"After providing advice, loans, and grants to the government's of the world's poorest countries for four decades," argue Doug Bandow and Ian Vasquez in their fine 1994 book, Perpetuating Poverty, "the multilateral can point to few, if any, cases in which their efforts have led to improved living standards and sustained economic prosperity. Instead of growth, the Third World has experienced social disintegration, economic stagnation, debt crises, and, in some regions, declines in agricultural production and incomes."
Even judged by the stated missions and policy goals of each agency, the World Bank and IMF are abject failures. Both agencies have lent hundreds of billions of dollars to developing nations since the 1950s, but these hard currency loans have actually damaged their clients in the developing world and reduced economic opportunities. Instead of promoting real commerce and stable economic growth, both the IMF and World Bank instead encourage financial profligacy and political corruption; speculation and monetary idiocy on a truly global scale. Loans from these and other multilateral institutions have left the citizens of borrower nations heavily burdened with hard currency debts and, as a result, deprived of meaningful economic opportunities.
"Who is really poor?" asks David Suzuki, a leading analyst of social and environmental issues. "How do we define improvement? What are the fundamental assumptions underlying the kind of economics the World Bank is forcing on the so-called 'developing world?'" Suzuki argues that the World Bank is unwilling to look at new ideas and that its "facile dismissal of scientific expertise and some 10 million deaths by starvation annually reveals why the World Bank mentality is so deadly."
Indeed, both the IMF and World Bank currently are in search of a new mission. The utopian illusion of "sustainable development" once advanced as the primary role of the multilateral agencies -- a positivist concept that only exists in the minds of liberal economists and bureaucrats -- has been replaced by a holding action to prevent defaults by the largest debtor nations.
"It is time to abolish the IMF," argues Shadow Open Market Committee member and conservative economist Allan Meltzer. "Set up to monitor a fixed exchange rate system that has long since disappeared, the IMF has become a government-to-government welfare agency that transfers wealth as its own discretion, yet fails to promote real market reform."
Typically, the IMF and World Bank extend hard currency loans, which are labeled for one type of "project" or another, but which in actuality are used to finance imports of consumer goods or the retirement of corrupt government officials. Once the hard currency has disappeared, however, the local economy is left to shoulder the burden of a foreign debt.
The fiscal reality is that both the IMF and World Bank are bankrupt and cannot continue without large subsidies from member nations. The outlays of both institutions, financed with debt and contributions by the member states, are de facto gifts that lack all of the important and reciprocal attributes of true loans. Indeed, since credits from the IMF and World Bank frequently do not result in the creation of productive, income-generating assets, multilateral credits appear to fit the classical definition of a fraud and should thus not be enforceable.
"The regular IMF practice of extending new loans to prevent defaults by debt ridden countries creates a moral hazard," argues James W. Coons, economist at Huntington National Bank in Ohio. "It underwrites irresponsible and destructive economic policies by removing the normal incentive for investors to police governments... The record of the World Bank is no better. Perverse incentives have compromised loan quality, exposing taxpayers in the industrialized countries -- the ultimate guarantors -- to a possible bailout with a price tag comparable to that of the U.S. S&L bailout."
World Bank credits are really not loans at all, but instead a peculiar form of foreign aid underwritten by private debt. The Bank's paid-in capital is a tiny fraction of the total loans and guarantees outstanding, normally about ten percent of total assets, with the difference being financed by private obligations issued in dollars and other currencies. The World Bank has only rarely had a positive net-cash flow from its clients, meaning that the loans are never really repaid in an economic, accounting sense. Consequently, the World Bank's balance sheet continues to expand as member nations are forced to pay in new capital and accept responsibility for much larger "callable" capital contributions in the future.
It appears that only so long as the World Bank makes new money loans and guarantees (which support off-balance sheet financing) will its clients maintain current interest payments, a financial pyramid scheme assisted by the fact that new World Bank credits carry grace periods free of interest payments. In this way, the Bank really is captive to its supposed "clients." The threat of default by one or more borrowers, particularly the larger debtors, will threaten the Bank's "AAA" rating and destroy the illusion of short-term profitability and positive cash flow.
Perhaps the most convincing example of the complete failure of the decidedly authoritarian, neoliberal world view represented by the IMF and World Bank is the recent experience of Mexico. In the wake of the extraordinary loans by both institutions following the December 1994 peso collapse, Mexico is now the largest client of both institutions and has a total foreign debt, public and private, that will exceed $170 billion by year-end 1995. With a net, ex-maquiladora trade surplus of $2-3 billion projected this year, Mexico must borrow over $25-30 billion simply to pay principal and interest on its existing foreign debt load. In such a situation, there obviously is no capital left over to finance private industry in Mexico, thus real interest rates there are in the 15-20 percent range, some of the highest in the world.
What has Mexico gained from the billions in loans by the IMF and World Bank? What income producing assets or new industries have been built? >From where will come the dollar income necessary to service and ultimately repay these loans, credits guaranteed in part by the U.S. Treasury? The sad answer is that the loans have financed virtually no productive assets, no factories, no sources of income to provide event the most remote possibility of repayment. The proceeds of the loans, that is, the dollars, are long gone and all that remains are a few inferior public sector infrastructure projects and mountains of debt. An April 1994 report by the Bank's operations evaluations department on loans to Mexico between 1948 and 1992 reveals that more than one third of the Bank's projects there were never completed and that the levels of poverty and economic dislocation are higher today than when the World Bank loans to Mexico first began almost half a century ago.