Whose growth is it anyway?

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.