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Created: 2000-02-28
Last Modified: 2000-03-01
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Debating Mark Weisbrot

On Globalization and the Role of Multilateral Agencies

J. Bradford DeLong

March 2000


Why do we need to have the multilateral "Bretton Woods" economic agencies--the International Monetary Fund [IMF], the International Bank for Reconstruction and Development [World Bank], and the World Trade Organization [WTO]? Let me start with the IMF, and with Mexico.



In the fall of 1994 and winter of 1995 New York-based investors in Mexico panicked. Each feared that other investors would pull their money out of Mexico no matter what the cost, and that the last investor to withdraw money would lose the greatest amount of invested principal. Given that all investors feared being the last one out, it made no sense for any investor to keep his or her principal in Mexican assets a minute beyond its maturity date.

With $5 billion in reserves to cover $23 billion in debts that would be converted into dollars and pulled from Mexico, the Mexican government by itself had no good options. It could push interest rates higher than sky-high to play on foreign investors' greed and keep their capital inside the country--in which case the extraordinary cost of money would strangle investment and employment, and a Great Depression would come rapidly. It could keep interest rates lower, and find itself unable to borrow and forced to start printing money to meet its obligations, in which case hyperinflation would follow. Or it could formally default--declare a form of national bankruptcy--in which case a Great Depression would come more slowly as ripped Mexico from its connections in the world trade network eviscerated its productive economy.

But all this was not preordained, for as an economy Mexico was not insolvent. It was merely illiquid. If investors had been willing to roll over Mexico's short-term debts, contractionary policies and a moderate devaluation to reduce imports and encourage exports to pay the Mexican government's foreign liabilities as they came due. Such a moderate devaluation coupled with contractionary policies might cause a recession (however, in Britain in late 1992 it did not), but a recession that would be much shorter and much shallower than what faced Mexico in the absence of funds to roll over its short-term debts.

The IMF gave Mexico other options. It--assisted by the U.S. Treasury--loaned Mexico enough hard currency that it could pay off its international obligations, keep the rise in interest rates low enough that Mexico in 1995-1996 suffered only a severe recession rather than a Great Depression, give Mexico time to wait for investors in New York to recover their wits, and so turn what could have been a major negative turning point in Mexican development into a one-year interruption of economic growth.


Real Flaws in the IMF

Now the IMF is far from perfect. Its resources are limited. Thus its first priority is not to prescribe the policies best for the country seeking its aid but to prescribe the policies that are most certain to get the IMF paid back. The IMF is also very wary of making access to its funds a routine affair--it wants there to be a certain amount of humiliation of the government seeking aid involved. Both these factors make the IMF lend countries seeking aid too little money, for too short terms, at too high interest rates, with too much associated conditionality aimed at generating substantial export surpluses quickly.

There is also a... certain rigidity, an unhealthy rigidity, of thought at the staff level. I remember the first time I finished an IMF Article IV consultation. I left shaking my head because the IMF staff members there believed that Alan Greenspan's monetary policy was risky and inflationary.


Fake Flaws in the IMF

But most of the criticisms that you probably hear of the IMF are simply false. The IMF does not dictate economic policies to developing countries--the IMF does impose conditions (too harsh conditions, in my view) if countries wish to borrow from it. The IMF does not use--as Ralph Nader will tell you--U.S. taxpayers' money to bail out Bob Rubin's Wall Street friends. The IMF does not use--as Pat Buchanan will tell you--U.S. taxpayers' money to bail out shady Asian plutocrats. The possibility of IMF loans and bailouts does not induce excessive investment and speculation in a manner analogous to the role played by federal deposit insurance in the Savings and Loan crisis of the 1980s. The key difference is that the FSLIC deposit insurance agency paid a lot of money into S&Ls that it never got back, while the IMF gets its money back.


World Bank

With respect to the World Bank, let me punt completely. I think that World Bank research does valuable work. I think that World Bank operations' mission is the result of a wrong guess made at the Bretton Woods conference. At the Bretton Woods conference the dominant belief was in a future in which a lot of countries would be unable to borrow to fund infrastructure, and so an ngo lender to sovereign governments like the World Bank would fill a missing market, and give rebuilding and developing countries an option that they would not otherwise have had. But the world we live in is, instead, one in which private capital markets are deep.

So the World Bank has tried to find a new mission by tying its loans to the giving of technical advice. But the World Bank is not very good at giving technical advice: it suffers from all the flaws of top-down social engineering by people who don't know the local situation detailed by James Scott in his book, Seeing Like a State.

I think there may well be a place for a large-scale multinational grant-making entity funding infrastructure projects in poor countries that would not otherwise be undertaken. But I can't figure out why we would want to have a World Bank as it is presently organized.


World Trade Organization

I think that the World Trade Organization has gotten off on the wrong foot--not substantively, but rhetorically. Its panels are misapplying the principle that the rules governing international trade should focus on the commodities traded and not on the production processes by which these commodities are made. And as a result the WTO is saying that the U.S. violates its treaty obligations when it restricts shrimp sold to shrimp caught by boats that try not to kill sea turtles, that the European Union cannot restrict or even require the labeling of food produced by genetically-modified organisms, and so forth.

This misapplication of the principle that trade rules govern nations' external commodity flows, not their internal production processes has to end. And it will end soon, or it will take the whole WTO down with it.

But look at the broader picture. Do we need an international forum in which the rules of international trade are hammered out, in which disputes about treaty commitments are adjudicated, and in which countries are given incentives to keep their treaty commitments? Yes. For if we don't the country with the biggest market will set the rules--which means that the rules will be set, unilaterally, by the United States. This means that the real decision maker, the deciding voter, will be some Republican congressman from Tennessee, someone who believes that international economic issues are "made for talk radio" because you can denounce all those evil foreigners stealing our jobs.

By contrast, with the WTO, the decision maker will be some social democrat from Luxembourg, or some democratically-elected representative of the billion people in India.

I can understand why someone like Pat Buchanan might hate and fear an organization like the WTO that gives political influence over the shape of the world to Indians or European socialists or--heaven forbid!--Zulus. But I cannot understand why Mark Weisbrot would join him.


The Big Picture

Let me back up a little. Perhaps the reason that Mark Weisbrot has this distaste for all three Bretton Woods institutions--the IMF, the World Bank, and the late-born WTO--is that they work. Without them we would have a lot more trade wars and trade barriers and thus a lot less international trade, Without them cross-border investments would be riskier, and we would have less first-world funded investment in developing countries. Without them countries that bet on international economic integration would find no source of assistance should there be a capital panic in New York or some major shock to their terms of trade. More countries would follow inward-oriented development strategies. Fewer countries would follow outward-oriented export-led development strategies.

Would this be a better world than the one we have?

Carolina textile magnate Roger Milliken--funder of both Pat Buchanan and Ralph Nader--certainly thinks so. He looks forward to creating a world in which fewer people in India, Pakistan, Mauritius, Malaysia, and Bangladesh can get jobs in textile factories, and in which his profits are higher. The people of the Turning Point Project--whose big ads last fall seemed to imply that there was something wrong with people in developing countries having the money to go to supermarkets, or to buy satellite TV dishes--seem to think so.

I don't. I am very impressed with the growing pile of evidence that rapid and successful economic development is much, much easier if your country is closely integrated into the world economy. A high export share of production--and use of those exports to buy the capital goods and the technologies deployed in the rich first world--appears to be a key step on the road to raising productivity and living standards.

It looks to be the best bet to make a truly human world.

Let me back up another step, and talk about the people at the Bretton Woods conference more than half a century ago who created these institutions and have handed them down to us. What were there purposes and intentions?

They sought to create a stable and long-lasting framework for an open world economy. The two most important and powerful people making the decisions at Bretton Woods--John Maynard Keynes and Harry Dexter White--saw such a framework as a key part in making a safe, peaceful, and prosperous world. Keynes was in his day the principal opponent of the doctrine of laissez-faire: the belief that the market will run itself for the best. He hoped that in less than a century that the economic problem would be solved: that we would live in a world of abundance, that "the arena of the heart and head will be occupied... by our real problems---the problems of life and of human relations, of creation and behavior...", and that we shall "assess...the love of money as a possession... for what it is... one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease." White was a man who, at least at some times and on some level,s, saw the best hope of humanity in the transcendence and supersession of the capitalist system by some form of socialism.

They did not seek to build institutions to impoverish or to exploit. I think that they did their work pretty well. And we should build on it--not tear it down.

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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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