Business as usual at the IMF

Posted by Ralph Blake on May 27, 2011. Filed under Economy,International. Posted with the tags:Economy, IMF
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The resignation of the Strauss Kahn as managing director of the International Monetary Fund (IMF) because of his arrest for an alleged sexual assault on a hotel chambermaid raises issues around the murky secretive world of the IMF and the macho culture of society that he came from.

Kahn was from France where every establishment male politician is expected to have a powerful libido. His previous aggressive behaviour to women was thus tolerated and not challenged. Of course such an attitude has much deeper consequences for women in French society. Only 10% of rapes are reported in France compared to 55% in the USA and only one in ten of them result in a conviction. Women in France are paid 27% less than men and hold fewer elected positions than in other large European countries. Segolene Royal was accused of neglecting her children when she ran for the presidency in 2007.

But what is the IMF anyway? It is a club of loan sharks established in 1944 in Bretton Woods (USA) by fort-five countries to stabilise the international finance system. Now over 200 countries are members and they each pledge a nominal amount of money in proportion to the size of their economies. If a country runs into financial trouble they can borrow up to a certain multiple of their pledged money and the other countries have to turn part of their pledges into real money for the loan. Countries votes within the IMF are based on these nominal pledges – the USA has 17% of the votes and Europe 30%.

The loans agreed to countries are made in return for the countries agreeing certain conditions – called structured adjustment programmes (SAP).. IMF inspectors monitor and make regular visits to inspect the borrowing country’s finances to ensure SAP conditions are being met. These SAPs will typically include cuts to public services, wage cuts and privatisation of national assets and services and opening up of the economy to international corporations and finance.

Prior to the financial crash most of the IMF’s time of the last three decades has been taken up with the debt crisis of developing countries – itself caused by the lending practices and terms imposed by Western countries and banks. This saw loans forced on the poor south at exorbitant interest rates and the solution of the IMF was to lend multiplies of these loans to these countries just to service the interest rate payments while imposing SAPs with severe conditions.

Of course since August 2007 the IMF’s attention has switched to the developed world as the bailing out of the world financial system, the global economy and the cost of the deepest recession since the 1930s has fallen onto governments. This has meant huge rafts of public debt have been racked up right across the developed economies. The weakest countries’ – Greece, Ireland and Portugal -economies public finances have deteriorated to the point where they are effectively bankrupt. In stepped the IMF together with European Union with fresh loans to pay off the original loans. That was to stop huge losses being carried by the international banks that held the original loans and avert another financial crisis and recession.

The current battle ground for this fire fighting is Europe with Spain the next likely candidate and Belgium and Britain not far behind. Britain has never accumulated these levels of public debt during peacetime and attempted to pay them off after a deep recession while the economy is stagnating. Britain was bailed out in 1976 by the IMF after a severe recession and increasing inflation meant that it had difficulty servicing its public debt.

So will Kahn’s resignation open up the door for a managing director of the IMF from the developing world? Not likely as the IMF director has always been from Europe and the IMF’s sister operation has always had a North American one. These positions are nominated from member countries but are in effect always ratified by the USA. Previously they have rejected nominations that do not meet their requirements. The IMF number two is always from the USA to. The USA calls the shots and wants to ensure the world financial system which it dominates is stabilised.

Since the crisis the IMF has been trying to stabilise Europe so it will be a European who is chosen to be the next head. Kahn was ideal for the USA because he was able to get the periphery countries to buy into the IMF’s austerity terms and keep Germany on side for providing bail out loans through the EU. That is why they are likely to go for another French candidate. German Chancellor Merkel is under pressure from the German electorate to be tougher on the bailout conditions and if necessary let countries default and essentially go bankrupt. But Washington fears this would be the start of domino of defaults across Europe leading to a new banking crisis and world recession.

The USA and the IMF may be more careful who they choose as individual but it will be business as usual who ever takes over at the IMF; making the poor pay more for the mistakes of global finance and propping up an unfair economic system.

The views are the authors own.