Friday, July 22, 2011

Greed, Neocolonialism, and Social Destruction: A History of the International Monetary Fund

The International Monetary Fund (IMF) has wreaked havoc on third world nations, burdening them with crushing debts and then forcing governments to enact massive austerity measures on their own people as to allow Western corporations to move in and exploit the newfound resources and cheap labor. While many know of the IMFs infamous policies, the origins of this tool of neocolonialism also should be examined.

World War 2 and Bretton Woods

Due to the protectionist policies that occurred during the period of the Great Depression, the founders of the IMF wanted to create a global economic organization that would “ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade.” [1] In addition to the Great Depression, “socialists, communists and anarchists had high credibility [at the end of WW2] because they were the leaders of the Resistance to Nazi occupation,” [2] which had American and British economic elites worried. Thus, in order to make sure that leftists didn’t come into power and to back the business classes, the US and British “required international institutions that would promote capitalist policies and strengthen the power of the corporate sector” [3] which became the IMF and the World Bank.

The IMF was created at the Bretton Woods Conference near the end of WW2. The main debate during the conference was as to what role the IMF would play. The British “imagined that the new IMF should be a cooperative fund which member states could draw upon to maintain economic activity and employment through periodic crises” whereas the Americans “foresaw an IMF more like a bank, making sure that borrowing states could repay their debts on time.” [4] While the US version won out in the end, it didn’t truly matter as either way; the IMF would be a tool to promote global capitalism, as can be seen in Article 1, Section 2 of the IMF’s Articles of Agreement. One of the purposes of the IMF was to

facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. [5]

By working toward “the expansion and balanced growth of international trade” it can be seen, in the context of a post-WW2 world that the US wanted to be able to flood the markets of Europe and Asia with its goods and the only way American corporations could make money from nations that had been destroyed by war was if there was a “maintenance of high levels of employment and real income.” Thus, in reality, a major reason the IMF was created was to give US companies a way to increase their profits

Bretton Woods System Collapses

The Bretton Woods system collapsed in 1971 when US President Richard Nixon took America off the gold standard. While there are stories that Nixon took the US off to gold standard as to “prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands,” [6] there were other factors at play.

The gold standard was a problem for both the US government and the American financial industry due to the fact that “the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset,” thus “government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets” [7] thus the government’s deficit spending was severely limited. By scrapping the gold standard, it allows for financial institutions “to use the banking system as a means to an unlimited expansion of credit” [8] and indefinitely increases the money supply. However, there are drawbacks:

As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. [9]

While the bankers are able to get more money off of their loan transactions, ordinary Americans would suffer via inflation, seeing their wages and salaries buying less and less.

Mexico Crisis and Structural Adjustment Policies

In 1982, the Mexican government alerted the IMF that it was unable to pay back its debts. Immediately, the IMF and World Bank came in and allowed Mexico to borrow more money to pay off the interest on the old debt. The reason this occurred was due to the fact that Mexico owed the US and Europe large sums of money and they didn’t want to lose it. However, there were strings attached to Mexico’s new loans, known now as Structural Adjustment Policies (or Plans). These usually force indebted governments to

  •         Spend less on health, education and social services - people pay for them or go without
  •          Devalue the national currency, lowering export earnings and increasing import costs
  •          Cut back on food subsidies - so prices of essentials can soar in a matter of days
  •          Cut jobs and wages for workers in government industries and services
  •          Encourage privatization of public industries, including sale to foreign investors
  •          Take over small subsistence farms for large-scale export crop farming instead of staple foods. So farmers are left with no land to grow their own food and few are employed on the large farms. [10]

Essentially, these austerity measures that are enacted destroy the middle and working classes as well as their social safety net and allow Western corporations to move in and exploit labor and resources for their personal profit.

The overall problem with Mexico and other countries that the IMF loans to in circumstances such as these is that they “essentially postponed the debt crisis by providing short term funds on very hard terms for what was essentially a structural problem of insolvency which required long-term solutions.” [11] It is quiet like what the US government has been doing for decades by raising the debt ceiling, while doing nothing to combat the root causes of the debt problem. In ‘aiding’ Mexico, the IMF was going along with the Washington Consensus which essentially called for the economies of indebted nations to go through neo-liberal economic reforms, which would, as was said earlier, allow for the destruction of the middle and working classes and for Western corporations to come in and dominate the nation’s economy.

End of the Cold War

At the end of the Cold War, the Soviet Union collapsed and several nations in Eastern Europe were soon created. While IMF was forcing its shock therapy onto Russia, they were busy engineering an economic crisis in Asia.

The Asian economic crisis of the 1990s came about due to “South Korea, Thailand, the Philippines, Malaysia and Indonesia's heavy reliance on short-term foreign loans and openness to hot money,” [12] openness that came from the US Treasury Department, the IMF, and others.

In 1997, it became obvious that the Asian governments wouldn’t be able to pay back their loans and investors panicked, exchanging their Asian currencies for dollars, thus making it more difficult for Asian nations to pay off their debt and greatly increasing the price of imported goods.

The IMF stepped in and allowed governments to borrow money to pay off their loans- with the usual structural adjustment policies of course. Strangely enough, even though the Asian economies were running budget surpluses, the IMF ordered them to cut spending, this only helped to deepen the economic slowdown.
Due to the IMF’s ignorant buffoonery, countless people suffered:

  • In South Korea, a country whose income approaches European levels, unemployment skyrocketed from approximately 3 percent to 10 percent. "IMF suicides" became common among workers who lost their jobs and dignity.
  • In Indonesia, the worst hit country, poverty rates rose from an official level of 11 percent before the crisis to 40 to 60 percent in varying estimates. GDP declined by 15 percent in one year.
  • In September 1998, UNICEF reported that more than half the children under two years old in Java, Indonesia's most populous island, were suffering from malnutrition.
  • At one point, the food shortage became so severe that then-President B.J. Habibie implored citizens to fast twice a week. Many had no choice. (emphasis added) [13]

Could the IMF Turn on the West?

Since its inception, the IMF has been used as a tool of neocolonialism by Western governments to rape and pillage the third world. However, due to the massive debts that Western governments have incurred, the IMF may, in an ironic twist of fate, turn on the very governments that created it.

Just last year, the IMF did an annual economic review of American economic policy, which is something they only do to third-world countries. While there are those that state that the $4 trillion fiscal gap is due to entitlement programs, such as Social Security, Medicare, and Medicaid, they are quiet wrong. The reality is that they are, for the most part, doing well. The problems are the wars in Iraq and Afghanistan. "The ongoing wars and occupations have already eaten up the $4 trillion by which Obama hopes to cut federal spending over the next ten years. Bomb now, pay later."  (emphasis added) [14]

Currently the IMF is arguing for the US government to make cuts to Social Security in order to get its budget deficit down and it looks like the Republicans want to implement that plan and more while the Democrats quietly look on.

The IMF is a horrible organization that has been used for neocolonial purposes for decades, however, it may soon be time where the Western countries end up getting a taste of their own medicine. Then we’ll see if the Western governments will be so supportive of the IMF as they are now.


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