Sunday, November 16, 2008

Why do we love to hate the IMF?

An interesting read.

Why do we love to hate the IMF?
By M. Ziauddin, Dawn, November 15, 2008

I PUT this question to a number of knowledgeable people. Most blamed the IMF conditionalities. According to one economic writer, regimes in Pakistan without exception prefer nice and easy money that can easily be diverted to their comforts.

In the opinion of a former top banker who negotiated the last two Fund programmes on behalf of Pakistan Islamabad has no option left now but to go to the lender of last resort. He advised the president to stop listening to sycophants who, he said, are not telling the president the truth. A former IMF staffer echoed the same sentiments and said time was running out.

One senior economic journalist said it is the Fund not the government which is reluctant to have anything to do with Pakistan because of its past experience with the country and also because of what he described as the very low financial credibility of the current political leadership.

A banker shot back: what do you personally believe?

Well, I confess I have yet to come across a real IMF success story. And in the case of Pakistan at least Fund programmes, more often than not, have acted more like the proverbial touch of Midas. The one-size-fits-all IMF prescriptions are supposed to entail all-round but equitable hardship during the implementation phase lasting three to five years.

As the Fund-prescribed reforms bite into subsidies and increase the user costs of social services, the poor undergo a lot of hardship. The rich on the other hand are obliged to endure their share of hardship by paying their taxes honestly, without any exemptions or exceptions, with evasion and avoidance holes plugged and pilferage of utilities stopped completely. Meanwhile, expenditure is to be kept on a tight leash.

Since Pakistan’s policymakers and official economic managers both belong to the ruling elite comprising the civil-military bureaucracy, big business and the feudal aristocracy, they readily comply with that part of the Fund programme reforms which involve increasing the hardship of the poor — slashing subsidies, spiking prices and hiking tax rates.

But they drag their feet on Fund conditionalities that demand extracting equitable hardships from the rich — cut in defence budgets, broadening of the tax base, rationalisation of profit margins and eradication of rent-seeking practices. And by the time the second tranche is due the programme is abandoned on one excuse or the other.

That the Pakistani ruling elite takes the Fund management on a ride every time the country finds itself cornered into an IMF programme is no more a secret. But the Fund has never been able to do anything about it because it is not geared for such a role. And there are reasons for this sorry state of affairs.

From the managing director of the IMF down to its lowly officer cadre they are all appointed on a quota basis rather than on merit. To make the recruitment policy even more meritless the civil services of member countries are offered the quota jobs. That is the reason why the Fund has never been known to have come up with anything more creative than its now infamous one-size-fits-all prescription to solve economic problems that differ in nature from recipient to recipient. That is also the reason why the Fund had no clue about what was going on in the global financial market until banks in the rich countries started collapsing.

Secondly, the US has been known to have used the Fund on occasions to promote its own global political agenda. So, depending on what the US wanted at a particular juncture the Fund has either been too generous with Pakistan or has tightened the screws without any economic rhyme or reason.

Take for example the three-year Poverty Reduction and Growth Facility (PRGF) which was signed in December 2001 but abandoned after two years with claims that Pakistan had at last broken the begging bowl. But in fact by that time the 9/11-related free lunch had been served and the ruling elite found it in its self-interest to ease out of the PRGF before the next generation of reforms affecting the rich was due.

We did the same in the early 1980s as well. As soon as the first Afghan war-related dollars started flowing in a very generous IMF programme (the Extended Fund Facility) was abandoned after the first tranche was released in return for denying the poor their two square meals.

And the two Fund-sponsored reschedulings of the 1970s and the two Standby Agreements (SBAs) of the 1990s could not be completed because the economy on all these four occasions had gone into a tailspin as a consequence of Fund-imposed recession, high unemployment and rising inflation.

Pakistan has never ever completed an IMF programme. Even the one that is touted as successfully completed — the SBA of 2000 — achieved that distinction only after a number of waivers, mostly concerning taxation and expenditure, were allowed.And paradoxically every time a Fund programme (there have been as many as seven in the last 35 years) was curtailed after making the life of the poor more difficult and that of the rich more cushy, the national economy slid farther down the pole.

And where did all the US billions that came in, first in the 1980s and then in the current decade, go? Well, most of it was used for purchasing sophisticated weapons systems and the rest was pocketed by the ruling elite, especially big business, mostly stock brokers this time.

The writer is Dawn’s special correspondent in London.

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