Historically the IMF and World Bank, like the WTO, have been characterized by “faceless” leadership. Prior to the mid-nineties, only a handful of liberal intellectuals knew these powerful international institutions existed. Even after the 1999 Battle of Seattle effectively launched the antiglobalization movement, the leaders of these august institutions remained anonymous. When the IMF issued warnings against countries with excessive public spending, they originated from the agency itself, rather than IMF officials. Prior to his June 2011 arrest for alleged sexual assault, no one outside of France had heard of Dominique Strauss-Kahn, who ran the IMF from 2007 and 2011.
The Historic Role of the IMF
The IMF was founded at the end of World War II at Bretton Woods. The British delegation, led by economist Maynard Keynes, wanted the IMF to be a cooperative fund member states could draw on to maintain economic activity and employment through the periodic economic crises that are characteristic of capitalist economies. The US delegation saw the IMF as more of a bank serving the needs of private lenders by ensuring borrowing states repaid their debts on time (see IMF History).
The US prevailed, and IMF loans came to be known as “structural adjustment” loans because they forced borrowing governments to adjust the structure of their economic activity. In most cases, this involved extreme austerity measures favorable to multinational corporations seeking to invest in their countries. Such measures included privatizing publicly owned assets (airlines, telecoms, railroads, health systems, etc); liberalizing trade and financial markets; increasing incentives (corporate and individual tax cuts and waivers of environmental/labor regulations) for foreign investment; and supporting commercial export crops at the expense of food production.
Developing countries that blindly followed these policies, especially in South America and Africa, found their countries mired in debt and huge social inequalities. Russia was one of the most extreme cases: its economy shrank by 55% before President Vladimir Putin set the country on an alternative path to recovery (see Re-introduce structural adjustment).
Repackaging the IMF’s Image
Given the historic anonymity of the IMF leadership, you have to wonder about all the publicity being lavished on Christine Lagarde, the new IMF managing director. Although global economics is a low priority in the US media, she receives near daily attention in the British and international media. For fifty-six, Lagarde is still a strikingly attractive woman. Presumably, however, there is some political agenda behind the decision to promote a bit of eye candy as a “rock star of the economic world,” as several media outlets have labeled her. Is it to project an image of a “kinder, gentler” IMF? Or to inspire confidence that new energetic IMF leadership has a workable solution to the impending Eurozone meltdown? Or possibly both?
According to Lagarde, who has just completed a series of six interviews for the BBC, her current mission is to raise $500 billion from IMF member nations to safeguard the agency’s ability to prevent economic calamity in Europe. In her view, the global economy is facing a “1930s moment,” a downward spiral that could “quickly engulf the entire world” (see BBC Business News).
Besides her carefully cultivated public persona, Lagarde is also unique in her willingness to lay out the IMF’s economic and political agenda. The policies she advocates include stronger economic growth to promote global re-employment; deeper “integration” of European economies (translation: creation of a centralized fiscal body capable of making budgetary decisions for the entire Eurozone); improved “fiscal consolidation” for the US and Japan (translation: less deficit spending); more domestic consumption and less reliance on foreign investment and exports in emerging economies (especially China); a stronger firewall around weaker Eurozone nations like Greece, Italy and Spain; and “structural reform” to improve the “competitiveness” of the industrial north (see Address at Davos).
Rebranding Structural Adjustment
The new IMF managing director gives double messages about structural adjustment and austerity cuts. After warning that budget cuts lead to “recessionary tendencies,” she states that some countries (which, like Greece, are on the verge of economic collapse) need to cut their public budgets immediately. She feels others can stretch their cuts out over time. “Structural reform” and “competitiveness” are Lagarde’s code words for “austerity cuts” and “structural adjustment,” which are no longer used in polite conversation. Among specific “structural reforms” Lagarde favors are pension reform, with an optimal retirement age of 67, “wage restraint” (i.e. abandoning the expectation that wages will keep pace with inflation), and social service reforms in which “recipients of social assistance are expected to improve their situation” (see Spiegel online and Address at Davos).*
LaGarde isn’t without her critics. Former IMF chief economist Simon Johnson refers to her appointment as “the fox guarding the henhouse.” Johnson, like former World Bank economist Joseph Stiglitz, has been highly critical of the extreme concentration of financial power and it threat it poses to the global economy. This is the subject of Johnson’s recent book, Thirteen Bankers.
His criticism of Lagarde centers mainly around her proposal to solve the Eurozone crisis by issuing additional loans to the debt-ridden “peripheral” countries (Greece, Spain, Italy, Portugal and Belgium). He maintains all these countries are looking at a default scenario, no matter how much money she throws at them. He accuses her of allowing EU leaders to use the IMF to conceal from their voters major flaws in the Eurozone structure. As senior fellow at a Washington DC think tank (Peterson Institute for International Economics), he also complains about the unfairness of expecting US taxpayers to bail out the IMF for the sake of European politicians (and Greeks “who don’t like to pay taxes”). In Johnson’s view instead of throwing other peoples’ money at struggling Eurozone economies, the EU leadership needs to make some a hard choice – either to integrate their fiscal systems in a way that allows fiscal transfers to poorer, less competitive countries or to create two tiers of Eurozone participation, in which only tier 1 members can borrow from the European Central Bank (see Fox in the Hen House and The Problem with Christine Lagarde).
Lagarde Gets the Cold Shoulder
Thus far Johnson’s arguments have resonated with most non-European IMF member countries. Despite Lagarde’s aggressive lobbying to add $500 billion to the IMF rescue fund at the recent G20 meeting in Mexico City, she came away empty handed. Most finance ministers agreed with the response U.S. Treasury Secretary Timothy Geithner gave her: the European Central Bank must make a much larger financial commitment before asking other G20 countries for money.
Fairy Tale Economics
The problem with mainstream media coverage, which continues to center around Lagarde and her “rock star” persona is that it’s a fairy tale – complete with a fairy princess – that never addresses the fundamental structural problems that caused the world economic collapse. The corporate media never tells the back story - that fossil fuel scarcity has effectively ended global economic growth, rendering our debt-based monetary system totally inoperable. Richard Heinberg convincingly makes the case that Peak Oil is responsible for the global economic collapse in his 2011 The End of Growth, as do Richard Douthwaite David Korowicz, Chris Vernon and Tom Konrad in Fleeing Vesuvius (see Will Peak Oil Spell the End of Capitalism?).
Instead the mainstream media promotes cruel myths about lazy Greek workers and a Greek middle class that refuses to pay taxes, obscuring the reality that much of the Greek debt is likely “odious” and fraudulently incurred.
The Real Cause of Greek Debt
The free Greek documentary Debtocracy effectively dispels the media myths about lazy Greek workers and and scofflaw Greek taxpayers being responsible for the Greek debt crisis. It begins with an overview of what its filmmakers feel has been a basic goal of both globalization and the creation of a single European currency – namely “labor discipline” and the suppression of wages in heavily unionized countries. They show how sweeping deregulation in the industrialized world in the 1980s allowed manufacturers to eliminate unions by shutting plants down and reopening them as sweatshops in the third world. The subsequent creation of the Euro as a single currency allowed the central European countries (Germany and France) to use the mechanism of debt to weaken strong unions in peripheral Eurozone countries, especially Greece. Germany, with relatively weak unions following reunification, imposed a virtual ten year wage freeze. While German workers suffered, German companies and banks racked up immense profits and stacks of cash, which they loaned to “peripheral” countries to finance big corporate tax cuts.
The bulk of the film focuses on the concept of “odious” debt and whether the Greek people should be forced to suffer for fraudulent loans from which they received no direct benefit. As Debtocracy poignantly depicts, Athens and other Greek cities are experiencing a third world humanitarian crisis, with massive homelessness, hunger and untreated illness. The film quotes a recent IMF report predicting a 5-10% decrease in Greek life expectancy due to the debt crisis and austerity cuts
Odious Debt: An American Invention
Odious debt was a concept invented by the US in the early 20th century to avoid repaying Spain’s war debt after the US took possession of Cuba following the Spanish-American War. It was used again by George Bush following the US occupation of Iraq, to avoid repayment of Sadam Hussein’s debts to China, France, Germany and Russia. Since then approximately a dozen countries – most notably Argentina, Ecuador and Iceland – have repudiated so-called “illegitimate” debt incurred by deposed leaders.
The film focuses mainly Argentina’s and Ecuador’s default on their foreign debt. In 2001 the structural adjustments the IMF forced on Argentina bankrupted the country. A popular uprising forced the Argentine president to flee (in a helicopter), and the new government declared the IMF debt illegal and unconstitutional. When Ecuador experienced a similar economic crisis and uprising in 2007, they, too, sent their president packing (again in a helicopter). In 2008, their new president Rafael Correa appointed a Debt Audit Commission to study the strong arm tactics (some of which John Perkins describes in Confessions of an Economic Hit Man) that led former Ecuadorian leaders to borrow billions of dollars to purchase US-built infrastructure that only benefited Ecuador’s wealthy elite. Correa’s Debt Audit Commission ascertained that only 30% of their external debt was legitimately incurred.
CADTM’s Call for a Greek Debt Audit Commission
Iric Toussaint, a French economist who participated in the Ecuadorian Debt Audit Commission, believes a major proportion of Greek debt may have been fraudulently incurred. The following evidence supports this view:
- Nearly one billion euros of debt resulted from a risky swap (of yen and dollars for euros) Goldman Sachs persuaded Greece to make in 2001. The transaction netted Goldman Sachs $600 million in profit (see Secret Greek loan).
- Major German and French loans were issued on condition that the Greek government incur further indebtedness to purchase hundreds of millions of euros of German and French armaments.
- Billions of dollars of Green debt resulted from major cost overruns on the 2004 Greek Olympics (which cost twice as much as the Sydney Olympics in 2000). These have never been explained nor investigated.
- In 2010 a former Goldman Sachs official was hired to manage the Greek public debt authority, with the result that the entire 2010 rescue package (103 million euros) was used to bail out Greek banks.
The film also discusses the March 2011 call by the Committee for the Abolition of Third World Debt (CADTM) to create an audit commission to examine Greek public debt. It ends with the ominous sound of a helicopter, eerily foreshadowing the forced resignation of Greek prime minister George Papandreou last November, when CNN advised him to get a helicopter to save himself from angry protestors (see Fall of Papandreou).
*A questionable objective in countries with double digit unemployment.
Dr Bramhall is a 64 year old American child and adolescent psychiatrist and political refugee in New Zealand. She has just published a free non-fiction ebook 21st Century Revolution, which can be downloaded at http://www.smashwords.com/books/view/120942. Her first book The Most Revolutionary Act: Memoir of an American Refugee describes the circumstances that led her to leave the US in 2002. Her website is www.stuartbramhall.com.