Mon, 10 Oct 1994

IMF lending policies

Developing nations dealt a humiliating blow to the International Monetary Fund (IMF) in Madrid last Sunday when they scuttled a proposal that would have effectively increased international foreign exchange reserves.

IMF managing director Michel Camdessus originated the scheme in an effort to help meet the need for an estimated $375 billion of new liquidity in the world economy over the next five years as international trade volumes continue to expand.

This was to be achieved by issuing roughly $50 billion in new foreign exchange reserves to the IMF members, in proportion to their share holdings in the fund.

The reserves were to take the form of Special Drawing Rights which can be cashed in by the banks or used to acquire low cost loans from the World Bank.

The United States and most other Group of Seven industrial nations were reportedly furious with Camdessus, whom they accused of trying to force them to approve billions of dollars more financial aid than they were willing to accept.

While a compromise deal is likely to be agreed in the next two months, the significance of the proposal's defeat lies not so much in the policy consequences, which are minimal, but rather in the message it sends to the rich nations that have dominated the IMF and World Bank policies for so long.

The reality is that the IMF has done little to help those nations that are currently playing a pivotal role in pulling the world out of recession.

They have achieved much of their growth through their efforts to attract private capital and dismantle trade barriers rather than due to the policies of the financial institutions. Private capital is leading the way.

The IMF has projected a 3.1 percent growth rate for the world economy next year, twice the average rate experienced between 1990-1993.

The forecast for developing nations is 5.6 percent, double that of industrial nations. Several rapidly developing nations of Asia, including Thailand, are expected to post growth rates of around eight percent.

India's finance minister, Manmohan Singh, came up with the most ambitious role for the financial institutions that would also help prevent them from becoming anachronistic in a world where private capital is dominating economic growth.

"For the first time in human history, the complete conquest of poverty, ill health and illiteracy is a technically and financially feasible goal of human endeavor," he said.

This is the objective to which the (IMF and World Bank) must dedicate themselves.

-- The Nation, Bangkok