Whose growth is it anyway?

By Makmur Keliat

JAKARTA (JP): Indonesia has finally obtained financial aid from the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB) for its reform measures aimed to help its troubled economy recover.

Questions have been raised as to why the World Bank and the ADB will be directly involved in the supervision of the implementation of these measures.

Such a question is indeed not unreasonable because both the ADB and the World Bank, whose official name is the International Bank for Reconstruction and Development, are basically development institutions. Their focus, therefore, is on long-term programs with an emphasis on the supply side of economics and project lending. The IMF, on the other hand, is concerned with the problems of balance of payments and its focus is on short- term programs with its primary orientation on the demand side, monetary sector and lending programs. Since Indonesia is facing a monetary crisis, the IMF seems to be the only institution qualified to exercise a supervising role.

The three institutions have different historical backgrounds. The IMF and the World Bank were established under the Breeton Woods agreement reached in New Hampshire, the United States, in 1944. That is why they are often called the Breeton Woods institutions. Because many developing countries had not gained their independence before the inception of the two institutions, they accommodate mainly the interests of developed countries, while the interests of developing nations are often marginalized. Furthermore, since they are products of World War II, they were conceived to prevent a repetition of the disastrous errors of the 1920s and the 1930s that subsequently led to World War II.

The ADB, a product of the Cold War, was established in 1966 to help Asia in broadening its financial resources for development. It is noteworthy that before its establishment, the United States did not support the idea of setting up an Asian bank. But due to the escalation of the Vietnam war, the United States shifted its stance in view of gaining the support of Asian countries in the war.

It, therefore, can be concluded that the involvement of the IMF, the World Bank and the ADB in collectively addressing the Indonesian monetary crisis indicates a blurring division of labor between these three institutions.

Why has their division of labor become blurred?

Decision making in these three institutions is not based on the principle of one country one vote, but on quotas of capital. Because the developed countries have the largest share of capital, they control the institutions.

The ADB groups more than 52 members, which comprises not only Asian countries but also Australia, New Zealand, the United States and some European countries. It is true that the articles in the ADB charter require Asian countries to have 60 percent of the total voting shares to ensure the Asian control of the organization. However, as seen from the fund contributions given by its members, it is clear that developing countries are put in the position of a minority because its voting shares total only about 45 percent. The remaining 55 percent is under the control of developed countries, including Japan.

Therefore, the division of labor has played a minor role in differentiating the institutional behavior of the World Bank, the IMF and the ADB. What is more influential is the financial resources contributed by their member countries. By the same token, it can be said that capital rules the game.

This, in turn, has facilitated the overlapping role between the IMF, the World Bank and the ADB. In this context, the increasing popularity of their structural adjustment policy (SAP) is a case in point. The term SAP refers to the recognition of the close linkage between economic development and balance of payments. In essence, it aims to increase export performance and strengthen the tradable sectors of economies, and, at the same time, it also attempts to raise domestic aggregate supply -- considered a long process and an important component of development.

In terms of economic diplomacy, the SAP is carried out through a "policy dialog" with borrowing countries. The dialog is focused on the framework of the economic policies of the borrowing countries and the conduciveness of development. In the vocabulary of political realists, however, the SAP has been considered as a "policy imposition" by credit providers. The reason is that the borrowing parties strongly tend to follow all the directions and suggestions set by the credit providers despite the fact that these conditions, more often than not, are harsh.

The starting point of the SAP can be traced in the early 1980s, when the World Bank introduced a new lending facility called the structural adjustment facility. This facility, launched amidst the wave of debt problems in Latin America, for the first time led the World Bank to become concerned with the exchange rate issue that was previously under the authority of the IMF.

In the initial years of its operation, the World Bank was primarily more concerned with the development of infrastructure, such as energy, transportation and communication.

When Robert McNamara was appointed the director of the World Bank in 1974, the institution started concerning itself with development in the agricultural sector and poverty eradication.

In the case of the IMF, the SAP was introduced in the middle of the 1980s when it launched a structural adjustment facility and an enhanced structural adjustment facility. Previously, the IMF had introduced a variety of financial aid facilities, including the compensatory financing facility in 1964, which was aimed at helping countries face a temporary decline in exports; the extended fund facility in 1974 which was aimed at addressing a structural imbalance in the economy; and the supplementary financing facility in 1979 which was basically a lending facility for countries with a serious deficit in their balance of payments.

In fact, the IMF also introduced the oil facility in 1975 for the countries that faced a difficulty in their balance of payments due to the rise of oil prices. But this facility is no longer available.

In 1987, the ADB jumped on the SAP wagon. Similar with other regional development banks, such as the African Development Bank and the Inter-American Development Bank in Latin America, ADB involvement has been mainly through cofinancing or parallel financing with the World Bank.

Though the SAP has been widespread in use, criticisms against it have become prevalent. The SAP, for instance, is criticized because its policy prescription has mainly been extracted from the theoretical underpinning of the monetarists' perspective. This can be seen from its strong tendency to reduce government expenditures rather than expanding the tax base to the point of creating a progressive tax structure.

According to this argument, the crux of the problem of the balance of payments in developing countries largely lies in the structural imbalance at the international level.

Another criticism has been directed toward the involvement of regional development banks. Some suspect that the ADB's involvement in SAP is for the financial interest of the World Bank. According to a study by Roy Culpper in 1994, there has been a net negative transfer from the bank since 1987, except in 1990.

This negative transfer has occurred because the total amount of the interest payments including amortization paid by developing countries to the World Bank has become larger in proportion to the total amount of its lending to developing countries. At the same time, there has been an increasing total amount of lending approved by regional development banks. Therefore, Culpper has surmised that the increasing amount of lending provided by regional development banks has been used to offset the net negative transfer and to ease the growing problems of servicing debts faced by developing countries.

If this is the case, then it is not unfair to say that the SAP, initially popularized by the World Bank and then supported by the IMF and regional development banks, is not motivated by a zeal to assist developing countries. It is mainly aimed at avoiding developing countries from going into default, and at the same time to enable the World Bank, the IMF, and the ADB to stay in their lending business activities. Seen from this point of view, lending seems to have become the common interest of all parties.

Developing countries have used it to accelerate the growth of their economies, through a so-called debt-induced growth. The World Bank, for instance, has to some extent used it to increase the total amount of its revolving fund. However, there has also been a painstaking difference. While the World Bank and other international lending institutions have grown continuously, developing countries do not have such a privilege. The problem of servicing debt always haunts them because once they default, the growth of their economy could become stagnant.

Makmur Keliat is a teacher at the Department of International Relations in the School of Social and Political Science at Airlangga University in Surabaya.