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Poisoned
Chalice: Wherever it is Prescribed, a Dose of IMF Medicine Only Compounds
Economic Crisis
by
George Monbiot
August
21, 2003
For
how much longer should we give those who run the global economy the benefit of
the doubt? The International Monetary Fund has made the same
"mistake" so many times that only one explanation appears to remain:
it is engineering disaster.
The
crises over which it has presided in Thailand, South Korea, Russia and
Argentina are well-documented by Joseph Stiglitz, the former chief economist of
the World Bank, among others. But we have, until now, lacked a comprehensive
description of the way it worked in eastern Europe. A new book by the economist
Pongrac Nagy* shows for the first time how the IMF smashed Hungary.
Communist
economic management was hopeless: coercive, unaccountable, incompetent and
wasteful. So when Hungary began to democratise in the late 1980s, it was plain
that a new economic system was required. There were a number of options for
transition. But before anyone had considered them, Hungary's naive and trusting
new government was persuaded by the western powers that it had no alternative
but to turn to the IMF.
Unless
a country's economic policy is approved by the IMF, it cannot obtain foreign
capital. Post-communist Hungary needed foreign capital for just one purpose: to
help repay its enormous external debt. It could have applied, as many other
countries had done, for debt relief, but the IMF, in the face of substantial
evidence, told it that this would deter foreign investors. The only option was
to implement the policies the IMF recommended.
It
has just one set of policies. Governments must impose restraints upon the
supply of money and credit, open the door to foreign capital, privatise state
assets and cut public spending. It justifies these demands by persuading them
that they are suffering from unmanageable debt and galloping inflation.
So
in 1990 the IMF told Hungary that it was undergoing an inflationary crisis.
Prices, it pointed out, had risen by 17% in 1989. In truth this rise was caused
not by inflation (demand outstripping supply), but mainly by policy changes,
such as the introduction of VAT and the abolition of subsidies. The IMF
insisted on pretending that it was caused by excess demand.
The
best way of reducing demand, the IMF maintained, was to restrict the amount of
money the banks could lend. So between 1990 and 1996, the central bank ensured
that the credit made available to businesses halved. The immediate and
predictable result was that interest rates soared (to 50%) and businesses all
over Hungary collapsed. As workers were sacked and wages were cut, consumer
demand crashed. The IMF, Nagy writes, had "artificially plunged the Hungarian
economy into its greatest-ever depression in peacetime". Between 1990 and
1993, Hungary's gross domestic product fell by 18%.
Far
from curing inflation, this treatment caused it. Between 1993 and 1996, prices
rose by 130%. This was not because demand was rising, but simply because it
wasn't falling as fast as supply. But the IMF, once more, treated this new
problem as if it was caused by runaway demand. It insisted on further economic
restriction, which, predictably enough, pushed Hungary further into depression.
To
ensure that Hungary serviced its debt, the IMF demanded that it cut every
possible public service, and privatise every possible state asset. Entire
economic sectors were flogged swiftly and cheaply, with the result that foreign
corporations acquired complete market control. To ensure, in the government's
words, "the desirable reallocation of income _ towards the business
sector", Hungary was then obliged to introduce one of the most regressive
tax policies in the world: 43% of government revenue came from taxes on
consumption, but just 20% from income tax and 14% from business taxes.
All
this was carried out, as all IMF programmes are, in conditions of total secrecy
and institutional deceit. The lie the IMF tells is that it simply approves the
"letter of intent" written by a government, in which the new economic
policies are contained. This story relieves it of all responsibility for what
happens. But the letter of intent is actually written by the IMF, and simply
signed by the government. It is massive and detailed, and guides the economic
and political life of the nation for between one and three years. It is
entirely confidential. The only sight the people of Hungary have ever received
of IMF policy was a leaked letter from a senior IMF official to the finance
minister. His demands precisely matched the policies the government was
implementing.
One-and-a-half
million people (almost 30% of the workforce) lost their jobs. The incomes of
those who stayed in work declined by 24%; pensions fell by 31%. By 1996, most
people were living on or around subsistence levels. Public services shrivelled.
Between 1989 and 1998, the crime rate rose by 166%. This, we must remember, was
the result of a process almost universally described as "the triumph of
capitalism".
Then,
in 1996, suddenly, without announcement or explanation, the policy changed. The
banks were permitted to start issuing credit again and the recession, as a
result, came to an immediate end. Over the next four years, industrial
production climbed by 45% and gross domestic product by 21%. Wages and pensions
began to rise again.
The
experiment, in other words, could not have had a clearer outcome. You apply the
IMF's medicine and the economy collapses. You stop, and the economy recovers.
It has been repeated often enough for us to trust the results. In Thailand,
South Korea, Indonesia, Russia and Argentina, the IMF's financial
liberalisation and forced restrictions led to economic crisis, which was
relieved only as those restrictions were lifted. Those nations which refused to
take the medicine, even though they were confronting almost identical
conditions (Malaysia, China, Poland) prospered while their neighbours
collapsed.
So
why, knowing what the results will be, does the IMF keep applying the same
formula for disaster? It can hardly be through lack of expertise. The truth is
that the results happen to suit its sponsors very well. While the IMF works
mainly in poor nations, it is controlled, through its one-dollar, one-vote
system, entirely by the rich. As a result, as Stiglitz says, its programmes
reflect "the interests and ideology of the western financial
community".
Desmond
Tutu once remarked that: "When the missionaries came to Africa, they had
the Bible and we had the land. They said 'let us close our eyes and pray'. When
we opened them, we had the Bible, and they had the land." The Hungarians
were handed the Bible of economic orthodoxy by its missionaries. Through deceit
and secrecy, the IMF ensured that their eyes were shut. By the time they opened
them, foreign banks and corporations owned the economy; the public sector was
giving way to foreign capital; structural unemployment had produced a pliant
and desperate workforce. The IMF, in other words, had engineered the theft of
an entire nation. How many more times does this need to happen before we can
see what the game is?
*
From Command to Market Economy in Hungary under the Guidance of the IMF,
Akademiai Kiado, Budapest.
George Monbiot is Honorary Professor at
the Department of Politics in Keele and Visiting Professor at the Department of
Environmental Science at the University of East London. He writes a weekly
column for the Guardian newspaper of London. His recently released book, The
Age of Consent (Flamingo Press), puts forth proposals for global democratic governance. His articles and
contact info can be found at his website: www.monbiot.com.
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