IMF, World Bank must stop SAPping needy countries of financial resources

Tens of thousands of people — including a small group from Princeton — will descend on Washington, D.C., this weekend to protest the International Monetary Fund and the World Bank. The mounting momentum challenging these institutions has the makings of the largest social movement since the 1960s. But what are the IMF and World Bank? And what's all the fuss about?

The IMF and World Bank grew out of an agreement reached among 44 countries in 1944, with the goal of fostering financial stability and development in countries devastated by World War II. The IMF, funded by the taxpayers of its 182-nation membership, primarily provides low-interest loans to central banks, which are then used to shore up reserves and stabilize currencies. The World Bank is funded by investments from banks and governments, and it lends this money at low interest rates to poorer countries, ostensibly for development purposes. (The goal of "a world without poverty" is inscribed above the entrance to the bank's headquarters.)

Both institutions are controlled by the countries that fund them, in proportion to the amount of money invested. As the largest investor, the United States is in a unique position to bring these institutions in line with their stated goals of reducing poverty and promoting economic development. Currently, they are not very good at doing either, and the United States isn't helping. Here's why.

At the time of the Third World debt crisis in the early 1980s, commercial banks risked insolvency because they lent enormous sums of money to developing countries, many of which were, by then, on the verge of defaulting on their loans. Bankers had to make a difficult choice: Admit they had made unwise, high-risk loans (often to embezzling dictators) and face the consequences or think up a way to enable developing countries to pay back some of the money they owed and thereby increase investors' confidence — no matter the human cost.

Not surprisingly, they chose the second course of action. Bankers, with the help of their governments, the IMF and World Bank, agreed to restructure the debt owed by countries unable to pay, and Structural Adjustment Programs were born. Then as now, countries must agree to the terms set by the IMF or the World Bank in exchange for assistance. Nearly 100 nations have been forced to agree to SAPs.

While the IMF and World Bank maintain that SAPs ensure economic stability and the ability of debtor nations to pay off debt, SAPs usually have the opposite effect. One standard demand is that the nation "float" its currency on the world currency market, which in almost all cases leads to an immediate and dramatic devaluation of the currency. Once this happens, it becomes even more difficult for these countries to pay back their loans, which sends their economies into crises and deepens their dependence on the IMF and World Bank. Debtor nations are forced to deregulate investment in the country, which allows foreign investors to come and go as they please. The 1997-98 worldwide economic crisis was fostered by the volatility of the currency market and the massive "capital flight" of jittery investors who pulled their investments at the first hint of trouble. So much for promoting economic stability.

Some statistics appear to support the claim that SAPs improve economic conditions, but they mask the fact that wealth creation in these countries goes largely into the pockets of a small elite — the same ones you see on TV promoting free trade. The poor, on the other hand, are hurt by SAPs, which demand drastic cuts in government spending on vital social services; privatization of state industries leading to wage reductions and massive layoffs; increased interest rates curbing economic development and stifling wages; and elimination of tariff protections for nascent industries, leading to widespread job loss.

SAPs also force countries to concentrate on growing cash crops for export at the expense of protecting the environment with sustainable development or alleviating poverty by producing food for domestic consumption. This, coupled with massive, ecologically unsound projects funded by the World Bank and demands to scale back environmental protection, has led to unprecedented environmental devastation.

The World Bank even admitted that its lending failed to help the poor. A rare in-house assessment of the outcome of its lending policies in Africa found a 73-percent failure rate. As long as these institutions remain committed to enriching commercial banks and multinational corporations — rather than to reducing poverty and promoting national independence through sustainable development — they will only continue to worsen conditions for the world's poorest populations. Joshua Guetzkow is a graduate student in the sociology department from San Jose, Calif. He can be reached at gosh@princeton.edu.