Flaws in the international finance system impact
28 April 2000
by Hugh McCullum
As South Africa watched its rand tumble in value, as Zimbabwe struggled to hang onto its
dwindling foreign exchange, as Mozambique picked itself up out of the flood waters with its
international debts simply postponed, rather than erased, another phenomenon of the globalized
economy was occurring in New York, the centre of all things financial in today’s globalized
This phenomenon — the crash of shares on Wall Street — had reverberations around the world,
especially when it happened during the recent meetings of the World Bank and International
Monetary Fund. Wall Street’s tumble, especially in the technology sector, forced the two world
banking institutions and those running them to acknowledge the vulnerabilities of the
international financial system and try to explain away to the rest of the world just what
was going on.
Some long-time critics of the two financial institutions, established in 1948 to support and
try to iron out the inequities of the global economy, said the Bank and the Fund need a
revolutionary rethink about how they manage that economy but they must also face the fact
that there are economists and analysts in many parts of the world who are now unwilling to
follow blindly the dictates of globalization.
At the spring meeting in Washington, similar to last year’s Seattle demonstrations against
the World Trade Organization, the world’s bankers were not just faced with unruly eco-warriors
and youthful anarchists, as business writer Larry Elliott describes the protesters, but also
with pin-striped heretics who argue that the IMF has badly mishandled the world’s economic
crises, especially in regards to poor and developing nations, many of those in Africa.
The former chief economist of the World Bank, Joseph Stiglitz published an article in the
US which attacks the Bank’s secrecy, its arrogance and its policies describing it as “full
of third-rank students from first-class universities.”
Even more damning is Stiglitz description of IMF missions to the third world.
“When the IMF decides to ‘assist’ a country, it dispatches a ‘mission’ of economists,” he
writes in the New Republic magazine. “These economists frequently lack experience in the
country; they are more likely to have knowledge of its five-star hotels than the villages
that dot its countryside.”
This heresy was hard on the heels of an IMF overview of the world economy’s development in
the late and unlamented 20th century. In the past 100 years – those years of two world wars,
innumerable regional conflicts (the most violent century in history), colonialism,
imperialism, several depressions and an almost unbridgeable chasm between South and North —
the overview describes a “stupendous increase in economic output.”
Goods and services exceeded in one millennium everything that had ever occurred before from
the dawn of humanity. At the same time, however, inequality between the world’s rich and poor
regions (North and South) also increased just as dramatically. GDP in Africa today is lower
than it was in the rich countries in 1900.
And, while politicians – good, bad or indifferent – in southern Africa struggle in a variety
of ways to meet their people’s needs, they are also unable to control in any meaningful way
the systemic pressures on them.
After independence, many African countries had some measure of relative prosperity but when
the terms of trade began to change 25 years ago and populations grew, ironically due to
improved health regimes after independence, resources were eaten up and investment remained
In the 1980s, the IMF and the Bank promised that the pains of changes they insisted upon would
be compensated for by development, a promise still to be fulfilled. In the early 1990s, when
new “conditionalities” aimed at encouraging western styles of multi-party democracy were
introduced, the promised economic improvements proved largely superficial.
Elliott says that this history of inequity and false promises culminated with the removal of
monetary controls in the 1980s ostensibly to make more efficient markets. It also removed the
ability of small and poorer countries (and later even some of the more affluent economies) to
set independent monetary policies. Under pressure from structural adjustment programmes of
various kinds, controls on international capital movements were dismantled and deregulation of
government financial processes imposed in the name of market efficiency.
The result, says the IMF itself, “was a large increase in internationally mobile capital flows
combined with domestic policy imbalances and volatile exchange rate expectations which
generated repeated crises.”The removal of all controls in the name of efficiency, says Elliott,
was supposed to bring a surge of long-term investment to the poor South, instead it resulted
in a boon for speculators, leading to capital flight and unrealistic austerity programmes to
The IMF and World Bank, for several years now have agreed that their top priority must be to
combat poverty and global inequality but their very policies, says Elliott, supported by
Stiglitz analysis of the two institutions, make it almost impossible for governments to pursue
growth and redistribution of wealth when they are captive to increasingly capricious global
The solution, say these economists, could well be to maximise domestic opportunity and provide
an economic climate for developing countries to strengthen and develop their own domestic
financial institutions and thereby create a flourishing market economy.
In the meantime, however, most countries are forced to stand by helplessly as markets rise
and fall with little room to address domestic problems. In other words, as Elliot and others
see it, the original concept of the Bretton Woods institutions was to oversee the international
system while they left national governments free to move domestically with a system of fixed
exchange rates and capital controls without wild and unexpected fluctuations.
The so-called “efficiencies of globalization” have neutered this concept, leaving third world
countries gasping to catch up within a system that is rigged against them. (SARDC)