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Turbulent Times for the IMF

7 minute read
John S. Demott

The savior of developing countries is also the scapegoat

The job of the International Monetary Fund has always been tough. Now it is also touchier than ever. Although the IMF makes loans to rescue troubled economies, it is stirring up anger and defiance in developing countries of Latin America, Asia and Africa. In some places, the controversy has been boiling over into violence. In the Dominican Republic, most union leaders are insisting that the country break off relations with the IMF, blaming its policies for causing riots last month that left more than 50 people dead. Leftists around the world accuse the IMF of trying to impose capitalist values, and Finance Ministers in developing countries frequently protest that it is interfering in internal politics by forcing them to adopt draconian economic measures.

The IMF’s many supporters, on the other hand, say that the organization has become a scapegoat for reckless spending in Third World countries. All it is doing, they contend, is calling for needed economic reforms, without which many countries would be financially paralyzed. Says John Williamson, a senior fellow at the Institute for International Economics in Washington: “Right now the fund is more harsh than is desirable, but it is not clear that it has an alternative.”

In a report last week the IMF warned that the economic problems of the biggest debtor nations are likely to get worse during the next three years. A growing part of their earnings from exports will have to go toward interest payments instead of internal development. Last week also, the world’s top money men met behind closed doors in Manhattan to discuss the rising debt crisis. Anthony M. Solomon, president of the New York Federal Reserve Bank and host of the session, has been warning that rising interest rates could push countries toward default. He has proposed that private banks set a limit on the interest rates they charge Third World debtors. Present at the meeting: IMF Managing Director Jacques de Larosière, who has brought the banks and the IMF together to rescue countries most in danger of default.

De Larosière and his staff at the IMF are paying particular attention to the perilous financial situation in Argentina. Six weeks ago, the IMF and the U.S. Treasury paved the way for a $400 million loan package from Latin American countries and international banks that enabled Argentina to meet a deadline for paying overdue interest on its $44 billion debt. But that was only a stopgap measure. At a meeting last week in Buenos Aires, IMF staffers and Argentine officials began working on a plan to get the country’s finances in order. Argentina’s 320 bank creditors have said they will not again reschedule Argentina’s debts unless an agreement is reached.

Never in its history has the IMF faced debt problems of such magnitude. The agency, which has 146 member countries and a staff of 1,600, including 750 economists, has spent most of its time since its founding in 1945 in relative obscurity. As the international lender of last resort, the IMF grants short-term loans for three to five years from its $35 billion lending pool to help nations finance temporary trade imbalances. The IMF deals with rich and poor countries alike. In the mid-1960s, for example, Britain borrowed some $3 billion to deal with its severe balance of payments problems.

But the oil crisis of the 1970s and the global recession of the early 1980s have turned the IMF into the Third World’s principal banker. After OPEC quadrupled oil prices in 1973, developing countries like Brazil borrowed heavily from private banks, in part to pay their steep oil bills. Meanwhile, Mexico and other poor countries with large oil reserves felt themselves suddenly rich and sought money to finance ambitious development projects.

Commercial banks at first lent freely to those countries on the basis of their economic promise, granting them liberal payback terms. But by 1982 the banks were sharply curtailing Third World lending. By then it was clear that those countries had difficulties even paying interest on their loans. Not only were they already deeply in debt, but their economies were slowing down because of recession in the industrialized nations. Oil-rich developing countries were also strapped for cash as oil prices dropped.

Since private bankers were reluctant to make substantial new loans, the IMF had to take over the job of keeping the Third World afloat. But that role has often placed the organization in the middle of its clients’ political problems. When a country’s Finance Minister wants an excuse for an unpopular economic measure, such as curbing inflation by holding the line on wages against the demands of angry unions, he frequently blames the IMF.

At the center of this controversy is Frenchman De Larosière, 54, who has been the IMF managing director since 1978. One admirer has called him “the referee in an international game of chicken.” His most important contribution to containing the debt problem has been to coerce banks into lending more to the most troubled countries. He got them to give an additional $8.8 billion to Mexico and $6.5 billion to Brazil.

De Larosière defends the IMF’S often harsh terms as unavoidable. Adjustment measures for some countries, he says, “will necessarily be severe.” But it does take a combination of velvet glove and iron fist to keep the world debt situation in control. De Larosière uses the soft approach on the IMF’S 22-man board of executive directors, who must eventually approve all IMF loans. Though they are people of varying views, he manages to compromise and persuade, while holding the trust of all.

The iron fist is used on private bankers as well as on the developing countries.

In November 1982, when Mexican and Argentine loan agreements were being considered, De Larosière sent telegrams to major commercial lenders, inviting them to a meeting at the New York Federal Reserve Bank. At the session, he told the bankers that if they did not put up $5 billion in new money for Mexico and $1.5 billion for Argentina, the IMF would not approve rescue programs for those countries, further jeopardizing chances of the banks’ getting back any part of their money. The moneymen were stunned.

Said one official: “They were not used to being talked to by anybody that way.”

They got the message and made the loans.

De Larosière is the quintessential French bureaucrat. After earning master of arts and master of law degrees at the University of Paris, he attended the Ecole Nationale d’Administration, the training school for France’s top civil servants. Designated an inspecteur des finances after graduation, he served in various economic policymaking posts before going to the IMF.

The managing director today remains very much the inspecteur. Quick-tempered, he dresses down ineffectual staffers during conferences. Says a foreign finance official: “When he is with three or four aides, he does 95% of the talking.”

Around IMF headquarters, De Larosière gets involved in the smallest details. He is, says a staffer, “the indisputable boss.” He keeps a computer in his office to follow international money markets. Nonetheless, De Larosière can also be informal; he frequently makes his own telephone calls.

Though generally diplomatic, he got into a sharp exchange in March with Treasury Secretary Donald Regan. Said the managing director: “The deficits in this country are contributing to keeping interest rates high worldwide and absorbing scarce capital from the rest of the world.” Replied Regan tartly: “I am troubled by the excessive preoccupation with U.S. fiscal policy. Quite simply, the U.S.

budget deficit is not the cause of all the world’s economic problems, nor would reducing our deficit be a panacea.”

When he is not arranging billion-dollar loans—or dueling with his critics—De Larosiere enjoys listening to Bach and Beethoven and entertaining in his Washington, D.C., house. When he can, he takes his wife France to the movies or the theater. He enjoys fly-fishing and reading history. His current bedside book is one of Jean Favier’s about the Middle Ages in France. It is a great way to escape the problems of contemporary world finance.

—By John S. DeMott. Reported by Gisela Bolte/Washington

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