November 2005

Oscar Ugarteche
Institute of Economic Research
National University of Mexico, UNAM

THE RISE AND FALL OF THE IMF

The issue is whether International Financial Institutions can be reformed or not. This paper will review the considerations in the creation of the IMF and the riole played by the US a the time, the manner in which the IMF has operated, the results to date and then briefly will look at the World Bank. It begins by reviewing the debt crisis and what led up to it in the 1970’s. There are many arguments on the roots and this paper takes a position on a monetarist argument. Then it reviews the process of debt rescheduling as the role of the Fund then with the adverse consequences on the economy of Latin American countries. Then it proceeds to look at the results of structural reforms to conclude that the institutions do not seem to work to their own ends. It makes a review of the IMF role in the Asian and Argentina crisis and passes review on the external debt renegotiation mechanism and proposes in the concluding remarks another international financial architecture without the existing IMF and with a much reduced WB dedicated to data gathering. The paper seconds Bello’s idea of a regional monetary fund, proposes an international board of arbitration for sovereign debt and downplays the role of the World bank, taking from Broad’s idea.

The creation of the IMF in 1944 resulted directly from the instability of the world economy during the 1930’s as a consequence of deflation that derived from the gold standard and depression that came from the application of the beggar thy neighbour policies plus a crisis of overproduction. The end of the gold standard in 1933 paved the way for a new international reserve standard, grounded on gold. This was to become the gold/dollar standard established in 1944 at a fixed rate of US$35.70 per ounce of gold, the price at which gold had been in the markets since the 1930’s. The reason for having the US dollar convertible to gold was because the United States had the strongest economy, was the world’s creditor, had the largest amount of international reserves and the US dollar effectively served as the world monetary reserve asset. The United Kingdom, previously a major international reserve economy, was no longer in a position to serve that function. It had turned into a debtor country during World War I and not withstanding that the United States waived those debts, it again became an important international debtor during World War II.

The concept of a currency stabilization board started developing since the 1930’s with various currency stabilization plans being designed between 1931 and 1935. (Eichengreen, 1989) Only when the US Treasury decided to put its pressure to obtain it, did it work. It was when Cordell Hull at the State Department decided that multilateralism was essential for the future of humanity and for the stability of world peace that the concept was more properly developed under the guidance of Harry White, pupil of Jacob Viner (1943). The establishment of the IMF in Washington DC in 1946 was to mark not only the importance of the institution for American foreign policy but its influence over it. With the definite disappearance of the concept of a board of international debt launched at the League of Nations during the 1930’s, the issue of US Confederate State unpaid debts of the 1840’s (CFB, 1955) disappeared from the international agenda and the new institution was able to operate fresh on the basis of US law. It was the law of the major creditor and major reserve holder in the world then, and is the law for most international financial transactions after World War II.

The debt problem: a monetarist view
Most analysts place the roots for the debt problems in major irresponsible borrowings, a large State sector, market distortions, corruption and public sector and balance of payments deficits. These analysts usually add to this the petrodollar crises which raised external deficit leading to what became known as the “debt crisis”. There are exceptions to this view such as Edwards and Larrain (1989), Griffiths Jones (1988) and more recently Hammes and Wills (2003). We wish to return to the U.S. interest rate analysis and the external shock element of the crisis, in order to follow the role of the IMF in it. James (1996: 355)) suggests that the IMF was worried in 1982 about the impact of US interest rates and that the impact of interest rate shocks went beyond immediate service costs

The 1970’s started with the delinking of the US dollar from gold at a fixed rate and the opening of the international gold and currency markets, on August 15, 1971 with the Smithsonian Agreement. It was done without consulting the IMF and marked the end of fixed exchange rates, the scheme designed to keep a stable world after WWII that gave the IMF its sense of mission.

The managing Director of the IMF, Schweitzer, was invited, with one hour’s notice, to attend a meeting in the U.S. Treasury with ? Fed President? Paul Volcker (Secretary?of the Treasury?Connolly was in the White House) who told him about the major elements in the Nixon Program…Then Schweitzer was able to see Nixon’s speech on television (James, 220)

The disregard for the institution meant to keep stability in the world economy is interesting because it introduces the position of the US Government towards the IMF. It has been used as a tool of US foreign policy but not kept in regard for purposes of international financial stability. The 1970’s was a time of cheap money and loan pushing as a result of the deregulation of the currency and gold markets. With the end of fixed parity and the dollar/gold standard, raw materials prices soared in US$ prices as exporters sought to put some order into those markets upset by the major changes after the Smithsonian Agreement of August 1971. The dollar price of gold went from 35 dollars an ounce to 455 dollars an ounce by 1980 and commodity prices tended to follow a gold reference which increased substantially reflecting the devaluation of the US dollar. According to Hammes and Wills, commodity prices in gold remained stable during the 1970’s.

The effective real interest rate of US dollars plummeted with the prime rate reaching an average of ?0..75% between 1974 and 1975 while inflation reached an average of 10% per annum. This opened the way to much irresponsible borrowing and lending . The credit cycle entered its boom period at the time, to put it in Marichal’s terms.(1989) Actually the credit cycle started in the 1960’s and accelerated as the supply of credit curve became steeper with more dollar liquidity entering the international banking circuits after 1971..(Ugarteche, 1986) Inflation soared in the United States from 3.2% in 1972 to 11% in 1974.(table 1) The effects of the oil price increase in December 1973 was to be seen starting from mid 1974 and more clearly in 1975. US inflation in 1973 and 1974 resulted from excess dollar liquidity rather than from oil price shocks. Those came later and were added to the first.

At the time developing nations borrowed because either: 1) they had oil and could afford it, especially at negative or very low rates, 2) because they did not have oil and had to cover massive deficit and could afford it at those rates. Lenders, public and private, overexposed themselves, while debtor nations held uncontrolled budget and balance of payments deficits around the world. The exchange rate fluctuations of the dollar and the search for a more stable exchange rate mechanisms on the side of the French, led to what is known as the Rambouillet agreement. The meeting took place at the French town on November, 15, 1975 and both sides reached and agreement as to the need to have an orderly exchange rate mechanism without fixed parity. There was the mistaken perception that U.S. dollar financial flows would be cheap and permanent as the average interest rate between 1973 and 1977 was practically nil. At this time, after many discussion as where to go with the IMF, some changes where introduced particularly referring to Article IV. The IMF would be kept out of the daily follow-up of exchange rates made by France and The United States. (James, 1989,: 269)

In lieu of a system of rules, the new article IV set about a new philosophy of management of the international economy. Section 1 referred to the obligation of members of the Fund “to assure orderly exchange arrangements and to promote a stable system of exchange rates” (that is not “a system of stable exchange rates”) Section 4, indefinitely postponed (at least as long as the United States was opposed) the readoption of par values. “The Fund may determine, by an eighty five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values”…In practice it seemed unlikely that a new stable system would be put in place soon. (James, 272)

The conditions after the Rambouillet meeting weakened the Fund to the point that economic policy summits between leading nations replaced previous discussion at the IMF. The G4, then G5 and later G7 countries made up a small “Library Group” (James, 266) that held its own discussions that allowed them to coordinate their economic policy. Giscard d’Estaing described it as “a private, informal meeting of those who really matter in the world”, (James, 267) whilst the other lesser developed economies held their discussions at the IMF and followed its prescriptions to a greater or lesser degree.

In the mid 1970’s some debtor nations started entering payments problems, such as Zaire, Jamaica, Egypt and Peru so in 1976 a new role was quickly found: that of “policeman for the banks” and advisor to debtor countries for debt negotiations. Exceptionally in 1976, President Ford obliged the British Labour Government to swallow a two year IMF standby with all its conditions in 1976.(James, 281) The Extended Fund Facility was introduced at the Fund in 1975 with increased conditionality than the one relating to one year standby loans. Then executive director stated that lending without conditionality made no sense. This became the rule for longer period adjustments. G7 creditors gathered at the Club of Paris do not consider renegotiating a debt without the Fund’s approval. It was a policeman with a big stick It must be pointed out that both the G7 and the Club of Paris are informal associations of leading rich country interests..

In the late 1970’s however real interests rate started to increase as stagflation began to be felt and Volcker applied a restrictive monetary policy from 1979 onwards. Eventually, in 1981, Reaganomics was introduced to reactivate the US economy, injecting a massive budget deficit while keeping the brakes on monetary supply. The consequence was a leap in real interest rates from 1.76% to 8.57% between 1980 and 1981 with the inverse effect on commodity prices. As inflation was put under control, U.S. domestic interest rates starting to go down and real rates were reduced. It took until 1992 to return to more or less normal average rates from before the crisis although they never returned to pre 1972 real rates.

US monetary policy and the debt problem

The pattern of real interest rates over fifty years b has four well defined periods:

All debtor nations with a primary exports base, entered defaults from 1982 onwards almost simultaneously when together with the rise in interest rates, commodities prices collapsed, and net resource transfers became sharply negative. From then on, in a continuous motion, debtors refinanced unpaid capital and interest due of the past year making them repayable in the following eight years. This increased the debt service ratio in a ladder effect for the next nine years. The IMF seemed to worried about the stability of the United States banking system more than about the stability of developing economies and acted accordingly. It served for all practical purposes as a foreign policy instrument of the US Treasury more than as a stabilizer of the world economy. Says Boughton (21), “Major parts of the world, however, suffered some of the most severe economic stresses of the century”. How did this come about?
GRAPH 1

The ladder effect
The ladder effect refers to the escalating weight of refinancing on Government revenues if capital is rescheduled every year and interest remain paid, given revenue restrictions. The existing bank refinancing mechanism of the 1980’s led to the following effect: The first year of default, the quota of unpaid capital would be restructured into a ten year loan. For example, in a 10 million dollars, ten year loan, one million be the yearly amortization quota. This amount would be restructured into a another ten year loan. If revenues fell during the entire decade, using this mechanism, the debt increased as follows. In the fourth round of refinancing, the debtor would be induced into a total default because it reaches the breakeven point between paying the entire original debt or rescheduling yearly payments, considering interest was kept up to date. This rescheduling mechanism sent the countries into default rather than help them recover payback capacity. The procedure of refinancing the unpaid capital year by year was what in the end made the debt unmanageable. Had the entire stock of the debt been reprogrammed in the first place over a longer payback period, this escalating weight would not have occurred.(see graph 2)

The thick line is the original payback schedule and the thinner lines are the increasing steps in terms use of Government revenues starting from rescheduling 1 through 9, where the first three refinancing reduced the amount of the quotas, but starting from the fourth, it is above the original payback schedule. There were nine rounds of refinancing during the 1980’s. At then end the stock was still due, but the amount really paid was almost twice what it would have been if payments had been made on time in the first place, had there been revenue to do so.

The schedules after nine rounds of refinancing extend over a 20 year period overall, as each round has the same ten year payback period as the original loan. The same exercise with total debt rescheduling over twenty years produces a vastly different scenario.

The Brady Plan solution in fact reduced the stock of the debt by half after debt service had more than covered the stock of the debt under the guise of increased overall interest payment in each round. The 10 year ten million dollar loan ends up being paid back over thirty four years and costing 20 million dollars. Over the initial 10 year period, with nine rounds of refinancing, this 10 m dollars loan cost 13 millions and the stock of the debt remains intact at 9 million dollars. If Brady had not come with a plan to reduce the stock of the debt to market values, which reduced them by around 55% and reduced interest rates to 4%, the debt would not have been manageable. (see graph 4)

The really existing rescheduling mechanism was set in place with IMF assistance and coercion, with no appearance of the institution to side with the debtor in the externally generated problem. If the object of the IMF was to maintain international stability, the result is mixed, while it did prevent a possible US banking crisis, on the other hand it launched Latin America and Africa into a depression metaphorically referred to as “the lost decade” and the ensuing policies have not been able to recover what was lost in incomes and production after 25 years. The cost of the debt during the 1980’s was more than what was borrowed and then the stock remained the same at the end of the decade as a result of this ladder effect. Between 1982 and 1989 rescheduling were done yearly while flows remained negative and both export revenues and tax incomes dropped sharply in Africa and Latin America as commodity prices fell and economic activity was depressed.

The role of the Fund during this period seems more related to the US Treasury and U.S banking stability while they made sure there was a negative net flow of capital in developing economies in order to maintain world stability. They were more worried about adjustment policies and how to face the high costs of the debt rather than doing something about the real origins of the international monetary strains. Stiglitz refers to the Latin American experience with the IMF as correct, as having done the right thing, however the debt management experience was not only unfair, but unreasonable. IMF policies did not tackle the problems of high international interest rates and falling commodity prices but instead centered on the State as an inefficient assigner of resources, following the new classical synthesis. Inflation, on the other hand, did not go down during the 1980’s, but inversely went up and this led many Governments to shy away from Fund prescriptions because their effects where not positive and they became politically difficult to swallow. Some Governments applied heterodox policies trying to get inflation under control but in all three cases it proved positive in the very short run but useless in the medium term as they all landed in hyperinflation: these are Brazil, Argentina and Peru between 1985 and 1989. As the IMF macroeconomic model became improved and the international interest rates went down slowly, the external sector became more manageable. Nevertheless the consequence of the compression of consumption and savings was negative for both the economics and the politics of the region during the period. What followed in terms of recovery of flows of capital, seems to have been related to privatization and opening up of the financial sector, mainly. It did not last more than six years and with international imbalances adverse to developing economies, after 1998 the flows for Latin America, at least, turned negative again. Over the last twenty five years, there have been six years of positive flows according tom ECLA. The region loses capital permanently. Included in graph 5 are long term financial flows: direct investment and long term loans.

The Brady Plan
Some discussions were held within Latin America in order to face what was a very serious economic problem that led to dire political consequences in the region. The IMF kept to the side of these. The discussion on the use of bonds in order to have a long run, one time reprogramming, was made in Latin America by Ugarteche (1984) Luis Carlos Bresser of Brasil in 1987 (1995), but also was a major part of the discussion held amongst Latin American academics as to how to come out of an entangled system that was depressing the region. In every major debtor country someone was speaking of bond conversions using the XIXth century history of debt crises solutions. In the US, Prof. Kenen from Princeton brought the point up in the early 1980’s. There was a consensus in Latin America by the time the Baker plan was designed in 1985, that only a long payback period with a return to the original amount owed in 1981 would make the debt payable. It was clear that the debt incurred between 1982 and 1985 was not voluntary for any of the parties, neither creditors nor debtors. That is why the Baker Plan failed in 1985. This led to the consensus amongst debtors that very long term bonds were the only reasonable answer. The Brady Plan in 1989, has elements of the Bresser Plan proposed in 1987. Debt reductions under the Brady Plan however were nowhere near to the debt increase caused during the decade by continuous refinancing and the unusually high US$ interest rates.(see graph 3) The IMF, and Witteveen at the time Ezxecutive Director, were more concerned with “correct” economic policies, than with the external elements that had induced an economic crisis of major dimensions to dozens of countries.(James, 322) Conditionality was then the name of the game and the sole object of the Fund was that countries follow their prescriptions in order to restore a sound economy. The only one that was not induced in this direction, and the IMF has no power to make it do so, is the United States.

Boughton suggests that the changes required from the Fund were met at the various breaking points between the 1970’s and 1980’s:

The Bretton Woods system of fixed but adjustable exchange rates came under strain and collapsed, and a more flexible system was negotiated. Because the new system imposed few constraints on national economic policies, the Fund was drawn into a more active “surveillance” role in overseeing its implementation. Moreover, as the landscape of the world economy became more precarious, the Fund was drawn into a more active lending role that required a deeper and more sustained involvement in the formulation of macroeconomic policies in countries facing economic crises. During the 11 years covered in this work, 1979 through 1989, a confluence of upheavals propelled the 01institution into a more central and pervasive role than ever before. (Boughton, 2001: 1-2)

Throughout the 1980’s Governments were pressed by the IMF and the Club of Paris, to pay up and follow their policies leading to high, and very high inflation ? after the adjustment programmes were introduced and tightened? which over time generated adjustment and refinancing fatigue. Incomes fell, growth fell, wages fell, consumption as a result also fell, political instability grew, income distribution worsened. Only then inflation was controlled and exports grew.

At the same time the Soviet block collapsed and its member countries opened to western trade, China grew into a major trading partner for most of the west and the role of the State was reduced as market orientated policies were put in place in every country either voluntarily or through adjustment policies. IMF adjustments agreed upon at the Institute of International Economics conference of 1982 were applied throughout the developing world as debt problems surged as a result of the above mentioned interest rate explosion. The uniformisation of policies allowed for what is now called “globalization” and fostered the new trading blocks, including those frustrated like the FTAA. It accelerated intra Asian trade and later in 1992 the formation of the European Union with its 25 member country projection. Africa was left for humanitarian aid and Latin America lost relevance all together. Mercosur was formed in 1994 between Brazil, Argentina, Uruguay and Paraguay and the Andean Community underwent a refurbishing from Andean Pact to Andean Community of nations as a sign that it had modernized and left the role of the State aside. N o doubt the IMF was a weapon of the G7 but more so of the US Treasury in the fight towards globalization understood as open markets for goods and services, particularly as the Soviet Union collapsed.

The philosophical and economic barriers between North and South and between East and West remained in place at the end of the 1980s, but the means for destroying them were nearer and more evident than ever before in history. This “silent revolution,” as Michel Camdessus named it in a more specific context, brought an unprecedented importance to the IMF as every region in the world struggled to keep its footing in an increasingly dynamic and global economy….To a great extent, the silent revolution of the 1980s resulted from a shift in economic philosophy toward a new classical synthesis in which government has an indirect role in, but not a direct responsibility for, ensuring national economic prosperity; in which private economic activity is promoted through good governance and the development of physical and social infrastructure. (Boughton: 3)

The IMF was at the time the guarantor of these “sound” economic policies and any doubt as to this matter were eliminated by the Club of Paris who would not sit down with the debtor nations unless the IMF had done its work. Boughton, IMF historian, admits the Fund is a political organization and that it played its role at the time. It must also be understood that the universalisation of the new classical synthesis had a political interest, over and above, its intellectual importance. Debtor governments had to comply to conditionality based on the new classical synthesis in order to return to the next round of debt negotiations at the Club of Paris and the London Club, for example. Primary budget surplus became as much a rule as trade liberalization, privatization and elimination of subsidies and market distortions. That this was a prescription for some countries and that in that measure it gave facilities to other stronger countries is not mentioned by Boughton. That the flying geese concept of Asia as having first started with import substitution, then advanced to substituting complex imported products, then advanced to simple export substitution and later ended in complex goods export substitution was ignored. Ministry of Finance officials spent many years during the decade negotiating with the IMF, the Club of Paris, the London Club and readjusting IMF projections, in order to jump the hurdle of not being in arrears and only to start the same exercise as soon as the previous cycle was completed. IN the end, import substitution policies were eliminated, with no later stages developed, and whatever the result, that was the optimal outcome of the model. Evidently, the result of IMF/WB conditionality in terms of economic growth is not very flattering, as can be seen below for Latin America as a whole. It appears that the economy grew until 1980 and then it has followed a seesaw pattern approximating 0 per capita growth average for the 1990’s. While this happened, European country deficits were increasing as were US deficits in the pursuit of contra cyclical policies. The major surplus country was China followed by Japan. The leading deficit country is and has been the United States.

If we take income per head of 1980 as the base year, before the so called debt crisis erupted, and see the point at 2002, last data provided by the World Bank in 1995 dollars, it is evident that out of eleven countries, Chile stands out as having doubled its per capita income.(see table 3) The rest are more or less in the same place, some are behind 1980 like Bolivia, and Honduras, but one has advanced some: Costa Rica. Aggregate growth has been reduced to nothing according to World Bank data on constant 95 dollars. For all the pain of the adjustments and the massive political and social problems introduced, the results are meager. Exports have grown substantially but bear little relationship with GDP per capita when we take 1980 as the base year. (see graph 6)

Conditionality seems to have supported export growth and inflation control but not income growth, or even less, wage recovery or employment. There is not much to be said about exports and growth. In terms of IMF mandate, this means that they have facilitated the expansion of world trade but have failed at maintaining high levels of employment and real income, have proved incapable of keeping exchange stability in Mexico (1994), (the devaluation went from 3 to the dollar to 10 to the dollar), Thailand (1997), Brasil went from 1 real tom 3 reales to the dollar (1998) and Argentina, from 1 to 4 to the dollar (2001) are to witness, nor have they been able to lessen the degree of disequilibrium in the international balance of payments of member, as is witnessed by the US deficit and the major Chinese surplus.

The result after twenty five years is that the balance of payments of Latin America on the whole is financed by emigrants who cannot find proper employment in their home country and growth is very unstable. Amongst the sources of foreign exchange in the economy, after the net revenue of goods and services comes the revenue from exports of people, just below foreign direct investment, but over portfolio investment, tourism, and loans.

Co responsibility and the IMF
Creditor debtor co responsibility was raised since the beginnings of the so called “debt crisis”. The first time the point came up was at an Organization of American States conference on external debt, meeting in Caracas, September 7, 1983 which concluded with a declaration under the name Bases para un entendimiento where shared responsibility was brought forward in view of high US interest rates, inflexible IMF conditions and a short leash policy of debt renegotiation. At the Latin American Conference of Heads of State held in Quito, January 9 to 13, 1984 the concept of co responsibility was recognized as a major issue at the political level and where they demanded that IFIs, international private banks and leading Governments take their share of their co responsibility at the same time as Latin American and Caribbean countries made their best efforts to keep their payments to date. James Baker, U.S. Secretary of the Treasury made at the IMF 1985 Seoul spring meeting a debt management proposal which was a recognition of co responsibility. The Catholic Church made its first report on debt and called for co responsibility through Un Informe Etico de la Deuda Internacional made by the Pontifical Commission in Rome in 1986 which then led to the Jubilee movement in 2000. The G7 made the same recognition in 1988 when it discussed the Toronto terms of debt management. The meaning of co responsibility does not seem to be clear. Eurodad demands that IFIs “need to publicly acknowledge the roles they played in exacerbating indebtedness in poor countries”. This is true not only for the poor countries but for all developing nations. Co responsibility then as now was a ´political declaration that bore little effect in terms of policies and “paying the price”. The debtors paid the price mostly. The IMF did not claim any responsibility of the creditors in the loan terms and interest rates as the case should have been given its multilateral essence.

The 1980’s saw how Governments exported more than half of national savings at the cost of adjustment policies which reduced Government wages, education and health expenditures, thus disorganizing Government bureaucracies and overall creating conditions leading to a loss of governance. Boughton, the Fund’s historian refers to this as

The 1980s brought more economic success than the 1970s, especially through the stabilization of prices. Although global output growth continued the declining trend that began in the 1970s, a gradual improvement in policymaking laid the groundwork for the noninflationary growth that many countries would enjoy in the 1990s. Major parts of the world economy, however, suffered some of the most severe economic stresses of the century.(21)

By the end of the 1980’s it was clear that inflation could be put under control but that the impact of reforms on economic growth was adverse to begin with. The hope was that this would open up the conditions for future growth on a new basis. The sole example was and is Chile. The private financial sector could not finance the world alone, and some conditions were required in order for loans to be recovered. It was not clear then, nor now, if those conditions are the ones set by the IMF, as was seen with the Mexican crisis of 1994, the Asian crisis of 1997, the Russian crisis of 1998, the Brazilian crisis of 1998, and the Argentine crisis of 2001., to name but a few.
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The argentine crisis and the IMF credibility gap
The first problems of credibility began in Thailand and Stiglitz has written about them extensively. The Stiglitz/Summers debate was a centrepiece that aired how the IMF lost its reputation and how the US Treasury, in spite of ignoring the IMF for itself, uses it for foreign policy purposes. Summers made sure Stiglitz left the Word Bank, where he held the post of Executive Vice President, and then “One of Stiglitz’s proteges, Ravi Kanbur, had been put in charge of writing the Bank’s World Development Report 2000 focusing on world poverty. The Report was to be released in September but by June Kanbur felt in all conscience he couldn’t continue. When the report finally appeared, Kanbur’s sections on the necessity of social spending, redistributive tax policies and control of speculative capital were either gone entirely or had been significantly watered down. With the help of pressure from the US Treasury the politics within the Bank remained firmly in favour of the Washington Consensus.” (New Internationalist 336,July 2001) Kanbur was also sacked.

The essence of the discussion was the speed with which capital accounts were opened and the usefulness for Wall St of Summers recommendations from the Treasury versus a more discrete approach to capital movements. In the end the Asian crisis, says Stiglitz, is a by product of market fundamentalism, aggravated by IMF recommendations in the same direction.

Unfortunately for the Fund, the following year after this debate (2000), the Argentina crisis exploded. In brief, Argentina decided to follow a convertibility plan in 1990 in order to brake inflation and stabilize the economy. This fixed rate was at 1 peso 1 dollar par and worked fairly well between 1990 and 1997 but in 1998, when Brazil devalued its currency also from par 1 to 1, to 3 reales to 1 dollar, the strains appeared in Argentina’s a accounts. Brazil was a main trading partner of Argentina at the time since the signature of Mercosur, an integration scheme that includes Uruguay and Paraguay. The impact of the Brazilian devaluation on the Argentine economy was quick and strong, resource transfers started to be negative as depositors took their money out and new foreign investments did not materialize. The level of foreign debt had doubled during the 1990’s and the national budget was strained to keep its debt payments to date. In face of this, the decision made in Buenos Aires with IMF support was to keep the exchange rate fixed at 1, and tighten monetary supply as much as possible in order to prevent a devaluation. The result by 2001 was that liquidity shortages forced barter, that alternative monies were introduced in the different States of the Nation and that foreign debt increased substantially in order to finance the rate of exchange. The private sector could only borrow abroad so overall total indebtedness grew substantially in the last two years before the crisis. By December 2001 this was no longer manageable and the IMF decided to suspend its standby programme. One week later they declared a default. Institutionally the IMF did not learn the Mexican lesson from 1994: that floating rates are better than fixed rates when there is a sudden serious imbalance as a result of an external factor.

In the aftermath, the research director of the IMF wrote a book titled Argentina and the Fund : from triumph to tragedy (Mussa, 2002) where he describes the problem and washes the IMF’s hands from what occurred. As Argentine GDP was contracting in 2002, the IMF was making a public relations campaign on how it was not responsible for what its advisees do. How they are only external advisors and how it was a real shame that Argentina had lost its opportunity. It did not rescue Argentina nor did it assume any responsibility with the creditors as to what happened. Even less so with the people or Argentina.

By 2004 Isabelle Mateos y Lago from the IMF wrote an independent evaluation report paper where she did an outside evaluation and said:

The role played by the International Monetary Fund (IMF) deserves special attention for at least three reasons. First, unlike the cases of Indonesia and Korea, where the IMF had no program involvement for several years preceding the crisis, in Argentina the IMF had been almost continuously engaged through programs since 1991 (Box 1.1). Second, again unlike the other cases, the crisis in Argentina did not explode suddenly. Signs of possible problems were evident at least by 1999, which led the government to seek a new Stand-By Arrangement (SBA) with the IMF in early 2000. Third, IMF resources were provided in support of Argentina’s fixed exchange rate regime, which had long been stated by the IMF as both essential to price stability and fundamentally viable. Drawing lessons for the future, in evaluating the past, and especially in determining accountability, it must be kept in mind that much of what we know now may not have been known to those who had to make the relevant decisions. (2004 a)

In the press conference where the report was presented, this was added :

In terms of the assessment of the fundamental causes of the crisis, it is our judgment that it was essentially a combination of the failure of Argentinean policymakers throughout the 1990s-and during the crisis period of 2000-2001-to take the necessary corrective action to make sure that domestic policies were compatible with the choice of the exchange rate regime. (2004b)
…
But the message is very clear from the Argentina case, too, that many programs that are not dealing with the most fundamental structural problems underlying vulnerability--and in this case it's fiscal structural problems--are in the end not very productive. And so, you know, the Fund should perhaps not have had so many programs with Argentina during the 1990s.
…
So our main message about the weaknesses of the Fund's role during this period was essentially not with the initial decision in January 2001. As I said, judged in a probabilistic sense, it could be justified. But it was with the lack of sufficient contingency planning, and because of that the decision to continue supporting a strategy that under most reasonable judgments one could have concluded, even with information at the time, was not working.
…
On the August package, we're absolutely clear in the report that we think it was a mistake. And, in fact, we're also saying that the May disbursement, you know, the Third Review under the program, was also a mistake in our view because the situation was unsustainable, clearly unsustainable.
…
We're suggesting that these $9 billion essentially that were disbursed between the spring and September could have possibly or hopefully been put to more productive use if they had been used in support of, say, a move to Plan B, a devaluation, or something like that, could have been used to limit the overshooting of the currency depreciation, and in the meantime would have avoided further deterioration in banks' balance sheets, would have avoided another six months of a really sharp recession.

The IMF is only one of the actors involved. In practice, the country itself is ultimately responsible for its policy decisions. This is especially important when the underlying policy choices are strongly owned by the country? as they were in Argentina.(8:2004a)

The Asian Monetary Fund, The Asian monetary unit and the future of the IMF

At the time of the Asian crisis, the Japanese Government launched the idea of having an Asian Monetary Fund that would take care of Asia’s balance of payments problems. When the Japanese Government announced its intention to do so, the US Treasury expressed its opposition to the idea and reinforce the role of the IMF. Bergsten (1998) suggests that it generated fears that it could undermine the leadership role of the IMF and foster a split between Asia and the United States. An Asian dominated fund would reduce its influence in the region and would have shattering effects on the IMF and the World Bank.(Lipscy, 2003).

Nevertheless, in Chiang Mai, Thailand, in May 2005, the ASEAN country members led by Japan, China, South Korea and including the ten country members, agreed to expand their bilateral swaps and form a certain protected currency area. This initiative covers sixteen countries and has a 40 bn dollars fund.. (http://www.aseansec.org/afp/115.htm)

On the other hand, in Latin America, Venezuela has acted as a lender of last resort, purchasing central bank positions without conditions, thus allowing the Argentine Government, to name one, the policy space to do what it feels is correct in terms of inflation control and economic growth. Others that have benefited from Venezuelan largesse are Bolivia, Ecuador and Colombia. President Chavez has said he wants to have a Latin American IMF.

Additionally, from 2002 onwards Argentina first and Nigeria later, negotiated their debt without the IMF, and both private and public creditors allowed them to do so. At that point the credibility gap was so large it was pointless to call in the IMF as a guarantor of either sound economic policies or lender of last resort. The major debtors returned the Fund the money borrowed from them ahead of schedule in a way of getting rid of conditionality, thus earning degrees of freedom at a time of international uncertainty on the future of the US dollar. In 1998, twenty one countries had standby loans. In 2006, there are only four and Indonesia has announced it will also pay the Fund ahead of schedule. The stock outstanding of debt owed to the Fund was 138 billion US$ in 1998 and has been reduced to 35 bn dollars in 2006. Bankers gathered around the Institute of International Finance addressed the IMF chair stating that they had doubts on the effectiveness of their recommendations”.(IIF, 2006) In brief, neither debtor Governments, leading G7 governments nor bankers believe in the IMF any more.

In this context the Executive Director of the IMF has pursued a policy of revival seeking a new role, much like in the past. Nevertheless it is generally recognised that the representation system is not adequate for the new world, that there is little transparency on elections, that policies are not adequate and that they no longer serve as international guardians.(Truman, 2005) Nothing will help get it back to where it was.

The IMF and the United States

The issue of the US deficits and what to do about them is key to recovering its credibility. It is evident that the US Treasury ignores the IMF recommendations and that it prefers to blame the rest of the world for its ills than assume responsibility for its misdoings.

Undersecretary Adams of the US Treasury made a statement April, 19, 2006, where he describes the US economic position:

We will also seek to advance fundamental reform of IMF governance. Modernization at the IMF needs to reflect rapid growth in many emerging markets and other key changes, such as the euro's advent. The IMF is a shareholder institution; members' roles should reflect their relative global economic weight. There is growing consensus on a two-step process. The first step would involve a small ad hoc increase for the most underweight emerging market countries around the time of the Singapore Annual Meetings. But this must be credibly linked to near-term completion of broad second step reforms. Such reforms should include revamping of IMF's quota formulas to make GDP the key variable, or developing an alternative metric to this end; achieving a further increase in emerging market countries' weights; and examining concrete actions to rationalize Executive Board representation. Fundamental reform also needs to bear in mind the voice of poor countries. We are confident that all countries ? with a collective interest in an IMF that is strong, legitimate, and relevant ? will help to provide leadership and find a consensus. (Statement by Under Secretary for International Affairs Timothy D. Adams in Advance of Meetings of the G-7, IMF, and World Bank)

The IMF article IV consultation to the United States produced at the same time says the following: http://www.imf.org/external/np/ms/2006/053106.htm

Reducing External Imbalances
7. The ease with which the United States has financed its record current account deficit has been remarkable, but is unlikely to be sustained indefinitely. A number of (possibly temporary) factors, such as short-term interest rate differentials and increasing demand for long-term bonds, have helped support the U.S. current account deficit and dollar over the past year. However, most forecasters project that the current account deficit will rise further in coming years, which may begin to strain the global appetite for U.S. assets. Delaying the inevitable multilateral adjustment will mean continued increases in U.S. external indebtedness, magnifying the potential for disruption to exchange rates, financial markets, and growth, both domestically and abroad.

8. Firm and vigorous implementation of the cooperative strategy laid out by the IMFC last April would support an orderly resolution to global imbalances, and the Fund will use its new remit for multilateral consultations toward this goal. The United States has a major role to play in addressing this shared responsibility, and its main task remains to boost national saving, including by more ambitious fiscal consolidation.
9. Leadership by the United States remains key to global trade liberalization. With progress slowing in the Doha Round negotiations, continuing U.S. commitment and initiative are essential to generate new momentum for a timely and ambitious conclusion. It also remains imperative to resist protectionist responses to global imbalances, particularly as restrictions on trade risk creating significant harm to the global economy. As we have long cautioned, the growing number of bilateral trade initiatives by the United States and others could undermine the multilateral trade system, and there would be merit in seeking agreement on common disciplines.

Putting Fiscal Policy on a Sustainable Path

10. As highlighted in the Budget, demographic and other pressures threaten both fiscal sustainability and the nation's future prosperity. Spending on Social Security, Medicare, and Medicaid currently account for over two-fifths of federal spending and is rising at an unsustainable rate. While there is no doubt that entitlement reform is essential for achieving a sustainable fiscal position, recent CBO analysis illustrates that even significant entitlement reforms and cuts in other spending may not be sufficient to accommodate the increased demands from an aging population, particularly on public health systems.

11. With the Administration indicating that it will achieve its objective of halving the deficit earlier than anticipated, the time is opportune to establish a more ambitious medium-term fiscal anchor. There will soon be the need to define a new objective consistent with the Administration's longstanding commitment to deficit reduction. With revenues continuing to be buoyant, we would again propose a target of balancing the budget excluding the Social Security surplus over the next five years. Such an objective would place the U.S. federal debt-to-GDP ratio on a clear downward path and reduce the burden on future generations, while providing the room needed to develop and phase in reforms of health and retirement systems. This would require consolidation at a rate of around ? percentage point of GDP a year, which would ease the burden on the Fed for keeping economy close to capacity while raising national saving and reducing global imbalances.

12. We agree that expenditure discipline should remain central to deficit reduction, but revenue measures cannot be ruled out. To be sure, there has been some success in slowing the growth of outlays, but the Budget projects that the federal deficit will remain around 2? percent in FY 2007, roughly unchanged in three years despite the strong economic expansion. This suggests some risk that the deficit reduction that is projected in subsequent years may be difficult to attain, especially since it does not take account of ongoing operations in Iraq and other fiscal pressures on revenues and outlays. Thus, action on both sides of the ledger may be required:

• On the expenditure side, entitlements and defense commitments limit the room for cuts, and the Budget already assumes that the ratio of discretionary spending to GDP will be reduced to unprecedented lows over the next five years. Indeed, recent Congressional debate over emergency appropriations underscores how difficult it will be to contain discretionary spending. Although budget rules cannot substitute for an underlying commitment to fiscal discipline, this suggests that there would be merit in re-introducing caps on discretionary outlays and pay-as-you-go (PAYGO) requirements, which had been successful during the fiscal consolidation in the 1990s. However, it would also seem prudent to extend the PAYGO rules to include the impact of tax measures, as was the case under the 1990 Budget Enforcement Act.
  
• On the revenue side, the significant reductions in marginal tax rates in recent years have supported economic efficiency. Although it may be difficult to sustain these tax cuts while meeting the fiscal burden from population aging, the priority should be on reforms to broaden the revenue base. The President's Advisory Panel offered useful suggestions along these lines, but consideration could also be given to consumption-based indirect taxes?such as a national sales tax, a VAT, or energy taxation?that would maintain revenue buoyancy as workers retire.

The result of the crisis, is that with 45% voting power concentrated in the G7 countries, and 17% in the US, when only 15% of the votes are required for a veto, the institution does not reflect the new world economic actors. Thus, they say, the IMF reflects more the interest of the G7 countries than those of the rest of the World. This one way in which it is an arm of US foreign policy. Bello and de los Reyes suggest that “For political reasons, it may prove difficult to abolish the IMF. But it can be disempowered and converted into a research agency tasked with monitoring capital flows.”(6). They also suggest that “In the global financial architecture, regional arrangements such as a regional financial institution can supplant the IMF as a regulator of global finance.” (7) because crisis are regional in nature and they can be stopped within a region.

Bello and de los Reyes conclude by saying that “More space, more flexibility, and more compromise--these should be the goals of the Southern agenda. Robin Broad,(2005) looks into the World Bank and finds it equally inadequate with more professionals doing academic work than reflecting on development issues as they come up. She suggests that the World Bank failures can be met with a sharp reduction in personnel and making them accountable. The point is to shrink the institution rather than getting rid of it. On the other hand, the Joint Economics Committee in the US congress , led by representative Saxton said “"The World Bank must be made more effective and focused on achieving real results in reducing poverty and misery in developing countries. The performance of World Bank projects must be closely scrutinized to ensure that resources that should be used to benefit the poor are not wasted. Further progress toward grant financing of World Bank projects is needed. In addition, the World Bank could provide technical advice, and foster needed institutional reforms," (JEC, 2006) Saxton concluded. The lack of results point in Braod’s direction rather than inm Saxton’s. It does not function.

Mainstream academics and opinion makers conform a crowd of abolitionists together with critics from the other shore who want to get rid of the IMF and the WB altogether. These include Akyuz, (2005) Walters (1994); Schultz, Simon and Wriston (1998); Schwartz (1998) and Milton Friedman (2004) who argue for closing down both the World Bank and the IMF on grounds that they have done more harm than good, and have the capacity for continuing to do more harm than good. Lissakers suggests that it needs to have bigger facilities without conditionality in order to prevent major crises. If it is true that it does more harm than good, this refers to the conditions attached to the use of lifesavers and not to the fact that there is a lifesaver. A bigger IMF without conditions for the first or second tranche could have been an alternative but the possibility that with their capacity to impose conditions they will do so again is high, and their nature of doing so is itself a reason to think of having decentralized stabilization funds. The regionalisation of monetary stabilization funds is a good idea so long as conditions are not attached that muddle up its workings

In conclusion: towards a new international financial architecture
The conclusion from the arguments of the role of the IMF and the Development banks is that in the first place, the results of what has been done over two and a half decades is not promising. If it is true that inflation is under control and that budgets are better managed, on the other hand the lack of results in terms of employments, wages and GDP per capita point in the direction that the policies are flawed. It is evident that exports grew but it also is evident that migration is the main source of revenues and growing more quickly than the balance in current account of the balance of payments. There is not much evidence of a relationship between exports and growth in Latin America over twenty five years with the exception of Chile. The speed of export growth does not imply a fast economic recovery,.

Finally, if Structural Adjustment Loan policies have resulted in this combination of outcomes, the question is what is the role of a development bank? Should the World Bank be placing conditions on loans in order to obtain structural changes so that these results can be shown? Given it deals with development, should it not worry about employment, wages, income distribution, and basic health and education indicators as well as environmental degradation and gender balance?

The impression it gives overlooking two and a half decades of bad country performance in Latin America is that they worry about the rich getting on and that the poor should pay the brunt of the effort. Increased indirect taxation as well as tax reductions for new investments have been at the center of policy recommendations that have not produced growth, but have generated more income inequality, Labour flexibility, meant to generate more employment, has landed being a source of social instability, violence and migration, instead. Opening of capital accounts has not been reflected in increased investment rates. Export promotion has resulted in export led stagnation. What is the purpose of the World Bank?

The proposed new architecture:
A new international financial architecture is required and it must include a new set of rules and institutions:

1. A universal legal code that will make sure all creditors have the same rights and all debtors the same duties, with the same enforcement mechanisms. This is analogous to what has occurred with international trade law in a process led by a UN commission called United Nations Commission on International Trade Law. (UNCITRAL) Currently international loans are signed using domestic laws of the US and UK.
2. It is clear that these problems recur, an International Board of Arbitration for Sovereign Debt is required as a new forum for negotiations instead of the Club of Paris and London Club. It should have a small secretariat as a part of the UN system as an international body that will function regularly and used by UN member countries. UNCTAD would appear to be the likely place since they have DMFAS and experience with dealing n foreign debt.
3. The IBASD Secretariat will recommend arbiters that will be selected by creditors and debtors in even proportions with the presidency decided by both sides in order to have an uneven number of board members. The inspiration of the IBASD lies in what was proposed for the German debt agreement of 1952. (Hersel, 1998)
4. Collective Action clauses must be incorporated into all new instruments in order for the recommendations that follow to operate. These consists of clauses whereby a majority of bondholders represent all, using the Mexican precedent.
5. No creditor/debtor discrimination must remain and the elimination of free riders is urgent in negotiations. Debt cancellation for the poorest countries in this approach should be immediate and unconditional given they have no payback capacity and that conditions placed on them have further damaged their capacity to have economic development, even less to work their way towards the MDG. The HIPC initiative n its three phases has proven a failure. Negative resource transfers from countries with income levels of under 1,000 dollars per capita with a PPP of about the same or less, a substantial percentage of the population with AIDS, and with massive undernourishment does not seem to speak of serious bargaining but on the exertion of power by multilateral banks.
6. If there was any evidence that HIPC conditions lead to better income levels, they might be considered, but there is nothing of the sort. HIPC conditions seem to confuse the issue that if Governments spend more on social sectors, they are advancing, much the same as is that more exports per se lead to more GDP growth, which they do not.. HIPC would have been taken seriously into account if income per capita in terms of constant PPP was improving or had done so. Nicaragua. Honduras and Bolivia are cases in point. It is not only too little too late, but inadequate.
7. It is correct that up to 100% of multilateral debt can be cancelled, but the concept should be to keep all creditor categories under the same treatment until the negative net resource transfer becomes cero or positive, and the conditionality should be related to economic, social and cultural rights. The MDGs is one step in that direction.
8. Regional stabilization funds should act as buffers against speculation in the money markets and should also watch the trends of the capital accounts of its member countries in order to suggest preemptive adjustments if the case may be, lending ahead of time.
9. The concept that the statistical office of the World Bank remain in operations while the rest of the bank disappear is attractive as the data gathering experience is high, and the capacity to distribute the data and disseminate the data banks is broad.
10. In the future, the new institutions should be kept from the influence of foreign policy in such a way that they may work effectively with all member countries and not be subject to the whims of any major partner.

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