a bimonthly publication of
progressive south asian politics

Volume 7: Number 1                      October 2, 1996
In this Issue...
"Other" wise?: The Selling of Global Cultural Difference by Sangeeta Rao
Global Technoscapes and Unborn Voices: Gendering Globalization by Mir Ali Raza
The Structural Adjustment of Grassroots Politics by Sangeeta Kamat
Foil Briefs

IMF, Capital and Us: The Economics of Imperialism

Radhika Lal

It is always useful for those in power, or those desirous of acquiring it, to wage hegemony, to portray their interests as the interests of all, to claim that their success leads to the success of others, even when all that can be held out to the masses is the "trickling downs" and scraps from the high table. For multinational corporations (MNC's) desiring unrestricted access to markets and production sites, the world view that best expresses this need, portrays exchange as a human characteristic, private property or wealth as the prime motivator of economic effort, the market as the most efficient mechanism for translating private vice (greed) into public virtue, and trade as the means of achieving an efficient allocation of global resources as each country specializes in the production of goods for which its resources are best suited. Low levels of economic income and growth are attributed to restrictions on free trade and the crowding out of the private sector by public sector initiatives. The process of development is said to involve the expansion of the market mechanism to areas previously untouched by it, or presently integrated with it but regulated by other institutions such as the state, with the newly privatized resources and markets created being "opened" to all sectors (read MNC's).

Historically, multilateral institutions such as the World Bank (WB), the International Monetary Fund (IMF) and the International Trade Organization setup in 1944 at Bretton Woods, have been perfectly positioned to push this agenda for MNC's. Although registered as UN specialized agencies, the management of these institutions have never answered to the UN or adopted similar decision-making procedures. The Bank is answerable to its board of Governors, consisting of the Ministers of Finance of its member countries, and here as in that of the IMF, it is money that speaks since voting power is based on the size of the financial commitments of the member countries. In more recent years the Big Five have been the US, Japan, Germany, France and England. In the beginning, the project was to provide the institutional framework and financial resources necessary to ensure that the reconstruction of the war-torn capitalist economies of Europe took place along non-statist and free trade lines. By the late 1940s, this role had either been fulfilled or been supplanted by other institutional mechanisms such as the US's Marshall Aid plan. Attention then shifted to "developing" the countries of the South.

In carrying out this agenda there has been a division of labor between the Bank and the Fund. The IMF acts as a monitor of the world's currencies by helping to maintain an orderly system of payments between all countries and by lending money to those of its members with serious balance of payments deficits (Footnote 1). The Bank, on the other hand, focuses on the use of loan capital to develop the South and to channelize resources into particular areas.

Regardless of the cause of the Balance of Payments deficit situation, finance is only made available to the country after it has agreed to implement measures advocated by the IMF to put its house in order. The agreement to implement these measures is supposedly indicative of the fact that the country wishes to be taken seriously by the international (financial and business) community. In the short run, the IMF recommends stabilization of the economy and in the long run, structural adjustment policies (SAPs) are mandatory. It is argued that the economy (a neutral term, no talk of the people affected ) needs to be subjected to "shock therapy", a necessary albeit painful process of belt tightening and austerity which are expected to change the country's import-export imbalance. The measures advocated include: (a) a reduction in the government deficit to help reduce the trade deficit directly as well as indirectly by deflating the economy (read: contracting the flow of income created by government spending) (b) an adjustment of the exchange rate wherein devaluation is typically called for. This is justified on the grounds that it will reduce export prices and increase import prices thereby increasing exports and decreasing imports, (c) adjustment of domestic prices to reflect true costs of production. "Imbalances" in the allocation of resources in the economy are attributed to biased pricing policies. The country needs to "get prices right" if the economy is to grow. This is to be achieved by removing price biases (e.g. subsidies) as well as the institutional structures making for them. The latter include unions, regulations, including, of course, those instituted by peoples struggles for health and safety, since they all "interfere" with the functioning of that nice market mechanism thing. The devaluation strategy to increase exports also often fails as the same formula is prescribed to many Third World countries who then end up competing with each other on a limited range of commodities creating a collapse of prices of export goods. Export revenues stagnate while the import bill continues to go up leaving the country in a far worse situation than it began. The Third World considered to be labor and natural resource abundant and capital-scarce, is expected to concentrate on the production of agricultural and resource intensive industries and leave the production of "capital-intensive " goods to the west. This takes the focus away from the fact that there is a definite bias in how productivity has been achieved -- i.e. via mechanization and automation of the functions earlier performed by labor. Countries, advised to put their money into labor-intensive techniques have an incentive to lower wages still further since the relatively lower wages are typically used to offset the productivity differential involved. This also works to the benefit of the multinational firms that choose to produce in the Third World.

It is critical to understand that, to the extent that it is only the implementation of these measures that can unlock the door to finance not only from the Bank, but also from other lending agencies, the IMF has tremendous power in influencing a country's economic possibilities. Even when so-called donor countries bypass the Bank and resort to bilateral aid or loans, they do so under the cover provided by the IMF. Major banks wanting to find outlets for their surplus capital, operate with the IMF providing the funds to underpin the riskiest loans and the muscle to squeeze repayment from the debtors. This means that an indebted country has little maneuvering space and cannot play off one financial institution against the other. All of this is not to suggest that IMF policies are always imposed on unwilling Third World victims. Third World elites and governments have been quick to use the cover of the IMF to push through policy measures that they would otherwise have had trouble getting through.

The World Bank is a bank. One should not mistakenly assume that because it states that "poverty reduction remains the centerpiece of the Bank's work" that it will forget either its bottom line or the financial interests of its members. It has four bodies: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA) dubbed by some as the Bank's charity window, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency, the first two of which are the most important. The IDA is funded by the multilateral aid budgets of its 158 member countries as well as on IBRD transfers and repayments on earlier IDA credits. The IBRD raises its funds on the international capital markets at low rates of interest and re-lends it to countries with a poor credit status at higher rates. But for the borrower countries the terms are more advantageous than they would have been had they tried to raise funds themselves in the international market.

However, as Graham Hancock, author of Lords of Poverty, points out: "what we have here then is an institution that functions in an "aid-like" manner and that lends to some of the poorest countries and riskiest countries on earth... [however] it is also an institution that consistently makes a profit and is regarded as highly credit-worthy by money managers on Wall Street and in the city of London (p. 54)." The Bank's secret for making money lies in the fact that it contracts with governments to repay the loans, by any means necessary, on pain of lending drought. With the combined power of the major capitalist countries and financial institutions against it, the risk of a country defaulting and walking away is minimal. And of course, the poverty reduction centerpiece does not apply when it comes to collecting payment nor, it appears, when making responsible decisions about the projects selected for funding.

In general, the Bank makes three kinds of loans: (I) specific project related loans, (ii) sector adjustment loans where only part of the money goes to meet the direct cost of the project while the rest goes to support sector-specific IMF-type policy changes; (iii) structural adjustment loans (SALs) which are completely disconnected from projects and are disbursed in short order in return for major policy changes at the national policy level. Conditions, or conditionalities in Bankspeak, attached to such loans relate to IMF recommended policies on the issue of tariffs, exchange-rate management, and reduction of the government's budget and scale of involvement in the economy. Some of loan money has also been known to go into lining the pockets of government officials and technocrats in exchange for creating a conducive environment for foreign private capital to operate and for handing over policy making power to the IMF-WB.

In the past, a major part of the Bank's sectoral funding has gone into the construction of giant hydroelectric dams, transportation systems, power stations, oil, gas and coal-mining projects thus opening up areas rich in natural resources for private capital and making it cheaper for energy/resource intensive plants to be operated therein. The Bank carries out the feasibility studies, makes proposals and typically contributes about a third of the total sum required, the rest having to be raised by the government of the recipient country possibly via co-financing from other bilateral and multilateral trade agencies.

Given the typical scale of operation and the sums spent on bank projects, it might be reasonable to expect that the Bank would use scarce resources rationally and also deliver economies of scale given its unique and powerful economic position. However, complete irrationality appears to reign. Most often the decisions include inappropriate choice of suppliers and techniques of production that raise the foreign component of the total bill but result in no particular gains in efficiency, viability, or costs of production. In many cases, the selection of sites are inappropriate in technical-economic terms leaving aside human and environmental costs involved which in any case are only peripherally considered, thus working to keep the project estimates down. Estimates of the project's economic viability more often than not bear no relation to reality and should the prices charged reflect the cost of production, services could never be delivered at anything like a reasonable price. Many of the projects funded by the Bank are not success stories even by the Bank's own criteria. A June 1992 WB report concluded that less than 20% of its structural adjustment technical assistance loans to Africa are substantially effective. The 1992 Wappnhans report found that Bank staff determined that more than one-third of the Bank's 1991 projects to be failures. Reports on, and demonstrations of, the people affected make these numbers appear to be gross underestimates of the levels of failure involved.

Unfortunately this does not appear to be simply a question of bad economics reigning at the Bank. What appear to be bizarre choices when it comes to the choice of suppliers, technology, site etc. begin to make some sense if it is realized that it is the interests of the donor country's corporations that dictate them. Welcome to Development Inc. and the Aid Regime. The message of erstwhile President of the WB, Mr. Eugene Black was simple: "our foreign aid programs constitute a distinct benefit to American business." The three major benefits are (I) foreign aid provides a substantial and immediate market for United States goods and services; (ii) foreign aid stimulates the development of new overseas markets for United States companies; (iii) foreign aid orients national economies towards a free enterprise system in which the United States firms can prosper. Former US President Nixon put it more bluntly, "Let us remember that the main purpose of aid is not to help other nations but to help ourselves." Numerous studies bear this out. A major portion of aid is actually spent in the country of origin. Foreign exchange loaned by the Bank enters the coffers of the central bank of the developing countries where it is immediately earmarked (by the donors) for the purchase of imports from their countries thereby returning the capital to its erstwhile location.

There has, however, been a slight shift away from the funding of economic white elephants in recent times primarily because of the tremendous pressure brought upon the Bank by Third World peoples movements, (most recently the Narmada Bachao Andolan - an Indian People's protest movement against a WB funded hydroelectric project in the Narmada Valley - See Sanskriti, Vol. 5, No. 1). This not only includes the creation of such "shock absorber" bodies within the Bank such as the Inspection Panel, but also a seeming shift in funding priorities (Footnote 2). By 1996, agriculture and rural development constituted 29% of the total loans, education 14%, the environment 6%, industry and energy 8%, infrastructure and urban development 15%, population, health and nutrition 19% and 9% was for adjustment related work. This does not necessarily work against the Fund-Bank ideological project which is to keep the world safe for capitalism in principle, and for MNC's in practice.

It is important to remember that markets are not expanded simply by seductive marketing techniques and via the aid regime but also by educating or more appropriately constructing a subject willing/desiring to consume. A case in point is the massive involvement of the Bank in primary education in Third World countries such as India through select NGO's and the simultaneous forced withdrawal of the State from the domain of education (see Kamat, this issue). At a basic level, schooling involves the disciplining of the majority to obey (excepting of course those who need to be schooled how to command) and to view the capitalist system's division of resources and labor as just and meritocratic.

This shift in the Fund-Bank project - their involvement in the creation of the desiring/consuming subject and their efforts to weaken the State in all but its repressive function - are consistent with the changes in the world economy since the late 1960s. If in the past the Fund-Bank-MNC objective with regards the Third World was one of finding cheap and viable production sites, with the saturation of markets in Western Europe and North America, (productivity increases bear no necessary relation to the growth of the market - productive capacity has periodically tended to outstrip demand since there is no limit to expansion from the side of production but demand does tend to reach saturation levels with reference to the prevailing income distribution and "tastes") MNC's are seeking the Third World out not just as production sites but also as markets. Hence the emphasis in the literature on the creation of a global consuming class (see Rao, this issue) which is susceptible to a high intensity marketing.

Not all projects, however, rely on trickle-downs for the poor. Some projects seem to be targeted to specially improving their position. Given the poverty reduction centerpiece of the Bank it is worth spending a few lines on evaluating the Bank's foray into Urban Shelter projects. Supporters of these projects stress the placement of erstwhile squatters in new sites (moved no doubt because they were probably occupying potentially valuable real estate or because their presence interfered with "Urban Beautification Plans") that are more "developed" and where the poor will acquire the right to those properties, on a sort of perpetual lease so long as they pay the rents or the maintenance charges assigned them for the provision of services (that they never asked for in the first place). However, predictably, in many of the projects, a substantial number have faced eviction for non-payment of rent. In the meantime, as development of the property has raised its real estate value, the real beneficiaries of the urban shelter projects are the real estate interests who buy up the properties left behind by evicted tenants. Extending the domain of marketization and private property has not been the route to happiness and enrichment of the poor. The commodification of subsistence resources -- water, fodder, shelter has meant loss of access to traditional/state forms of support even as their integration into the market provides little relief.

But supporters of the Bank-Fund liberalization project point to the change in world growth and investment patterns that they claim have worked to benefit some of the developing countries compared to the post-WWII period when most of Foreign Direct Investment had been undertaken by 5 nations: US, Japan, Germany, France and England investing in each other with the exclusion of Japan. It is true that the macro picture has changed somewhat especially with the emergence of China as a major production site and a major market. By 1993, 75 % of foreign investment stock was in the developed countries, and 25% was in the developing countries. In terms of inflows the numbers were 62% and 35% suggesting a movement in favor of the developing countries over time. However, most of the latter is concentrated in a handful of countries: China followed by Singapore, Argentina, Malaysia, Mexico, Indonesia, Thailand, Hong Kong, Columbia and Taiwan. In 1993, the US was the largest recipient of FDI followed by China which had 13% of the total flow. However two issues come to mind at this point. Are these "success" stories the result of implementation of IMF-World Bank policy? Evidence for Korea, the most touted case, points more to a favorable geo-political configuration that worked to Korea's benefit: the desire of the US and others to see the non-communist neighbors of communist countries flourish, the demand stimulus from the Vietnam War that worked to benefit most of the designated Asian Tigers, and a strong developmental state as opposed to free market policies which are usually the staple of World Bank economic advice. Secondly, without going into the issue of whether it is desirable to reproduce the South Korean model, it is still fair to ask whether it is possible. Given the nature of the factors and conditions outlined above, I would answer not. One would have to evaluate the nature of its bourgeois class, the general conditions facing the country and the manner of its integration into the world economy.

What is happening in this period of so-called globalization is that certain regions are being connected via relations of production and consumption whereas others like many parts of Africa are literally disappearing from the economic and social landscape visible to the Developed Capitalist World.

The possibility of being part of the global consuming elite, receiving the fat salaries that the multinational institutions have to offer (per diem amounts at the Bank and Fund being higher than most monthly salaries) might allow the representative members of the upper and middle classes to feel at one with the Bank's world view. But this fictitious unity can only be maintained so long as one chooses to ignore the manner in which these lifestyles are paid for and by whom. Ignoring the issue does not make it go away. From time to time, the growing unevenness both within and across countries, the increased impoverishment of peoples especially those taken "from plan to market", manifests itself in explosive violence which only the foolish and ignorant would attribute to non-capitalist traditional, tribal emotions rather than as the mobilization of peoples by nationalist projects which claim to be seeking to reverse conditions or to isolate their group from the experience of uneven development and impoverishment. Consider the case of Yugoslavia. Observers point out that multiethnic Yugoslavia was once a regional economic success. In the two decades before 1980 its Gross Domestic Product (GDP) growth rate averaged 6.1%. By 1990, the annual rate had collapsed to a negative 7.5%, and industrial production to a negative 10% growth rate. In 1991 the GDP declined by a further 15%, while industrial output shrank by 21%. The IMF had induced devaluation of the currency, wage freezes, sharp cuts in government spending, elimination of socially-owned worker-managed companies, unabated price increases and it effectively controlled the central Bank. As Michael Chossudovsky points out :state revenues that should have gone as transfer payments to the republics and provinces in this hour of need went instead to service Belgrade's foreign debt. The republics were largely left to their own devices. In one fell swoop, the reformers engineered the final collapse of Yugoslavia's federal fiscal structure and mortally wounded its federal political institutions. By cutting the financial arteries between Belgrade and the republics, the reforms fueled secessionist tendencies that fed on economic factors as well as ethnic divisions, virtually ensuring the de facto secession of the republics.

Those of us who do not buy into the Capital-Bank-Fund project need to be able to demonstrate not only the conditions against which we struggle, but to provide alternatives to the Fascist nationalism of the right, to its appropriation of the repressive apparatus of the state even as it talks endlessly of freeing civil society from the state. The question that stares us in the face at the end of the day is how shall we be free of the tyrannies of the free market and the structural hierarchies endemic to civil society?


  1. For details on a South Asian IMF-Bank related horror stories, see Sanskriti v. 5, n. 1 & Multinational Monitor December 1993 re: Sardar Sarovar Project; See New York based Samar magazine Summer 1996 issue & Multinational Monitor December 1994 re: Arun III project in Nepal; Multinational Monitor July/Aug 1995 India Open for Business.
  2. Chossudovsky, Michel "Dismantling Yugoslavia, Colonizing Bosnia" Covert Action Quarterly Spring 1996, #56.
  3. Hancock, Graham Lords of Poverty: The power, prestige, corruption of the international aid business (NY: The Atlantic Monthly Press, 1989) Henwood, Doug Left Business Observer #49,(1991); #68 (1995) Multinational Monitor, The World Bank: Fifty Years is Enough, vol 15, # 7 July/Aug 1994
  4. Payer, Cheryl The World Bank: A Critical Analysis (N.Y.:Monthly Review Press,1982)
  5. Wood, Robert From Marshall Plan to Debt Crisis (Berkeley: University of California Press, 1986)
  6. The WB Home Page
[Radhika Lal is a graduate student of Economics at the New School for Social Research, New York]

Footnote 1: The Balance of payments (BoP) refers both to the trade and capital accounts of a country with the rest of the world. To the extent the BoP is always in balance, a deficit in one account (e.g. a trade deficit when imports exceed exports) means there must be counterbalancing surplus in the other. (e.g. on the capital account as when the total inflows of foreign currency exceed the outflows).

Footnote 2: The only project that has been to date reviewed and resolved by the Inspection Panel is the Arun III project in Nepal where the report of the panel was partially responsible for the Bank backing out of the project. However, in the meantime, the World Bank has been at it again, forcing the Nepali and Indian governments into a treaty to construct a completely unsubstantiated project - the Mahakali dam.

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