Globalization, the NGOs, and the IMF: A New Dialogue

An Op-ed by Flemming Larsen, Director, Office in Europe, International Monetary Fund, Le Monde, 19 September 2000

Recent financial crises and the growing income gap between rich and poor countries have fueled intense criticism of today’s global economic and financial system from numerous nongovernmental organizations (NGOs). Much of this criticism is targeted at institutions like the IMF, together with the World Bank and the WTO. We are perceived to be fostering the policies and reforms that have led to unprecedented levels of international trade, capital flows, technology spillovers, and exchange of information, in short, globalization.

A constructive approach to dispel misunderstandings about globalization and address legitimate concerns should start by emphasizing three things: the global economic and financial environment is evolving rapidly; the implications of the changes are often not fully understood; and our institutions and policies will need to adapt to cope with the challenges posed by globalization. All this is particularly true of the phenomenal growth in size and sophistication of global financial markets. As financial resources are put to better uses, there is considerable potential for gains in productivity and living standards. But it should also be recognized that a heightened role for market forces carries with it the risks of investor error. The crises that rocked the financial markets during 1997-98 illustrate the costs of swings in market sentiment in reaction to an unfortunate mix of policy shortcomings and the markets’ own mistakes.

In other areas also, it is necessary to acknowledge that globalization benefits people unevenly, and that it can and does produce losers as well as gainers. This is of course not a new problem: technological developments and rapid economic changes that have been beneficial for society as a whole have usually been painful for some. But government authorities can, and should, take the necessary measures to ease the adjustment burden. When such changes take on a significant and growing international dimension, the need is underscored for well-functioning global economic and financial institutions, and internationally agreed rules and regulations.

The IMF is responding to these challenges, and a strong effort is being made to reach out to civil society at large and the NGO community in particular, through an ongoing and open dialogue, to explain what we are seeking to do. The hope is that this dialogue will foster a common understanding both of the benefits of open markets and of the economic and financial shortcomings in the system, their causes, and the merits of the various proposals for alternative remedial action. The following represents a summary of the concerns my colleagues and I typically encounter when meeting with representatives of civil society.

Globalization and Poverty

A rallying point for many critics of the system, and of the IMF, is the fact that while the advanced countries are becoming more and more prosperous, extreme poverty remains endemic in many parts of the world. This has led to the belief that globalization is somehow responsible for the plight of the poor: there is a widespread perception that the poorest countries’ efforts to integrate into the world economy through trade liberalization and other market-oriented reforms have led to a more uneven income distribution. A concern often raised is the fear of a race to the bottom whereby the free play of market forces compels the poorest countries to lower wages and labor standards in order to attract foreign investors. From these lines of reasoning, it is tempting to conclude that trade should be restricted. Some even question the benefits for the poor of policies aimed at fostering economic growth.

But the notion that trade and economic growth tend to aggravate poverty is false. Experience has confirmed time and time again that trade generally benefits the poor by fostering advances in efficiency and stimulating higher growth, which are key to raising living standards. Conversely, restrictive trade policies tend to hamper productivity, damage growth, and worsen conditions for the poor. We only need to point to the experience of the 1930s and to Latin America’s unsuccessful experiment with inward-looking trade policies.

And trade liberalization is beneficial to society as a whole even though some groups may be negatively affected in the short run by increased competition from abroad. At the end of the day, can anyone deny that trade liberalization has had huge positive effects on countries as diverse as Finland, France, Mexico, Portugal, Singapore, Thailand, and Turkey? If these countries have benefited from open markets, shouldn’t the poorest countries be given the same opportunities?

Instead, those who are genuinely concerned about the poorest countries should campaign for improved access for developing countries’ exports into the markets of the advanced economies and for an end to agricultural export subsidies that are undermining the livelihood of many farmers in the developing world. In fact, these reforms would be in the interests of the advanced economies themselves, even if they would need to find other ways to support rural incomes. Many NGOs do, of course, agree on the need for greater market access for developing countries, but it is also clear that some of them, and many of the anti-globalization activists, genuinely see trade as part of the problem rather than part of the solution.

Similarly, some NGOs are highly critical of the role of foreign direct investment, especially when undertaken by multinational enterprises that are perceived to exploit the poor. We disagree, even though there may be unfortunate examples when multinationals have not behaved ethically. For us, foreign direct investment is also a critical source of management know-how at the same time as it promotes foreign trade and fosters higher growth and employment.

The IMF agrees that trade and foreign direct investment can only be part of the solution. We are aware that the benefits do not necessarily accrue to those most in need and that some may be negatively affected by the removal of trade barriers and the associated dislocations. Trade liberalization therefore needs to be accompanied by reforms aimed at improving the living conditions of the poor-such as policies that favor basic education, health care, and infrastructure, policies that strengthen incentives for entrepreneurship and job creation, and measures to combat corruption.

The Debt Burden

The IMF has been pointing out for a long time that the debt burdens of many poor countries have been unsustainable, and that debt alleviation is justified both on humanitarian and economic grounds. Such a measure would provide the incentive for governments to improve their policies and for enterprises to invest. On this there is full agreement with the NGOs.

Many NGOs call for immediate, unconditional debt cancellation on humanitarian grounds. We share the concerns behind this call, but we argue that debt reduction is not an end in itself, but a means to an end; the true objectives being durable poverty reduction and sustainable economic growth in the poor countries. Debt reduction alone cannot deliver this, since the resources provided may be wasted. This is why the international community has linked debt reduction to poverty-reducing policies and economic reform. It is in the best interests of both creditors and debtors that the debt relief occurs as swiftly as possible in combination with meaningful progress in tackling the problems that contributed to the emergence of an excessive debt burden in the first place.

What is the IMF’s role in debt reduction? The enhanced heavily indebted poor countries (HIPC) initiative, introduced in 1999, in which the IMF and World Bank have major roles, is central to the efforts of the international community to establish a virtuous circle of debt relief and poverty reduction. The IMF has set up the Poverty Reduction and Growth Facility (PRGF) as its vehicle basis for concessional assistance under the initiative. A key aspect of this initiative is that it should be the governments of the countries themselves that decide how best poverty should be reduced in full consultation with civil society. So far, 10 low-income countries have become eligible for debt relief under the enhanced HIPC initiative, and the IMF and World Bank are doing their utmost to increase this number to as many as 20 by the end of this year.

The Adjustment Controversy

Unfortunately, many of the broader reforms needed for the recipient countries to reap the benefits of debt reduction and strengthen growth are criticized by the NGO community. This criticism is not directed primarily at the macroeconomic stabilization policies that the IMF always promotes, because the NGOs generally accept them as being necessary conditions for fostering sustained growth.

Instead, the criticism is mainly directed at so-called structural adjustment programs (SAPs), which are widely considered to have contributed to poverty. Through privatization schemes, SAPs are also considered to deprive poor countries of their natural resources and wealth to the benefit of multinational enterprises. Also, SAPs are viewed as detrimental to smaller enterprises because of the higher interest rates that can result from credit market reforms. And finally, the SAPs are considered to lead to a self-defeating push to export more commodities thereby putting downward pressure on export prices.

We in the IMF are fully conscious of the problems that can be associated with rapid structural changes, and that some structural adjustment programs may have been too detailed, stretching some countries’ capacity for implementation. It is for these reasons that these questions are now under close review and that NGOs are being involved locally in the assessment of the need for and impact of reforms-a key aspect of enhancing ownership of these programs by the countries concerned.

We remain convinced, however, that the strengthening of economic incentives through greater reliance on market forces instead of administrative decisions (that are prone to rent seeking and corruption) is essential to improving the economic performance of the poorest countries. We agree that structural adjustment policies must be designed in such a way that any adverse social or environmental consequences are minimized. However, in countries where structural adjustment programs are pursued steadfastly, there is ample evidence that economic performance does in fact improve. In Sub-Saharan Africa, for example, in countries with reform programs, average annual output growth has increased from just 1 percent in 1992-94 to about 4 1/2 percent in 1998-99. Since 1987 (and up until very recently when natural disasters had a disastrous effect on Mozambique), cumulative gains in real per capita incomes in Mozambique and Uganda-two relatively consistent reformers-have been very significant, at over 30 and 40 percent respectively. In India, partly in response to structural reforms, per capita growth has averaged well over 4 percent since the mid-1990s, in sharp contrast to the three decades following independence in 1947 when, stifled by regulation, per capita growth averaged only 1.5 percent per year.

In some of these countries, however, it is often argued that poverty levels have been increasing along with the structural reform effort-held to be clear proof of the reforms’ failure. In our view, this means that the program design for achieving higher growth rates has to be specially oriented towards dispersing the benefits of growth to the poor. What the critics also forget is that poverty levels would have been even higher in the absence of structural reforms.

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Our dialogue with the NGOs is helping us to better understand their points of view and it is clearly having an impact on our policy formulation and presentation. This impact has been particularly visible in the huge quantity of information the IMF now releases (see www.imf.org). It is our hope that the NGOs, in turn, also are in better position to understand the IMF’s policies. It is clear that civil society and the IMF share the dual objectives of alleviating poverty and enhancing the stability of the global financial system. We need to continue the dialogue to determine the best approaches to achieving our common goals.