Domination of market fundamentalists

Yvan Magain, Economist, Brussels

If you look back over the last 20 or 30 years, nearly 100 countries have faced a monetary crisis. Over the last five years, almost all emerging countries have gone through the same crisis: Thailand, South Korea, Indonesia, and now Argentina. No economist is predicting an end to this recurrent crisis; they just wonder which nation will be next.

The world is going through a period of great instability, resulting from high prices and high unemployment rates. Everybody acknowledges that trade agreements are unfair. The North imposed on the South the opening of its market doors, but has kept its own shut to the South, i.e. in the fields of agriculture and textiles. Globalization is not working, because the game rules were set solely by industrialized countries, or worse, by some private conglomerates within these countries to protect their own interests. Therefore, the needs of developing countries were never met and the eradication of poverty remains a dream.

The International Monetary Fund (IMF) experts say that by encouraging foreign direct investment (FDI) and by opening the financial markets, growth and development will follow suit. This argument was put forward without any real proof. It is well known that capital liberalization is leading to more economic instability and not necessarily to more growth. They say to developing countries that the countries need a financially free market in order to attract FDI. This is not true. Malaysia, a country which temporarily imposed control on capital movements -- and faced the shortest crisis in Southeast Asia back in 1998 -- is continuing to benefit from FDI.

The IMF's overall objective was to assist countries facing an economic crisis to enforce fiscal policies that favored healthy growth and to support full employment policies. But the IMF decided that its main task was to impose a liberalization of financial markets serving the particular interests of financial circles.

The IMF has also given priority to fighting inflation and not unemployment, although most research shows that a moderate level of inflation, in facilitating the economy's adjustment, is much better than no inflation. The IMF is also more preoccupied by guaranteeing debt reimbursements than maintaining the health of borrowing countries.

It must be said that the IMF in Asia made a lot of mistakes. For several countries in recession, it imposed restrictive budgetary policies, which in turn aggravated the crisis, without taking into consideration the interdependence of these Asian nations. Before the monetary crisis, only eight percent of Indonesians were living below the poverty level. That figure has increased to at least 25 percent. The IMF imposed the closure of banks and is responsible for interest rates hitting astronomical levels in these countries, with thousands of companies falling into debt. As a consequence, many companies were forced into bankruptcy and many workers were laid off.

IMF experts did not think of the political or social consequences, and if they had, it would have been even worse when looking at the end result. At a time when unemployment was skyrocketing and poverty was increasing, it continued to force the economies of these countries into recession, spending billions of U.S. dollars on assisting foreign creditors. At the same time they demanded an end to subsidies on basic necessities. This course of action could only end in social explosion. What is remarkable is that after the IMF acknowledged its blunders in Asia, it repeated the same mistakes in South America, particularly Argentina.

When facing the Asian crisis, the IMF should have kept in mind its initial mission: To support the economy of a developing country through fiscal policies that generate growth. In Indonesia in 1997 and 1998, reimbursements to foreign creditors should have been suspended and a new bankruptcy procedure should have been initiated, such as those that exist in developed countries, and similar to the one launched in South Korea.

Behind the IMF's strategy, there is an ideology of market fundamentalists which says that the market suffices to all. The research of Prof. Joseph Stiglitz, from the University of Columbia in New York and winner of the 2001 Nobel Prize in economy, showed how the market works in reality. In all successful economies, the government has played an important role. But a certain ideology in developing countries states that governments shall not intervene or if they do, as little as possible. It is time to leave behind the measures proposed by the IMF, which means privatization, liberalization and less government intervention.

The IMF experts shall come back to a more adjusted policy where the government has a real role to play. The IMF experts must offer economic assistance to these countries, and, first of all, open to these developing countries our markets. The IMF would favor the opening, the transparency and the democratization of the decision process.

The developing countries are not adequately represented. The different points of view are also not well represented. This is particularly marked within the IMF, where finance experts are dominating all others.