this now – because it will be uniquely positioned, as a result.
The Russian banking system will be forced to restructure. Hundreds of banks will go insolvent and bankrupt. The rest will consolidate. But this will only result in the formation of a few "bad banks". The next stages will involve the formation of healthy retail activities, where none exist today. Banks will begin to compete for savings. They will diversify their portfolio and, as a result, their exposure (risk) will diminish. Then they will have to invest this money to generate the kind of returns that will attract the savers. They will not risk another asset bubble. They will not invest in brokerage operations, speculate, or bet against the Rouble anymore. Their future profits will be the result of investments in real assets: industry, the services sector, new and small businesses. These are very good news: the banks have been taught a lesson they will not easily forget. It is: paper profits and paper assets are on paper only. Here today, gone tomorrow.
A devalued Rouble will enhance the competitiveness of the Russian industrial and commodity production sectors. Rouble inflation will not fully reflect the devaluation for a long time. This difference will allow Russian manufacturers and commodity producers to compete vigorously.
Russia was long subjected to the quack "medical experiments" of the IMF. It was led down the path of deflation, which the IMF has plunged half the world into. It needed to reflate urgently. It could not have "chosen" a better way to do so. The devaluation will reflate the economy. It is equivalent to the infusion of new blood to a body dilapidated by endless austerity and economic bloodletting.
It might sound outlandish – but Russia is showing the way to other countries in the Third World as it has so often done in the past. It, in effect, has acted against the IMF dictates and by devaluing its currency it has readopted the path of John Maynard Keynes. It was about time.
(Article published August, 1998 in "The New Presence"
and October 28, 1998 in "Argumenti i fakti")
Return
Russian Roulette
The more involved the IMF gets in the Russian economy – the more controversy surrounds it. True, economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are loudly complaining. Some economists regard this as a sign of the proper functioning of the IMF – others spot some justice in some of the complaints. The IMF is supposed to promote international monetary cooperation, establish a multilateral system of payments, assist countries with Balance of Payments (BOP) difficulties under adequate safeguards, lessen the duration and the degree of disequilibrium in the international BOPS of member countries and promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.
It tries to juggle all these goals in the thinning air of the global capital markets. There is little dispute that the IMF is indispensable. Without it, the world monetary system would have contracted more readily and many countries would be worse off. It imposes monetary and fiscal discipline, forces governments to plan, and introduces painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters endure. Lately, it began to lend credibility to countries and to manage crisis situations. But, this scapegoat role allows politicians in Russia to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a reformed market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to have prolonged the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if not – the IMF is always to blame. Negative feelings, which would have normally brought about a real, transparent, corruption-free, efficient market economy are vented and deflected.
The IMF money in Russia encourages corrupt and inefficient spending because it cannot really be controlled and monitored. The rule is: the more resources the Federal and regional governments have – the more will be lost to corruption and inefficiency. The IMF cannot rationalize spending in Russia because its control mechanisms are flawed: they rely too heavily on local, official input and they are remote (from Washington). They are also underfunded.
Despite these shortcomings, the IMF assumed – and not only in the case of Russia – two roles which were not historically allocated to it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. Russia experienced it last month. No banks or donor countries extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) shifted – so did responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments ("why worry, the IMF will bail me out in case of default"). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline. There is no better example than the bloated and wrongly priced Russian market for short-term government obligations, the GKOs.
The IMF is too restricted in both its ability to operate and in its ability to conceptualise and to innovate. It, therefore, resorts to prescribing the same medicine of austerity to all the sovereign patients, which are suffering from a myriad of economic diseases. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (the daily turnover in the foreign exchange markets alone is 6 times the total resources of the IMF). The result is fiascos like South Korea and Indonesia where 40-60 billion USD aid packages was consumed by sick economies in days to no avail. More and more, the IMF looks anachronistic and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico, which shares a border with the USA and not Bulgaria, which doesn't?), politicisation (South Korean and Indonesian officials complained that the IMF officials tried to surreptitiously introduce trade concessions to the USA into an otherwise financial package of measures) and too much red tape.
The problem is that the IMF forces governments to restrict flows of capital and goods, and to reduce budget and balance of payments deficits. Consequently, governments find themselves caught between non-compliance with the IMF performance criteria – and addiction to its assistance. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". This looks a trifle overblown. But the process that he describes is, to some extent, true and fully applicable to Russia.
The inevitable devaluation of the Rouble (supposed to encourage exports and stabilize the currency) will lead to increased inflation. The higher prices will burden businesses and increase their default rates. The banks will increase their interest rates to compensate for higher risks and for inflation. Wages in Russia are never fully indexed or paid timely so the purchasing power of households will be further eroded. Despite recent posturing, tax revenues will fall as a result of a decrease in wages and the collapse of many businesses. Thus, the budget will be either cruelly cut or the budget deficit will increase. The options of raising taxes or improving the collection methods are fantastic in the chaotic environment euphemistically known as the Russian Economy. The Rising costs of manufacturing (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) will lead to the pricing out of the local markets of many local firms. A flood of cheaper imports will ensue. The comparative advantages of Russia will disappear as it slides into ever growing trade deficits. Finally, The Russians believe, Western creditors will take over the national economic policy. Communism will be replaced by IMF-ism. No country is independent if the strings of its purse are held by others. Russians, too nationalistic to acquiesce, will rebel. The price will be partly paid by the likes of the Prague Stock Exchange.
(Article published October 2, 1998 in "The New Presence")
Return
Foreigners do not Like Russia
Russia's New Economy
With no Russian in sight, foreigners like to belittle and mock Russia. "It is a criminal gangland" (an American term which better fits Italy), "corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They point to its 160 billion USD in foreign debt. But this is one of the lowest rates in the world (c. 40% of GDP). The USA owes almost twice as much per its GDP.
Foreigners do not like Russia. Russia should stop relying on them so heavily. Not because of nationalistic reasons. Because of realistic ones. It is not realistic to expect foreign institutions and lenders (such as the IMF) to provide Russia with another 45 billion roubles. It was the IMF that de-monetised the Russian economy. Its outlandish demands to limit the money supply reduced the amount of roubles in circulation to a dangerous, life-threatening, level (15% of GDP). The result was an unprecedented barter economy (more than 75% of all transactions) and a collapse of the popular trust in the rouble.
There has never been a post-communist "Russian Economy". There was a "Moscow Economy" and a "Rest of Russia Economy". The first was a bubble of consumption, novelty seeking, vanity and financial assets. The "crisis" in August was merely the bursting of the MUSCOVITE bubble. How come I consider this to be good for Russia?
First, it will weed out the weak economic players. Shady companies, the manufacturers of shoddy goods, financial leeches and parasites – all will vanish together with easy, corrupt and criminal money. Foreign firms, which came over to ride the wave of unbridled consumerism and to make a quick buck, will go home. The export revenues of oligarchs and robber barons will revert back to the nation. In time, their inefficient and corrupt fiefdoms and monopolies will crumble. They may even begin to pay taxes.
Multinationals committed to the still promising Russian market will not go away. They will invest more and provide even more credits to local suppliers and partners. They will hire good staff, reduce costs and finally acknowledge the existence of life (and markets) outside Moscow. The crisis in Moscow is blessing for the rest of Russia, as has often been the case in history.
This is also the chance of domestic industry and services. With unemployment up, wage costs are down by half. So are rent and security costs and other overhead. Many good people are available today at a reasonable price. Companies have rationalized, cut the fat, sacked unneeded people, become lean and mean. They are fast becoming competitive in their own markets and, later on, perhaps, in export markets.
Additionally, imports are down by 45%. Domestic firms face much less competition, on the one hand, and less choosy clients, on the other hand. This is their chance to capture market share. Russian businesses are used to operating without a banking system, or in hyperinflation. Foreigners are not. Shops will prefer to stock cheaper domestically produced goods. Both product quality and the attention to the consumer's needs and demands need to improve. But the prize is enormous: control of the Russian market.
But is there a Russian market? This is the only cloud in the silver lining. Russia is being regionalized, broken down. The movement of both people and goods is gradually restricted. The fragmentation of a hitherto unified market is detrimental. This is the real risk facing Russia. Whatever the POLITICAL arrangements – the economy must remain united. The various oblasts, mini-states and fiefdoms are simply not economically viable on their own.
(Article published November 23, 1998 in "The New Presence")
Return
IMF – Kill or Cure
This was the title of the cover page of the prestigious magazine, "The Economist" in its issue of 10/1/98. The more involved the IMF gets in the world economy – the more controversy surrounds it. Economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are not too happy with it, all are loudly complaining. Some economists regard this as a sign of the proper functioning of the International Monetary Fund (IMF) – others spot some justice in some of the complaints.
The IMF was established in 1944 as part of the Bretton Woods agreement. Originally, it was conceived as the monetary arm of the UN, an agency. It encompassed 29 countries but excluded the losers in World War II, Germany and Japan. The exclusion of the losers in the Cold war from the WTO is reminiscent of what happened then: in both cases, the USA called the shots and dictated the composition of the membership of international organization in accordance with its predilections.
Today, the IMF numbers 182 member-countries and boasts "equity" (own financial means) of 200 billion USD (measured by Special Drawing Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110 countries. It is truly international.
The IMF has a few statutory purposes. They are splashed across its Statute and its official publications. The criticism relates to the implementation – not to the noble goals. It also relates to turf occupied by the IMF without any mandate to do so.
The IMF is supposed to:
A. Promote international monetary cooperation;
B. Expand international trade (a role which reverted now to the WTO);
C. Establish a multilateral system of payments;
D. Assist countries with Balance of Payments (BOP) difficulties under adequate safeguards;
E. Lessen the duration and the degree of disequilibrium in the international BOPS of member countries;
F. Promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.
The IMF tries to juggle all these goals in the thinning air of the global capital markets. It does so through three types of activities:
Surveillance
The IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "consultation" (with the countries' monetary and fiscal authorities). The famed (and dreaded) World Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance.
Sometimes, countries, which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country – or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings.
The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement, which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored.
Financial Assistance
Where surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair.
Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later.
Technical Assistance
The last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data – where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions – no policy will succeed, no matter how right.
From the narrow point of view of its financial mechanisms (as distinct from its policies) – the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal.
A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction.
A country can draw no more than 25% of its quota in the first tranche of a loan that it receives from the IMF. The first tranche is available to any country, which demonstrates efforts to overcome its BOP problems. The language of this requirement is so vague that it renders virtually all the members eligible to receive the first instalment.
Other tranches are more difficult to obtain (as Russia and Zimbabwe can testify): the country must show successful compliance with agreed economic plans and meet performance criteria regarding its budget deficit and monetary gauges (for instance credit ceilings in the economy as a whole). The tranches that follow the first one are also phased. All this (welcome and indispensable) disciplining is waived in case of Emergency Assistance – BOP needs which arise due to natural disasters or as the result of an armed conflict. In such cases, the country can immediately draw up to 25% of its quota subject only to "cooperation" with the IMF – but not subject to meeting performance criteria. The IMF also does not shy away from helping countries meet their debt service obligations. Countries can draw money to retire and reduce burdening old debts or merely to service it.
It is not easy to find a path in the jungle of acronyms, which sprouted in the wake of the formation of the IMF. It imposes tough guidelines on those unfortunate enough to require its help: a drastic reduction in inflation, cutting back imports and enhancing exports. The IMF is funded by the rich industrialized countries: the USA alone contributes close to 18% to its resources annually. Following the 1994-5 crisis in Mexico (in which the IMF a crucial healing role) – the USA led a round of increases in the contributions of the well-to-do members (G7) to its coffers. This became known as the Halifax-I round. Halifax-II looks all but inevitable, following the costly turmoil in Southeast Asia. The latter dilapidated the IMF's resources more than all the previous crises combined.
At first, the Stand By Arrangement (SBA) was set up. It still operates as a short-term BOP assistance financing facility designed to offset temporary or cyclical BOP deficits. It is typically available for periods of between 12 to 18 months and released gradually, on a quarterly basis to the recipient member. Its availability depends heavily on the fulfilment of performance conditions and on periodic program reviews. The country must pay back (=repurchase its own currency and pay for it with hard currencies) in 3.25 to 5 years after each original purchase.
This was followed by the General Agreement to Borrow (GAB) – a framework reference for all future facilities and by the CFF (Compensatory Financing Facility). The latter was augmented by loans available to countries to defray the rising costs of basic edibles and foodstuffs (cereals). The two merged to become CCFF (Compensatory and Contingency Financing Facility) – intended to compensate members with shortfalls in export earnings attributable to circumstances beyond their control and to help them to maintain adjustment programs in the face of external shocks. It also helps them to meet the rising costs of cereal imports and other external contingencies (some of them arising from previous IMF lending!). This credit is also available for a period of 3.25 to 5 years.
1971 was an important year in the history of the world's financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF – it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility), which provided, for the first time, MEDIUM term assistance to members with BOP difficulties, which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years.
The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account), which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established.
During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes – the contributions did not meet its expanding roles.
It got involved in the Latin American Debt Crisis – namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening – the monetary police of the global economic scene.
The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord, which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low-income members, which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth – providing that they are enduring protracted BOP problems. ESAF loans finance 3-year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds.
In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility – also used by Macedonia). It was a temporary outfit, which expired in April 1995. It provided financial assistance to countries, which faced BOP difficulties, which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years.
In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund's approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia.
Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision-making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank.
The Board of Governors oversees the operation of a Board of Executive Directors, which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987 till 2000) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System.
The members' voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK.
There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers – many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully).
This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment – the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful – the credit goes to the politicians, if failing – the IMF is always to blame. Rage and other negative feeling, which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have – the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) – the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result – from donor countries, as well) – the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded.
Despite these shortcomings, the IMF assumed two roles, which were not historically identified with it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could – and usually does – mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) is shifted – so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler – the losses to the IMF. This does not encourage prudence or discipline.
The IMF is too restricted both in its ability to operate and in its ability to conceptualise and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients, which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin – a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (to use a gross understatement – the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic) and its goals untenable.
The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico and not Bulgaria – is it because it shares no border with the USA), politicisation (South Korean officials complained that the IMF officials were trying to smuggle trade concessions to the USA in an otherwise totally financial package of measures) and too much red tape. But this was to be expected of an organization this size and with so much power.
The medicine is no better than the doctor or, for that matter, than the disease that it is intended to cure.
The IMF forces governments to restrict flows of capital and goods. Reducing budget deficits belongs to the former – reducing balance of payments deficits, to the latter. Consequently, government find themselves between the hard rock of not complying with the IMF performance demands (and criteria) – and the hammer of needing its assistance more and more often, getting hooked on it.
The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". With all due respect (Chossudowski conducted research in 100 countries regarding this issue), this looks a trifle overblown. Overall, the IMF has beneficial accounts, which cannot be discounted so off-handedly. But the process that he describes is, to some extent, true:
Devaluation (forced on the country by the IMF in order to encourage its exports and to stabilize its currency) leads to an increase in the general price level (also known as inflation). In other words: immediately after a devaluation, the prices go up (this happened in Macedonia and led to a doubling of the inflation which persisted before the 16% devaluation in July 1997). High prices burden businesses and increase their default rates. The banks increase their interest rates to compensate for the higher risk (=higher default rate) and to claw back part of the inflation (=to maintain the same REAL interest rates as before the increase in inflation). Wages are never fully indexed. The salaries lag after the cost of living and the purchasing power of households is eroded. Taxes fall as a result of a decrease in wages and the collapse of many businesses and either the budget is cruelly cut (austerity and scaling back of social services) or the budget deficit increases (because the government spends more than it collects in taxes). Another bad option (though rarely used) is to raise taxes or improve the collection mechanisms. Rising manufacturing costs (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) lead to pricing out of many of the local firms (their prices become too high for the local markets to afford). A flood of cheaper imports ensues and the comparative advantages of the country suffer. Finally, the creditors take over the national economic policy (which is reminiscent of darker, colonial times).
And if this sounds familiar it is because this is exactly what is happening in Macedonia today. Communism to some extent was replaced by IMF-ism. In an age of the death of ideologies, this is a poor – and dangerous – choice. The country spends 500 million USD annually on totally unnecessary consumption (cars, jam, detergents). It gets this money from the IMF and from donor countries but an awful price: the loss of its hard earned autonomy and freedom. No country is independent if the strings of its purse are held by others.
(Article written in January, 1998)
Return
The IMF Deconstructed
A Dialogue with Mr. Tom Rodwell
The following is a standard IMF document, taken from its own website.Underlined phrasesare related to categoriesAand/orB(see below). The phrases here are general examples as part of general criticism of the ideological tone and "aesthetic" of the IMF. This dialogue is a combination of philosophy and economics: does/can the IMF (or any organization) "facilitatethe expansion andbalancedgrowth of international trade?"
The IMF is the cornerstone and centrepiece of the financial architecture of the world. Long a sacred cow, it has lately become the eye of a controversy. Its prescriptions to ailing countries as diverse as Zimbabwe and Russia have, at times, proven to be inadequate, some say: ruinous. The IMF is a result of an ideology and its instrument. This is clearly revealed in its intentionally vaguely phrased documents. Tom and Sam, a philosopher/journalist/composer and a philosopher and physicist turned economist, try to read between the lines (in the best of East European traditions…).
The IMF:
Statutory Purposes
The IMF was created topromote international monetary co-operation; tofacilitatethe expansion andbalanced growthof international trade; to promote exchangestability; toassistin the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties underadequate safeguards; and to shorten the duration and lessen the degree ofdisequilibriumin the international balances of payments of members.
Areas of Activity
Surveillanceis the process by which the IMFappraisesits members' exchange rate policies withinthe framework of a comprehensive analysisof thegeneral economic situation and the policy strategyof each member. The IMF fulfils itssurveillance responsibilitiesthrough: annual bilateral Article IVconsultationswith individual countries; multilateral surveillance twice a year in the context of its World Economic Outlook (WEO) exercise; andprecautionary arrangements,enhanced surveillance, and program monitoring, which provide a member withclose monitoring from the IMF in the absence of the use of IMF resources. (Precautionary arrangements serve to boostinternational confidence in a member's policies. Program monitoring may include the setting ofbenchmarksunder a shadow program, but it does not constitute a formal IMFendorsement.)
IMF IDEOLOGICAL TONE
Tom:
The nature of the IMF is inextricably linked with its controlling member state and staff's economic and political viewpoints. The IMF talks about itself, and about economic/political phenomena generally, in precisely the same terms. The kind of economics it discusses is one of authority, monitoring, and, dare I say it, intervention. While the IMF allegedly intends to promote "international monetary co-operation" and to "facilitate the expansion and balanced growth of international trade" (standard free-market shibboleths), it consistently refers to "enhanced surveillance", "close monitoring", and "precautionary arrangements". Orwellian undertones are hardly muffled.
Sam:
The IMF has yet to adopt the "client-orientated" approach. It harbours deep (and oft-justified) distrust of the willingness of governments to blindly follow its dictates. It is a paranoid organization, based on authoritarian techniques of "negotiations" and "agreement". Euphemisms rule. Normally, the IMF holds "consultations" with the host governments. These are rather one-sided affairs. The governments are needy and impoverished ones. They lack the cadre of educated people needed in order to truly engage the IMF in constructive discourse. They are intimidated by the bullying tactics of the IMF and of its emissaries. The tone is imperial and impatient.
Tom:
The IMF clearly sees itself astheauthority on international development ideology. International development becomes an ideological construction, with subsets of subjective terms: free trade, financial contact, and economic vision. Many of these terms are defined in such a way that they enframe that which they discuss. The ideological position of the influential members is often significantly different from the developing countries. Sadly, the ideology only becomes reality when it is part of every day life in the developing nations.
Sam:
Worse still, the IMF's language is riddled with contradictions in terms and logical fallacies. Let us review a few:International monetary co-operationin IMF lingo meansexchange (rate) stability.But with such stability the expansion andbalanced growthof international trade is not achievable. Trade is based on dynamic exchange rate disparities. Moreover, there is nothing inherently wrong in such dynamism. The changing disparities reflect the relative advantages of the countries involved. In a world of fixed exchange rates – trade stagnates. And what is "balanced" growth anyhow? Trade has been growing at 3-5% annually for a few years now. Is this balanced, overdone or insufficient, as some free trade zealots cry out?
Additionally, a regime of stable exchange rates won't go far towards facilitating the second result: to shorten the duration and lessen the degree ofdisequilibriumin the international balances of payments of members. If a country runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency, in the name of exchange rate stability – its balance of payments is only likely to worsen. Take Macedonia: with a 14% of GDP deficit in its BOP – it MUST devalue and URGENTLY. Its currency is HEAVILY overvalued and the whole economy is deflating. Yet, the IMF is about to repeat there the same grave error it committed in Russia: to protect the currency, the whole system is drained of liquidity (demonetised), interest rates are kept insanely high and the balance of payments deficit skyrockets, until the inevitable collapse. If the IMF is interested in self-perpetuating crisis situations in order to preserve its clout – it is doing a fine job indeed.
The IMF was never authorized to rate the creditworthiness of its shareholders (=the countries). It is acting ultra vires in providing clean or soiled bills of financial health. Its ability to strangle a country financially if it does not comply with its programmes – no matter what the social or economic costs are – is very worrying.
LANGUAGE
Tom:
The language in the IMF document can be roughly divided into two sections.
APhrases concerning the-history-role/activities-nature of the IMFBPhrases concerning – subjective economic and political concepts – local policy – international policy.
Here's my summary of the kind of language used:
1. Quasi-intellectual terms ("big words for a dismal science"), e.g. disequilibrium, comprehensive analysis, policy strategy;
2. Spin-doctoring euphemisms, e.g. promote, facilitate, balance, co-operation, safeguards, monitoring, responsibilities, precautionary arrangements, endorsement, benchmarks. This also includes intimidating terms such as "surveillance";
3. Distancing terms, e.g. members, general economic situation, policy strategy.
(1) Is simply pretension. The average "comprehensive analysis" undertaken by the IMF is often curiously selective and self-serving.
Sam:
Not to mention cursory "kangaroo-court" economic judgements replete with clear contempt and disregard for the "natives". The latter are held to be cheats who are merely trying to extort as much money as they can and probably stash it in Swiss bank accounts (private ones, needless to say).
Tom:
(2) Is the most obnoxious section. These phrases mislead. They paint a picture of the stability and democracy that supposedly is Western capitalism. They paint an image of the IMF as a fair, unbiased, caring, and democratic organisation. These phrases also confuse in that they connect "nice terms" (like balance, co-operation and safeguards) with complicated and subjective economic terms. Thus the language often functions as a "pacifier", or perhaps as a "chaser", softening the blow of the "hard stuff".
(3) Indicates the insular attitude of the IMF. Their "grand scheme" is apparently removed from localised activities and concerns.
Sam:
There is one place, which absolutely complies with the IMF utopia. There is no inflation there. People do not particularly care if the exchange rate never changes or what is the outlandish level of interest rates needed to ensure this eerie stability. It is the cemetery.
The IMF's deadly sin, yet to yield its grapes of wrath, is not to understand that economics is a branch of psychology and should be at the service of humans and society. When setting economic goals one must always act with pragmatism and compassion. In the realm of humans, to be compassionate IS to be pragmatic. Otherwise, reality is bound to frustrate the most rigorous planning. If social costs are not accounted for – unemployment will bring about crime and a black market, which will render the official market and its statistics meaningless, for instance. If exchange rate stability supported by inanely high interest rates prevails over the goals of industrial reconstruction and export-enhancement, the result is erosion of the very fabric of society. Lack of liquidity translates into a lack of trust in fellow citizens and in institutions. If public expenditures are harnessed too strenuously – corruption will flourish. The IMF's propensity to provide a "catchall" one-measure-fits-all panacea is nothing short of shortsighted and disastrous. It cannot be that the same financial recipe will apply to Pakistan, Macedonia, Estonia and Russia. Yet, a close scrutiny of the four IMF programmes imposed upon these countries (Estonia wriggled out) – demonstrates striking similarities. It is a fact that there are conflicting CAPITALIST economic models. Not because human nature is so diverse – and it is – but because different people have different preferences. Americans prefer profits and self-reliance to social justice. Not so the French. Paradoxically, this is exactly why markets exist: to trade in disparate preferences. The IMF is a central planning agency but as opposed to previous models it believes that it is omniscient – and knows that it is omnipotent.
Tom:
The IMF's desire to paint a kind of stasis on the world economy is, as you have said, a kind of religious-ideological defence mechanism. The language employed by the IMF is an attempt to give form to the haphazard and contradictory nature of international trade and development. This language functions in a similar way to their policies, in that both seek to describe and promote a uniform concept/practice of international economics.
The reference to economics as a branch of psychology is spot-on. It is ignorant, unethical and unworkable to attempt to impose or promote any kind of exclusive and conformist concept of "the economy". Indeed, the IMF's bizarre language and policies reveal a mistaken view (commonly held) that there is such a single practice or entity called "The Economy", or "International Trade". Absolutist and limiting concepts of economy (communism, now capitalism) are increasingly being shown to be unworkable. The language used by the IMF is evidence of the impractical, restrictive and unethical nature of an elitist concept/practice of economics.
FINAL STATEMENT
Tom:
The IMF is a part of the industry of "trade", "development", and "economics" in general. This criticism of the language found in their promotional documents is, in some ways, a criticism of the aforementioned "economics industry" in general. When I first read the IMF's comments/reports, I was struck by the combination of arrogance and defensiveness (in a tone of barely muted desperation). I now believe that these documents were written with the first whiff of fear in the NYC air-conditioned officeambience. No doubt that those miners, steel workers, farmers, and manufacturers whose own industries were flattened by free trade hysteria will feel atinydegree of satisfaction, if we really are seeing the decline of the "economics industry".
The IMF is unethical because it espouses an abstract concept "free trade" that influences the complex process of "development" (too often defined with insufficient complexity) while being unconcerned with specific and local realities and interactions. It is simply too abstract: international development is not assisted on atrulylocal level by investment in the military, state, or heavy industry. It is ridiculous for a third world country to build massive steel-plants, or allow foreign companies to extract vast amounts of timber or oil, when local people are concerned with finding clean drinking water. This abstraction criticism stands for the entire "economics industry", and will continue to do so while it has an insufficiently perceptive and complex understanding of localised realities.
The language of economics is murky, and our criticism of it will remain justified as long as the IMF (et al) produce officious and misleading documents. The practice of economics is also murky, and our criticism of it too will remain justified as long as policies that are illogical, impractical and unethical are produced and enforced.