Whose growth is it anyway?<\/p>\n
By Makmur Keliat<\/p>\n
JAKARTA (JP): Indonesia has finally obtained financial aid
\nfrom the International Monetary Fund (IMF), the World Bank and
\nthe Asian Development Bank (ADB) for its reform measures aimed to
\nhelp its troubled economy recover.<\/p>\n
Questions have been raised as to why the World Bank and the
\nADB will be directly involved in the supervision of the
\nimplementation of these measures.<\/p>\n
Such a question is indeed not unreasonable because both the
\nADB and the World Bank, whose official name is the International
\nBank for Reconstruction and Development, are basically
\ndevelopment institutions. Their focus, therefore, is on long-term
\nprograms with an emphasis on the supply side of economics and
\nproject lending. The IMF, on the other hand, is concerned with
\nthe problems of balance of payments and its focus is on short-
\nterm programs with its primary orientation on the demand side,
\nmonetary sector and lending programs. Since Indonesia is facing a
\nmonetary crisis, the IMF seems to be the only institution
\nqualified to exercise a supervising role.<\/p>\n
The three institutions have different historical backgrounds.
\nThe IMF and the World Bank were established under the Breeton
\nWoods agreement reached in New Hampshire, the United States, in
\n1944. That is why they are often called the Breeton Woods
\ninstitutions. Because many developing countries had not gained
\ntheir independence before the inception of the two institutions,
\nthey accommodate mainly the interests of developed countries,
\nwhile the interests of developing nations are often marginalized.
\nFurthermore, since they are products of World War II, they were
\nconceived to prevent a repetition of the disastrous errors of the
\n1920s and the 1930s that subsequently led to World War II.<\/p>\n
The ADB, a product of the Cold War, was established in 1966 to
\nhelp Asia in broadening its financial resources for development.
\nIt is noteworthy that before its establishment, the United States
\ndid not support the idea of setting up an Asian bank. But due to
\nthe escalation of the Vietnam war, the United States shifted its
\nstance in view of gaining the support of Asian countries in the
\nwar.<\/p>\n
It, therefore, can be concluded that the involvement of the
\nIMF, the World Bank and the ADB in collectively addressing the
\nIndonesian monetary crisis indicates a blurring division of labor
\nbetween these three institutions.<\/p>\n
Why has their division of labor become blurred?<\/p>\n
Decision making in these three institutions is not based on
\nthe principle of one country one vote, but on quotas of capital.
\nBecause the developed countries have the largest share of
\ncapital, they control the institutions.<\/p>\n
The ADB groups more than 52 members, which comprises not only
\nAsian countries but also Australia, New Zealand, the United
\nStates and some European countries. It is true that the articles
\nin the ADB charter require Asian countries to have 60 percent of
\nthe total voting shares to ensure the Asian control of the
\norganization. However, as seen from the fund contributions given
\nby its members, it is clear that developing countries are put in
\nthe position of a minority because its voting shares total only
\nabout 45 percent. The remaining 55 percent is under the control
\nof developed countries, including Japan.<\/p>\n
Therefore, the division of labor has played a minor role in
\ndifferentiating the institutional behavior of the World Bank, the
\nIMF and the ADB. What is more influential is the financial
\nresources contributed by their member countries. By the same
\ntoken, it can be said that capital rules the game.<\/p>\n
This, in turn, has facilitated the overlapping role between
\nthe IMF, the World Bank and the ADB. In this context, the
\nincreasing popularity of their structural adjustment policy (SAP)
\nis a case in point. The term SAP refers to the recognition of the
\nclose linkage between economic development and balance of
\npayments. In essence, it aims to increase export performance and
\nstrengthen the tradable sectors of economies, and, at the same
\ntime, it also attempts to raise domestic aggregate supply --
\nconsidered a long process and an important component of
\ndevelopment.<\/p>\n
In terms of economic diplomacy, the SAP is carried out through
\na \"policy dialog\" with borrowing countries. The dialog is focused
\non the framework of the economic policies of the borrowing
\ncountries and the conduciveness of development. In the vocabulary
\nof political realists, however, the SAP has been considered as a
\n\"policy imposition\" by credit providers. The reason is that the
\nborrowing parties strongly tend to follow all the directions and
\nsuggestions set by the credit providers despite the fact that
\nthese conditions, more often than not, are harsh.<\/p>\n
The starting point of the SAP can be traced in the early
\n1980s, when the World Bank introduced a new lending facility
\ncalled the structural adjustment facility. This facility,
\nlaunched amidst the wave of debt problems in Latin America, for
\nthe first time led the World Bank to become concerned with the
\nexchange rate issue that was previously under the authority of
\nthe IMF.<\/p>\n
In the initial years of its operation, the World Bank was
\nprimarily more concerned with the development of infrastructure,
\nsuch as energy, transportation and communication.<\/p>\n
When Robert McNamara was appointed the director of the World
\nBank in 1974, the institution started concerning itself with
\ndevelopment in the agricultural sector and poverty eradication.<\/p>\n
In the case of the IMF, the SAP was introduced in the middle
\nof the 1980s when it launched a structural adjustment facility
\nand an enhanced structural adjustment facility. Previously, the
\nIMF had introduced a variety of financial aid facilities,
\nincluding the compensatory financing facility in 1964, which was
\naimed at helping countries face a temporary decline in exports;
\nthe extended fund facility in 1974 which was aimed at addressing
\na structural imbalance in the economy; and the supplementary
\nfinancing facility in 1979 which was basically a lending facility
\nfor countries with a serious deficit in their balance of
\npayments.<\/p>\n
In fact, the IMF also introduced the oil facility in 1975 for
\nthe countries that faced a difficulty in their balance of
\npayments due to the rise of oil prices. But this facility is no
\nlonger available.<\/p>\n
In 1987, the ADB jumped on the SAP wagon. Similar with other
\nregional development banks, such as the African Development Bank
\nand the Inter-American Development Bank in Latin America, ADB
\ninvolvement has been mainly through cofinancing or parallel
\nfinancing with the World Bank.<\/p>\n
Though the SAP has been widespread in use, criticisms against
\nit have become prevalent. The SAP, for instance, is criticized
\nbecause its policy prescription has mainly been extracted from
\nthe theoretical underpinning of the monetarists' perspective.
\nThis can be seen from its strong tendency to reduce government
\nexpenditures rather than expanding the tax base to the point of
\ncreating a progressive tax structure.<\/p>\n
According to this argument, the crux of the problem of the
\nbalance of payments in developing countries largely lies in the
\nstructural imbalance at the international level.<\/p>\n
Another criticism has been directed toward the involvement of
\nregional development banks. Some suspect that the ADB's
\ninvolvement in SAP is for the financial interest of the World
\nBank. According to a study by Roy Culpper in 1994, there has been
\na net negative transfer from the bank since 1987, except in 1990.<\/p>\n
This negative transfer has occurred because the total amount
\nof the interest payments including amortization paid by
\ndeveloping countries to the World Bank has become larger in
\nproportion to the total amount of its lending to developing
\ncountries. At the same time, there has been an increasing total
\namount of lending approved by regional development banks.
\nTherefore, Culpper has surmised that the increasing amount of
\nlending provided by regional development banks has been used to
\noffset the net negative transfer and to ease the growing problems
\nof servicing debts faced by developing countries.<\/p>\n
If this is the case, then it is not unfair to say that the
\nSAP, initially popularized by the World Bank and then supported
\nby the IMF and regional development banks, is not motivated by a
\nzeal to assist developing countries. It is mainly aimed at
\navoiding developing countries from going into default, and at the
\nsame time to enable the World Bank, the IMF, and the ADB to stay
\nin their lending business activities. Seen from this point of
\nview, lending seems to have become the common interest of all
\nparties.<\/p>\n
Developing countries have used it to accelerate the growth of
\ntheir economies, through a so-called debt-induced growth. The
\nWorld Bank, for instance, has to some extent used it to increase
\nthe total amount of its revolving fund. However, there has also
\nbeen a painstaking difference. While the World Bank and other
\ninternational lending institutions have grown continuously,
\ndeveloping countries do not have such a privilege. The problem of
\nservicing debt always haunts them because once they default, the
\ngrowth of their economy could become stagnant.<\/p>\n
Makmur Keliat is a teacher at the Department of International
\nRelations in the School of Social and Political Science at
\nAirlangga University in Surabaya.<\/p>",
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