The Un­bal­anced Equa­tion

More than one bil­lion peo­ple still live in deep poverty de­spite to­day’s bet­ter re­sources and tech­nol­ogy.

Southasia - - COVER STORY - By Shab­bir H. Kazmi

The prime pur­pose be­hind the cre­ation of mul­ti­lat­eral fi­nan­cial in­sti­tu­tions was re­con­struc­tion in the af­ter­math of World War II by pro­vid­ing funds and tech­ni­cal as­sis­tance to war-af­fected coun­tries. The ob­jec­tive for the cre­ation of the In­ter­na­tional Bank for Re­con­struc­tion and De­vel­op­ment (IBRD) – the orig­i­nal in­sti­tu­tion of the World Bank Group – was to re­duce poverty in mid­dle-in­come and cred­it­wor­thy poor coun­tries by pro­mot­ing sus­tain­able de­vel­op­ment through loans, guar­an­tees, risk man­age­ment prod­ucts and an­a­lyt­i­cal and ad­vi­sory ser­vices.

The World Bank is a vi­tal source of fi­nan­cial and tech­ni­cal as­sis­tance to de­vel­op­ing coun­tries around the world. It is not a bank in the or­di­nary sense as it en­joys part­ner­ship with almost ev­ery coun­try for re­duc­ing poverty and support de­vel­op­ment. The World Bank Group com­prises five in­sti­tu­tions which are: 1) In­ter­na­tional Bank for Re­con­struc­tion and De­vel­op­ment, 2) In­ter­na­tional De­vel­op­ment As­so­ci­a­tion (IDA), 3) In­ter­na­tional Fi­nance Cor­po­ra­tion (IFC), 4) Mul­ti­lat­eral In­vest­ment Guar­an­tee Agency ( MEDA) and 5) In­ter­na­tional Cen­tre for Set­tle­ment of In­vest­ment Dis­putes (ISID). To­gether, the IBRD and the IDA make up the World Bank.

The World Bank Group has set two goals to be achieved by 2030: to end ex­treme poverty by de­creas­ing the per­cent­age of peo­ple liv­ing on less than US$1.25 a day to no more than 3 per­cent and to pro­mote shared pros­per­ity by fos­ter­ing the in­come growth of the bot­tom 40 per­cent of ev­ery coun­try. How­ever, the real con­cern is that although poverty has de­clined rapidly over the past three decades – even ac­cord­ing to the World Bank it­self – hu­man­ity con­tin­ues to face ur­gent and com­plex chal­lenges. More than one bil­lion peo­ple still live in deep poverty, a state of af­fairs that is morally un­ac­cept­able given the re­sources and tech­nol­ogy avail­able to­day. At the same time, ris­ing in­equal­ity and so­cial ex­clu­sion seems to ac­com­pany ris­ing pros­per­ity in many coun­tries. Un­der th­ese cir­cum­stances, the World Bank's over­ar­ch­ing mis­sion of a world free of poverty is as rel­e­vant to­day as it has ever been.

The In­ter­na­tional Mon­e­tary Fund (IMF) is also an or­ga­ni­za­tion of 188 coun­tries, work­ing to foster global mon­e­tary co­op­er­a­tion, se­cure fi­nan­cial sta­bil­ity, fa­cil­i­tate in­ter­na­tional trade, pro­mote high em­ploy­ment and sus­tain­able eco­nomic growth and re­duce poverty around the world. The IMF was con­ceived in July 1944, when rep­re­sen­ta­tives of 45 coun­tries agreed on a frame­work for in­ter­na­tional eco­nomic co­op­er­a­tion to be es­tab­lished after the Sec­ond World War. They be­lieved that such a frame­work was nec­es­sary to avoid a rep­e­ti­tion of the dis­as­trous eco­nomic poli­cies that had con­trib­uted to the Great De­pres­sion. The IMF came into for­mal ex­is­tence in De­cem­ber 1945, when its first 29 mem­ber coun­tries signed its Ar­ti­cles of Agree­ment. It be­gan op­er­a­tions on March 1, 1947. Later that year, France be­came the first coun­try to bor­row from the IMF.

The IMF has played a part in shap­ing the global econ­omy since the end of World War II. Broadly speak­ing, its his­tory can be di­vided into the long years of co­op­er­a­tion and re­con­struc­tion (1944-71), the end of the Bret­ton Woods Sys­tem start­ing in 1972–81, the debt and painful re­forms (1982–89), the so­ci­etal change for East­ern Europe and Asian up­heaval (1990–2004) and glob­al­iza­tion and the cri­sis that started in 2005, which con­tin­ues till to­day.

The job of re­build­ing na­tional economies be­gan at the end of the Sec­ond World War. The IMF was as­signed the re­spon­si­bil­ity for over­see­ing the in­ter­na­tional mon­e­tary sys­tem to en­sure ex­change rate sta­bil­ity and en­cour­age mem­bers to elim­i­nate ex­change re­stric­tions that hin­der trade. Dur­ing the Great De­pres­sion of the 1930s, coun­tries raised bar­ri­ers to for­eign trade, de­valu­ing their cur­ren­cies to com­pete against each

other for ex­port mar­kets and cur­tail­ing their cit­i­zens' free­dom to hold for­eign ex­change. Th­ese at­tempts proved self-de­feat­ing. World trade de­clined sharply while em­ploy­ment and liv­ing stan­dards plum­meted in many coun­tries.

The break­down in in­ter­na­tional mon­e­tary co­op­er­a­tion led the IMF's founders to plan an in­sti­tu­tion charged with over­see­ing the in­ter­na­tional mon­e­tary sys­tem – the sys­tem of ex­change rates and in­ter­na­tional pay­ments that en­ables coun­tries and their cit­i­zens to buy goods and ser­vices from each other. The new global en­tity was as­signed the man­date to en­sure ex­change rate sta­bil­ity and en­cour­age its mem­ber coun­tries to elim­i­nate ex­change re­stric­tions that hin­dered trade.

The coun­tries that joined the IMF be­tween 1945 and 1971 agreed to keep their ex­change rates (the value of their cur­ren­cies in terms of the U.S. dol­lar and, in the case of the United States, the value of the dol­lar in terms of gold) pegged at rates that could be ad­justed only to cor­rect a "fun­da­men­tal dis­e­qui­lib­rium" in the bal­ance of pay­ments, and only with the IMF's agree­ment. This sys­tem, known as the Bret­ton Woods sys­tem, pre­vailed un­til 1971, when the U.S. gov­ern­ment sus­pended the con­vert­ibil­ity of the dol­lar (and dol­lar re­serves held by other gov­ern­ments) into gold.

In Au­gust 1971, U.S. Pres­i­dent Richard Nixon an­nounced the "tem­po­rary" sus­pen­sion of the dol­lar's con­vert­ibil­ity into gold. While the dol­lar had strug­gled through­out the 1960s within the par­ity es­tab­lished at Bret­ton Woods, this cri­sis marked the break­down of the sys­tem. An at­tempt to re­vive the fixed ex­change rates failed, and by March 1973, all ma­jor cur­ren­cies be­gan to float against each other. Since the col­lapse of the Bret­ton Woods sys­tem, IMF mem­bers are free to choose any form of ex­change ar­range­ment they wish (ex­cept peg­ging their cur­rency to gold): al­low­ing the cur­rency to float freely, peg­ging it to another cur­rency or a bas­ket of cur­ren­cies, adopt­ing the cur­rency of another coun­try, par­tic­i­pat­ing in a cur­rency bloc or form­ing a part of a mon­e­tary union.

The IMF re­sponded to the cri­sis emerg­ing from the oil price shock of the 1970s by adapt­ing its lend­ing in­stru­ments. To help oil im­porters deal with the an­tic­i­pated cur­rent ac­count deficits and in­fla­tion in the face of higher oil prices, it set up the first of two oil fa­cil­i­ties. From the mid-1970s, the IMF re­spond to the bal­ance of pay­ments dif­fi­cul­ties con­fronting many of the world's poor­est coun­tries by pro­vid­ing con­ces­sional fi­nanc­ing through what was known as the Trust Fund. In March 1986, the IMF cre­ated a new con­ces­sional loan pro­gram called the Struc­tural Adjustment Fa­cil­ity. The SAF was suc­ceeded by the En­hanced Struc­tural Adjustment Fa­cil­ity in De­cem­ber 1987.

The fall of the Berlin Wall in 1989 and the dis­so­lu­tion of the Soviet Union in 1991 en­abled the IMF to be­come a (nearly) univer­sal in­sti­tu­tion. In three years, mem­ber­ship in­creased from 152 coun­tries to 172. The IMF played a cen­tral role in help­ing the coun­tries of the for­mer Soviet bloc in their tran­si­tion from cen­tral plan­ning

to mar­ket-driven economies. This kind of eco­nomic trans­for­ma­tion was never at­tempted be­fore and the process was less than smooth at times. For most of the 1990s, th­ese coun­tries worked closely with the IMF, ben­e­fit­ing from its pol­icy ad­vice, tech­ni­cal as­sis­tance and fi­nan­cial support. By the end of the decade, most economies in tran­si­tion had suc­cess­fully grad­u­ated to mar­ket econ­omy sta­tus after sev­eral years of in­tense re­forms, with many join­ing the Euro­pean Union in 2004.

In 1997, a wave of fi­nan­cial crises swept over East Asia, from Thai­land to In­done­sia to Korea and beyond. Almost ev­ery af­fected coun­try asked the IMF for both fi­nan­cial as­sis­tance and for help in re­form­ing eco­nomic poli­cies. Con­flicts arose on how best to cope with the cri­sis, and the IMF came un­der crit­i­cism that was more in­tense and wide­spread than at any other time in its his­tory.

From this ex­pe­ri­ence, the IMF drew sev­eral lessons that al­tered its re­sponses to fu­ture events. First, it re­al­ized that it would have to pay more at­ten­tion to weak­nesses in the bank­ing sec­tor of dif­fer­ent coun­tries. In 1999, the IMF – to­gether with the World Bank – launched the Fi­nan­cial Sec­tor As­sess­ment Pro­gram and be­gan con­duct­ing na­tional as­sess­ments on a vol­un­tary ba­sis. Sec­ond, the Fund re­al­ized that the in­sti­tu­tional pre­req­ui­sites for a suc­cess­ful lib­er­al­iza­tion of in­ter­na­tional cap­i­tal flows were more daunt­ing than it had pre­vi­ously thought. Along with the eco­nomics pro­fes­sion gen­er­ally, the IMF damp­ened its en­thu­si­asm for cap­i­tal ac­count lib­er­al­iza­tion. Third, the sever­ity of the con­trac­tion in eco­nomic ac­tiv­ity that ac­com­pa­nied the Asian cri­sis ne­ces­si­tated a reeval­u­a­tion of how fis­cal pol­icy should be ad­justed when a cri­sis was pre­cip­i­tated by a sud­den stop in fi­nan­cial in­flows.

The im­pli­ca­tions of the con­tin­ued rise of cap­i­tal flows for eco­nomic pol­icy and the sta­bil­ity of the in­ter­na­tional fi­nan­cial sys­tem are still not en­tirely clear. The cur­rent credit cri­sis and the food and oil price shock are clear signs that new chal­lenges for the IMF are wait­ing just around the cor­ner. For a long time in­ter­na­tional cap­i­tal flows fu­eled a global ex­pan­sion that en­abled many coun­tries to re­pay money they had bor­rowed from the IMF and other of­fi­cial cred­i­tors and to ac­cu­mu­late for­eign ex­change re­serves.

The founders of the Bret­ton Woods sys­tem had taken it for granted that pri­vate cap­i­tal flows would never again re­sume the prom­i­nent role they had in the 19th and early 20th cen­tury and the IMF had tra­di­tion­ally lent to mem­bers fac­ing cur­rent ac­count dif­fi­cul­ties. The lat­est global cri­sis un­cov­ered fragility in the ad­vanced fi­nan­cial mar­kets that soon led to the worst global down­turn since the Great De­pres­sion. Sud­denly, the IMF was in­un­dated with re­quests for standby ar­range­ments and other forms of fi­nan­cial and pol­icy support.

With broad support from cred­i­tor coun­tries, the Fund’s lend­ing ca­pac­ity was tripled to around U.S.$750 bil­lion. To use those funds ef­fec­tively, the IMF over­hauled its lend­ing poli­cies, in­clud­ing by cre­at­ing a flex­i­ble credit line for coun­tries with strong eco­nomic fun­da­men­tals and a track record of suc­cess­ful pol­icy im­ple­men­ta­tion. Other re­forms, in­clud­ing ones tai­lored to help low­in­come coun­tries, en­abled the IMF to dis­burse very large sums quickly, based on the needs of bor­row­ing coun­tries and not tightly con­strained by quo­tas, as in the past.

If one reviews the stated ob­jec­tives and ac­tual per­for­mance of the IMF, there is a wide dif­fer­ence. This dis­par­ity could be at­trib­uted to chang­ing for­eign pol­icy ob­jec­tives of the de­vel­oped na­tions and their greed to con­trol the global econ­omy and pro­duc­tive re­sources, par­tic­u­larly en­ergy re­sources. This could be best un­der­stood if one ex­am­ines the pre­vail­ing sit­u­a­tion in South Asia, Mid­dle East and North Africa (MENA) in the af­ter­math of 9/11, es­pe­cially at­tacks on Afghanistan and Iraq with the con­sent of the UN. The re­cent agree­ment ar­rived by 5+1 de­vel­oped coun­tries with Iran cre­ated hopes for eas­ing ten­sions but the dis­putes re­main there.

To un­der­stand the role played by the World Bank and the In­ter­na­tional Mon­e­tary Fund ( IMF) with spe­cific ref­er­ence to Pak­istan, which has re­mained the fo­cus of the U.S. for­eign pol­icy start­ing from the Cold War era to the on­go­ing war on ter­ror be­ing fought in Afghanistan for more than a decade, one has to con­sider a few im­por­tant points.

The de­vel­oped coun­tries that talk about pro­mo­tion of democ­racy and at times par­tic­i­pate in ‘regime change’ ex­er­cises sup­ported two mil­i­tary rulers Gen­eral Zia-ul-Haq and Gen­eral Pervez Mushar­raf in Pak­istan. The coun­try was fac­ing eco­nomic sanc­tions at the time Pervez Mushar­raf dis­missed the elected gov­ern­ment of Nawaz Sharif.

As the UN ap­proved the NATO at­tacks on Afghanistan, Pak­istan was as­signed the role of a ‘front­line part­ner in the war on ter­ror’ and most of the sanc­tions were re­moved. It was not sur­pris­ing be­cause the ji­had in Afghanistan was fought from Pak­istan with the help of re­li­gious par­ties that par­ented the Tal­iban, which later be­came the worst foe. Pak­istan was then asked to erad­i­cate the Tal­iban.

Another mil­i­tary ruler Field Mar­shal Mo­ham­mad Ayub Khan ruled Pak­istan for nearly ten years and cel­e­brated ‘the decade of re­forms’ be­cause dur­ing his regime almost all the mul­ti­lat­eral donors ex­tended aid, grants and soft-term loans to Pak­istan. In that pe­riod, Pak­istan’s GDP size and its growth rate was even bet­ter than some of the most pros­per­ous coun­tries.

Against that time, the 1990s is of­ten termed as the lost decade be­cause Pak­istan went through the worst eco­nomic cri­sis dur­ing this pe­riod. Each elected gov­ern­ment of Be­nazir Bhutto and Nawaz Sharif was dis­missed twice. Th­ese dis­missals re­freshed the mem­o­ries of the dis­missal of Zul­fikar Ali Bhutto’s gov­ern­ment in the 1970s and his sub­se­quent hang­ing. Dur­ing the rule of Zul­fikar Ali Bhutto, the Mus­lim world wit­nessed the rise of the Or­ga­ni­za­tion of Is­lamic Con­fer­ence, which was not ap­proved and two of its founders, King Faisal of Saudi Ara­bia and Zul­fikar Ali Bhutto met un­for­tu­nate deaths.

This raised the sus­pi­cion that the global and re­gional su­per­pow­ers cer­tainly didn’t ap­prove of the emer­gence of new eco­nomic pow­ers, par­tic­u­larly in South Asia, the Ara­bian Penin­sula and North Africa. Yet another vic­tim that has been en­dur­ing eco­nomic sanc­tions for the last three decades is Iran. The bot­tom line is that fi­nan­cial as­sis­tance is driven by the for­eign pol­icy of the global and re­gional su­per­pow­ers.

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