The IMF and the Dollar-System
"A direct connection exists between slackening growth and IMF intervention. If the growth of the gross domestic product per capita is taken as a basis, Latin America showed a growth of 75% between 1960 and 1980. In the following twenty years up to 2000, the gross domestic product per capita only rose 6%..Growth may be good for the poor but are IMF policies good for growth?"
The IMF and the Dollar System
By F.William Engdahl, US/ Germany
[This article originally published on November 17, 2003 is translated from the German on the World Wide Web, http://www.zeit-fragen.ch/ARCHIV/ZF_111a/TO1.HTM.]
One of the supporting pillars under girding the present dollar system is Washington's control of the International Monetary Fund, the IMF. How this actually functions is carefully hidden behind a fašade of technocrats and an economic theory based on the ideology of the free market. In reality, the IMF is a modern collection agency for the dollar empire. The IMF demands its tribute with the help of important international banks that spend dollars to extend American financial- and business hegemony, the driving engine of globalization.
Although the IMF represents a main support of the dollar system, its nominal director is ironically a European, the German Horst Kohler. Before Kohler, the director was the Frenchman Michel Camdessus. The real hierarchies of power are carefully concealed behind this fašade. The statutes of the IMF insure that no important decision can be made without the approval of 85% of the executive directorate. The United States, which designed the original IMF Charter in Bretton Woods, New Hampshire in 1944, made sure that it had the decisive blocking minority with an 18% voting share. This blocking minority still exists today. Insiders know very well that Washington leads the IMF. It is no accident that its headquarters are located in Washington, D.C.
The IMF was called into being in 1944 on the occasion of the international monetary conference in Bretton Woods, New Hampshire. On President Roosevelt's initiative, a monetary- and trading system for the post-war era was founded. The IMRF should be a fund supporting the stability of the currencies and trade of the European allies in the post-war era. Up to now, the US owned the largest share of the world gold reserves and granted dollar credits for Europe's reconstruction. The original IMF idea was to combine the reserves of member states in a pool from which every individual state could receive credits to stabilize its currency in the case of a short-term payment problem.
Ten years after the Great Depression, creating a stable growing Europe as an export market for American products was in the interest of the large industrial nations including the US. The first country that received credits after the war was Great Britain. The last European country was Italy in 1977.
Restructuring in the 1980s
Since 1977 none of the G& European countries has turned to the IMF to borrow money. Instead they obtain money from private banks or contract public debts. They know only too well how destructive are the IMF conditions. At the end of the 1970s, some were convinced that the IMF fulfilled its role as Nato fulfilled its role after the ending of the Cold War. Washington had other plans for the IMF.
In the early 1980s, the role of the IMF changed dramatically under the pressure of the US. Instead of serving as a stabilization fund for the industrial countries in Europe or Japan, the IMF became the decisive instrument for controlling the economic policy of underdeveloped countries. In the course of the first Latin American debt crisis at the beginning of the 1980s, the IMF assumed a completely new role as constable amassing dollar loans from private New York and international banks. The IMF was the driving force for what was later termed "globalization".
Latin American Debt Crisis
After the first oil price increase around 400% in the 1970s, many developing countries like Brazil, Argentina and most countries in Africa accepted massive credits for financing their necessary oil imports or trade deficits. They made dollar loans from the great international banks that operated the Eurodollar market in London. London was the center for handling the recycling of vast sums of petrodollars of the Arab OPEC-countries to the US and the other important banks.
The large banks took the new oil dollars and immediately lent them to countries like Argentina or Egypt with a handsome profit. Before the 1970s, Argentina's economy grew quickly and developed a modern industry and agriculture that brought a rising standard of living to its population. Argentina had almost no foreign debts. Ten years later, the country was under the control of the IMF and foreign banks. The US changed the rules and created the debt crisis.
In October 1979, the indebted countries experienced a dramatic shock. Overnight their cheap dollar loans cost 300% more in interests. Paul Volker from the US Federal Reserve unilaterally changed the interest policy upgrading the dollar in relation to other currencies. As a result, US interest rates rose around 300% and those of the London banks even more massively. Bank credits to Argentina and other countries were arranged with "floating" or freely fluctuating interest rates. If the leading international interest rate on the London bank market (London Interbank Offered Rate) was low, Argentina paid a low interest rate on its debts. However many countries were confronted with a payment crisis when this interest rate suddenly rose around 300% between 1979 and 1980.
In 1982 the crisis reached the level of insolvency. At this point Washington demanded that the IMF start a process of debt collection with countries developing into debtors. What was described as the debt crisis of the third world arose. The impression was created as though countries like Argentina were responsible for this crisis through their own mismanagement. However great may have been the extent of political corruption in the debtor countries, the corruption of the IMF system and petrodollar recycling was far greater. The Volker interest rate shock completed the bundle of destruction of living standards through dollar debts.
How did the IMF act during the debt crisis of the third world? The role of the IMF consisted in supporting the dollar hegemony of the US, not in helping poor countries overcome a temporary debt crisis.
IMF as a Supra-National Organization
The IMF is described now and then as a tool of neo-colonialism. This is a trivializing expression since the British or European colonialism of the 19th century - as ruthless as it was - never brought about the extent of dismantling and destruction of the health- and living standards as the IMF since the 1970s.
The IMF operates as a supra-national organization with the goal of controlling helpless debtor states and forcing an economic policy on them that drives these countries deeper into debt crises while simultaneously opening their markets for exploitation by foreign, often US-American capital and global corporations. The debtor states can never come out of their dollar debts but fall deeper and deeper. The policy of the IMF assures this. Dollar-indebtedness is one of the mainstays of the dollar system and of private international banks. If the debts were repaid, the banks would lose their influence and their credit contracts. As long as the debts increase, the credit businesses also grow. This is the paradox of the modern world of banking.
The real goals of the IMF are clearly different from its public opinions. The IMF has never changed its methods despite repeated evidence for the destructive effects of its policy, the "conditions". This has a reason.
The Example of Argentina
The example of Argentina deserves close consideration. In the spring of 2002, Argentina was unable to meet its payment obligations amounting to $141 billion in foreign debts. As a result, it experienced one of the most disastrous economic crises of modern history. The IMF played a crucial role. In the spring of 2000, Argentina turned to the IMF for an emergency credit to prevent the collapse of its currency bound to the strong US-dollar at that time. When the dollar gained in value, the Argentine export trade collapsed. The country suffered a recession. The IMF intervened with a "rescue" package of $48 billion but set conditions.
As the first condition before any credits were granted, the government had to agree to incisive cuts in spending dictated by the IMF. State subsidies of food for people with low incomes were ended. This led to plundering food supplies. The interest rates exploded with the futile attempt to deter foreign banks and owners of securities from selling. The economic depression only worsened. To receive money, governmental partnerships saw themselves forced to privatization and liberalization of the free market. The water supply of Buenos Aires was sold to Enron at a ridiculously low price just like a pipeline from Argentina to Chile.
With the argument that the trust of foreign holders of securities and foreign creditors has the highest priority, Washington insisted that Argentina maintain its fixed currency. The land fell into the worst depression of its history. Millions of people lost their work. Even the bank accounts were frozen in the final stages. The ordinary citizen could not set aside his saved money for the vital necessities.
The "Washington Consensus"
What does the IMF do when it meddles in a country seeking an emergency credit in a crisis to bridge indebtedness or a monetary crisis? The IMF always acts according to the same pattern whether in Russia, Argentina, Zimbabwe or South Korea, all very different cultures, economic systems and social situations. The demands of the IMF are frequently described as the "Washington Consensus", a term coined by the American economist and IMF-supporter John Williamson in 1990- to summarize the aggressive methods of the IMF.
The medicine of the IMF nearly always contains demands for privatization of state industries. It insists that public expenditures for health and education be drastically cut, that the domestic currency be devalued in relation to the dollar and that the country be opened for the free flow of international capital, for capital flowing into the country and especially for capital flowing out of the country.
"Memorandum of Understanding" - the Prerequisite
First of all, the IMF requires the particular government to sign a secret "Memorandum of Understanding" with the IMF in which it agrees with a list of "conditions" - the prerequisite for any financial allocation by the IMF. Banks do not invest in any country that lacks the official approval of the IMF on the globalized free capital markets of today. Therefore the role of the IMF goes far beyond granting emergency credits. The IMF decides whether a country receives funds from the World Bank, private banks or any other source.
The Four Steps of the IMF-Course: I. Privatization
The conditions of an IMF-deal are always the same. The privatization of state industries has the highest priority. Privatization with a weak peso or ruble allows foreign dollar investors to buy up dirt-cheap the main property assets of a country. The responsible politicians of the country are often corrupted with enticing secret deals to privatize the national assets. Foreign multinational corporations can grab the profitable mining industry, oil or other valuable resources with their dollars.
The Example of Russia
The classic example is the Russian government under Yeltzin. Dollar-billionaires emerged overnight in the course of the plundering of the people's assets via IMF-dictated privatization. The Clinton administration stood completely behind this process. It knew that Russia would develop into a dollar zone. That was its intention.
II. Liberalization of the Financial Markets
As a second condition, the IMF demands that the respective country liberalize its banking- and financial markets, in other words open them for foreign investors. This enables high-profile speculators as for example a George Soros, Citibank or another money institute to become established in a country, amass property assets in a speculation, make immense profits as in Thailand in the middle of the 1980s and sell quickly to finally leave the country with enormous profits while the economy of the country collapses behind them. Then the multinational corporations can buy up the main property assets very cheaply.
The Example of Asia
In the 1990s, the IMF and the US Treasury Department that defines US-IMF policy, began exerting intense pressure on the fast growing East Asian "tiger states" to end their national controls on capital flow. They argued that Asia would obtain great sums of money for investments. In truth, this opened a gigantic new market to American pension funds and large banks for their speculative businesses. Too much money flowed into the countries. The real estate market was dangerously inflated. This balloon burst when Soros and other US speculators consciously turned the tap off in 1997 and triggered the Asian crisis. As a final result, the Asian economies saw themselves forced to turn to the IMF for rescue measures.
Collapse of the Baking System in Indonesia
However the IMF did not "rescue" any of these Asian economies in 1998. Rather the IMF rescued the international banks and hedge-fund speculators. In Indonesia, the IMF required the government to raise the interest rates to 80% to keep foreign investors from leaving the country and stabilize the situation of the land. In truth, the interest conditions of the IMF guaranteed the total collapse of the Indonesian and other Asian banking systems. IMF critics like Joseph Stiglitz leveled this criticism.
Weakening South Korea
As soon as the IMF gained influence on South Korea, one of the strongest industrial economic powers worldwide, it emphasized dissolving the great industrial conglomerates reproached for "corruption" and capitalist "cronyism". In reality, Washington hoped to weaken a grown-up rival and open the doors for a takeover to American firms like GM (General Motors) and Ford. This partly succeeded until Korea and other regional economic powers were strong enough to rebuild their own national controls. Malaysia openly resisted the conditions of the IMF and imposed currency controls during the crisis. As a result, Malaysia was hardly damaged. This greatly embarrassed the IMF.
III. The "Market-Price" Demand
The next stage of the IMF conditions consisted in fixing a country's domestic price "corresponding to the market". This coded formulation meant abolishing state subsidies and price controls. In developing countries, gasoline, food and other essential goods for the population are often subsidized by the state. In 1998, for example, the IMFR demanded Indonesia's cancellation of state subsidies for the poor. The notion of a price "based on the market" is in itself a fiction. People always make the market. The market in Switzerland, Denmark or Japan is different than in Cuba or Cameroon. The goal of the IMF is to drastically slash state budgets to minimize the influence of the state on the economy and make the respective country defenseless against the foreign takeover of its most important property assets. The government portions in the weak economy are cut to assure the foreign banks' share in the spoils.
Finally, the IMF requires massively devaluing the currency of a particular country, often 60 to 70% or more. The argument here is that this makes exports "more competitive" and leads to higher incomes so foreign dollar debts can be paid off. This is a crucial element of the Washington Consensus medicine of the IMF. As examples, Chile devalues the peso around 50 percent while the Republic of the Congo must export twice as many tons of copper to gain the same dollar profit from export surpluses. This means a 50% reduction in raw material prices for the mammoth multinational corporations of industrial countries.
Even though demand has risen, raw material prices have been drastically forced down in the last 20 years since the IMF started playing the decisive role in restructuring developing countries. The reason is that the countries of Africa and Latin America are mainly raw material exporting countries and their goods, for example oil, are all sold in dollars. These countries must earn dollars to pay their dollar debts. Thus the IMF with its policy drives down raw material prices calculated in dollars. This was intended though never admitted. The IMF is an agency assuring the rule of the dollar on the world market, not an organization helping developing countries.
The True Work of the IMF
Unfortunately this is not an exaggeration. Defenders of the IMF claim that "market liberalization" has led to greater economic growth in developing countries during the last 20 years. The opposite is reality. The gross domestic product in all countries of the former Soviet Union between 1989 and 1997 fell to 30-80% of the state reached before the collapse of state control according to a study by Joseph Stiglitz during his time at the World Bank. Poland was the only exception.
Rapid Privatization in Russia
Russia's gross domestic product only amounts to 60% of the 1989 amount. Its gross domestic product collapsed 40%. The number of unemployed rose from 2 million to 60 million. The rapid privatization without appropriate legal and institutional securities like unemployment- or health insurance led to a social catastrophe comparable to catastrophes in war times. The demands of the IMF for free capital movement allowed the new Russian dollar-oligarchs like Beresovsky to plunder billions of dollars, transfer them to secret bank accounts in Cyprus or Lichtenstein and buy luxury villas in Monte Carlo. (1)
Effects of the IMF in Africa
The effects of the IMF in Africa are also outrageous and destructive. In Zimbabwe, the IMF required the government to privatize state enterprises and slash the subsidies for food, education and health care to receive IMF assistance. The government fulfilled most of the demands. However the IMF then lodged the reproach that it supported the war in the Democratic Republic of the Congo and under this pretext refused awarding credits to Zimbabwe. In Kenya, the IMF insisted that certain western interests of well-meaning persons be represented in the Moi government. Washington later accused these governments of being "corrupt", a reproach suited to make public opinion in the West blind to the moral travesty of events under the auspices of the IMF..
Deeper in Debt
If one accepts the official debt statistics of the World Bank, the game of the IMF obviously serves to support the dollar. The first debt crisis in the third world broke out in 1982. The IMF intervened to "stabilize" the debt problem. Since then, the foreign debts of developing countries have increased exponentially. In Argentina, the former "success land" of the IMF, the foreign debts in 1990 were $62 billion. In 2000, they were $146 billion. In the same time period, Brazil's foreign debts rose from $120 billion to $240 billion. Iran isolated from the IMF system by US sanctions is one of the few developing countries that have managed to reduce its foreign debt.
The total dollar-debts of all countries with low and medium incomes nearly doubled, rising from $1.4 trillion in 1990 to $2.5 trillion in 2000. In most cases, the unpaid interest costs were merely added to the capital owed to foreign creditors with compound interest rates. The debts grow exponentially with compound interests that were often 10-15% per year.
A Debt Pyramid
The result is a Ponzi-debt pyramid. (2) The more a country pays, the more it owes. Bankers call t his "interest capitalization". This is no different than the plight of a poor indebted shop-owner forced to turn to a credit-shark of the Mafia to survive. At the end he paid more and more interests until he was bankrupt and the Mafia took over his whole property. The IMF and the banks know that only 80% of the debts of the third world will ever be repaid. They rely only on the fiction of legality and the possibility of using debts as a lever to cheaply grab the assets of countries. According to the World Bank, $326 billion in interests alone were paid by a group of 109 debtor countries to foreign creditors between 1980 and 1986. The repayments of the actual debts amounted to another $322 billion. Thus a total capital of $648 billion flowed to New York banks and other credit institutes as debt service for an original credit sum of $430 billion. Despite this enormous effort, the 109 debtors still owed the banks a sum of $882 billion in 1986. The reasons are the pyramid effect of compound interest, interest capitalization and Volker's interest-policy of floating interests.
In 1990 the developing countries paid $150 billion in interests for their dollar-debts, three times more than what they received altogether in assistance. This gave a powerful impetus to the dollar-credit system that lends money on the assumption that the whole $2.5 trillion of debts of the third world will be repaid. The IMF still follows this myth. Despite its disastrous situation, occupied Iraq today must "acknowledge" the billions of debts from the Hussein era, much of the debts to the former Soviet Union. Russia is still forced to accept billions of debts from the Soviet era to western agents. Debts are more sacred than human life under the IMF system. (3)
The common trick of all "debt restructuring" enforced by the IMF is as follows: As long as the debtor can pay the interests on its debts, the lending banks in New York, London or wherever cannot declare its credits as overdue. Even if they know that they will never be repaid, they treat the loans as good credits and use them as an additional security for awarding further credits by their bank. The banking system of the dollar world has largely crashed through the pyramids of the unrecoverable debts of the third world - from Africa to Indonesia, from Argentina to Croatia.
Development Backwards Thanks to the IMF
Economic growth in developing countries has dramatically slowed down in the last two decades since the IMF began supervising debtor states in 1982. A direct connection exists here between slackening growth and IMF intervention. If we take the growth of the gross domestic product per capita as a basis, Latin America showed a growth of 75% between 1960 and 1980. In the following 20 years up to 2000, the gross domestic product per capita only rose 6%.
In Africa's sub-Sahara countries, the gross domestic product per capital grew 36% in the two decades up to 1980. In the next two decades, the gross domestic product fell 15%. According to the statistics of the World Bank, approximately 300 million Africans - nearly half of the population of the continent - survive with less than 0.65 Euro per day. The cuts in the system of national health care dictated by the IMF have led to increased child mortality on the whole continent. In 2002, Malawi suffered a famine. This coincided with the IMF decision in April 2002 to exclude Malawi from relief with the reproach of "corruption". The IMF instructed the Malawi government to sell the grain reserves of the country to repay a loan of the National Food Reserve Agency from a bank of South Africa. The IMF also demanded the export of corn to service the debts and ignored the developing famine. The IMF denied hypocritically that this process played any role in the famine. (4)
With the Arab states including Algeria and Morocco, the growth of the gross domestic product per capital fell between 1960 and 1980 from plus 175% to a minus 2% in the following two decades, a breathtaking collapse.
The only obvious exception to this negative development is East Asia including China. Growth here was higher between 1980 and 2000. The inclusion of China tipped the balance. China posted an increase in its gross domestic product of around 400% and constitutes 83% of the regional population. China has refused uncompromisingly all business with the IMF. China has a controlled state economy with complete control over its own currency, hardly a model state in the sense of the IMF.
Globalization is a term that is often used imprecisely. When we apply the term globalization to refer to the total process of neo-colonialism led by the IMF and the WTO under the dollar system, this is a descriptive term. Globalization then describes the creation of a worldwide dollar empire, a Pax Americana. Established critics of the IMF-system like Joseph Stiglitz, the former Clinton advisor who was chief economist of the World Bank formulate precise reproaches against the IMF. They assume that only a misguided policy causes the problem. However the institution of the IMF in itself, the World Bank and the WTO were mainly developed to advance the globalization of the dollar system, the second pillar of the Pax Americana alongside the military power. It is not a failed policy or a result of a technical-administrative error. This is the crucial point that must be understood: The IMF exists to support the dollar system. (5)
1 Marc Weisbrot et.al. Growth may be good for the poor but are IMF and World Bank Policies good for growth? Center for Economic Policies Research, Washington, August 2000. The policy of the IMF is sharply criticized in this paper. It documents the real plunge of living standards since 1980 in countries that are targets of the IMF.
2 Charles Ponzi promised people in the 1920s that he knew a way to double their assets in only 90 days. He devised a system in pyramid-form. It functioned a certain time for him until he finally entered prison on account of fraud and so on.
3 World Bank. World Development Indicators 2002, Table 4.16, External Debt
4 Data on the effects of the IMF demands on Africa are found at
www.africanperspective.com and in the magazine African Business, January 2003, in the article "Who Caused the Malawi Famine?" by Kwesi Owusu and Francis Ng'ambi.
5 A useful but limited critique of the policy of the IMF is found in the book by Joseph Stiglitz, Globalization and its Discontents, 2002.
"The worldwide network of special organizations, above all the international financial institutions, must be considered as part of the American system. The International Monetary Fund (IMF) and the World Bank officially represent global interests and bear responsibility worldwide. In reality, however, they are dominated by the US that called them into being with the Bretton Woods conference in 1944."
Zbigniew Brezinski, The Only Superpower: America's Strategy of Predominance, 1999
What is the "Washington Consensus"?
The policy demanded from a country by the IMF was described in a list of points termed the "Washington Consensus". This consensus that doesn't exist anywhere as an official document is an exact description of the political guidelines of the IMF and is applied as such. It was outlined in 1989/1990 by John Williamson, an economist at the Institute for International Economic Theory in Washington, D.C. He listed 10 central goals of the policy and described this as the "Washington Consensus". The "Washington Consensus" includes "discipline" in the state budget, cutting public expenditures in the public health- and educational systems; liberalization of financial markets even if most countries cannot handle the great influx of foreign capital; encouraging "more competitive" interest rates to stimulate fast export growth; cancellation of protective tariffs freeing the way for foreign imports, often American agricultural products, driving indigenous corn- or other food producers into bankruptcy; abolition of barriers for foreign direct investments; privatization of state enterprises; de-regulation even for the unions to allow a new competition that includes foreign firms with far more resources and guaranteeing property rights, especially for foreign businesses and banks.
The Consensus as a political package forces a weak developing country like Indonesia or Zimbabwe to open its economy on all planes for the takeover of its most valuable resources by foreign powers. The Consensus contains technical descriptions that sound rational. In reality, it is the model for a foreign multinational rule called neo-colonialism by some critics. Once robbed of their defense and their protection, only a few countries can compete with enormous multinational businesses or banks.
The IMF strategy is supported by the US dominance in the World Trade Organization (WTO) and in the World Bank. A developing country only has a few possibilities for resisting its demands. A land needs the approval of the IMF to receive foreign capital in its economic cycle. This means agreeing more or less with what is described as the Washington Consensus. The former chief economist of the World Bank, Joseph Stiglitz, laments that many countries in Latin America and Africa follow "the dictates of the `Washington Consensus' - reduction of inflation and budget deficits, trade liberalization, privatization of state enterprises - but still wait for development".
In contrast, many Latin American and African economies in the 1960s pursued opposite strategies and enjoyed strong economic growth. For obvious reasons, the IMF normally ignores this point. This policy is still observed despite increasing attacks on the ideas of the Washington Consensus and its free enterprise policy. This is not because the Consensus brings economic growth but rather because of economic control by multinational banks and firms that bolster the dollar system.
"The first stage is privatization which according to Stiglitz should be called `corruption'. Instead of opposing selling off state enterprises, he says, leading national personalities merrily sell off electric power stations and water works. They use the demands of the World Bank to silence local critics. Their eyes become enlarged with the prospect of ten-percent profits paid to Swiss bank accounts when the selling price of national property assets is cut a few billion."
"The Globalizer who came in from the cold". Interview with Joe Stiglitz by Greg Palast, London Observer, October 10, 2001
"The constantly growing gulf between the propertied and the have-nots plunges an increasing number of people in the third world managing with less than a dollar a day into bitter poverty. Despite repeated promises in the 1990s to reduce worldwide poverty, the number of people living in poverty has actually risen around 100 million. In the same time period, the aggregate world income climbed around 2.5 percent annually."
Joseph Stiglitz, Globalization and its Discontents, 2002
"Modern high-tech warfare is designed to avoid physical contact with the enemy. One doesn't see what one does in dropping bombs from a height of 30,000 feet. Modern economic control is very similar. From a luxury hotel, conditions can be imposed heartlessly about which one would reflect twice if one knew the people whose lives would be destroyed."
Joseph Stiglitz, Globalization and its Discontents, 2002
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