IMF, its prescriptions and Washington consensus are no longer the models for the world to emulate. They are in fact suspect in the eyes of the global economic community, barring market fundamentalists.
Writing the foreword for Inviting the invaders – India Inc – For sale by Dr. Dharmendra Bhandari in the 1990s, the late Nani Palkhivala had raised doubts on the curative ability of the IMF prescriptions. For those who knew the late Palkhivala this was not surprising. He was a liberal no doubt. And yet despite being a champion of free markets, he had the innate ability to discriminate between liberal market mechanism and the market fundamentalism. And therein lies the crux of the matter.
It is indeed a tribute to the liberal thoughts of the late Palkhivala that Raghunath G Rajan, the senior economist from the IMF (the very organisation that the late Palkhivala was mildly critical in his foreword) delivered the Palkhivala memorial lecture in Chennai recently. It is, however, ironical that the IMF, which was originally founded with the belief that the markets often worked badly, now champions the belief of market supremacy, virtually acquiring ideological overtones. Speaking on the occasion Rajan did bring about some of the standard prescription menu of the IMF to the fore. One of the fundamental assumptions in the policy formulation of the IMF for its 'client countries' is partly based on the outdated presumptions that markets by themselves lead to efficient outcomes. In fact such an approach prevents effective government interventions – especially in the emerging ones. Ideally, the relationship between government and markets are complementary – both working in tandem. While modern economists has taught us that markets were at the centre of the economy, there was an important, if not limited role for the government to play. In short, a ‘pure market economy’ without any intervention of the government is a macro-economic hallucination.
The next standard prescription of the IMF is to recommend external liberalisation – irrespective of the state of internal liberalisation. It may be noted that external trade liberalisation without internal trade liberalisation is akin to Hamlet not being the Prince of Denmark. This sequencing is the crux of many contentious issues, mostly for trade liberalisation. It is thus no wonder that Rajan says: "as an economy we are still not as open to foreign goods and services, labour, or knowledge as we should be. On the IMF's trade restrictiveness index, India has a score of 8, which places it amongst the most restrictive countries. India's GDP accounted for 1.6 per cent of world GDP in 2003 but its trade accounted for only 0.94 per cent of world trade." Readers should note that all these indices are external benchmarks and not based on what India requires – complete liberalisation of internal trade. It is thus no wonder that Rajan and his ilk would be more concerned if a person in Chennai could not import rice from California rather then from the neighbouring Andhra Pradesh. That the internal trade rules in India do not allow rice to be transported easily between Andhra and Tamil Nadu and that it is relatively easier to buy rice from California makes it bad economics and as the last elections showed us, bad politics too. All these have repeatedly given IMF a distinct impression of being a mouthpiece and cheerleader of the Wall Street and transnational companies. This poor sequencing of the reforms process world over has eroded the credibility of the IMF considerably.
Another issue that has incensed poor across the world, especially in Third World countries, has been the issue of agricultural subsidies. Arguing forcefully that India should open her agriculture and reduce her agri-tariffs Rajan added: "India should continue fighting, as do organisations like the IMF, for elimination of tariff barriers and export or production subsidies in developed countries. But putting restrictions on our trade hurts us, independent of what the rich countries do. By increasing the cost of doing business, barriers to imports hurt our competitiveness and also increase prices for consumers. By insisting that rich countries liberalise before we bring down trade barriers, we are merely shooting ourselves in the foot. As Gandhi said: "an eye for an eye only makes the whole world go blind," and it is as true of trade as of revenge."
Nice words indeed but all these theoretical economics are no consolation to our poor. Agricultural trade specialists have repeatedly pointed the potential disaster should India unilaterally open up her agriculture ahead of the reduction of these subsidies in the OECD countries. In fact, the Cancun round of the WTO collapsed on this precise issue of continued agricultural subsidies being maintained by the rich and the developed countries. It may be noted that despite the hullabaloo created on the increase of farm subsides in India in recent times, Indian subsidies are less than 7 per cent of the agricultural GDP as compared to well over 40 per cent in the OECD countries. The real impact of this is felt when we convert these abstract figures into absolute ones. For instance, Japan is said to subsidise her cows by about $1300 per annum as compared to a per capita income of less than $600 for an Indian. The comparison can never be more odious than this. Surely if you believe in rebirth, pray to be reborn as a Japanese cow. Yet the tutoring of liberalising our agriculture continues.
Capital account convertibility
Another standard yet the most controversial recommendations of the IMF has been the capital account convertibility. Pleading passionately for the need for India to usher in capital account reforms, Rajan states: "India's capital account is still closed. It still places restrictions on foreign entry and participation in various areas of the economy, even those that have little implication for national defence. If India is to be a global centre for financial services, it needs capital account convertibility, allowing ordinary people to invest abroad at will." Readers will recall as to how the East Asian Contagion was caused by capital account convertibility. The crises erupted when the government of Thailand, facing a shortage of foreign-exchange reserves, devalued its currency, thereby breaking the fixed-rate peg. The instigating factor was the build up of short-term and often poorly secured borrowings from abroad. Faced with huge repayment obligations because of sudden devaluation, the Thai economy went into a tailspin. As the crisis reverberated through the Thai economy, it rapidly led to bankruptcies and layoffs.
The crisis also spread through the region almost immediately and with great speed. Within weeks the Malaysian ringgit, the Philippine peso, Korean Won and the Indonesian rupiah were all under siege. Stock markets collapsed dramatically as did real estate markets. The Asian contagion spread from markets to markets and from country to country. Asians saw the currency attacks wiping out 20 or 30 per cent of the national wealth in a matter of days what had been arduously built over several decades. In fact no one spoke about capital account convertibility for the next few years given the experiences of the Asian crisis. The risk of losing decades of hard earned wealth in a few trading sessions far out weighed the benefits of the system and effectively put an end to the debate on convertibility. On the contrary, post-contagion, some countries began modelling on the Indian way of controlling and regulating its foreign exchange, especially on the capital account. In fact the Malaysian experience with the contagion was shallower and its rebound faster – the simple reason that it eschewed the IMF prescriptions and opted the Indian way – ie. of restrictions and control on capital account convertibility.
Devoting an entire chapter to the East Asian crisis in his book – Globalisation and its Discontents, the author and the Noble laureate Joseph Stiglitz have virtually castigated IMF for the Asian contagion on the idea of capital account convertibility and adds: "surely, one might have argued, there must be some basis for their proposition, beyond serving the naked self-interest of financial markets, which saw capital market liberalisation as just another form of market access – more markets in which to make more money. Recognising that East Asia had little need for additional capital, the advocates of capital market liberalisation came up with an argument that it would enhance the countries' economic stability!"
No longer a model to emulate
IMF, its prescriptions and Washington consensus are no longer the models for the world to emulate. They are in fact suspect in the eyes of the global economic community, barring market fundamentalists. Repeatedly world over people, countries and economies have demonstrated that they have succeeded only when they have not followed its advice, not otherwise. Whether it was prime minister Meles Zenawi of Ethiopia or prime minister Mahathir Mohammad of Malaysia or Dragoslav Avromovic, the renowned Yugoslavian economist who preferred to reject the IMF, commended restructuring packages and decided to follow an innovative national strategy to tackle their respective national crisis, the pattern is clear and the lessons, instructive. Standard global prescriptions from the IMF have come unstuck for local problems.
Scuttled the AMF idea
Strange as it might sound, only last year, in a report of the World Economic Forum on the competitiveness of 102 countries based on 80 indicators, India was ranked among the last dozen countries in a number of critical areas. But despite her poor show, India was ranked No 1 amongst 102 countries on the parameter of availability and extent of local competition. It is also equally amusing to note that the IMF, which advocates competition for all others, was strangely reluctant to have competition for itself. In 1997 at the height of the Asian crisis, Japan offered to help create an Asian Monetary Fund (AMF), in order to finance the bailouts of various East Asian economies hit by the Asian contagion. In fact, Japan had pledged $100 billion for the creation of the AMF. However, the IMF was clearly not enthused and did everything possible to smother the idea. Neither was it to the liking of the US treasury, which is the only shareholder of the fund with a veto power. The duo feared an erosion in their authority should a viable alternative present itself before the world. Economics is a science of alternatives, of weighing options and exercising one’s choice. Being a monopoly of ‘sound advice,’ IMF stands as a symbol of ills plaguing the global economic integration. That it has failed repeatedly and its advices are suspect is well-documented by a number of experts who have had a ringside view of the working of the institution. And by its own admission, all monopolies are bad. But by virtue of being a monopoly IMF distorts the macroeconomic advice and restricts the choice of selecting from a range of policy alternatives, especially to those countries that face economic crisis. Reducing macroeconomic solutions into standard prescriptions, be it for Peru or Pakistan, India or Indonesia, Japan or Jamaica, the IMF has brought disrepute to the process of globalisation. And it is precisely for this reason we need to have an alternative.