Play It Again, Sam

Robin Hahnel

in case anyone thought the IMF and the World Bank had gotten the message in
Seattle, Washington, DC and Prague, all he or she has to do is read the
December 5 edition of the Washington Post to find out otherwise.
Looming disasters in Chad and Turkey are proof positive that nothing besides a
tactical adjustment of rhetoric has changed.

Douglas Farah
and David Ottaway inform us: “In June, when the World Bank agreed to back a
controversial 650-mile oil pipeline from this impoverished desert nation
[where more than two-thirds of the population lives on an average of less than
$250 a year] to Africa’s Atlantic coast, it declared that it had found a way
to prevent corrupt officials from stealing the country’s new wealth.
Criticized for years over projects in developing nations that failed to return
benefits to their populations, bank officials knew that the $3.7 billion
pipeline—the most expensive infrastructure project now underway in Africa
—would be closely scrutinized. So they imposed strict accounting standards
and insisted on guarantees from the Chadian government to ensure that its oil
profits would be spent to improve public health, education and vital
infrastructure here, rather than disappearing into secret bank accounts or
funding weapons purchases by those in power. World Bank officials said that
their ‘Chadian model’ would prove they could overcome the African
nation’s endemic corruption and that it might be applied to other
corruption-prone oil-producing lands. In a press release after it approved the
project, the bank called the agreement with the Chad government an
‘unprecedented framework to transform oil wealth into direct benefits for
the poor, the vulnerable and the environment.’ So when Chadian President
Idriss Deby, a general who seized power in a 1990 coup, declared last week
that he had used $4.5 million of the government’s first oil receipts to buy
weapons instead of bolstering social programs, saying ‘it is patently
obvious that without security there can be no development programs,’ he sent
a jolt through the bank.”

demonstrators in Seattle, Washington DC, and Prague were not the only ones who
warned the World Bank that this is exactly what would happen. Human rights
activists in Chad fought the project for years, claiming it would “only
escalate armed power struggles and be diverted by authoritarian rulers to buy
guns or to fatten their bank accounts.”

But the
diversion of profits to purchase arms is only one problem. The main objections
critics have voiced to this and similar World Bank projects elsewhere are that
too much of the profits go to foreign companies and banks, leaving too little
to make a significant dent in unpayable international debts that should be
forgiven. Chad is only projected to receive $2 to $3 billion over 25 years
from the pipeline, the rest going to the consortium of international oil
companies led by Exxon Mobil Corporation, to the international banks financing
the project, and to the World Bank for brokering the deal and putting up 3
percent of the initial financing.

In the same
edition of the Washington Post, Molly Moore informs us from Istanbul
that “Turkey’s stock market plunged today and some interest rates soared
to more than 1,200 percent in a financial crisis that analysts fear could
spread to Russia and other struggling economies. Turkish officials began
emergency talks with the International Monetary Fund in Ankara, the capital,
urgently asking for a $5 billion loan to help counter a rush to sell Turkish
lira that threatens to undermine the country’s precarious economy. Officials
fear that if it is not contained, the financial crisis could send Turkey’s
economy into a downward spiral of unemployment and company closures.
Investors, both foreign and Turkish, are moving their money out of markets
here as they lose confidence in the country’s future and worry about the
effect a devaluation of the lira could have on their holdings. Turkey’s
stock market has lost nearly 40 percent of its value in the last two weeks,
including today’s plunge of 8 percent.”

How is this
possible? Reporting from Washington in the same story Steven Pearlstein tells
us: “The first 10 months of this year marked one of the most stable economic
periods in recent Turkish history.” And: “In the past year, Turkey has won
praise from the IMF and international financial analysts for streamlining its
financial policies, reining in government spending and making other economic
policy changes suggested by the IMF.” In other words, Turkey was a paragon
of neoliberal economic virtue according to the IMF, and therefore one would
think the last place a crisis should break out. But of course that was what
the IMF and World Bank had said about the East Asian economies only a year
before their crises. In that case as well, East Asian economies who succumbed
to pressure from the U.S. Treasury Department and the IMF to open themselves
completely to international financial investment, including short-run,
speculative capital flows, were praised by the U.S. and the Fund as neoliberal
success stories. But as soon as the hot money took fright and fled, as soon as
the IMF imposed its draconian conditionality agreements—calculated to
protect international investors—in exchange for a bail out, and as soon as
all this left the East Asian economies in ruins, Fund managers hastened to
tell us the East Asian governments had been less virtuous than heretofore

Once again we
will be told the Turkish fall from grace is due to their “crony
capitalism,” “lack of transparency,” and “insufficient prudential
regulation.” We are already being told “the crisis was set off by almost
daily disclosures of banking scandals and related criminal
investigations”—as if this were not what triggers most financial crises.
The real question is why disclosure of some bad loans triggered a crisis in
this situation whereas it usually does not? The reason we are not reminded of
the real question is the answer points to the magnitude and conditions under
which international speculative capital poured into Turkey over the past few
years, i.e., the “financial streamlining” orchestrated and praised by the
IMF. We are also told “astronomically high interest rates have taken hold in
loans between banks because lending banks fear that borrowing banks may
default”—small wonder. The real question is who decided to subordinate the
interest of financing productive Turkish investments, which will be brought to
a standstill by astronomical interest rates, to the interests of international
wealth management in the first place?

international investment banks taking part in an IMF sponsored program in
Turkey come to mind. Moore informs us: “Banks in Germany—which have
invested heavily in Turkey’s efforts to sell off state-owned companies and
its economy in general—have suffered drops in their own share prices because
of the Turkish crisis.” Finally, we are also being warned that Turkish
government reluctance to shut down troubled banks and assume their liabilities
may deepen the crisis. “The government has already placed 10 troubled banks
in receivership. According to sources familiar with the talks, the IMF is
pressing officials in Ankara to take over and close more of the country’s 81
banks, a politically difficult step that would cause powerful owners to lose
their investments. In return, the government would guarantee all or most of
the depositors’ funds.” Notice whose cronyism is subject to criticism and
whose is not. For the Turkish government to worry about Turkish business
losses is irresponsible cronyism. But when the IMF urges the government of a
developing country to guarantee the funds of wealthy international
depositors—in this case German banks financing the IMF privatization program
in Turkey—it is only sound crisis management.

One question is
whether the IMF bailout will work in Turkey in even the most narrow terms. We
are informed: “The flow of investment funds out of the country has led the
central bank to spend at least $6 billion of its $18 billion foreign exchange
reserves in the last two weeks shoring up the lira— buying the currency to
offset the downward pressure on its value caused by investors selling it to
buy dollars and leave the country. Analysts fear that if the IMF does not
quickly give Turkey its requested $5 billion emergency loan, the government
could soon run out of foreign reserves and be unable to support the lira. In
that case, the currency’s value would likely plummet.” Whereas the IMF
pulled off a successful bailout in Mexico in 1995, they failed to do so in
East Asia in 1997 where it was predominantly Japanese banks and multinational
companies who stood to lose, as opposed to U.S. banks and companies in Mexico.
Technical “success” in Mexico was due to the speed and size of the bailout
package. In Asia the IMF was slow and cheap, concentrating instead on forcing
internal “reforms” in the stricken economies. The U.S. Treasury Department
even dispatched then deputy secretary Larry Summers to tell the Japanese in no
uncertain terms that their offer to put up $100 billion for bailouts without
conditions was unacceptable. Turkey has already spent a third of its foreign
exchange reserves in just two weeks to prop up the lira. Whether $5 billion
from the IMF will prove enough and arrive quickly enough to ward off the
speculative attack on the Turkish lira remains to be seen. Whether Larry
Summers proves more interested in using the crisis to force further
debilitating “reforms” on Turkey, or more interested in staving off an
international financial crisis and any possible contagion, remains to be seen.

But whether the
IMF bail out is a technical success, as it was in Mexico, or a failure, as it
was in East Asia, is not the most important issue. Technical success means
international investors will not suffer and the stricken economy will recover
more quickly. Technical failure means greater investor losses, extending to
taxpayers, contagion effects in other emerging markets, and a much deeper and
longer depression in the afflicted economy. But in either case IMF policies
are detrimental to the interests of developing economies as they tie them more
tightly to the torture rack of highly leveraged international wealth
management. At a minimum, the crisis in Turkey proves once again that playing
the IMF game—reducing government spending, privatizing public services,
opening completely to international investment, and accumulating what used to
be more than sufficient foreign exchange reserves to adequately protect your
currency ($18 billion in the case of Turkey)—is no protection at all from
economic ruin in the brave new world of unchecked neoliberalism.

Hahnel teaches economics at American University in Washington, DC and is
author and co-author of numerous books on economics and politics. His latest
book, on globalization, is
Panic Rules! (South End